Crop insurance remains a crucial safeguard for farmers, tracing back to the Great Depression and evolving into a vital tool amidst today's market and weather volatility. Supported by a partnership among the federal government, private insurers and farmers, it offers tailored protection against diverse risks for farmers across the nation. Farmers bear a significant part of the cost themselves, and ongoing innovation in policy offerings allows more and more farmers to shield themselves from unexpected losses, bolstering the resiliency of the food system. Provisions that keep program costs in check and promote good farm practices optimize the return on investment for taxpayers. As the U.S. navigates an increasingly uncertain future, improving crop insurance through passage of a new five-year farm bill is essential for safeguarding the livelihoods of farmers, the stability of rural economies and the reliability of our food system.

Crop insurance is exactly like it sounds: an insurance product designed to help shield farmers against a myriad of potential risks, ranging from adverse growing conditions to market fluctuations. This coverage fills crucial gaps that private insurance products may neglect or find impossible to address alone. Supported by the federal government, these policies provide financial stability for farmers, who can tailor coverage to suit their unique operational needs from a variety of policy options. Products are available for annual crops, perennial tree crops and livestock and may protect against the value of the commodity, the replacement value of a damaged or destroyed commodity, or the operating margin for a commodity.

Crop insurance has its roots as part of the policy response to the Great Depression and was permanently authorized under the Agricultural Adjustment Act of 1938 and the Federal Crop Insurance Act of 1980.  The Risk Management Agency (RMA) has discretion over policy offerings, coverage and administration. The Congressional Budget Office (CBO) projects net spending each year and estimates the costs of supporting a portion of a farmers’ policy premium, compensating private insurers for their administrative and operating expenses and reinsuring losses from policies sold. Projections depend partly on commodity prices. If commodity prices increase in the future, the expected value of insured crops would rise, leading to higher anticipated values for insured liability and premium discounts compared to scenarios with lower commodity prices. For marketing year 2024, the CBO projects a total program cost of $12.37 billion

Title XI of the farm bill supports new and continued insurance products farmers may purchase through a public-private partnership. Private-sector companies known as approved insurance providers sell and service crop insurance policies while USDA plays critical roles in financing, regulating and reinsuring the policies.  Farmers work with their local crop insurance agent to select the base coverage policy that fits their farm or ranch. Additional products, or endorsements can be added to underlying policies for additional costs.

Crop insurance provides protection for a limited number of events or conditions. These are called “covered perils” or “causes of loss” and include adverse weather conditions; failure of irrigation water supply; fire from natural causes; plant diseases if the farmer applied the correct crop protectorant; and insect and wildlife damage. Certain policies also insure against losses from market price declines. Crop insurance does not cover damage or loss of production due to the inability to market a crop for any reason other than actual physical damage for an insurable cause of loss.

Farmers have the flexibility to customize their crop insurance to align with their farm management objectives and practices. In many cases farmers can choose to insure based on a farm’s average yield, its average crop revenue, the county’s average yield or the county’s average revenue. Revenue protection is usually more expensive due to the higher level of risk associated with market fluctuations. Using farm-level averages is also more expensive than using county options because of the smaller risk pool.

To begin, farmers must first select the level of coverage they want to purchase. The coverage level refers to the percentage of commodity value that is covered — referred to as the liability — and the corresponding loss that a farmer must incur before an indemnity payment will be made, much like a deductible. A coverage level of 80%, for example, would insure losses greater than 20% of the liability but provide no protection for losses less than 20% of the liability. The lower the coverage level, the more extreme the losses have to be to trigger an indemnity, which lowers the associated risk of a plan. For this reason, farmers pay a higher cost for higher coverage levels.

Farmers participating in crop insurance are required to follow USDA’s guidance on good farm practices while planting, growing and harvesting their crops. This reduces risk to the program related to operator-caused crop losses.

USDA’s administrative burdens for the program are reduced by providing payments to AIPs to distribute, rather than the agency directly working with hundreds of thousands of crop insurance policy holders. AIPs receive payments from USDA on behalf of farmers to offset a portion of premium costs. For most acreage policies discount rates (the portion of a crop insurance premium paid for by the government) are set by statute set in the farm bill and may vary based on the coverage level a farmer selects.

In addition to premiums, farmers also pay administrative fees. Crop insurance policies are priced in a way that must be “actuarily fair” and USDA is statutorily required to operate in ways that “improve the actuarial soundness of federal multiperil crop insurance coverage.” This means the total value of premiums paid over many years should be about equal to the value of indemnity payments distributed. One way USDA measures success is through a financial performance indicator known as a loss ratio defined as the indemnities paid divided by the premiums collected for policies in a given year. As of March 2024, the loss ratio for 2023 policies is 0.86, meaning that more premiums were paid for policies than indemnities paid for losses incurred.

To encourage the conservation of wetlands and highly erodible lands, the Federal Crop Insurance Program requires participants to meet conservation compliance requirements. To comply, farmers must agree to maintain a minimum level of conservation on highly erodible lands and not convert wetlands to crop production. The 2014 farm bill included a provision that could eliminate crop insurance support for producers who are out of compliance with conservation requirements.

“Friends are like money; easier made than kept.” -Samuel Butler

Ron Kern is the manager of the Ogle County Farm Bureau.