Did a change in the way that cotton insurance rates are computed make cotton insurance more affordable or open the door for potential abuse? A clear answer could emerge this coming fall.
There’s no doubt that crop insurance premium rates for the commodity declined significantly compared to the last two years. For example, a Washington County, Miss., cotton grower who expects an 800-pound yield and a price of 62 cents would pay $17.07 per acre at the 75 percent coverage level in 2001. That compares to $21.77 in 2000 and $42.90 in 1999.
The new program’s affordability is being blamed for an increase in projected cotton acreage this spring. But Pete Dunn, an insurance agent with Dunn, Marley and Harris, in Clarksdale, Miss., believes changes had to be made. “In the past, cotton insurance was at about 10 percent participation on buy-up policies and those 10 percent were the ones that typically filed the claims.
“USDA finally said, ‘Okay, let’s get it affordable so that everyone will take it and see where it lands.’ The problem is that it coincides with a price drop in all the other major commodities and cotton is the only crop that looks like it will cash flow right now.”
On the other hand, some cotton producers are concerned that rules covering “first time cotton” will encourage more cotton production on marginal soils. For example, under the new program, a farmer in Mississippi County, Ark., can plant cotton on a field with no yield history and establish a transition yield of 879 pounds per acre (for irrigated cotton in the county). He can pay an insurance premium of around $60 per acre at the 85 percent buy up level and guarantee himself $456 per acre in coverage.
According to John Edwards, a farmer in Leachville, Ark., this is an invitation for abuse. “Say you have a soybean field that traditionally yields 35 bushels per acre. At the $5.26 loan rate, you would gross $184 per acre. But you could put together a cotton budget for that ground that is only $140 more and still pass muster for insurance purposes,” he said. “And that would include the $60 insurance premium.”
That $140 would result in the cotton producer gaining an additional $272 in gross income per acre. “And that’s guaranteed. With soybeans you might not make the yields. You can plant cotton and then go fishing and not worry about it.”
A model change
According to Mike Moore, regional director of USDA/RMA, Valdosta, Ga., the process of changing cotton crop insurance began in the late 1990s. “Sen. Cochran (R-Miss) and some cotton producers expressed concern that the rates were not in line with the risk. They asked USDA to look at another rate model besides the experience-based rate model being used to determine cotton premium rates.
“We went to a yield variation model and that model indicated that the premiums were overstated. So we went in and lowered the cotton base rates, which are the unsubsidized rates. At the same time, Congress came in and put more subsidy in the program. So cotton got a double benefit.”
Basically, cotton premium rates are now based on the yield histories of farmers within a county who are both in and out of the insurance program, rather than only on the yield histories of farmers in the program.
In general, cotton premiums came down because the yield variation model assumed higher yields than the previous experienced-based model. Normally, premium rates go down as yield history goes up.
Moore stressed that the FSA is tightening compliance under new insurance program rules. The agency can exclude losses due to poor farming practices and expand penalties for fraud. On the other hand, the agency has no control over what and where farmers plant nor can it establish minimum input cost requirements.
“The cotton insurance program will be overwhelmed with claims and will never be able to police the program properly,” Edwards said. “It will take all their manpower to work the claims.
“A crop insurance program should be for that disaster, that hurricane or flood that comes through and wipes out a cotton crop,” Edwards said. “You can’t have a cotton insurance program that guarantees you a profit. And that’s what this is getting close to.”
The big decline in cotton premiums has several corn producers wondering why corn insurance in the Mid-South didn’t come down also.
According to Moore, there’s not enough historical data on corn available in the south for USDA to go to the yield variation model. “We had virtually no corn in Mississippi and in the rest of the South for years and years. The experience that we have generated was based on a minuscule amount of acres. It would be real hard to use the same approach to rate corn as we did cotton.”
Meanwhile, corn farmers in the Midwest have little to complain about. At the 75-percent buyup level, they pay less than one-third the cost of premiums that Mississippi growers pay.
“The premium for the 75-percent buy-up level in Champaign County, Ill., on soybeans would be about $3 an acre,” says Dunn. “Here in Mississippi, it would be approaching $10 an acre. Corn insurance up there would be about $4 an acre. Here it’s about $14.
“You can say that’s not right, but if you look at the historical loss ratio, last year they (the Champaign County region) paid out about 20 cents out of every dollar they took in in claims over all the crops. In Mississippi, our loss ratio is a little above a dollar. That means a little over a dollar was paid out in claims for every dollar collected in premiums. And that includes the farmer-paid premium and the subsidy.”
Moore added that since the government subsidy is in percentage form, the South actually is getting a greater benefit in terms of dollars than Midwest growers. “If you subsidize a $20 premium at 50 percent, you’re giving that person a $10 benefit. But if you subsidize a $5 premium at 50 percent, you’re only giving that person a $2.50 benefit. That worked to our advantage here in the South.”
Dunn says that his company has signed up more growers than in years past at the higher levels of insurance. “They’re starting to figure out that they’re using the same yield history and unit structure for ASCS disaster losses as we do for crop insurance.
“In other words, if a person had just a CAT policy and either owned or cash-rented all his ground, then he had only one unit for loss purposes for ASCS. But when they buy higher levels of coverage, we can split them up by farm numbers, irrigated and non-irrigated, which also gets them a higher payment for the disaster program.”
The signup period ended Feb. 28.
e-mail: Elton Robinson.