Pinpointing Policy: Insurance vs. Disaster Assistance

Crop insurance and disaster assistance are both important to farmers and ranchers. As a prolonged drought, natural disasters and wildfires have likely touched every Kansas agricultural operation over the last few years, most farmers have received either an insurance indemnity, disaster payment or both. Crop and livestock insurance programs and policies are not perfect and have their weaknesses and gaps in coverage, so an agricultural future that includes both insurance and disaster aid may well be the only answer. But some disaster programs create disincentives to fully utilize insurance, thereby weakening the program and inadvertently contributing to the need for disaster assistance.

The Issue

In the shadow of federal debt ceiling and overall spending debates, both the U.S. Senate and House are holding hearings to discuss, debate and ultimately write the 2023 farm bill. Both disaster programs and crop and livestock insurance programs will be scrutinized and criticized by legislators from both the left and right. It’s never been more important for Farm Bureau members to discuss these programs, share how they have been impacted, and to communicate priorities for where limited dollars would be best spent and how these programs can be improved and streamlined. And lastly, be prepared to communicate to congress how important these programs are to your farm operations and the important role they play in our nation’s agricultural safety net.

Background

Crop insurance is a vital part of the farm safety net and is the primary risk management tool for many Kansas producers as more than 90 percent of corn, cotton, grain sorghum and soybean acres were insured in 2021, with wheat (85 percent) not far behind. The Annual Forage, and the Pasture, Rangeland, Forage policies provided $157 million of protection and the Livestock Risk Protection and margin products provided another $126 million. Disaster programs are also important. The Emergency Relief Program (ERP) Phase 1 paid a total $308.8 million to more than 23,000 Kansas producers for losses occurring in 2020 and 2021, according to the Farm Service Agency. American Farm Bureau Federation (AFBF) provides a great summary of existing disaster programs and their history in this Market Intel article, Revisiting Disaster Programs and the Farm Bill, from last October. Some disaster programs were made permanent in the 2014 farm bill, including the Livestock Indemnity Program (LIP); the Livestock Forage Disaster Program (LFP), the Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program (ELAP) and the Tree Assistance Program (TAP). Other disaster programs are considered ad hoc. Disaster programs like the Wildfire and Hurricane Indemnity Program Plus (WHIP+) and, most recently, the Emergency Relief Programs, which include the Emergency Livestock Relief Program (ELRP) and Emergency Relief Program (ERP), Phase 1 and Phase 2, were authorized by congress in response to extreme natural disasters and ag losses that were outside the scope of existing policies and/or coverage levels. The recently announced Pandemic Assistance Revenue Program has a signup period ending on June 2, 2023. It provides financial assistance for producers who suffered at least a 15 percent decrease in allowable gross revenue for the 2020 calendar year, as compared to 2018 or 2019.

Crop insurance is an integral part of Farm Bureau policy, mentioned 352 times in the 2023 AFBF Policy book. As part of our farm bill priorities, AFBF policy 239 8.1.4 states we support, “Risk management tools that include both federal crop insurance and commodity programs as top funding priorities.” AFBF policy 239 8.2.7.1.1 states we support, “A robust crop insurance program, with no reductions in premium cost share. We oppose means testing, income limits, or add in’s, such as required production practices, that might limit the availability or adversely impact risk pools.” And in AFBF policy 225, members provide many suggestions as to how crop and livestock insurance policies might be improved and become more “robust.” Disaster assistance is discussed much less in our policy book (disaster(s) only 59 times) and in both AFBF policies 225 and 239, we make multiple suggestions on how disaster programs might be improved and better implemented. 

Can Disaster Programs Create a Disincentive to Buy Up on Insurance?

As disaster programs are crafted, their goal is not to replace current insurance programs but to fill gaps insurance programs might have or cover losses outside the scope of existing insurance programs. In fact, often a requirement of receiving a disaster payment is the purchase of insurance in the following years.

But while not explicitly providing a disincentive to buy up, some programs may be seen as coming close. Sound insurance programs need high levels of participation and producers purchasing higher levels of coverage (known as “buy up”) to function efficiently and effectively. Insurance programs work best when losses are spread across as many acres and participants as possible, including both large and small operations.

An example of a disaster program that came close to providing a disincentive to “buying up,” on crop insurance is the now completed Emergency Relief Program (ERP) Phase 1. This program paid on crops in which federal crop insurance or NAP coverage was available and a crop insurance indemnity or NAP payment was received. The ERP Phase 1 payment calculation depended on the type and level of coverage obtained by the producer. Each calculation used an “ERP factor” correlated to the selected level of crop insurance coverage purchased by the farmer.

Let’s look at two Gray County farmers whose Actual Production History (APH) happened to equal the county T-Yield. One who purchased crop insurance at the 65 percent coverage level versus one who bought up to the 80percent coverage level. Plugging those identical yields into the RMA Premium Estimator, for 2021 corn resulted in farmer premiums of $13 and $25 per acre (65 percent vs. 80  percent buy up). If both farmers suffered a 40 percent yield reduction relative to their APH, the farmer with the 65 percent coverage level received an indemnity of $13.96 per acre, netting after their premium, 96 cents. The farmer who purchased the 80 percent buy up, received a $55.85 indemnity and after their premium, netted $30.85 per acre. Clearly an incentive to buy up on crop insurance coverage!

Now let’s add in their ERP payments[1]. The ERP adjustment factor, which works in the calculations like the crop insurance coverage level, was 87.5 percent for farmers who had a coverage level of 65 percent and 95 percent for those who bought up to the 80 percent coverage level, calculating a payment similarly to how a crop insurance payment is calculated. ERP Phase 1 payments though, were then reduced by the amount of crop insurance indemnity already received. Using the same 40 percent yield reduction relative to their identical APHs, the farmer at the 65 percent coverage level had an ERP calculation of $76.79, reduced by the $13.96 indemnity, to a payment of $62.83, while the farmer at the 80 percent coverage level had an ERP calculation of $97.93, reduced by their $55.85 per acre indemnity, and resulting in a disaster payment of $41.89.

EXAMPLE

Crop Insurance Coverage Level                        65%                 80%

ERP Calculation                                              $76.79             $97.73

 =         Net ERP Payment                              $62.83             $41.89

Crop Insurance + Net ERP Payment  $76.79             $97.73

 =         Net Crop Insurance and ERP             $63.79             $72.73

The farmer who “bought up,” and committed $12 more per acre in crop insurance costs ($25 - $13), ends up netting only $8.94 per acre more ($72.73 - $63.79) after disaster program payments. Arguably less than a resounding incentive to buy up on insurance coverage.