King Corn

Which means corn farmers are less afraid of losing a percentage of their crops to drought or frost because they know they have extra acreage to work with, says Utterback: "[Federal] crop insurance has been a godsend to the nontraditional Midwestern Corn States."

In 2003, about 217 million crop acres across the country were insured for about $41 billion in coverage and $3.5 billion in premium; by 2012, that number had grown to about 282 million acres insured at about $117 billion in coverage and $11 billion in premium, according to the Risk Management Agency (RMA), which administers FCIC programs. The RMA operates under the USDA.

Yet the burgeoning corn crop industry could still be a problem for the FCIC down the road. Utterback—the resident economist for Farm Journal, the 137-year-old flagship publication of Philadelphia-based Farm Journal Media—sees three possibilities on the horizon for the future of federal crop insurance:

1. Demand for U.S. corn could be outpaced by supply, causing corn prices to drop dramatically;
2. Corn crop revenues already teetering on the edge could fall below the cost of production, causing farmers to plant fewer acres, thus decreasing supply;
3. Farmers, feeling they are not getting the advantages they desire from the federal crop program because of falling crop revenues or over-supply—or both—drop from the FCIC program.

RISING PRODUCTION COSTS

Since 2000 the cost to produce a bushel of corn has risen from $1.77 to about $5.32. The FCIC's July 2013 corn futures (as of April 30) predict guaranteed corn prices to be $5.63 per bushel, says Utterback. But with the cost to produce that bushel around $5.32, it doesn't leave much profit.

As an FCIC policy is annual, many farmers may opt out if the guaranteed price for corn falls below their needs. Currently some 85 percent of all eligible U.S. farmers use the FCIC for crop insurance. "If prices get too low, the government program is not doing anything for them," Utterback says.

If a farmer has, say, 2,000 acres of corn, it might cost him $26 an acre to insure it under the FCIC for the following year's crop, "Which means he has to make a $48,000 commitment to that in the winter," Utterback says. That's a big commitment, he notes, especially if prices are falling and production costs are rising.

Export markets, which have long been the strength of the corn market, have bowed out, destroying that demand. There are only two ways to get foreign markets interested again in U.S. corn crops: if those countries have crop failure due to a major weather event, or if U.S. prices drop so low that they can't afford not to buy it.

The question is, "How do you get prices cheap when you have too much supply?" says Utterback. "The market is very nervous right now: the farmers, and the commodity markets."

The next question is, with such a high cost to produce, will adequate acres of corn get planted to meet objectives? The economic incentive for farmers is to plant another 97 million acres of corn, as in 2012, for 2013.

"If we plant the acres, and demand goes up, prices are going to have to be lower," Utterback says. Several years of high prices has allowed costs to rally. His belief is that the corn industry has pushed 2011 and 2012 prices to a level that's so high, buyers may back off.

Forecasts for spring corn set-ups—the way in which a crop is planted for ideal growth and harvest size—are already showing higher costs for farmers: the cost of production for February 2014 is estimated at $5.30 to $5.40 a bushel, he says. 

"The dilemma that will be created is if we get a supply response and supply has been rationed, you will go through a period of price weakness."

CROP FRAUD

Farmers also fear higher insurance premiums due to revelations about a multi-year crop insurance fraud ring of 41 people discovered to be operating in North Carolina.

All of the defendants were working in or around the tobacco industry, which comprises some $80 million to $100 million in premium.

"It was a pretty sophisticated group of people that included an independent crop insurance agent, some adjusters, and buyers for various tobacco companies," says Mike Connealy, president and CEO of multi-peril crop insurer ProAg, a wholly-owned subsidiary of CUNA Mutual Group of Madison, Wis. "They were all getting a cut."

Some defendants, such as a convenience store cashier, were also convicted of money laundering for the group. Another defendant re-sold the supposed "failed" crops, which had been hidden away in an unused warehouse, to crop buyers at R.J. Reynolds and Philip Morris, he says.

Such high-profile cases can place the entire farming industry in a bad light—especially at a time where lawmakers in Washington are contemplating the renewal of the Federal Agriculture Reform and Risk Management Act of 2013 (the 2013 Farm Bill).  

"This gives farmers a bad image, which I don't think they deserve in aggregate," says Tom Zacharias, president of the National Crop Insurance Services (NCIS), an international trade group. "Someone violates the rules, and the rest of us have to shoulder the cost."

That cost could come in the form of increased regulation to attempt to prevent similar fraud in the future, or more likely, be reflected in higher premiums, Zacharias says. "And those folks abiding by the rules have to pay more than they should because of it," he says.

The FCIC sets policy terms, conditions and premium rates, and the insurers in the program offer the same products and price. As a result, agencies essentially compete on customer service and claims adjustment.

"Fraud cases are rare, and they tarnish the outstanding performance of the program," says Greg Deal, president and CEO of NAU, QBE's crop insurance business. Such fraud schemes also give ammunition to foes of the FCIC program, he adds.

The insurance companies have some dollar risk in every policy as well, so they have an economic incentive to fight fraud, says Connealy: "If we have a loss with tobacco or any crop, part of that loss is the company's; some of that belongs to us and some of that belongs to the government. We're joined at the hip and want to minimize as much fraud as possible."