Crop Insurance in Missouri

Crop Insurance in Missouri

Ray Massey and Ann Ulmer
Agricultural Economics Extension

Crop insurance offers producers a way to manage risk associated with commodity production and prices. Crop insurance can decrease the production risk associated with weather, pests and insects and the price risk associated with fluctuating markets. The Risk Management Agency (RMA) of the U.S. Department of Agriculture (USDA) administers the Federal Crop Insurance Corporation and other programs to help support U.S. agriculture. Currently RMA reports crop insurance data back to 1989. This publication summarizes the data from 1990 to 2005.

Crop insurance products
There are two basic types of crop insurance -- yield insurance and revenue insurance (Table 1). The following descriptions of crop insurance products available in Missouri are provided by the USDA RMA (http://www2.rma.usda.gov/policies/).

Yield-based insurance coverage

Actual Production History (APH) - APH, or multiple- peril crop insurance, policies insure producers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects and disease. The farmer selects the amount of average yield he or she wishes to insure; from 50 to 85 percent. The farmer also selects the percent of the predicted price he or she wants to insure; between 55 and 100 percent of the crop price established annually by RMA. If the harvest is less than the yield insured, the farmer is paid an indemnity based on the difference. Indemnities are calculated by multiplying this difference by the insured percentage of the established price selected when crop insurance was purchased. Catastrophic (CAT) coverage is 50 percent yield and 55 percent price elections. Any increase in the yield or price elections is considered buy-up coverage.

Group Risk Plan (GRP) - GRP policies use a county index as the basis for determining a loss. When the county yield for the insured crop, as determined by the USDA National Agricultural Statistics Service (NASS), falls below the trigger level chosen by the farmer, an indemnity is paid. Payments are not based on the individual farmer’s loss records. Yield levels are available for up to 90 percent of the expected county yield. GRP protection involves less paperwork and costs less than the farm-level coverage described above. However, individual crop losses may not be covered if the county yield does not suffer a similar level of loss. This type of insurance is most often selected by farmers whose crop losses typically follow the county pattern.

Dollar Plan - Dollar plan insurance was sold in Missouri for nursery crops in 2004, but statistics indicate none was purchased in 2005. The dollar plan provides protection against declining value due to damage that causes a yield shortfall. The amount of insurance is based on the cost of growing a crop in a specific area. A loss occurs when the annual value of the crop is less than the amount of insurance. The maximum dollar amount of insurance is stated on the actuarial document. The insured may select a percent of the maximum dollar amount equal to CAT, or additional coverage levels.

Table 1. Summary of crop insurance plans.

Introduced
in Missouri Insures
against Yield
coverage Price coverage Results on which indemnity is based

Actual Production History (Multiple Peril) - APH 1989 Individual production risk 50-75% of
APH yield
(up to 85% in selected areas) 60-100% of RMA price Actual yield

Catastrophic - CAT 1995 Individual production risk 50% of
APH yield 55% of RMA price Actual yield

Group Risk Plan - GRP 1993 County production risk 70-90% of
county yield 90-150% of RMA price County yield

Group Risk Income Protection - GRIP 2005 County income risk 70-90% of
county yield 90-150% of RMA price County income

Crop Revenue Coverage - CRC 1997 Individual revenue risk 50-85% of
APH yield Higher of futures price in February or at harvest Actual yield and futures price at harvest

Revenue Assurance - RA 2000 Individual revenue risk 65-85% of
APH yield Futures price in February, or higher of futures price in February or at harvest (optional) Actual yield and futures price at harvest

Based on information from "Managing Risk with Crop Insurance" Iowa State University, University Extension, RM 1854.

Revenue insurance plans Note: All revenue-based options determine revenue differently. See the provisions of each policy for its definition of revenue.

Crop Revenue Coverage (CRC) - CRC is based on the individual producer’s actual production history and the futures price from the Chicago Board of Trade. The policy places a minimum on production and price so that indemnities are paid for production losses due to natural perils and for losses due to market decline. CRC provides revenue protection based on price and yield expectations by paying for losses below the guarantee at the higher of an early-season price or the harvest price.

Revenue Assurance (RA) - RA insurance is similar to CRC. However, the producer has a choice between the base price option and the harvest price option. The base price option is determined by the February futures price and is unaffected by the actual market price – the price is fixed. The harvest price option allows the producer to take advantage of market increases by receiving the higher of the February futures or the harvest time price.

