As drought conditions continue to spread across farm country, importance of crop insurance is reinforced

(Journal stock photo.)

First low prices, then a pandemic, and now drought. This year brought many economic challenges for wheat growers. Farming is a risky business, and crop insurance is one of the most important policy tools that is relied on to mitigate risk.

Unlike other farm programs and ad hoc disaster assistance, crop insurance is a public-private partnership which means growers pay into the system and must have an indemnifiable crop loss to receive a payment. Drought conditions in many areas of the country will undoubtedly hurt yields at harvest time. As a crucial component for protecting producers and the feasibility of farming, crop insurance provides a risk management tool for unpredictable weather and assists producers in qualifying for the necessary operating loans to produce a crop. With this in consideration, any cuts or reduced access to crop insurance programs could be detrimental to farmers who rely on it to stay in business when disaster strikes.

The National Association of Wheat Growers is particularly concerned about the severe drought being faced by our member states including California, Colorado, Kansas, Oklahoma, Oregon, and Texas. Oregon, Colorado, and Kansas are being hit the hardest and continue to see D3 (extreme drought) conditions spread across their states. Colorado and Kansas have even developed drought levels of D4 (exceptional drought) in parts of their states. Kansas began to experience drought levels of D3 on May 5 in two counties, and as of June 30 the state is seeing extreme drought in ten counties and exceptional drought in three counties. One farmer in Johnson, Kansas, reported that his rain gauge has collected less than one and a half inches in the last twelve months. For Colorado, nearly 85% of the state is experiencing drought while 50% of the state is being impacting by severe to exceptional drought. These severe conditions contribute to wildfire dangers and even more crop loss. Oregon began to experience drought levels of D3 on April 21 in three counties and as of June 16 it has spread to twelve counties. Without crop insurance, producers in these drought-stricken areas could lose their crops without any risk protection, which could drive those farming operations out of business.

The indemnity payments that farmers may receive due to loss of crop from the severe drought will not make them whole but could help these producers to stay in business. According to the U.S. Department of Agriculture’s Risk Management Agency, farmers spend $3.5 to $4 billion per year of their own money to purchase insurance from the private sector. On average, farmers also must incur losses of almost 30% before their insurance coverage pays an indemnity. As of July 6 RMA reported that in 2019 the crop insurance industry has paid more than 10 million in crop insurance indemnities to help farmers cope with their losses and this number is expected to grow as claims are finalized.

In general, rural communities rely on crop insurance as well. Agriculture lenders often insist that producers who borrow money have crop insurance to ensure loan payments. Agriculture producers tend to have tight margins with high risk, which is not extremely attractive to lenders, but lenders allow crop insurance to serve as collateral when applying for an operating loan. Not to mention the direct damage that farm failures could have on rural communities through the loss of jobs. Agriculture plays a huge part in the American economy, which is another reason that producers need to have access to crop insurance. From this perspective, crop insurance affects almost all agribusinesses, including farm equipment, fertilizer, and seed companies, which could also be hurt if cuts to crop insurance programs are made.

In farming, disasters like drought are inevitable, but crop insurance is the best tool we have in mitigating some of this risk. Crop insurance is such an important policy tool for farmers that they invest their own money to purchase this protection. Farmers spend $3.5 to $4 billion per year to purchase crop insurance and bearing a significant portion of losses through deductibles. The federal government spends less than a quarter of 1% of its budget on farm safety net programs, making this a worthwhile investment to protect the world’s most affordable and safe food supply. Adequate funding of crop insurance should be a high priority for policymakers as agriculture is being hit with low prices, the effects of COVID-19, and other unpredictable disasters.

Dave Milligan is president of the National Association of Wheat Growers and a Cass City, Michigan, wheat farmer.