Drought could drive nationwide crop insurance payments to $25 billion

• Crop insurance customer

Farmer Lewis Bainbridge stands Thursday by one of his corn fields that was cut for silage because of poor yield from drought conditions southwest of Mitchell. “You certainly can’t buy enough crop insurance to make a profit,” he said. “But you can buy enough to cover expenses.” (Chris Huber/Republic)

Talk about it

For four generations, members of the Bainbridge family have farmed in the fields west of Ethan. Lewis Bainbridge, a member of the third generation, remembers stories from a time when the future of his family’s farm was far from certain.

His grandparents, Zach and Lydia Bainbridge, farmed during the Dust Bowl. Lewis Bainbridge recalls tales of dust clouds sweeping through his grandparents’ home and dirtying the dishes in their cabinets. Those times, he has been told, were tough. As he stood Thursday near the fence around what is now his son’s field, which is mostly empty now aside from a lone strip of corn and a few wayward bulls, Bainbridge said growing this year’s crop amid a widespread drought was also tough.

The amount of corn from this field in particular was so low — less than 10 bushels per acre — it was all cut for silage, he said. Only one strip was kept, and that’s because it was needed for something Bainbridge’s grandparents didn’t have: crop insurance.

“It’s like most insurance,” he said. “You buy it and hope you don’t have to use it.”

But after a year in which drought has had a severe impact on his family’s crop, Bainbridge is relieved to be insured.

That lone strip of corn, and many others like it in other fields, helps control erosion and gives insurance adjusters a sample to determine the extent of the losses in a field, and eventually what farmers will be paid to help make up for those losses. That process, however, is not a simple one.

Generally, crop insurance is split into two types: yield insurance and revenue insurance.

Yield insurance protects farmers against unexpectedly low yields caused by bad weather. It works by determining a farmer’s expected yield based on the crop and the farmer’s production history — typically a 10-year yield average — and then pays the farmer a fixed rate for the difference between what was expected and the actual yield on a certain percentage of the crop.

Revenue insurance guarantees a farmer will receive at least a certain level of income by protecting against drops in both commodity prices and yields.

Matt Diersen, an extension economist at South Dakota State University, said revenue

The payments being given out are “probably adequate to cover (farmers’) expenses,” but probably not much else.

“Most farmers would rather have the crop than the crop insurance,” he said.

Ken Potter farms corn and soybeans on more than 2,000 acres in fields south of Bridgewater. He said crop insurance should be a part of the “master plan” farmers have for their operations.

“We can hardly afford not to have crop insurance,” he said. “You just have to have it, no matter what.”

The need was especially apparent this year, he said. Potter averaged 20 bushels per acre in corn and 15 bushels per acre in soybeans, he said, a sharp decline from last year. In 2011, South Dakota farmers averaged more than 120 bushels per acre in corn and more than 35 bushels per acre in soybeans, according to USDA statistics.

“In these extreme conditions, I don’t think what you do as far as a farming practice really does anything good for the crop,” Potter said. “It just fizzles out after a while.”

For Paul Hetland, who raises corn, soybeans and winter wheat on about 3,000 acres northwest of Mitchell, the impact of the drought wasn’t as harsh. Still, he said, having crop insurance is vital.

“In today’s world, it’s all about risk management,” Hetland said. “Crop insurance is our only tool.”

The rising cost of essential items like fuel and fertilizer, which Smith, of Farm Credit Services of America, called “astronomical,” has made the safety net that crop insurance provides even more important.

“If anything, a year like this shows just how important it is,” Hetland said.

The stability and protection crop insurance provides is more noticeable today than it was just a generation ago, when Hetland’s father ran the farm, he said.

“If he experienced a disaster like this, there were times it might take him four to eight years to work out of it,” he said. whom were affected by widespread flooding, were paid almost $474 million for losses, or nearly 66 percent of what was paid in premiums.

More than $10.8 billion was paid out for losses nationwide in 2011. With an ongoing drought affecting crops on a scale not seen in decades, experts estimate that total could more than double this year.

A U.S. Department of Agriculture report issued earlier this month shows 27 percent of South Dakota is in “exceptional drought,” the worst of the five categories measured by the USDA, and more than 82 percent of the state is in severe, extreme or exceptional drought.

As of Monday, more than $149 million had already been paid out in South Dakota, and more than $2.2 billion had been paid out nationwide from crop insurance for losses claimed so far this year. But as farmers continue to complete their harvests and find out what their drought-related losses are, the totals will inevitably go up.

“It’s still very, very early,” Diersen said. When all is said and done this year, Smith estimates about $25 billion will be paid out nationwide. Other estimates are as high as $40 billion, she said.

Though the increase may look dramatic, Smith said it will not have an immediate impact on premiums, because those are based on long-term loss data. “It’s not going to be a big swing,” she said. insurance is more common in South Dakota than in other states because of its distance from the center of the Corn Belt.

“You have more revenue and profit variability the farther away from the corn or soybean belt you are,” he said.

Depending on the policy, a farmer could have one or both types of coverage. Historically, coverage has been set on a field-by-field basis, with coverage levels usually falling between 65 and 85 percent. But more recently, farmers have been given the option to insure their crops based on an “enterprise unit,” which tracks the gains and losses of an entire county and bases payments on that total instead.

“You certainly can’t buy enough crop insurance to make a profit,” Bainbridge said. “But you can buy enough to cover expenses.”

