Ag Policy Blog
Chris Clayton DTN Ag Policy Editor

Thursday 02/06/14

Crop Insurance Provisions in the New Farm Bill

A few people have commented that they didn't know exactly what the farm bill did in crop insurance. There is perception that crop insurance takes a cut. That's actually the opposite of what happened in crop-insurance programs. For the most part, those programs and options for producers are propped up. The final bill also does not include any income means testing for crop insurance premium subsidies despite the initial language in the Senate version of the bill.

The Congressional Budget Office calculated crop insurance costs increase about $5.7 billion over 10 years under the bill, totaling $89.8 billion over 10 years. That's effectively double the estimated budget score for commodity programs, according CBO.

The two new big ticket items in the crop-insurance title are the Supplemental Coverage Option -- $1.7 billion over 10 years --- and the Stacked Income Protection for cotton producers -- $3.29 billion over 10 years. SCO and STAX are optional county-based revenue programs meant to add extra protection to individual crop-insurance policies for producers.

Here are some of the key changes in crop insurance under the Agricultural Act of 2014:

Clipping USDA: One of the longest provisions in the managers' statement on the farm bill prevents USDA from negotiating outright budget savings through a Standard Reinsurance Agreement with the crop insurance industry. USDA negotiated a $6 billion budget savings over 10 years in the last agreement. The new legislation prevents USDA from generating such savings again. The next SRA must be budget neutral. "Any SRA negotiated pursuant to Section 508(k)(8)(A)(ii) shall not be used as a means of achieving further cuts to Federal Crop Insurance. To this end, this provision of law requires forbearance from further cuts in any future SRA negotiation to the maximum extent practicable."

Conservation compliance: One of the bigger changes in crop insurance is in regards to conservation. The bill requires conservation compliance with highly erodible land and wetland conservation practices to be eligible for premium subsidies when buying crop insurance. A farmer who has not had to comply with conservation compliance for commodity program eligibility will have five years to develop an approved conservation plan. That ineligibility language would only apply after a final determination has been made and only applies to future crop years afterward. "A determination is not final until after the producer has exhausted all administrative appeal rights." This doesn't mean a producer found ineligible cannot buy crop insurance, but they cannot receive the premium subsidy. A farmer also has at least two years of reinsurance to mitigate a wetlands conversion before becoming ineligible. The provision doesn't apply to any wetland conversion prior to enactment of the bill. Also, for producers who convert wetlands of fewer than five acres, the farmer can make a contribution to conservation equal to 150% of the cost of mitigation to remain eligible for the premium subsidy.

Sodbuster: The legislation reduces crop-insurance benefits for farmers who plow native sod. Under the provision, insured yield would be 65% of the county transitional yield for the first four years of production. The premium subsidy also would be reduced by 50% as well. This provision only applies to farmers in Iowa, Minnesota, Montana, Nebraska, North Dakota and South Dakota, a region known as the prairie-pothole region.

Supplemental Coverage Option: SCO is an added insurance policy that farmers can buy if they sign up for Price Loss Coverage in the commodity title. It will cover losses exceeding 14%, meaning it will cover losses below 86% of revenue. SCO will cover that gap between 86% of revenue and when individual insurance coverage kicks in. SCO will be available in 2015 for farmers who enroll in Price Loss Coverage. Farmers signing up for the Agriculture Risk Coverage program, or ARC, are not eligible to buy SCO. Farmers who buy SCO would pay 35% of the actual premium cost and USDA would subsidize the other 65%. The big distinction between ARC and SCO is that SCO does not have a payment cap.

(Note: Earlier this week I indicated SCO could be either a countywide or individual policy. That is incorrect. I stumbled over some language in the Managers' statement on the bill. SCO is exclusively a countywide policy and pays based on county revenue.)

