Minding Ag's Business

Forgive and Forget Disaster APHs

Matt Huie of Beesville, Texas, could hardly contain his relief when he heard that USDA would implement a new farm bill rule in time to patch his crop insurance coverage for 2015 after all. The surprise reversal means growers of most major crops--except winter wheat--will be able to exclude extreme yield disasters from their 10-year Actual Production History (APH). As DTN's Chris Clayton reported Oct. 20 (see "USDA Rolls Out APH Exclusion" on the Ag Policy page), growers in counties where yields fall more than 50% will be able to exclude those results when calculating their 10-year history. Growers in adjacent counties would also be eligible. Details won't be released until December, including potential surcharges for premiums.

Proponents had argued that existing yield-plug provisions weren't designed for the extreme and prolonged drought conditions overhanging the Southwest in recent years.

Huie suffered near-zero yields due to weather disasters in 2006, 2009, 2012 and 2013. Forgiving those results will boost his APHs for corn, cotton and sorghum 20% to 30%. Right after he hung up with me, he planned to call his lender with the good news.

"There's still a chance they will jack up rates, which would be a concern," Huie says. "But this goes a long way to fix the gaps in our production coverage. We owe USDA a big thank you for getting it done."

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In a statement yesterday, the American Soybean Association also expressed gratitude. "The rollout of the APH program is a lifesaver for soybean farmers in so many parts of the country. It quite literally means the difference between continuing to farm following disastrous years, and being forced out of business," said ASA First Vice President Wade Cowan, who farms in Brownfield, Texas, and has experienced significant drought in each of the last four growing seasons. "Weather is the single biggest external factor in soybean farming. We have no control over its effects, but with the APH program, we can better respond to its impacts."

The APH exclusion, according to Cowan, takes on additional significance this year, given the decline in prices for many commodities. "Without the APH program, producers who have suffered severe weather would face the double-whammy of low prices and low yield protection," Cowan said.

One sometimes overlooked benefit is that establishing a realistic APH is doubly important now since it is the basis for payments under the new Supplemental Coverage Option, a rider that allows growers like Huie to buy up insurance coverage to the 86% level. Until now, federal crop insurance wasn't offered above 75% levels on any crop he grows.

Initially, those within the crop insurance industry balked at the provision, saying it could undermine actuarial soundness. Critics argued it was similar to offering a 16-year-old, accident-prone Corvette driver the same coverage as a 50-year-old pickup driver with a spotless record. They pointed out that the farm bill gave USDA no discretion but to charge higher premiums for anyone availing themselves of this provision, but it would take some time to compile the data. USDA officials said it had no manpower to spare until it constructed data and regulations for the main farm safety net provisions.

When asked if premiums would reflect the higher risk in modified APHs, Risk Management Agency Administrator Brandon Willis said, "Our team is working on this to make sure [premiums] are rated accurately."

In an interview with DTN, Willis said the premium rate charged per dollar of SCO (and cotton's STAX program) will not be affected by the yield exclusion rule. However, it will generally result in more dollars of SCO coverage. I interpret that as resulting in higher premiums for growers, but who knows how much.

Bystanders may not appreciate how challenging it will be for RMA to compile all the data necessary to calculate premiums under the exclusion, he added. First the agency needed to help the Farm Service Agency compile historic county yield data by every covered crop for every county, a major challenge since FSA did not possess reliable data nationwide and needed to supplement it with crop insurance records. Approximately 2,600 counties grow corn but some lack ancient history and others didn't have enough producers to be statistically sound. Imagine the issues with other crops.

To ready the system for changes in APH rules will require tracking down county yield data back decades, Willis told DTN. Some farmers may rotate crops, so a corn-soybean rotation would need yield records dating back 20 years to complete their personal averages. The yield exclusion can be used when growers have less than 10 years of history, but RMA would need county yield records going back another 10 years from the earliest yield in the farmer's database.

Farmers like Huie know it required extra effort on USDA's part, but low yields--on top of the expected low price guarantees for 2015--would have severely eroded his ability to acquire operating money come December and January. "I'm going to be gracious to RMA. It's a big deal," Huie says.

Follow me on Twitter@MarciaZTaylor

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Pedro Sanchez
10/24/2014 | 9:22 AM CDT
Glad the farmer in Texas is happy. However, dropping 4 of the past 8 years of your ACTUAL YIELD HISTORY because of weather is a horrible actuarial decision. You are talking about a 50% write down of bad production. Maybe what should happen is farmers in high risk areas drone to drought, hail, and other weather related issues assume more of the financial risk than the tax payer. I get we want to keep farmers in business, but at what cost? With cash rent and input costs at obscenely high levels relative to gross revenue we need corrective action. If the government is going to play this game, we will artificially raise the price level of what we have to pay for inputs as the floor of loss moves up. If the support wasn't nearly as good, we would see input prices and rental rates drop faster in corrective fashion. Granted most of the above is purely my humble opinion, but I deal with enough business persons and know enough about economics to understand the "mentality" out there. The risk-reward dynamic is completely out of whack because of our crop insurance program. Yet we farmers happily (or grudgingly most likely) pay the price to the landlords and input suppliers.