May 11, 2016

Volatile market leads to lower crop insurance premiums for farmers

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A central Illinois farmer drives a tractor through his field during the early parts of spring planting 2016.

Photo by Darrell Hoemann/CU-CitizenAccess.org

A central Illinois farmer drives a tractor through his field during the early parts of spring planting 2016.

CHAMPAIGN, Ill. — Thanks to a drop in market volatility and grain prices, farmers may pay up to 10 percent less this year for crop insurance.

The federally subsidized insurance program protects farmers from income loss caused by poor crop yields or crop prices. The taxpayer-funded program came under scrutiny by federal lawmakers after a drought in 2012 resulted in more than $17 billion in payouts to farmers.

Farmers pay about 40 percent of the insurance premium’s cost.

For the 2015 crop year, Illinois farmers enrolled about 19 million acres in various crop insurance programs and paid an average of $15 per acre for their share of the premium, according to federal data. Each acre was subsidized with taxpayer funds of about $19 on average.

Experts say that although crop insurance premiums for farmers will likely be the same or lower in 2016, farmers in Champaign County may still see a loss in profit this year due to current market conditions.

Gary Schnitkey, a professor of agricultural and consumer economics at the University of Illinois at Urbana-Champaign, initially anticipated potentially higher crop insurance premiums.

But due to a decrease in market volatility and grain prices, he said farmers can expect their premiums to decrease by possibly five to 10 percent on average.

Schnitkey said one of the biggest factors driving the decrease in premiums is the lower volatility.

“That was pretty unanticipated,” he said. “I did not think it was going to come down as much as it did.”

The Andersons grain storage facility west of Staley Road in west Champaign, Ill., on April 15, 2016.

Photo by Darrell Hoemann/CU-CitizenAcces.org

The Andersons grain storage facility west of Staley Road in west Champaign, Ill., on April 15, 2016.

According to an article by Schnitkey on Farmdoc Daily, an agricultural news website based from the University of Illinois, the volatility factor “summarizes the market’s estimates of the likelihood for price movements of various magnitudes.”

Schnitkey said this decrease in volatility is the most surprising change that affected the premiums, and that it is “pretty hard to anticipate those being as low as they are.”

Farmers had to make a decision on crop insurance by the annual deadline of March 15.

“What we’ve been hearing is that most farmers will just stay where they’re at [with their coverage],” Schnitkey said.

He noted that the Risk Management Agency, the U.S. Department of Agriculture agency that determines crop insurance rates, primarily considers the overall risk factor, the crop’s price level and the volatility of the market when determining rates.

“Farmers view it as a pretty important piece of their risk management strategies,” Schnitkey said. “Without crop insurance, they don’t have any sort of guarantee on revenue, and with it, they do.”

Rodney Weinzierl, a corn and soybean farmer in central Illinois and the executive director of the Illinois Corn Marketing Board, said farmers may still lose money this year.

“A farmer can insure a portion of their loss, but they’re still going to have a loss even with crop insurance,” he said. “Very few farmers will not lose money… just because of the market conditions.”

Doug Yoder, a crop agency manager with Country Financial Insurance, said the expectation for lowered premiums is “a good example of how volatile this whole environment is for farmers and landowners.”

With the high cost of items like fertilizer and fuel and the decrease in grain prices, Yoder said most farmers will find it difficult to generate enough revenue to break even on expenses this year, let alone make a profit.

Therefore, he expects to see farmers looking to cut costs in certain areas.

“I don’t think crop insurance is one of those ways they should cut expenses,” Yoder said.

In 2015, 89 percent of corn acres and 87 percent of soybean acres were insured in Illinois, Yoder said.

“The reason they need it so much is [that] so much is out of their control — weather, bugs, disease, the markets, the prices they receive,” he said. “So many things are out of their control, and that’s why they need this type of protection.”

The vast majority of policies purchased in Champaign County last year — 90 percent — were revenue protection policies, Yoder said.

When farmers’ revenue falls below a specific threshold, the policy pays a part of that lost difference.

Coverage can vary greatly even within the state, but Yoder said Champaign County is one of the counties in Illinois that produces a more stable yield.

“For the most part, we’re talking very good, productive soils with good growing conditions,” he said.

Yoder said educating elected officials is one of the biggest challenges facing the federal crop insurance program in the future.

“A lot of newly elected officials don’t understand agriculture to start with, and they don’t understand this very complicated crop insurance program,” he said. “They just see the dollars they’re spending on it . . . they want to cut those costs.”

But, Yoder said, cutting costs to the crop insurance program can only do more harm.

“Without (crop insurance), our cost of food would go up in the end because it’s going to be that much more expensive to grow it, without this protection,” he said.