Make Disasters Less Disastrous

Without crop insurance, last year’s drought would have put some farmers out of business. That’s for sure. What’s less certain is the impact proposed changes will have on the program.

By Des Keller | Photos By Des Keller

Thanks to widespread drought, last year was not kind to thousands of U.S. producers.

Thanks to widespread drought, last year was not kind to thousands of U.S. producers.

We are bumping along in a pickup truck through a Missouri farm field, skirting the edge of 30 acres’ worth of what would normally be harvest-ready corn. Luke Saunders, a claims adjustor for Great American Insurance, holds his GPS out the window—closer to the stalks—to measure the exact size of the plot.

Behind the wheel of the pickup is Richard “Dale” Cragen, who farms about 400 acres and runs a trucking business near Frankfort, in the northeast part of the state. “I’ve carried crop insurance for 25 years,” says Cragen, 66. “Suffering one of these years without it would make it tough to recoup the money you lose.”

Thanks to widespread drought, last year was not kind to thousands of U.S. producers. Crop insurers will likely make the largest damage payments in the program’s recent history—as much as $11 billion, which is actually smaller than early estimates for the year. Missouri was one of the hardest hit states, and Cragen’s 30 acres is a case in point. Once he’s determined the exact size of the field, Saunders conducts an on-the-ground inspection of the corn itself—or at least what passes for it in this field.

Even when Saunders finds a plant with ears, they are stunted and kernels can be few and far between, like an undersized piano with two-thirds of its keys missing. And the kernels that do exist are often sporting signs of the gray-to-green Aspergillus ear rot mold. So what is the final verdict on this field?

“We could see the yield was so low it was not worth combining,” says Cragen. After measuring the field and making a systematic determination of the amount of actual corn there, Saunders agrees. For the record, the yield for Cragen’s entire 120 acres was a measly 9 bushels per acre. Cragen will receive an insurance payment on the field based on a percentage of his average yield times a fall market price for corn.

In all, Saunders, 29, processed the claims of more than 200 farms last fall and winter. While the crop losses were large, few if any of his customers will face the loss of their business, owing to the fact that insurance at least covered all their expenses—if not a portion of their revenue—and allowed them to plant again this spring.

“People are very happy to see us,” says Saunders, whose schedule from September into January had him on the road for 12 hours a day, with more paperwork awaiting him after dinner. Saunders understands the need to process claims as quickly as possible. He farms with his father, Phillip, and younger brother Chris near Shelbina, Mo. (See “History Means a Lot”) “Adjustors are the main point of contact for the insurance company,” he says. “We see the fields. We see the crops. I’m one of the main reasons someone gets their check to cover losses.”

The crop insurance program is sponsored and largely underwritten by USDA’s Risk Management Agency (, although it is sold and administered by more than a dozen private insurance companies such as Great American. Nearly 85% of eligible farmland—about 281 million acres—was covered by $116 billion worth of crop insurance in 2012.

Drought-stricken corn; ''we could tell it wasn't worth combining.''

Drought-stricken corn; ”we could tell it wasn’t worth combining.”

More than 60% of a premium’s cost is paid by taxpayer subsidy. The harsh reality is that if farmers had to pay the entire cost of an actuarially sound crop insurance program, few could afford it because premiums would be so expensive.

Last year, drought baked huge sections of the Midwest and Southern Plains. Subsidies paid nearly $7 billion of the more than $11 billion spent on crop insurance payments. To help cover the cost of increasing insurance subsidies, the federal government has purposefully shifted billions of dollars over the past decade away from non-crop insurance farm programs and ad-hoc disaster bills.

A farmer can now purchase more types of crop insurance than were previously available. One of the most popular categories of such protection, according to Saunders, is crop revenue coverage (RC), which insures a specific dollar amount of revenue a given producer might have received if no disaster had occurred.

It is no wonder that RC is popular. With one version of this type of policy—for which a farmer pays more—producers can take advantage of either a spring or fall average commodity price. In 2012, according to Saunders, that meant being able to buy a “harvest price option” that used a $7.50-per-bushel corn price to calculate losses instead of the average for spring of $5.58.

On Dale Cragen’s 30 acres, that could mean a $7,000 difference in what he collects from crop insurance, assuming that his average yield is 170 bushels per acre and he insures 75% of his average yield. Seventy-five percent, in most cases, is the highest level at which crop yields can be insured. By comparison, coverage in Canada can be as high as 90%.

Crop insurance is still no substitute, however, for the income actually generated by growing a healthy crop. Had Cragen been able to grow corn at 170 bushels per acre on the 30 acres that were examined and sell it for $7.50 per bushel, he could have grossed an additional $9,600 over and above the maximum insurance payment.

The crop insurance program has come under criticism because it involves large subsidies to farmers in the form of lower premiums. The private crop insurance companies involved receive additional subsidies—as much as $2 billion in 2012—to administer, sell and service the policies. Critics simply say the program is too expensive and insurance companies are overcompensated.

“The government essentially bought participation in the program through large subsidies,” says Vince Smith, an agricultural economist at Montana State University, who studies the issue. The percent of the premium paid by taxpayers has risen from about 20% of the cost in the early 1980s, to 45% in the mid- to late-1990s, to 62% today.

Discussions under way in Congress may cut the premium subsidy back to 52% of the cost. Smith says he believes a cutback at that level would give only a small percentage of farmers a reason not to buy crop insurance.

Either way, today’s version of crop insurance has become a must for many farmers. “The crop insurance was critical this year,” says Cragen. “Having it at least lets you sleep at night.”