STAX for cotton: Stacked Income Protection insurance, or STAX, was created for cotton producers, starting in 2015. The premium subsidy for STAX is 80% of the premium costs determined by USDA. Cotton farmers also will be able to buy STAX, a countywide protection covering losses ranging anywhere from 10% to 30% as a countywide coverage to stack on top of individual coverage. Farm-bill conferees cautioned that they want to ensure that the total possible indemnity does not exceed the total insured value of the crop. As an insurance-industry primer stated, "An indemnity is paid based on the amount that expected county revenue exceeds actual county revenue as applied to the individual coverage of the producer, except that indemnities may not include or overlap the producer’s selected deductible."

Enterprise Units: The bill makes permanent the higher premium subsidy for enterprise units, which has been a pilot program. Enterprise units allow farmers to combine all their acreage in a single county into one unit. The bill also creates separate enterprise units for irrigated and non-irrigated crops by 2015.

Strike disaster losses: A farmer can exclude a recorded or estimated yield for a crop year when the entire county is 50% below the 10-year average yield. Effectively, that year can be voided from a producer's yield history. A primer by the crop insurance industry adds, "This also applies to contiguous counties and allows for the separation of irrigated and non-irrigated acres."

Low test weights: The Senate amendment requires the Corporation to establish procedures to allow insured producers not more than 120 days to settle claims, in accordance with procedures established by the Secretary, involving corn that is determined to have low test weight.

Irrigation v Dryland: Starting in 2015, farmers will be able to choose different coverage levels for irrigated versus dryland acres.

Beginning farmer and rancher provisions: Farmers who haven't actively operated or managed a farm or livestock operation for more than five years can receive a higher transitional yield rate than traditional farmers on the same land. Outside of CAT coverage, those beginning farmers also can receive a 10% higher premium subsidy as well.

Peanuts: Growers also will have an insurance program starting in 2015. The program could have its protected price indexed to the Rotterdam price for peanuts or another price level set by the Secretary of Agriculture.

Other insurance options ahead: The bill encouraged RMA to do more research and develop crop insurance policies for rice, sweet sorghum, biomass sorghum, peanuts, sugar cane, alfalfa, pennycress and other specialty crops. Also, RMA will need to look at creating margin coverage for catfish producers to cover the difference between market prices and the costs of production.

Alfalfa: The Managers' language also notes that livestock producers need forage, but alfalfa acres have declined as much as 25%over the past decade. The bill stresses the importance of studying a crop insurance policy for alfalfa.

Organic: For organic producers, the bill requires RMA to create standards ensuring that prices for organic crops are based on retail or wholesale prices. USDA must report to Congress the progress being made in developing and improving crop insurance for organic producers.

Follow me on Twitter @ChrisClaytonDTN

Posted at 6:03PM CST 02/06/14 by Chris Clayton
Comments (4)
Chris: Does your statement on Organic imply that prices for organic products must be based on their production costs?
Posted by tom vogel at 6:56PM CST 02/08/14
No, but it is meant to create more standard indemnity claims for organics because you don't have those posted national prices like you do with commodities.
Posted by CHRIS CLAYTON at 2:27PM CST 02/10/14
Will the insurance companies that are offering crop insurance, many multi-insurance companies have gone strictly crop insurance so there must be money to be made, be held accountable to the bill and the farmer when claims are settled? Getting less than one tenth revenue for a total crop loss, all things being equal, highest coverage available, does not pay the associated crop bills. It now takes more than a couple good years to make up for one bad year. Crop insurance has been touted as a risk management tool; for us in fruit and grain, it has not. It is better than nothing, but not near what it should be.
Posted by Sharon Schmuhl at 11:10AM CST 02/11/14
With all these new provisions, I wonder if I need to check my old policy. I recently purchased crop insurance from Ruhl. https://www.iruhl.com/farm-insurance/crop I wonder how it will affect my policy. If anyone else is looking for insurance the cover almost every type, including farming and agriculture. Thanks for the great article, it's nice to learn about new trends in the industry.
Posted by Timothy Ruhl at 1:59PM CDT 05/01/14
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