Minding Ag's Business
Crop Insurance Prevents Main Street Meltdown
Crop insurance not only deflected a financial disaster on grain farms after last summer's epic drought, it warded off a meltdown for Main Street businesses as well, a new study by University of Nebraska-Lincoln economists Eric Thompson and Brad Lubben finds.
Farmers in the four states studied--Iowa, Nebraska, South Dakota and Wyoming--had collected a record $4.5 billion in 2012 insurance claims through March 4. Those payments not only helped growers cover losses and afford to plant another crop in 2013, but preserved more than 20,000 jobs in ag-related businesses, the economists concluded.
The study, financed by Omaha-based Farm Credit Services of America, is one of the first to examine the benefits of crop insurance beyond the farm gate. The states in question are key to the nation's grain output, normally supplying about 35% of U.S. corn production. Growers there paid $885 million in insurance premiums to cover 85% of the major crop acres eligible for 2012 insurance, so the net funds recirculating in the farm and rural economy were about $3.6 billion.
Those dollars might look small relative to total farm income, but in Nebraska alone they represented more than 20% of crop producers' 2012 profits, Lubben estimates.
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“This research helps us answer the question: ‘What would have happened in both rural and urban communities if producers had not been protected by crop insurance during the severe drought last year?’” Doug Stark, president and CEO of FCSAmerica says. “The study shows that while crop insurance is critical for farmers, in years of significant loss it also helps stabilize jobs and incomes off the farm as well. Indemnity payments replace some of the income that farmers would have earned from a more normal crop, enabling them to continue investing in their businesses and households."
Droughts have a powerful psychological effect on farmer spending. Last summer, orders for farm equipment, grain bins, trucks and other capital intensive purchases dried up and even normal fertilizer orders were put on hold, retailers told DTN at the time. Between March and September, the DTN-Progressive Farmer Ag Confidence Index, a quarterly survey of 500 farmers nationwide, registered its steepest drop in farmer attitudes since the survey began in 2010. Moods improved considerably once growers assessed how well crop insurance payments and higher commodity prices buoyed incomes.
It's not just the size of 2012 indemnities that matters to farmers and their communities, but the speed they were paid, Lubbens told DTN. In the past, ad hoc disaster programs usually covered extreme losses, but these payments are subject to political deadlock that can drag on for years. Despite the worst drought since at least the 1950s, cattlemen's request for 2012 livestock feed and forage assistance has stalled.
By the time Congress authorizes funds it authorized in January's fiscal cliff legislation, "it may be late 2013 or early 2014 before USDA can pay forage losses in 2012, on cows cattlemen sold in 2013 because they didn't have the money to feed them," Lubbens says. "Even when paid, the indemnities are not timely to the loss and the financial crunch has already come and gone. The sector has already suffered financial damage."
Critics have questioned the necessity of a subsidized crop insurance program, but they forget that Congress has a long history of approving ad hoc aid, especially in election years. Shifting to a private-public partnership where producers pay some of the cost and where claims can be paid in a timely manner offers many economic and societal benefits.
"Without crop insurance, a lot of nonirrigated producers would have been forced to leave after 2012," Lubben said. Droughts are particularly hard on beginning farmers or smaller producers with low equity. So shocks on that scale aren't good for individuals, the demographics of the farm population or the towns and factories across the Grain Belt that depend on them.
For a full copy of the study go to http://www.fcsamerica.com/…
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