The developers of cost of production insurance hope to conduct pilot programs for cotton in seven Mid-South counties and parishes in 2003.
Other commodities may start up similar programs the same year, although program administrators aren't sure which ones. But eventually, cost of production insurance will be available for 12 commodities, including wheat, rice, corn, soybeans and some fruits and vegetables.
In Mississippi, cotton pilot programs will be implemented in Coahoma, Leflore and Yazoo counties; in Louisiana, in Concordia, East Carroll, Franklin and Tensas parishes. Other cotton pilot programs will be conducted in Alabama, Arizona, California, Georgia, North Carolina and Texas.
AgriLogic, Inc., a consulting firm based in College Station, Texas, is developing ground rules for the new cost of production insurance program. USDA's Risk Management Agency tabbed the firm for the task in July 2001.
AgriLogic had placed the cotton cost of production insurance program on fast track and hoped to begin a pilot program this year.
But the process bogged down and had to be delayed until 2003, according to Ray Young, Wisner, La., cotton producer and crop consultant who helped pioneer the concept.
Young talked about cost of production insurance at the 2002 annual meeting of the National Alliance of Independent Crop Consultants, in Albuquerque, N.M.
Cost-of-production insurance allows producers of commodities (crop and livestock) to insure 70 to 90 percent of actual documented variable rate costs of production, fixed costs and land expense. The latter would be capped at certain levels.
Thus, the most a producer can lose in any one year is 10 percent of these costs and any other inputs not covered, except the cost of the insurance itself.
For example, if disaster struck early in the season and the producer spent only $100 on the crop before it was lost, the maximum indemnity would be $90 — 90 percent of $100.
To find out if you have a claim at the end of the year, “Put all your cotton in one sack,” Young said. “Then put all your expenses in one hand and all your receipts in another. If your receipts come up short of what your insured cost of production was, you have a claim.
“If you have a claim, you have to document your expenses,” Young stressed. Income for purposes of insurance includes market receipts, by-product income, LDPs and other government payments (excluding disaster payments).
“We started working on the concept about three years ago,” said Young, immediate past president of the Louisiana Federal Land Bank Association and a member of the Coalition of American Agricultural Producers (CAAP), an umbrella organization for a group of farm credit institutions that support the concept.
The pioneers of the concept wanted an insurance program that provided a safety net and was not a revenue enhancer. The latter often led to abuse of crop insurance, especially in the South, Young noted.
“The only ones who bought crop insurance were the ones who had problems,” Young explained. “So if you didn't plan on having problems, you couldn't afford to add another $30 to $40 an acre to your input costs to buy insurance.
“And there's been some outright fraud. We wanted to find a way to make crop insurance work better for us.”
The logic behind cost of production insurance “is that you ought not to be able to get more out of the insurance than you put into the crop,” Young said.
“Some people are doing better than that. So we thought cost of production crop insurance would be a good way to approach this.”
Cost of production crop insurance is not meant to replace other types of crop insurance, said Young. “We think it will be another option and we think it will be one of the better ones.
“But it won't be for everyone. It will be for the producer who is really working hard, managing, spending money, trying to make good yields every year. It's going to be an advantage to him. He will be rewarded for that good effort.”
Growers must insure all of their acreage in a county as a single unit under cost of production insurance. Irrigated and non-irrigated areas would be treated the same except irrigated areas would carry a higher production cost.
“If you're insuring cotton, you have to insure all your cotton in a county. You can't just insure one farm and not another,” Young said.
Young feels that the government will provide a 50 percent to 60 percent subsidy for the insurance premium. “I'm hoping my premium (for cotton) will be around $5 or $6 an acre after the subsidy. I don't know that though.”
Each farmer's premium will be figured individually, according to Young.
“There will be a county premium calculated for every county where the insurance is sold. Then each individual's premium will be based on the county level. If you're better than the county average, you'll have a lower premium, if you're lower than the county average, you'll have a higher premium.
In addition, Young said that if an individual's proven yield is consistently above his cost of production, his premium will be less than the individual whose yield often dips below his cost of production. Cost of production insurance may not be the best fit for the latter farmer, noted Young.
Young said that cost of production insurance does not address the problem of unexpected production costs.
“There are lot of questions we can't answer. Some may have a terrible season and it costs twice as much to control weeds as it did the year before. That's a problem. When you come in to sign up, you have an amount (in production costs) you want to insure.”
Land costs would be covered whether the land was owned by the farmer or rented. Young said the program was designed “with a lot of input from growers” after a series of meetings during the 2001 growing season.
Prior to AgriLogic being awarded a contract to develop cost of production insurance, the company had been under contract by CAAP to study the feasibility of the concept.
Providing funds for that effort were several CAAP member organizations, including Farm Credit Bank of Texas, Western Farm Credit Bank, Ag America Bank, Ag First Farm Credit Bank and the National Association of State Departments of Agriculture. Since July 2001, RMA has been funding the project.
Cost of production crop insurance is authorized by language in the Agricultural Risk Protection Act of 2000, passed by Congress in the same year.
Eventually, cost of production insurance will be administered by USDA's Risk Management Agency and sold by the same insurance agencies that sell current farm catastrophic and revenue products.