Group Risk Income Protection (GRIP) - GRIP makes indemnity payments only when the average county revenue for the insured crop falls below the revenue chosen by the farmer. GRIP insurance provides protection against an unexpected decline in revenues, whether due to low yields, low prices or some combination of the two. GRIP combines the group, or county average, yield coverage of the GRP with commodity exchange-based price coverage similar to the RA and CRC policies.

Crop insurance availability Specific crop insurance products are offered for various crops in different counties. New crop insurance products are introduced into counties with the most need and later expanded to other counties as the perceived demand arises. The most significant change in crop insurance availability in 2006 was the expansion of GRP and GRIP coverage. GRIP for wheat expanded to an additional 37 counties in 2006. GRP and GRIP was expanded for corn to 23 additional counties; for grain sorghum to four counties; for soybeans to two counties; and for cotton to one additional county. Crop insurance for corn was added in two counties, Polk and Webster, and livestock gross margin (LGM) coverage was expanded to all Missouri counties. Appendix 1 is a table of the all crop insurance options available in each county in 2006.

Acres of row crops insured
This publication reports data for the principal row crops in Missouri. Crop insurance is available for minor crops such as fruits, tobacco and specialty corn, but are included in this report when only whole state data are discussed.

Level of coverage
The number of crop acres insured increased dramatically from 1990-1995 and has leveled out in the last five years. Figure 1 shows the number of acres of Missouri crops that have been insured since 1990. The total number of acres insured has been flat at about 7 million acres since 2000.

Figure 1. Insured crop acres in Missouri.
Source: U.S. Department of Agriculture, Risk Management Agency

Figure 2. Crop acres insured by type of insurance.
Source: U.S. Department of Agriculture, Risk Management Agency
* Group Risk includes both Group Risk Plan and Group Risk Income Protection.

In 1995, the federal government created CAT insurance. With CAT, the premium was paid 100 percent by the government and the farmer paid a registration fee of $50 (later raised to $100/crop/county insured). CAT was initially required for farmers to obtain certain federal farm benefits but later was made optional. Its requirement was responsible for its sudden rise in the number of acres covered by CAT insurance in 1995. The first year, CAT covered more than 5.5 million acres, replacing over 1 million acres that had previously been insured by buy-up plans. However, after the initial jolt of the CAT mandate, the number of acres covered by CAT decreased and number of acres in the buy-up plan continued to increase.

Buy-up insurance allows the purchaser to increase the percent of yield or revenue insured. It offers greater coverage than that of the fully subsidized CAT insurance. Buy-up enables the producer to insure yield or revenue, depending on the type of insurance coverage and the crop to be insured. A subsidy provided by the government offsets a portion of the premium. The percentage of premium paid by the government subsidy decreases as coverage level increases.

Type of insurance product
A previous section of this publication explained the different insurance products available to Missouri farmers. Actual production history (APH) insurance covers individual production losses; group risk plan (GRP) covers production losses in a county. Crop revenue coverage (CRC) and revenue assurance (RA) cover revenue losses.

Figure 2 shows the number of acres that have been insured by each of the insurance products. APH was the first insurance product and continues to be the most popular. However, over the last 10 years, CRC and RA plans have increased in popularity. Now almost 50 percent of the crop acres insured are under some type of revenue insurance. The GRP and GRIP products, summed together into group risk, represent a small number of acres and do not show up well on the graph.

Figure 3. Percent of Insurance Type by County for all Crops, 2005.
Source: U.S. Department of Agriculture, Risk Management Agency
The usage of insurance products varies by crop and location. Figure 3 shows the insurance type by county in 2005 as a percent of all insurance coverage. APH accounts for the vast majority of coverage in the bootheel area of the state. In the northern portion of the state, the majority of the coverage is RA, although APH and CRC are also popular. CRC is the most used crop insurance product in a few counties in the center of the state. GRIP is the newest crop insurance product, popular in limited areas of the state.

Type of insurance by crop
Figure 4 shows the percentage of crop acreage enrolled in the different insurance plans in 2000 and 2005. The preferred type of insurance varies by year because of new product offerings and farmers seeking products that best meet their needs. RA, first introduced in Missouri in 2000, has tended to replace CRC as the preferred crop revenue insurance product. RA has also replaced some APH coverage in corn and soybeans. CRC, though offered for rice, has almost completely fallen from use, being replaced almost exclusively by APH insurance. The amount of uninsured acreage was similar in 2000 and 2005.

