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2012 farm drought losses to possibly top $20 billion
By JO ANN HUSTIS
Illinois Correspondent

MORRIS, Ill. — This year will certainly be a record-setter in the number of insurance payments made to agricultural producers for the 2012 crop year, according to a specialist in the business.

“Basically, what we’re seeing here for the 2012 crop season is nationwide,” Kent Olson, with the Ottawa, Ill., branch of 1st Farm Credit Services, noted at the company’s annual informational meeting in Morris Jan. 18.

“More than $20 billion is expected to be paid out in (2012 drought) losses. Today we’re at about $11 billion paid out on about 55 to 60 percent of the claims. In Illinois, we’re looking at over $2 billion worth of losses,” he said.

“In our immediate neighborhood (La Salle, Grundy, Kendall and Livingston counties), the losses were basically double what they were in the 2011 season. The insurance provider we work with had 8,000 total crop loss claims last year. This year, they’ll have more than 18,000 claims.”

In speaking of the staff members involved in the process, Olson noted the amount of payouts “is creating quite a workload and everything else for these folks.” The importance of the program, however, and the amount of money and amount of losses paid in the 2012 crop season is being realized, he said.

“Last year, the 2011 season, based on losses that were paid out in Kansas, Texas and some of the Southwestern states, was a little over $10 billion,” he said. “We could see those actually double in the 2012 year, versus the previous record that we had only a year ago in 2011.”

The many types of risks producers face is the basis for crop insurance, with the two most important being yield and price, the University of Kentucky noted in extension service information. Crop insurance protects yields against unavoidable problems such as drought, heat, hail, excess moisture, frost, freezing and insects.
Crop insurance also protects prices by using futures contracts on commodity exchanges like the Chicago Board of Trade. Choosing and signing up for crop insurance requires an understanding of options that are available in the program.

All crop insurance policies are covered by private independent insurance companies. These companies have a standard reinsurance agreement with the federal government, in which the government chips in part of the premiums farmers are charged for their policies. In addition, these insurers have a loss/share program in which the federal government underwrites some of the losses the program incurs, Olson explained.

“Also, individual insurance companies use their resources plus reinsurance from large, multinational reinsurance companies to provide funding for those losses, in addition to what they recoup from the federal government to pay crop loss,” he said.

The crop insurance program is basically separate from the farm bill in terms of the standard reinsurance agreement, and is negotiated between the government and the individual insurance companies.
“The current agreement we’re working off of was done in the 2011 season,” Olson said. “They covered a four-year time frame, so the 2011, 2012, 2013 and 2014 (years) are covered under the current reinsurance agreement. The farm bill can maybe tweak some of the provisions, but ultimately it goes back to that reinsurance agreement to establish the baseline of the program.”

As the crop insurance program evolved over the last several years, the revenue products, the countywide products, are fairly similar, but many private companies that offer them have also developed add-on products.

“Some of those are things we’ve been familiar with a number of years, like hail insurance and wind policies,” Olson said. “But, there are additional policies that fill gaps in coverages that the individual insurance companies offer, that growers can tailor to meet their risk-management needs for the 2013 year.”

The vast majority of producers across the United States would not think of risking their livelihood and future without crop insurance coverage, the Rain and Hail Insurance Society  (RHIS) of Iowa noted in a press release. More than 265 million acres of cropland were insured in 2011, which ranks among the highest in the program’s history, the RHIS added.

Producers are electing higher coverages and revenue coverage to protect their production and revenue exposures. In a time of rapid changes in agriculture, including increasing price volatility and production costs, producers and their lenders are relying on the coverage provided by crop insurance as they work to maximize opportunities and minimize risks, it stated.

Olson, who grew up on a farm near Triumph, Ill., works out of the 1st Federal Credit Services office in Ottawa, one of 15 branch offices in the northern part of the state. Each office has individual crops insurance specialists and support positions.

“(Which means) there’s numerous folks in any branch office who can answer questions related to the federal crop programs or any individual private program regarding crop insurance,” he said.
1/23/2013