MSGA Blog

Soybean Business: Crop Insurance 101

This article appears in the May-June issue of Soybean Business Magazine. Click here to read the digital version.

It was 1993, and after fighting to grow a crop amid a record-setting cool and wet growing season, Bill Gordon’s father had to admit defeat.

He couldn’t bring himself to till under the crop, so the task fell to a teenage Bill. It was one of many lessons in farming, and one of his first about crop insurance.

“Even though ‘93 was so hard, crop insurance kept us farming,” says Gordon, a Minnesota Soybean Growers Association (MSGA) director and fourth-generation farmer near Worthington, Minn.

The country’s crop insurance system has evolved along with modern farming, and now covers 96 percent of Minnesota’s soybean acres.

To Ed Usset, a grain marketing specialist and research fellow at the University of Minnesota’s Center for Farm Financial Management, the only question about that statistic is why it’s not 100 percent.

“Who wouldn’t buy it?” he says.

Neither a string of strong harvests nor a drop in commodity prices have led soybean producers to make major changes to their coverage, says Robert Johansson, the USDA’s acting deputy under secretary for farm production and conservation.

“Row crop growers in the Midwest view it as an essential tool,” he says. “Even though commodity prices have fallen, we haven’t seen significant changes in coverage levels.”

That sentiment was echoed by farmers and other experts who say crop insurance is a safeguard they wouldn’t go without.

“I really believe farmers are very in favor of crop insurance as a risk management tool,” Gordon says. “It provides a sufficient but not perfect safety net.”

Strong harvests, low claims

In his sample pre-harvest marketing plans, Usset begins this way: “Buy crop insurance.”

“That’s where it starts,” he says. “You buy crop insurance, because without it everything else you do you just can’t be confident about.”

Subsidies, of course, play a large role in the popularity and success of crop insurance. Though these subsidies vary by insurance type, the government on average pays about 60 percent of premiums, leaving farmers to pay the final 40 percent.

In 2016, Minnesota soybean farmers paid about $70 million in premiums, while subsidies totaled about $100 million.

For Minnesota farmers, premiums and subsidies have greatly exceeded payments out. Since 1995, statewide losses for all farmers have exceeded premium payments only three times.

Over the past 15 years, the “loss ratio” — the ratio of payments in to the program to payments out — is about .60 among Minnesota soybean farmers. This means that paid claims have totaled 60 cents for every dollar paid in, including the subsidy.

The government’s goal is a loss ratio of one; a dollar out for each dollar in. If losses continue to stay low, premiums are likely to trend down, Johansson says.

“The longer we go without a loss, the likelier we are to go back and revisit rates to make sure we’re not overcharging,” he says.

The program has become about more than risk.

It has more or less become a precondition for farmers’ operating loans. Just as an automotive lender requires a borrower to purchase car insurance, an agricultural lender like Compeer Financial generally sets crop insurance as a condition of a loan.

“For beginning farmers in particular, crop insurance is absolutely critical to doing a spring input loan to buy chemical, fertilizer and seed and even pay rent,” says Mark Koch, a financial officer with the farmer-owned lending cooperative Compeer.

Taking crop insurance to the next level

Insurance is typically a strategy to estimate your risks and take steps to protect yourself from misfortune. Crop insurance is that and more.

It is also a marketing tool that allows producers to guarantee a given price for their crop, allowing them to sell it before the seed is in the ground.

“The biggest advantage I would say of crop insurance is that it allows you less risk in forward contracting,” says MSGA Director Joel Schruers, who farms in Lincoln County. “If you have a guarantee of 70 percent or 75 percent of your total production, it at least allows you to sell up to that amount.”

Experts say advance selling is a smart option that not enough producers take advantage of.

He doesn’t have firm numbers, but Usset says it’s his sense that farmers who sell at least part of their crop before harvest are still in the minority. Many of those who wait are missing out on the highest prices.

“The fact is, if you look at the history of pricing opportunities, you’re going to find that, more often than not, spring and early summer is a good time to get something done,” he says.

Koch agreed, saying, “Historically, some of the best marketing opportunities happen between May and July but without crop insurance, producers wouldn’t have the confidence to make new crop sales without having that safety net.”

An evolving system

In the decades before modern crop insurance took shape, disaster recovery was made on a case-by-case, or “ad hoc,” basis.