Payouts could double

Rhonda Smith, vice president of crop insurance at Farm Credit Services of America, said the cost of premiums for policies based on enterprise units can be one-third that of traditional policies. But, Smith said, farmers shouldn’t choose coverage based only on price.

“Most producers get that they need to have insurance,” she said. “They just really need to make sure they have the policy with the coverage they need.”

Farm Credit Services of America is a farm lender and insurance provider based in Omaha, Neb.

Because the specifics of crop insurance are always changing, producers should be in regular contact with their agent, Smith said.

“They need to know what all their options are.”

Even with all its intricacies, the core principle of crop insurance is simple.

“If something bad happens, you don’t want to have to make up that difference on your own,” Diersen said. “So, you buy insurance.”

It cost about $21 to insure an acre of corn and about $12.50 to insure an acre of soybeans last year in South Dakota, Diersen said. Premiums do vary based on location, what crop is being insured and the farmer’s production history.

To make a claim, farmers are required to notify their insurance provider within 72 hours of discovering any damage or production loss. An insurance adjuster contacts the farmer and investigates the claim based on an in-person appraisal of the damage and the farmer’s production history. Once the adjuster’s appraisal is completed, an amount can be calculated based on the extent of the damage and the insurance holder’s policy.

Last year, 94 percent of South Dakota’s 5.2 million acres of corn and 95 percent of South Dakota’s 4.1 million acres of soybeans were insured.

The same year, the state’s farmers, many of

‘You just have to have it’

While crop insurance is administered by the federal government through the USDA’s Risk Management Agency, it is sold entirely through private insurance companies.

Reserves set aside by the insurance companies during more productive years will be used to cover the payouts this year, Diersen said.

“A drought is not unprecedented,” he said. “There are substantial reserves in place to cover the losses this year.”

Darrell Guthmiller, of Menno, has worked in the crop insurance industry for 30 years. Today, he works as a quality control specialist for Heartland Crop Insurance, an insurance provider based in Topeka, Kan.

Payments to drought-stricken farmers will certainly cut into insurance companies’ profits, he said, but there is no risk of those companies going broke. For farmers, that risk may have been very real without crop insurance this year.

“It’s the only thing that really guarantees they’re going to have an income,” he said.

Guthmiller does most of his work in southeastern South Dakota. It’s an area the drought has hit especially hard.

“Everything is pretty much a loss situation,” he said. “It’s a major setback.”

Guthmiller performs audits on claims exceeding $200,000, as is required by federal regulations. He has personally done at least a dozen audits this year and expects to do more.

Government role

Crop insurance in the United States began in the 1930s as an attempt by the federal government to revive the country’s ailing agriculture industry in the wake of the Great Depression and Dust Bowl. At first, the government limited the program to just major crops in major producing areas until it passed legislation in 1980 that expanded the program.

A subsidy that paid up to 30 percent of farmers’ premiums, meant to encourage participation in the program, was also included in the 1980 legislation. Still, the program did not reach the sought-after levels of participation.

After a series of special disaster relief bills in the late 1980s and early 1990s, Congress made crop insurance a requirement for farmers seeking other government loans and benefits.

In the years since, Congress repealed mandatory participation but expanded the role of the private insurance industry and increased the subsidies included in the program.

When Congress adjourned last month without passing a new farm bill, legislative decisions that could impact the future of crop insurance were left on the table.

Though separate pieces of legislation, programs within the farm bill and the crop insurance program do interact with one another. For example, a $3 billion subsidy to cover farmers’ crop insurance deductibles was included in the farm bill passed by the Senate earlier this year.

Because crop insurance has become more widely adopted in recent years, many of the relief programs included in past farm bills aren’t as vital today, Diersen said.

Still, the stalled farm bill has left area farmers uncertain of exactly what protection they will have in the future. Bainbridge, Potter and Hetland all expressed concerns about the political environment in Congress, and the impact it could have on the farm industry.

For insurance providers, the stalled farm bill isn’t an immediate concern.

“We are funded for next year,” Smith said. “We have our program in place.”

In 2011, the federal government spent more than $7.4 billion to subsidize crop insurance premiums for the nation’s farmers. That equates to about 62 percent of the $11.9 billion paid in crop insurance premiums last year. In South Dakota, the federal government spent more than $480 million on crop insurance subsidies in 2011, or about 66 percent of the nearly $723 million paid in premiums in the state.

“It really encourages the farmers and ranchers to buy the coverage,” Diersen said of the subsidies.

Because subsidizing crop insurance has led to more farmers taking advantage of the coverage, Diersen said, the government hopes the result will be a more stable ag economy.

The affordability of the insurance itself is also kept in check by the subsidies, Smith said. “If it wasn’t subsidized by the government, premiums would be more than double what they are now.” Bainbridge said the benefit of the subsidies can be felt “every time you go to the grocery store.”

“We have some of the most reasonably priced, wholesome, high quality food in the world,” Bainbridge said. “You can have situations in other countries where you could spend the majority of your income on food.” Hetland compared the subsidies to a deduction on a tax return. “I think it’s a good use of those dollars,” he said. “It’s an incentive.”

It isn’t just farmers who benefit from subsidies, Hetland added. “We look at food production almost as a matter of national security,” he said. “If we don’t have an environment with some stability, it makes it hard to attract people into this line of work.”

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