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Crop Insurance & the 2012 Farm Bill Kent Lanclos

This article discusses various aspects of the crop insurance program, including program participation, premium rates, yield trends, and program costs. It also addresses concerns and offers potential solutions for improving participation in the South.

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Crop Insurance & the 2012 Farm Bill Kent Lanclos

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  1. United States Department of Agriculture Risk Management Agency Crop Insurance & the 2012 Farm BillKent Lanclos AAEA Annual Meeting July 26, 2011 Pittsburgh, PA

  2. Program Participation Kent Lanclos Risk Management Agency 2

  3. Program Participation Kent Lanclos Risk Management Agency 3

  4. ProgramParticipation Kent Lanclos Risk Management Agency

  5. PremiumRates Kent Lanclos Risk Management Agency

  6. Premium Rates Rating Methodology Review • RMA’s general approach to premium rating is appropriate • Consistent with actuarial principles • Review posted on RMA’s Website • RMA’s rating methodology, and supporting documentation also available • No legislation required Kent Lanclos Risk Management Agency

  7. PremiumRates Rating Methodology Review • Adjusting historical loss experience to reflect • Current T/P mix • Unit structure • Alternative weighting of years • Work underway by contractor • Does not impact price component of revenue rates Kent Lanclos Risk Management Agency

  8. Yield Trends Kent Lanclos Risk Management Agency

  9. YieldTrends Impact of Yield Drag *CL = coverage level **ECL = effective coverage level Kent Lanclos Risk Management Agency

  10. YieldTrends • Addressing Yield Trends • FCIC Board approved 508(h) submission at May 2011 meeting • Proposal by Illinois Corn Marketing Board • Initially for corn & soybeans for 2012 • Potential expansion to other crops in 2013 • No legislation required Kent Lanclos Risk Management Agency

  11. DecliningYields • Current Measures • Yield Plug • Replace low yield with 60 percent of the county T-Yield (10-year county average) • Yield Floor • APH can not go below 80 percent of T-Yield • Yield Limitation • Year-to-year change in APH limited to 10 percent Kent Lanclos Risk Management Agency

  12. DecliningYields • Addressing Declining Yields • Alternative yield plug that relies on producer’s own history rather than county averages • Variable percentage tied to number of actual yields • More actuals => higher percentage • Replace current T-Yields with Personal T-Yield based on insured’s APH • Legislation may be required • Cost/paygoconsiderations Kent Lanclos Risk Management Agency

  13. 3rd PartyDamage • Damage not due to a natural cause • No indemnity payment • Zero production meaning guarantee negatively impacted for next 10 years • Also, premium rate higher because of lower rate yield • Consider options Kent Lanclos Risk Management Agency

  14. Crop Insurance in the South South = Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia Midwest = Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin Kent Lanclos Risk Management Agency

  15. Crop Insurancein the South • RMA commissioned two studies of crop insurance participation in the South • Consistent findings of 2 studies • No inherent flaw in program/policies such that “crop insurance doesn’t work in the South” • Low participation (particularly BUP) due to • Misinformation & negative perceptions • High premium rates & other risk management options • Reliance on disaster assistance • Not required by lenders • Does not payoff every year Kent Lanclos Risk Management Agency

  16. Crop Insurancein the South • Addressing Participation Concerns • Priority for RMA, but … • No silver bullets • Minimizing fraud, waste and abuse to change perceptions • Premium rates • Re-weight historical loss experience • Reduce use of yield floors, cups, disaster plugs, etc. • Education and changing culture is a slow process Kent Lanclos Risk Management Agency

  17. ProgramCost Kent Lanclos Risk Management Agency

  18. ProgramCost • The new SRA achieved $6 billion in scored savings over 10 years • At current prices, savings would be significantly larger • Future program costs • Lower premium rates => higher participation & coverage levels, but lower premium subsidies and company underwriting gains • CBO scoring assumes loss ratio of 1.0 • Future loss experience may be less favorable than recent past Kent Lanclos Risk Management Agency

  19. ProgramCost • Conundrum, if you will • For FSA programs (counter-cyclical payment, marketing loans), higher prices mean reduced spending • For crop insurance, higher prices mean higher more spending for premium subsidies and underwriting gains Kent Lanclos Risk Management Agency

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