OMAHA (DTN) -- Farmers in Northern Plains states and parts of the Corn Belt will lose the prospect of larger potential payouts under prevented planting claims following a crop-insurance change announced earlier this week by USDA's Risk Management Agency.
For years, the Obama administration repeatedly sought a $1.4-billion cost savings over 10 years by asking Congress to reform prevented planting coverage by eliminating the option of buying 10% higher coverage for prevented planting. Without calling on Congress, the Trump administration made multiple changes to prevented planting insurance this week in line with spending cuts proposed in the Obama era.
On Monday, in a memo sent out to insurers and USDA Risk Management Agency field offices, USDA eliminated the Prevented Planting +10 Percent Option for the 2018 crop year and future crop years. USDA kept the 5% option for farmers, though analysis shows very few farmers have taken the 5% option. The 10% option paid out more than $4 billion in indemnities from 1994-2013.
The move comes after USDA changed prevented planting coverage factors for some crops last spring, which included lowering the coverage factor for corn from 60% to 55%. On Friday, USDA announced some other coverage factor changes, such as lowering the canola factor from 60% to 55%. The coverage factor for hybrid seed corn was also lowered from 50% to 45%.
The Obama administration had projected in a 2016 budget proposal that dropping the prevented planting buy-up and changing the coverage factor for prevented planting would save about $1.4 billion over 10 years.
USDA press staff did not reply to questions about projected cost savings or how Agriculture Secretary Sonny Perdue would use those savings.
A spokesman for USDA's Risk Management Agency pointed to the proposals in the past to eliminate the 10% option as a cost-savings measure. RMA also stated, "USDA's Office of Inspector General issued a report in 2013 and determined that RMA needs to improve the prevented planting provisions to be more cost effective; to encourage producers to plant a crop, where possible; and to make eligibility criteria more objective and clear."
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Multiple lobbyists told DTN that USDA's announcement on Monday came as a surprise and there was no advanced consultation with commodity organizations. One lobbyist said Perdue has been wanting to expand insurance options for livestock and dairy producers, and the move was possibly done as a way to free up money for those efforts.
The move on the buy-up option affects two states the most: North Dakota and South Dakota. Over a two-decade period from 1994-2013, the 10% prevented planting option led to more than $2 billion in indemnities for North Dakota from 1994-2013, or 59% of all prevented planting claims in the state. In South Dakota, the 10% option paid $680.4 million, accounting for 46% of claims over the two-decade stretch. Those numbers come from a 2015 study of prevented planting done for USDA by the firm Agralytica Consulting.
The payouts to different states tamper down significantly for the additional 10% coverage. The third-largest states for payouts was Minnesota with $182.6 million, covering 27% of the claims in that state from 1994-2013.
Agralytica showed that eliminating the buy-up option for prevented planting would have reduced indemnities by nearly $813 million in a five-year period from 2008-2012. And virtually all of the savings would have come from dropping the 10% option because so few farmers take the 5% option. Of that $813 million in savings, $499 million, or 61%, would come from the Northern Plains states -- North Dakota, South Dakota, Nebraska and Kansas.
Corn Belt states of Illinois, Indiana, Iowa, Missouri and Ohio also would have seen a combined prevented planting indemnity reduction of $152 million from 2008-2012, or about 19% less than was paid out at the time.
Agralytica noted in its report, "One could question the logic behind offering this additional coverage." That's because the additional 10% bump in coverage, during a high-price year, could easily cover 80% or more of production costs "and make prevented planting more profitable than taking the risk of growing the crop."
Still, Agralytica also stated the main reason to continue offering the buy-up options on insurance for prevented planting was to collect higher premiums in proportion to the higher risk of claims among those who elect the additional 10% coverage.
The 10% option was eligible for 31 commodities to purchase over the two decades studied by Agralytica. The 10% buy-up option overall accounted for 46% of the policies nationally that received indemnities. Almost no farmers elected for the additional 5% coverage option.
According to the Agralytica analysis, the 10% option accounted for more than $4 billion in indemnities from 1994 to 2013, while the 5% option accounted for $23.5 million over the two-decade span.
USDA's 10% prevented planting announcement: https://goo.gl/…
Prevented Planting Coverage Factor changes for 2018: https://goo.gl/…
Agralytica report for RMA in 2015: https://goo.gl/…
Chris Clayton can be reached at Chris.Clayton@dtn.com
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