2000 2005

Figure 4. Crop acres insured by insurance plan as a percent of total acres insured, 2000 and 2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Cotton, corn and soybeans are the most insured crops, each having near 80 percent of planted acreage insured. However, the type of insurance purchased for these crops varies. Cotton uses APH almost exclusively while corn and soybeans are more evenly divided between APH, CRC and RA. Oats and grain sorghum are the least insured crops in Missouri. These crops are considered less risky to grow and usually constitute a minor portion of the production of a farm; hence, the perceived need to insure them is less.

Economic considerations of crop insurance
Subsidies
Producers pay a premium for crop insurance based on the type of insurance and coverage level. A government subsidy is available to offset a portion of the insurance premium. The total amount of subsidies paid has increased dramatically from 1990 to 2005. Figure 5 shows that subsidies, in 2005 dollars, for crop insurance sold in Missouri have increased from about $6 million in 1990 to near $70 million in 2005. Appendix 2 is a table of subsidies received by county.

Figure 5. Crop insurance subsidies paid in 2005 dollars, 1990-2005.
Sources: U.S. Department of Agriculture, Risk Management Agency data in 2005 dollars using Federal Reserve Bank of Minneapolis Consumer Price Index.

Crop insurance loss ratio and farmer benefit cost ratio
There are two ratios that can be used to examine the cost to benefit received by the producer in a given year. Figure 6 provides both the loss ratio and the farmer benefit cost ratio over the past 16 years. The loss ratio is calculated by dividing the indemnity paid to the producer by the total premium paid by the producer and the federal government (the subsidy mentioned in the previous section). Insurance companies must operate with loss ratios below 1 or they become insolvent. The loss ratio for the past 16 years has averaged 0.76, indicating that for every dollar of premiums paid, an average of 76 cents is returned to the producer as indemnities.

The farmer benefit cost ratio is the indemnity paid to the producer divided by the premium paid by the producer. The farmer benefit cost ratio for the past 16 years has averaged 1.67, meaning that for every dollar that producers paid in insurance premiums they received $1.67 In insurance indemnities. Clearly, some of the subsidy paid by the government to the insurance companies is returned to the farmer as indemnities.

Figure 6. Loss ratio and farmer benefit cost ratio, 1990–2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Loss ratio and farmer benefit cost ratio by county
The loss ratio varies by county. Figure 7 shows the loss ratio by county from 1990 to 2005. The loss ratio in southeast Missouri is low in relation to the rest of the state, in several counties between 0.1 And 0.4. A total of 19 counties had a loss ratio above 1, generally located in the central section of the state.

Figure 7. Loss ratio by county, 1990-2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Figure 8 displays individual county farmer benefit cost ratios from 1990 to 2005. Five counties had a farmer benefit cost ratio of less than 1. All other counties for which data exist indicate that they had farmer benefit cost ratios greater than 1. Producers in these counties received over $1 in insurance indemnities for every $1 they paid in crop insurance premiums. Eight counties, mostly located in southwest and south central Missouri, had farmer benefit cost ratios above 3.

Figure 8. Farmer benefit cost ratio by county, 1990-2005.
Source: U.S. Department of Agriculture, Risk Management Agency

The two figures can be used to estimate the actuarial soundness of the premiums charged for crop insurance. First, when a loss ratio exceeds about 0.8, the insurance company would be losing money. Several of those counties with loss ratios greater than 0.9 may have adjustments made in premiums to make them more actuarially sound. Second, a county with a low loss ratio and a high farmer benefit cost ratio (e.g., New Madrid county), can do that only with heavy subsidization by the federal government. Should the federal government reduce its subsidies, these counties would probably see a precipitous drop in their farmer benefit cost ratio or increase in their loss ratio.

Farmer benefit cost ratio by crop
The farmer benefit cost ratio varies by crop as seen in Figure 9. the ratio for rice has declined, but still offers the highest return, with a 16-year average of 2.61. The wheat ratio had a 16-year average of 2.39 partially due to the high ratio in 1996. the ratios for corn and soybeans are similar except for a major difference in 1995. TShe 16- year farmer benefit cost ratio was 1.63 for corn and 1.48 for soybeans. The cotton ratio in 1998 was 32.19, with a 16-year average of 1.90.

Figure 9. Farmer benefit cost ratio by crop, 1990-2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Source of crop loss
Crop loss can be due to a number of perils, including insects, plant diseases, tornados, wildlife, wind and fire. However, the most common in Missouri and surrounding states are excess moisture, drought, freeze/frost and hail (see Figure 10). Missouri, like several surrounding states, experienced the most crop loss due to drought or heat, followed by excess moisture and flood, in 2005.

