New September 2007
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Crop insurance offers producers a way to manage risk associated with commodity production and prices. Crop insurance can decrease the production risk associated with weather, pests and insects and the price risk associated with fluctuating markets. The Risk Management Agency (RMA) of the U.S. Department of Agriculture (USDA) administers the Federal Crop Insurance Corporation and other programs to help support U.S. agriculture. Currently RMA reports crop insurance data back to 1989. This publication summarizes the data from 1990 to 2006.
There are two basic types of crop insurance (Table 1):
Table 1
Summary of crop insurance plans.
| Introduced in Missouri | Insures against | Yield coverage | Price coverage | Results on which indemnity is based | |
|---|---|---|---|---|---|
| Yield insurance | |||||
| Actual Production History (Multiple Peril) - APH | 1989 | Individual production risk | 50 to 75 percent of APH yield (up to 85 percent in selected areas) | 55 to 100 percent of RMA price | Actual yield |
| Catastrophic - CAT | 1995 | Individual production risk | 50 percent of APH yield | 55 percent of RMA price | Actual yield |
| Group Risk Plan - GRP | 1993 | County production risk | 70 to 90 percent of county yield | 90 to 150 percent of RMA price | County yield |
| Revenue insurance | |||||
| Crop Revenue Coverage - CRC | 1997 | Individual revenue risk | 50 to 85 percent of APH yield | Higher of futures price in February or at harvest | Actual yield and futures price at harvest |
| Revenue Assurance - RA | 2000 | Individual revenue risk | 65 to 85 percent of APH yield | Futures price in February, or higher of futures price in February or at harvest (optional) | Actual yield and futures price at harvest |
| Group Risk Income Protection - GRIP | 2005 | County income risk | 70 to 90 percent of county yield | 90 to 150 percent of RMA price | County income |
The following descriptions of crop insurance products available in Missouri are provided by the USDA RMA.
Yield-based insurance coverage
Revenue insurance plans
Note
All revenue-based options determine revenue differently. See the provisions of each policy for its definition of revenue.
Specific crop insurance products are offered for various crops in different counties. New crop insurance products are introduced into counties with the most need and later expanded to other counties as the perceived demand arises. Significant changes in crop insurance availability occurred in 2006 with the expansion of GRP and GRIP coverage. GRIP for wheat expanded to an additional 37 counties in 2006. GRP and GRIP was expanded for corn to 23 additional counties; for grain sorghum to four counties; for soybeans to two counties; and for cotton to one additional county. Appendix 1 is a table of all crop insurance options available in each county in 2007.
This publication reports data for the principal row crops in Missouri. Crop insurance is available for minor crops such as fruits, tobacco and specialty corn, but are included in this report when only whole state data are discussed.
Level of coverage
Figure 1
Insured crop acres in Missouri, 1990 to 2007.
The number of crop acres insured increased dramatically from 1990 to 1995 and has leveled out in the last six years. Figure 1 shows the number of acres of Missouri crops that have been insured since 1990. The total number of acres insured has been steady at about 7 million acres since 2000.
In 1995, the federal government created CAT insurance. With CAT, the premium was paid 100 percent by the government and the farmer paid a registration fee of $50 (later raised to $100/crop/county insured). CAT was initially required for farmers to obtain certain federal farm benefits but later was made optional. Its requirement was responsible for its sudden rise in the number of acres covered by CAT insurance in 1995. The first year, CAT covered more than 5.5 million acres, replacing over 1 million acres that had previously been insured by buy-up plans. However, after the initial jolt of the CAT mandate, the number of acres covered by CAT decreased and number of acres in the buy-up plan continued to increase.
Buy-up insurance allows the purchaser to increase the percent of yield or revenue insured. It offers greater coverage than the fully subsidized CAT insurance. Buy-up enables the producer to insure yield or revenue, depending on the type of insurance coverage and the crop to be insured. A subsidy provided by the government offsets a portion of the premium. The percentage of premium paid by the government subsidy decreases as coverage level increases.
Type of insurance product
Figure 2
Crop acres insured by type of insurance, 1990 to 2007.
