January 27, 2010 Crop Drought Tolerance Is Up, But Crop Insurance Premiums Haven’t Budged

Report Suggests Lower Crop Losses Should Mean Lower Insurance Costs

All signs point to lower crop insurance premiums for farmers in the U.S. – especially in the nation’s Corn Belt – according to an Iowa Ag Review report in its Fall 2009 issue. Through analyzing trends in corn crop drought tolerance in its “Drought Tolerance and Risk in the U.S. Crop Insurance Program” report, it looks like the current risk to American crops is low enough to no longer justify current crop insurance premiums.

Corn and Soybean Crop Losses Ratios Have Been Declining

Iowa’s report shows a significant difference between crop losses in the 1990s compared to the first decade of the 21^st Century.  According to the report:

“…the overall loss ratio for the U.S. crop insurance program has indeed been declining. The average loss ratio from 1989 to 1999 was 1.12. The average from 2000 to 2008 has been 0.88. And there has not been a loss ratio above 1.0 since 2003. However, a declining loss ratio, in and of itself, is not proof that crop risk has been reduced. For example, the decline could be due to good growing-season weather. There have not been widespread losses in the Corn Belt due to drought since 1988, and Corn Belt states account for more than half of the total liability in the program. Before we can conclude that risk has been reduced, we need to account for whether the decline in loss ratios could have been caused by a string of better-than-average growing seasons that could change in the future.”

Corn Crop Drought Tolerance Is Increasing Over Time, Too

The Iowa Ag Review report also found that data suggests that crops like corn and soybean have become more drought resistance, compared to how crops dealt with similar conditions over the past few decades.

“…the data seem to support the idea that corn has become more drought-tolerant over time. The evidence for soybeans is a bit mixed. Percentage yield loss due to drought is lower in 2000–2008 than in 1980–1989 for all droughts except for the most severe category, while there is no clear pattern for bushel-per-acre loss. But for both corn and soybeans, the evidence seems strong that the percentage of yield lost due to drought has declined over time.

For corn, a return of a 1988 drought would reduce yields by 31 percent in 2008, which is far below the 45 percent losses from the same drought in 1988. This is a reduction in yield risk from drought of 31 percent. For soybeans, there has been less of an increase in drought tolerance than for corn. But for a 1988-style drought, estimated losses have been reduced from 28 percent of drought-free expected yields to 23 percent—a reduction in drought risk of about 18 percent.”

Crop Insurance Premiums Are Based On Past Risk, So Reduced Risk Demands Reduced Premiums

In simple terms, U.S. crop insurance rates are determined by the history of risk associated with that particular crop. Since that risk has been demonstrated as declining from the 1980’s and 1990’s compared with the 2000’s, it is reasonable to assume crop insurance premiums would decline, as well.

“The maintained hypothesis that underpins all premium rates for the U.S. crop insurance data of a constant percentage yield risk over time is not supported by the data. Both corn and soybean yields in the Corn Belt are more tolerant of drought today than they were in the past. Because drought is such an important source of yield risk, this finding implies that Corn Belt crop insurance premiums are too high.”

And the impact of lower premiums would be incredibly helpful to farmers saddled with high insurance premiums where most pay in much more than they draw out.

From the report:

“The impact of lower premiums on farmers is straightforward: if premiums were to drop by 40 percent, then the premium that farmers would have to pay for the same level of coverage would fall by 40 percent. Consequently, farmers would greatly benefit if increased drought tolerance were accounted for in crop insurance. The amount that crop insurance companies receive as an expense reimbursement would also drop by the same percentage because expense reimbursements are calculated as a proportion of premiums. This drop in expense reimbursement could be lower if farmers responded to a premium decrease by buying more expensive coverage.”

Live Asset Insurance Offers Options That Federal Crop Insurance Is Unable To

Live Asset Insurance provides growers insurance that covers fewer crops than the government programs at a lower cost. Live Asset provides coverage as a private company – unsubsidized by the federal government – against wind, freeze, hail, fire and flood, among others.

For more information on how our policy differs than what data suggests is an unnecessarily bloated government crop insurance program, check out our crop insurance options.