Farm income is forecast to increase over last year, helped by insurance payouts from the crop-insurance program covering losses from the disastrous drought in much of the country, but insurance associations argue that the program is not a “bailout” that guarantees profits for farmers.
The 2012 Farm Sector Income Forecast from the United States Department of Agriculture says net farm income is forecast to be more than $122 billion this year, up close to 4 percent over last year.
The USDA, which issued its report during the last week of August, says that the increase will, in part, be helped by crop-insurance payments. The forecast also reflects market impacts of “widespread drought and high temperatures during the growing season [and] large increases in the value of this year’s crop….”
Drought conditions are putting corn and soybean yields at nine-year lows, the report says, but the factors hurting corn producers helps another segment of the farm market: wheat farmers. Wheat farmers will see prices increase by almost 13.5 percent, says the report, with the increase in demand to replace corn with wheat.
“Despite the severity of the 2012 drought, shortfalls in marketing-year production do not necessarily have a detrimental impact on sector-wide farm income,” says the report.
The report adds, “A large anticipated rise in other farm income reflects large increase in crop insurance indemnity payouts.”
Despite the forecast, representatives of the National Crop Insurance Services in Overland Park, Kan. say that the reality is farmers will not profit from their insurance payments through the crop program. Like any insurance program, there are deductibles farmers will be subject to, as high as 25 percent, and regional conditions that play into determining insurance indemnification.
Tom Zacharias, president of NCIS, says one reason for the USDA’s higher forecast is that the drought is driving up commodity prices; that, in-turn, affects insurance payments.
“There will be some winners and some losers once this is done,” says Zacharias.
He notes that some regions of the country will have good crop yields, while other regions, due to the drought, will not. Until crops are harvested in the fall, it will remain difficult to make an accurate estimate of yields and losses. For now, any forecast is “the subject of speculation.”’
Critics argue that the Federal government should not be subsidizing premiums.
A spokesman for R Street says that “it is not surprising at all” that farmers are seeing an increase in net income despite the drought.
“Crop insurance provides just these sorts of perverse incentives—the government subsidizes two-thirds of the cost of coverage; it provides attractive reinsurance to the participating insurers; and then in the event of a significant loss event, farmers further benefit from rising commodity prices,” says Ray Lehmann, senior fellow and public affairs director for R Street. “Rather than true risk management, it makes it virtually impossible to lose money.”
Jennifer McPhillips, senior director, Federal Government affairs for the Independent Insurance Agents & Brokers of America, says the crop-insurance program remains popular with farmers. The program, she insists, is not a bailout for farmers, but works like any insurance program to protect farmers when there is a disaster, such as what they are experiencing this year.
Farmers, she adds, do pay into the program, [40 percent of the total premium, says Zacharias] and she says it is important to note that it is a program that remains strong and affordable to protect the nation’s food supply.
“Farmers have said time and time again that the crop program is their primary risk management tool and they feel strongly that it should be preserved,” says McPhillips.
Zacharias contends, “Critics of the program will look for available resources to criticize the program. The drought of 2012 is one where I have not met farmers praying for drought. Farmers are better off with a crop.
He adds, “Companies are sharing in part of the risk with the Federal government. Farmers are paying part of the premium. This is a three way split of the cost of handling an enormous agricultural disaster.”