A previous section of this publication explained the different insurance products available to Missouri farmers. Actual production history (APH) insurance covers individual production losses; group risk plan (GRP) covers production losses in a county. Crop revenue coverage (CRC) and revenue assurance (RA) cover revenue losses.
Figure 2 shows the number of acres that have been insured by each of the insurance products. APH was the first insurance product and continues to be one of the most popular. However, over the last 10 years, CRC and RA plans have increased in popularity. Now almost 50 percent of the crop acres insured are under some type of revenue insurance. The GRP and GRIP products, summed together into group risk (GR*), represent a small number of acres.
Figure 3
Percent of insurance type by county for all crops, 2005.
The usage of insurance products varies by crop and location. Figure 3 shows the insurance type crop reporting district in 2006 as a percent of all insurance coverage. APH accounts for the vast majority of coverage in the bootheel area of the state. In the northern portion of the state, the majority of the coverage is RA, although APH and CRC are also popular. GRIP is the newest crop insurance product, popular in limited areas of the state.
Type of insurance by crop
2000
Figure 4
Crop acres insured by insurance plan as a percent of total acres insured,
2000 and 2006.
2006
Figure 4 shows the percentage of crop acreage enrolled in the different insurance plans in 2000 and 2006. The preferred type of insurance varies by year because of new product offerings and farmers seeking products that best meet their needs. RA, first introduced in Missouri in 2000, has tended to replace CRC as the preferred crop revenue insurance product. RA has also replaced some APH coverage in corn and soybeans. The amount of uninsured acreage was similar in 2000 and 2006.
Cotton, corn and soybeans are the most insured crops, each having near 80 percent of planted acreage insured. However, the type of insurance purchased for these crops varies. Cotton uses APH almost exclusively while corn and soybeans are divided between APH, CRC and RA. Oats and grain sorghum are the least insured crops in Missouri. These crops are considered less risky to grow and usually constitute a minor portion of the production of a farm; hence, the perceived need to insure them is less.
Subsidies
Figure 5
Crop insurance subsidies paid in 2006 dollars, 1990 to 2006.
Producers pay a premium for crop insurance based on the type of insurance and coverage level. A government subsidy is available to offset a portion of the insurance premium. The total amount of subsidies paid has increased dramatically from 1990 to 2006. Figure 5 shows that subsidies, in 2006 dollars, for crop insurance sold in Missouri have increased from less than $5 million in 1990 to near $78 million in 2006. Appendix 2 is a table of subsidies received by county.
Appendix 2
Subsidies by county, 1990 to 2006 ($1,000).
Crop insurance loss ratio and farmer benefit-cost ratio
Figure 6
Loss ratio and farmer benefit-cost ratio, 1990 to 2006.
There are two ratios that can be used to examine the cost to benefit received by the producer in a given year. Figure 6 provides both the loss ratio and the farmer benefit-cost ratio over the past 17 years. The loss ratio is calculated by dividing the indemnity paid to the producer by the total premium paid by the producer and the federal government (the subsidy mentioned in the previous section). Insurance companies must operate with loss ratios below 1 or they become insolvent. The loss ratio for the past 17 years has averaged 0.62, indicating that for every dollar of premiums paid, an average of 62 cents is returned to the producer as indemnities.
The farmer benefit-cost ratio is the indemnity paid to the producer divided by the premium paid by the producer. The farmer benefit-cost ratio for the past 17 years has averaged 1.49, meaning that for every dollar that producers paid in insurance premiums they received $1.49 in insurance indemnities. Clearly, some of the subsidy paid by the government to the insurance companies is returned to the farmer as indemnities.
Loss ratio and farmer benefit-cost ratio by county
Figure 7
Loss ratio by county, 1990 to 2006.
The loss ratio varies by county. Figure 7 shows the loss ratio by county from 1990 to 2006. The loss ratio in southeast Missouri is low in relation to the rest of the state, in several counties less than 0.5. A total of 19 counties had a loss ratio above 1, generally located in the central section of the state.
