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| Professor: Corn farmers getting short end of crop insurance stick |
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By TIM ALEXANDER
Illinois Correspondent
BLOOMINGTON, Ill. — Dr. Joshua Woodard, a professor of agricultural economics from Texas A&M University, stopped by the office of the Illinois Corn Growers Assoc. (ICGA) and Illinois Corn Marketing Board (ICMB) June 24 to give an overview of the crop insurance plan to those officials.
Who’s paying in, who’s getting premiums and why the entire system is severely off-track was the focus of Woodard’s visit. At the core of his message is that Illinois and Midwest corn farmers are being gouged by the federal crop insurance program by paying too much to support payouts in other states for other crops.
Set up in the 1970s, the federal crop insurance program works through a partnership among a farmer, an insurance provider and the government. Premiums are partially paid by the farmer and partially by the government, while the risk is shared by the insurance company and the government.
Woodard told the group that federal law ensures that crop insurance “loss ratios” should be 1.0, with a loss ratio greater than 1.0 signifying that more money is being paid out than the program is taking in. American corn’s loss ratio is 0.58 and Illinois’ is 0.39, Woodard stated, and there exists a “huge pocket” over the Midwest where loss ratios are consistently less than 1.0.
Comparatively, the loss ratio for tobacco is 2.24, and the state of Alabama’s average loss ratio is 1.37. Woodard said if the actuarial data are correct, a pattern like that has basically a zero chance of happening.
“The law says that all of these loss ratios should be 1.0. Every farmer should get a fair shake. This program is supposed to be fair for all producers,” he said.
Woodard said there are several causes for the incorrect actuarial, but the primary cause is the USDA Risk Management Agency’s (RMA) procedure for calculating APH (actual production history) does not account for an increasing yield trend.
As genetic modification allow farmers to plant more weather-resistant crops, risk is decreasing as yields are increasing. The RMA model equates yield increases with increased risk, causing Woodard to deem the model functionally wrong.
“You don’t have these problems if you don’t have a yield trend,” Woodard said.
Tim Lenz, ICGA president and a corn grower from Strasburg, told Farm World Midwest growers have long been overcharged for federal crop insurance based on loss ratio.
“The heart of the Corn Belt – Illinois, Iowa, parts of Indiana and southern Minnesota – are basically 0.5 percent or less for a loss ratio. By law, the crop insurance is supposed to be an even payout, but it’s actually under a 50 percent payout.
The rate methodology does not seem actuarially sound,” he said.
“The higher the yields go, according to the RMA model, the more variability in (risk). That has been proven not to be true with today’s hybrids and farming practices. This affects corn more than anything else because corn has a steeper upward-trending yield curve,” Lenz added.
“You can look at soybeans the same way, though there is not quite the uptrend in yield as with corn. But again, the rate methodology does not fit the Midwest, or other low-risk areas.”
Lenz and the ICGA hope that language in the 2012 farm bill will address changes in the federal crop insurance program.
“We need a bigger safety net, we’ll talk about shifting some direct payments. We just don’t want to keep putting money in a system that seems to be incorrectly rated for Midwest corn and soybeans,” Lenz said.
“We’ve been looking at this a long time. If we can’t get the RMA to change the way they process and manage the program, then we will figure out ways to allow the corn farmer to keep more of that money that he’s overpaying.”
To read more about Woodard’s visit to the ICGA/ICMB office and view a color-coded U.S. map of crop insurance program loss ratios, go to www.ilcorn.org |
| 7/7/2010 |
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