In the rearview mirror, that system looks unfair and unreliable. Gordon says farmers were left in a passive role, only able to hope that they’d get bailed out.

Nor was it particularly efficient from a financial perspective.

“Waiting for an ad hoc program to ‘bail us out’ is not a winning game plan for any business owner,” Koch says.

The Federal Crop Insurance Act of 1980 set subsidies at 30 percent of the premium (at 65 percent coverage), a figure that has risen over the decades to incentivize higher participation.

When crop prices hit their peak several years ago, there was a relatively brief period in which crop insurance all but guaranteed a profit.

“I don’t think the program was designed to do that,” Schruers says.

He’s right. Johansson, the USDA under secretary, says the government sees crop insurance as a way to manage your risk, not an investment tool to profit from.

In any case, with depressed commodity prices, guaranteed profits are no longer the case, Schruers says.

The political future of the program is in question. President Donald Trump’s budget proposal for the next farm bill includes a 36 percent cut to crop insurance over the following decade. Its largest cost savings comes through the removal of the harvest price option, which compensates farmers when harvest prices are lower than planting prices.

Choices, choices

As anyone who has sat down with a crop insurance agent knows, a farmer has a bewildering array of choices, from the levels of coverage to geographical units to a set of private-market options.

One common trend is to choose what’s called “enterprise” coverage, which combines all of one crop in a particular county under one umbrella. It doesn’t matter what happens in a particular field, only the aggregate.

Federal subsidies for enterprise coverage are much higher than for other units. At the 80 percent level, the subsidy is 68 percent, compared with 48 percent for basic and optional units.

The subsidy is higher for enterprise units because there is less risk of a claim. If one area underperforms, it can be canceled out by a higher-performing field.

“One of the reasons why subsidy rates were changed to encourage enterprise was because they’re viewed as less risky unit structures relative to basic and optional,” Johansson says.

For most producers, enterprise makes the most sense; it now accounts for 59 percent of coverage among soybean farmers nationwide, says Duane Voy, director of the USDA Risk Management Agency’s St. Paul office.

“Under optional units you have more opportunities to have a claim, but really what a producer is concerned about is his overall production in a county,” he says.

Fighting fraud

As with all insurance, fraud among crop insurance happens.

“I’m not an expert, but I believe it exists to some degree in every form of insurance,” Usset says.

Voy says one method to root out fraudulent claims is to look for anomalies, areas where one farmer’s experience is much different than similarly situated farmers. Undergoing a spot check is a little like speeding past a police officer on the freeway; you probably ease off the gas.

“In most cases, for somebody who was an anomaly, once they’ve been spot checked, their behavior changes,” he says.

Johansson says the USDA has reduced its improper payment rate from 4.1 percent in 2012 to about 2 percent in 2016 (the government-wide average is 4.7 percent). Furthermore, repeatedly claiming losses carries a disincentive of its own, he says.

“If you continually report losses it will affect your underlying premium,” he says.

That said, for Gordon, the idea that a producer would forgo planting a crop in favor of collecting crop insurance doesn’t make much sense. Planting, growing and harvesting a crop is more than a job; it’s part of a farmer’s identity.

“It’s bred into us, for lack of a better term,” he says.

The next generation

As Congress considers a new farm bill later this year, Schruers has a suggestion: Call it the “food security” bill instead. 80 percent of the bill’s funding is spent on food stamps, or SNAP.

Second, it would help serve as a reminder that crop insurance and other programs help keep grocery store aisles full.

“The U.S. has never been hungry as a whole … so people believe that everything comes from the grocery store,” Schruers says.

As Gordon puts it, “What crop insurance has done is kept farmers on the fields. It’s about raising a crop to feed people so the next generation can do the same thing.”

Crop insurance, by the numbers

$1.2 billion — Crop insurance premiums paid by Minnesota soybean growers over the past 15 years (does not include deductibles).

$1.6 billion — Crop insurance compensation to Minnesota soybean growers, also over the past 15 years.

$400 — The per-acre gross revenue (at February 2018 prices) guaranteed by an 80 percent coverage policy at 50 bushels per acre.

$472.89 — The predicted average per-acre costs of growing soybeans in 2018.*

* Estimate is for herbicide-tolerant soybeans following corn at 50 bushels per acre, in Iowa. Land costs are included using a cash rent equivalent.

Follow The Conversation