Figure 10. Source of crop loss by indemnity payments, 2005.
Source: U.S. Department of Agriculture, Risk Management Agency

There is variability in crop loss over time. Figure 11 is the source of crop loss by indemnity payments from 1990-2005. For the 16- year period, drought and heat make up the major cause of loss for most states, followed by excess moisture and other perils such as a cold or cold wet weathers, insects, plant diseases, fire, wind and wildlife damage.

Figure 11. Source of crop loss by indemnity payments, 1990-2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Over the past 16 years in Missouri, excess moisture/flood and drought/heat have been the major causes of insured crop losses. However, as is seen in Figure 12, in certain years other risks can be significant. Figure 12 shows the percentage of indemnities paid out for each type of loss.

Figure 12. Source of crop loss in Missouri based on indemnity payments, 1990-2005.
Source: U.S. Department of Agriculture, Risk Management Agency

Summary
Crop insurance offers producers a means to manage risks. There is no correct amount or type of coverage; the amount of coverage necessary for each producer varies. Producers must assess their current situation and make decisions based on their current needs. The subsidy provided by the government helps offset a portion of the cost associated with the premium cost. However, this does not provide a sufficient reason to purchase the insurance. There is still a cost incurred by the producer that increases as coverage level increases.

Due to the amount of federal government subsidies integrated into crop insurance, on the average, over time, Missouri has received about $1.61 for every dollar spent on crop insurance. This does not mean that every farmer, every year will receive a favorable indemnity for premiums paid. It does mean that the federal government indirectly is subsidizing Missouri agriculture through crop insurance.

About the authors
Ray Massey is an associate professor of agricultural economics with the Commercial Agriculture Program. Ann Ulmer is an extension associate with the Commercial Agriculture Program.

Appendix 1. Crop insurance availability by county, 2006.

Corn Cotton

County Apples Barley
APH Burley
tobacco APH CRC GRIP GRP RA APH CRC GRIP GRP

Adair x x x

Andrew x x x x x x x

Atchison x x x x x

Audrain x x x x x x

Barry x x x x

Barton x x x x x

Bates x x x x x

Benton x x x

Bollinger x x x x x

Boone x x x x x

Buchanan x x x x x x

Butler x x x x x x x

Caldwell x x x x x

Callaway x x x x x x

Camden x x x

Cape Girardeau x x x x x x

Carroll x x x x x

Carter

Cass x x x x x

Cedar x x x

Chariton x x x x x x

Christian x x x

Clark x x x x x

Clay x x x x x

Clinton x x x x x x

Cole x x x x x

Cooper x x x x x x x

Crawford x x x

Dade x x x

Dallas x x x

Daviess x x x x x

DeKalb x x x x x

Dent x x x

Douglas

Dunklin x x x x x x x

Franklin x x x x x x

Gasconade x x x

Gentry x x x x x

Greene x x x

Grundy x x x x x

Harrison x x x x x

Henry x x x x x

Hickory x x x

Holt x x x x x

Howard x x x x x x x

Howell

Iron

Jackson x x x x x x

Jasper x x x

Jefferson x x x

Johnson x x x x x

Knox x x x x x

Laclede x x x x

Lafayette x x x x x x x

Lawrence x x x x x

Lewis x x x x x x

Lincoln x x x x x

Linn x x x x x

Livingston x x x x x

McDonald x x x

Macon x x x x x

Madison x x x

Maries x x x x

Marion x x x x x

Mercer x x x x x

Miller x x x

Mississippi x x x x x x x

Moniteau x x x x x x

Monroe x x x x x x

Montgomery x x x x x x

Morgan x x x

New Madrid x x x x x x x x x

Newton x x x x

Nodaway x x x x x

Oregon

Osage x x x x x x

Ozark

Pemiscot x x x x x x x x x

Perry x x x x x

Pettis x x x x x x

Phelps x x x

Pike x x x x x x

Platte x x x x x x

Polk x x x

Pulaski x x x

Putnam x x x

Ralls x x x x x

Randolph x x x x x

Ray x x x x x

Reynolds

Ripley x x x

St. Charles x x x x x

St. Clair x x x

Ste. Genevieve x x x

St. Francois x x x

St. Louis x x x

Saline x x x x x x

Schuyler x x x

Scotland x x x x x

Scott x x x x x x x

Shannon

Shelby x x x x x x

Stoddard x x x x x x x x x

Stone

Sullivan x x x

Taney

Texas

Vernon x x x x x

Warren x x x x x

Washington

Wayne x x x

Webster x x x

Worth x x x x x

Wright x x x

St. Louis City

APH - Actual Production History GRIP - Group Risk Income Protection

CRC - Crop Revenue Coverage GRP - Group Risk Plan

RA - Revenue Assurance

Appendix 1. Cont. Crop insurance availability by county, 2006.

