Crop Insurance: The New Face of Farm Policy
From walking on soil baked into near-concrete during the worst drought in over 50 years in 2012, to dredging across flooded fields this soggy spring, farmers are wondering when an “average” year will occur. And that’s just weather. As a 26 year-old farmer, I’m starting to wonder what “average” or “normal” even means.
In my relatively short career, corn prices have been below $2.00 and over $8.00 per bushel, land prices have nearly tripled since I purchased my first field, proposed regulations point to increasing costs without offsetting revenues, and farm policy has evolved from focusing on price supports and direct payments to farmers towards a more market-oriented risk management tool called crop insurance, a public-private partnership whereby farmers purchase policies and only receive a payment if there is a documented loss.
In light of our new “normal” characterized by volatility — in weather, markets, and regulation —farmers would struggle without access to crop insurance. The Farm Bill, which will guide American agriculture for the next five years, is currently being debated in Congress. At its centerpiece is crop insurance, a vital component that is an economic and social development tool for rural America and the new face of farm policy.
The average American farmer is 58, the oldest at any time in our history. Assuming most of us retire at 65, that puts us seven years away from real problems if we don’t start transitioning to the next generation. Crop insurance helps young farmers because it serves as a “stop-loss” collateral source to back credit—a crucial transition tool given the high capital costs of farming. In this sense, crop insurance is a bridge to the future for America’s farmers, as well as a first-rate risk management tool.
Crop insurance is also a working capital tool. But why farmers and not other business sectors? Non farmers do not negotiate with the whims of Mother Nature, cater to consumers in foreign and domestic markets, AND compete with neighbors two miles up the road, farmers two states over and farmers outside our borders to produce a non-differentiated commodity.
Farmers in other countries need to stockpile a large share of their profits into cash reserves planning for a bad year – be it weather, price or market related – so that they have sufficient liquidity when disaster strikes. Because American farmers can purchase crop insurance, we don’t need enormous cash reserves and we can instead reinvest our profits. I have paid down debt faster and invested in newer and more sustainable technologies because I had crop insurance to cover big, volatile losses. Farmers put profits back into their communities and do so more quickly because of crop insurance.
Crop insurance saves taxpayers money. In the past, when disasters struck — and they struck often — the federal government was called upon. Recovery was paid for completely by taxpayers. Last year, when farmers here in Illinois were decimated by drought, we had crop insurance policies and didn’t need a disaster bill to help us plant this year.
Crop insurance is a vast improvement over the price support system and direct payments of the past. It puts emphasis on farmers having “skin in the game” to protect themselves from the risks they deem most likely to occur. It is not uncommon to hear a farmer complain about the money he has spent over the years purchasing crop insurance. It’s a major expense for us, but one we’re happy to pay for because it gives us something this new era rarely allows: peace of mind.
Crop insurance allows market forces to work; we can fail or succeed. Crop insurance is only a buffer, not a guarantee; it is based on historical yields and current prices. It protects “good” farmers — those that apply new technologies, manage risk, and preserve soil and resources — from circumstances beyond their control, like last year’s drought, this year’s flood and the volatile market we now accept as the new “normal.” In contrast, it allows “bad” farmers to fail because, over time, they will tend to have lower yields. The free market still works, just with a buffer that ensures long-term stability in an unstable environment.
Is crop insurance perfect? No. In my perfect world, I want the final 50 years of my farming career forged in a landscape with a stable dollar and interest rate, vastly reduced government regulations, increased free trade and an educated, appreciative consumer. But today, in the real world, crop insurance is the best risk management tool we have. It helps farmers survive the worst of times, reduces costs to taxpayers and allows market forces to work. It’s the new face of farm policy.
Andrew Bowman is a fifth generation farmer, Certified Crop Adviser, and full lines insurance agent, including crop insurance, from Oneida, Ilinois. This op-ed appeared in the Farm Bureau News Service on August 2, 2013.