Figure 8
Farmer benefit-cost ratio by county, 1990 to 2006.
Figure 8 displays individual county farmer benefit-cost ratios from 1990 to 2006. Six counties had a farmer benefit-cost ratio of less than 1. All other counties for which data exist indicate that they had farmer benefit-cost ratios greater than 1. Producers in these counties received over $1 in insurance indemnities for every $1 they paid in crop insurance premiums. Eleven counties, mostly located in southwest and south central Missouri, had farmer benefit-cost ratios above 2.5.
The two figures can be used to estimate the actuarial soundness of the premiums charged for crop insurance. First, when a loss ratio exceeds about 0.8, the insurance company would be losing money. Several of those counties with loss ratios greater than 0.9 may have adjustments made in premiums to make them more actuarially sound. Second, a county with a low loss ratio and a high farmer benefit-cost ratio (e.g., New Madrid county), indicates heavy subsidization by the federal government. Should the federal government reduce its subsidies, these counties would probably see a drop in their farmer benefit-cost ratio or increase in their loss ratio.
Farmer benefit-cost ratio by crop
Figure 9
Farmer benefit-cost ratio by crop, 1990 to 2007.
The farmer benefit-cost ratio varies by crop as seen in Figure 9. The ratio for rice has declined but still offers the highest return, with a 17-year average of 2.55. The wheat ratio had a 17-year average of 2.34 partially due to the high ratio in 1996. The ratios for corn and soybeans are similar except for a major difference in 1995. The 17-year farmer benefit-cost ratio was 1.48 for corn and 1.38 for soybeans. The cotton ratio in 1998 was 32.19, with a 17-year average of 1.77.
Farmer benefit-cost ratio by insurance plan
Figure 10
Farmer benefit-cost ratio by insurance plan, 1997 to 2006.
Looking at the benefit-cost ratio by type of insurance plan gives a historical perspective of which plans are returning the most indemnity for the premium paid. Figure 10 shows the benefit-cost ratio by the major plans by year and a 10-year average. No one plan always has a better ratio than another. The 10-year average indicates that the benefit-cost ratios are fairly close. Within each insurance plan there are yield and price selections that will affect the coverage so a simple answer of "this plan pays better" is not justifiable.
Figure 11
Source of crop loss by indemnity payments, 2005.
Crop loss can be due to a number of perils, including insects, plant diseases, tornados, wildlife, wind and fire. However, the most common in Missouri and surrounding states are excess moisture, drought, freeze/frost and hail (see Figure 11). Missouri, like several surrounding states, experienced the most crop loss due to drought or heat, followed by excess moisture and flood, in 2005.
Figure 12
Source of crop loss by indemnity payments, 1990 to 2005.
There is variability in crop loss over time. Figure 12 is the source of crop loss by indemnity payments from 1990 to 2005. For the 16-year period, drought and heat make up the major cause of loss for most states, followed by excess moisture and other perils such as a cold or cold wet weather, insects, plant diseases, fire, wind and wildlife damage.
Figure 13
Source of crop loss in Missouri based on indemnity payments,
1990 to 2005.
Over the past 16 years in Missouri, excess moisture/flood and drought/heat have been the major causes of insured crop losses. However, as is seen in Figure 13, in certain years other risks can be significant. Figure 13 shows the percentage of indemnities paid for each type of loss.
Crop insurance offers producers a means to manage risks. There is no correct amount or type of coverage; the amount of coverage necessary for each producer varies. Producers must assess their current situation and make decisions based on their current needs. The subsidy provided by the government helps offset a portion of the cost associated with the premium. However, this does not provide a sufficient reason to purchase the insurance. There is still a cost incurred by the producer that increases as coverage level increases.
Due to the amount of federal government subsidies integrated into crop insurance, on the average, over time, Missouri farmers have received about $1.49 for every dollar spent on crop insurance. This does not mean that every farmer, every year will receive a favorable indemnity for premiums paid. It does mean that the federal government indirectly is subsidizing Missouri agriculture through crop insurance.
MP749, new September 2007