Grain sorghum

County Grapes APH CRC GRIP GRP Hybrid
corn seed Nursery
(fg&c) Oats
APH Popcorn
APH Peaches

Adair x x x x

Andrew x x x

Atchison x x x x x

Audrain x x x x x x x

Barry x x x x

Barton x x x x x

Bates x x x x

Benton x x x

Bollinger x x x

Boone x x x

Buchanan x x x x

Butler x x x

Caldwell x x x

Callaway x x x

Camden x

Cape Girardeau x x x

Carroll x x x x

Carter x

Cass x x x x

Cedar x x x

Chariton x x x x

Christian x

Clark x x x x

Clay x x x

Clinton x x x

Cole x x x

Cooper x x x

Crawford x x x x

Dade x x x

Dallas x

Daviess x x x x

DeKalb x x x x

Dent x x x

Douglas x x x

Dunklin x x x x

Franklin x x x

Gasconade x x x

Gentry x x x x

Greene x

Grundy x x x x

Harrison x x x x x

Henry x x x

Hickory x x x

Holt x x x x

Howard x x x

Howell x

Iron x

Jackson x x x

Jasper x x x x

Jefferson x x x

Johnson x x x x

Knox x x x

Laclede x x x

Lafayette x x x x x

Lawrence x x x x x

Lewis x x x

Lincoln x x x

Linn x x x x x

Livingston x x x

McDonald x

Macon x x x x

Madison x x x

Maries x x x

Marion x x x x x

Mercer x x x x x

Miller x x x

Mississippi x x x

Moniteau x x x

Monroe x x x x x

Montgomery x x x

Morgan x x x

New Madrid x x x x x x x

Newton x x x x

Nodaway x x x x x

Oregon x

Osage x x x

Ozark x

Pemiscot x x x

Perry x x x

Pettis x x x

Phelps x x

Pike x x x

Platte x x x

Polk x

Pulaski x

Putnam x x x x

Ralls x x x

Randolph x x x x

Ray x x x

Reynolds x

Ripley x x x

St. Charles x x x

St. Clair x x x

Ste. Genevieve x x x

St. Francois x x x x

St. Louis x

Saline x x x

Schuyler x x x x

Scotland x x x x

Scott x x x x

Shannon x

Shelby x x x x

Stoddard x x x x x x

Stone x

Sullivan x x x

Taney x

Texas x

Vernon x x x x x x

Warren x x x

Washington x

Wayne x x x

Webster x

Worth x x x x

Wright x

St. Louis City x

APH - Actual Production History GRIP - Group Risk Income Protection

CRC - Crop Revenue Coverage GRP - Group Risk Plan

RA - Revenue Assurance

Appendix 1. Cont. Crop insurance availability by county, 2006.
<

Rice Soybeans Wheat

County Potatoes
APH APH CRC APH CRC GRIP GRP RA APH CRC GRIP GRP RA

Adair x x x x x x x x

Andrew x x x x x x x x

Atchison x x x x x x x x

Audrain x x x x x x x x x x

Barry x x x x x x

Barton x x x x x x x x x x

Bates x x x x x x x x x x

Benton x x x x x x x x

Bollinger x x x x x x x x x x

Boone x x x x x x x x x x

Buchanan x x x x x x x x

Butler x x x x x x x x x x x x

Caldwell x x x x x x x x

Callaway x x x x x x x x x x

Camden

Cape Girardeau x x x x x x x x x x

Carroll x x x x x x x x x x

Carter

Cass x x x x x x x x

Cedar x x x x x x

Chariton x x x x x x x x x x

Christian x x x

Clark x x x x x x x x

Clay x x x x x x x x

Clinton x x x x x x x x

Cole x x x x x x

Cooper x x x x x x x x x x

Crawford x x x x x x

Dade x x x x x x x x x x

Dallas

Daviess x x x x x x x x

DeKalb x x x x x x x x

Dent

Douglas

Dunklin x x x x x x x x x x x x

Franklin x x x x x x x x

Gasconade x x x x x x

Gentry x x x x x x x x

Greene x x x x x x

Grundy x x x x x x x x

Harrison x x x x x x x x

Henry x x x x x x x x x x

Hickory x x x x x x

Holt x x x x x x x x

Howard x x x x x x x x

Howell

Iron

Jackson x x x x x x x x

Jasper x x