B6—Lancaster Farming, Saturday, July 18,1981
WASHINGTON, D.C. - Faced
with an ever-rising ante for
production costs, farmers now
stand to lose more than ever if
natural disaster strikes their
crops.
With last summer’s severe
drought well in mind, many far
mers may look into new insurance
options provided for virtually all
crops this year by the Federal
Crop Insurance Act of 1980.
Federal crop insurance has been
around about four decades. But
until now, it wasn’t available in
many parts of the country, and
often farmers had to rely on an
array of disaster relief and loan
programs when drought, hail,
pests, disease, and other
calamities struck.
The new program will protect
crops when ASCS disaster
payments are phased out after the
1981 harvest. Subsidized crop in
surance will then replace the
complex system of disaster
payments and emergency loans
that has built up over the years,
explains USDA economist Clayton
Ogg.
Program changes will provide
more protection through higher
yield and dollar guarantees. They
also provide much greater
flexibility. Farmers can tailor
coverage to individual financial
situations, change policies from
year to year as risk management
needs change and receive in
surance guarantees based on in
dividual yield history.
A major attraction of federal
crop insurance is that the
Government pays 30 percent of the
premium price with the subsidy
covering up to 65 percent of
established yields.
When the 1980 Act was written,
only 1,626 of the nation’s roughly
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New FCIC insurance covers more crops
3,000 counties had crop insurance,
Ogg notes Half of them had in
surance for wheat, and many in
sured corn, soybeans, cotton,
tobacco, and various other crops
Originally, 250 counties were to
be added annually until all
counties were covered However,
this spring the Secretary of
Agriculture announced that by 1982
insurance will be available in all
counties where the six crops
currently eligible for disaster
payments are grown wheat,
cotton, gram sorghum, nee, corn,
and barley
The insurance can be purchased
from private insurance agents,
banks, production credit
associations, and county ASCS
offices, as well as from local of
fices of the Federal Crop In
surance Corporation.
Although deadlines for obtaining
coverage for spring crops are
past-deadlines vary with crops,
regions, and seasons—there’s still
time to buy protection for many
fall crops m most areas. Producers
can find out deadlines from local
sources of the new insurance.
Farmers can choose to cover 50,
65, or 75 percent of their normal
yield, Ogg says. They can then
select from a range of three
guaranteed prices, with the
highest insured price set within 90
percent of the projected market
price.
Although the 75-percent
coverage of the full projected price
is available, the 30 percent
discount off the premium price
covers only the first 65 percent of
the guaranteed yield. Producers
less in need of protection can select
smaller amounts of coverage that
cost only a fraction of the higher
options.
This year, eligible producers can
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surance—without the 30 percent
discount oft the premium—it they
participate in farm programs tor
wheat, cotton, gram sorghum,
corn, nee, or barley.
Premium payments and
program features vary among
counties and crops. As an example,
let’s look at the protection a farm
in an lowa county can get on its
corn and soybean crops this year.
Let’s say the fictitious farmer
chooses 75-percent coverage tor
200 acres of corn and 100 acres of
soybeans. Let’s assume also that
• The average corn yield is 110
bushels, according to FCIC
records.
• The 75-percent yield guarantee
at $2.70 a bushel means a sub
sidized premium ot $9 90 an acre
tor corn.
• The average soybean yield is 30
bushels per acre.
• The soybean price guarantee
chosen is $7 a bushel, which costs
$8.50 an acre tor the premium.
Now let’s assume that severe
drought reduces the 1981 corn yield
to 20 bushels per acre and soybean
yield to 10 bushels. Payment for
the damaged corn crop under the
subsidized Federal Crop Insurance
Program is calculated as follows.
1) 75 percent of the 110 bushel
average yield = 82.5 bushels
2) 82.5 bushels (guaranteej-20
bushels (production) = 62.5 bushel
loss
3) 62.5 bushels x $2 75 = $168.75
per acre
4) $l6B 75 x 200 acres = $33,750
payment
Payment for the soybean
damage is determined this way.
1) 75 percent of the 30 bushel
yield = 22.5 bushels
2) 22.5 bushels (guarantee)-lO
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bushels (production) = 12 5 bushel
loss
3) 12 5 bushels x $7 = 587.50 per
acre
4) J 87.50 x 100 acres
payment
The subsidized insurance
program would pay 542,500 tor the
two damaged crops. At premiums
of 59.90 an acre for corn and fS 50
an acre for soybeans, premium
costs were 52,830, leaving a net
benefit of 539,670.
The tradeoffs between insurance
benefits and premium costs
depend, of course, on extent ot
losses and the level of protection
chosen. Insured farmers who
suffer no losses must still pay the
premium.
However, the premium
payments are a tax-deductible
business expense, thus lowering
the cost ot insurance protection
If, in the example above, the
farmer had decided against in
surance, but had participated in
the 1981 feed gram program,
disaster payments would have
covered the corn crop But
soybeans aren’t eligible tor
disaster payments
Let’s see how the tarmer would
tare under the low yield disaster
program, without insurance.
Assuming a target price ot $2.40 a
bushel and the same yield
reduction as above, ' payments
would be calculated as follows.
1) 60 percent ot the 110 bushel
average = 00 bushels (only
production below 00 percent ot
normal yield is eligible)
2) One-halt the target price =
51.20 per bushel (the payment rate
equals one-halt the target price)
3) 66 bushels (eligible) - 20
bushels (production) = 46 bushel
loss
4) 46 bushels x 51.20 = 555.20 per
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5) $55.20 x 200 acres = $11,040
payment
Fanners who want to minimize
risk can choose to pay the higher,
nonsubsidized crop insurance
premium and receive the com
bined protection m 1981.
Assuming the same com and
soybean acreage and coverage as
above, premium charges would be
$3,370, up $540 trom the subsidized
premium costs. But the combined
potential returns from insurance
and disaster payments—assuming
the same damage—would rise
substantially. $42,500 + $11,040 =
$53,540.
In this example, participating in
the teed gram program and paying
the additional corn premiums
increased total payments by
$ll,OOO. The actual result would
depend on the level of coverage
and the extent ot any loss from
drought, wind, hail, disease, or
other natural disaster.
Under the new program, there
will be one straightforward system
tor everyone. Previously, a vast
array of programs sprung up
wherever farmers suffered losses.
Premium rates are set by the
FCIC, based on the potential risk of
crop loss in each area. This should
encourage farmers to plant crops
that are better suited to their
particular area.
The expanded protection will
serve farmers’ financial needs by
helping ensure cash flow stability.
This will make it easier to obtain
and pay loans, especially tor those
producers who don’t have a big
capital reserve
Forward contracts will also be
more secure with insurance to
guarantee funds for meeting the
contract.
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