SOMEBODY IN WASHINGTON LOVES KANSAS WHEAT GROWERS[1]

Introduction. The prices used to calculate the disaster program have been announced but the use of the National Agricultural Statistics Service (NASS) marketing year average 2002 price will not be complete for spring crops until September 1. Therefore it is expected the 2002 NASS Summary Report will be used to set NASS prices. USDA also announced the disaster aid signup date starting June 6. The USDA press release is located at:

http://www.usda.gov/news/releases/2003/03/0102.htm

Most insured growers will find the final USDA policy decision that sets the payment cap is an improvement over some of the proposed alternatives. Because USDA will use the higher of the crop insurance price election or the NASS average price, the result is a higher limit on per acre benefits. This will result in fewer farmers suffering a reduction in disaster aid payments.

Someone in Washington must love Kansas Wheat growers because the NASS price used to set the cap is $3.60[2] and few if any Kansas wheat growers will suffer a reduction in disaster aid. Kansas wheat Crop Revenue Coverage (CRC) payment price was $3.34 and Revenue Assurance with Harvest Price Option (RA-HPO paid $3.40) and that is much lower than the NASS price used to set the cap. This in not true for Nebraska wheat growers where the CRC wheat payment price was $3.72. In states where the wheat revenue insurance payment price was higher than the wheat NASS price some wheat growers may (will) hit the payment cap. In Kansas on 2002 wheat there were no RA offers at 80% and 85% coverage in 2002 (higher RA coverages were available on Kansas wheat in 2003). Therefore it will not be possible for RA insured Kansas wheat growers to exceed the cap. It appears only 85% CRC or MPCI-APH insured Kansas wheat growers have any chance of exceeding the per acre cap but very few Kansas farmers bought 85% coverage. Because of the higher CRC payment price one would expect more Nebraska wheat farmers will hit the cap. The result is that highly insured Kansas wheat farmers with the added disaster aid will end up with the about the same number of dollars as Nebraska wheat growers.

Corn, Milo , and Soybeans Disaster. For corn farmers only the revenue insured growers are likely to exceed the cap and then it will likely require a yield loss that is greater than 90%. The reason corn farmers are hitting the limit is because the CRC payment price was $2.52 (RA-HPO paid $2.43) and that is higher that the NASS $2.35 price used to set the cap.

Milo growers are less likely to hit the cap because the cap price is $2.41 and CRC paid $2.39. Because the CRC payment price is lower than the cap price it is unlikely milo growers will exceed the cap. There is no RA offer on milo.

The CRC and RA-HPO soybean payment price was $5.45 and that is slightly higher than the NASS $5.40 price used to set the cap. The MPCI-APH paid $4.92 and RA without the harvest price option paid $4.50. It is unlikely that MPCI-APH insured soybeans growers will exceed the cap and no chance for the �basic� RA insured grower to exceed the soybean cap.

Price Defined. The major disaster aid issue left was the prices in the disaster formula. USDA has defined (1) the price used to pay disaster payments, (2) price used to value any production, and (3) the price used to calculate the per acre cap on payments. The price that will be used to pay most Kansas disaster claims will be the MPCI price elections. Only if there is no MPCI price election available will USDA use a 5 year average price.

The per acre payment cap and value of any production price will equal the higher of the National Agricultural Statistics Service (NASS) seasonal average price or the MPCI price election. For 2002 most Kansas crops will use the NASS price with the exception of upland cotton.

For disaster aid claims on 2001 crops, the 2001/2002 marketing year NASS average price for corn was $1.97, wheat $2.78[3], milo $1.94, soybeans $4.38 and 29.8 cents for upland cotton. The 2001 MPCI-APH price elections for corn was $2.05, wheat $2.80, milo $1.95, soybeans $5.26 and 60 cents for upland cotton. Therefore, the MPCI-APH price elections will be used rather than NASS prices for 2001 payment caps and calculating value of any production.

The 2002 MPCI-APH price elections for corn was $2.00, wheat $3.15, milo $1.85, soybeans $4.92 and 52 cents for upland cotton. The seasonal average NASS prices are not reported until after the marketing year, that ends on May 31 for wheat and August 31 for the other crops. Therefore, it is expected that USDA will use the prices reported by NASS in Crop Values 2002 Summary, released in February 2003. This report generates a national average NASS price.

Based on the NASS February report the seasonal average corn price is $2.35, $3.60 for wheat[4], $2.41 for milo, and $5.40 for soybeans. NASS prices are higher than the MPCI price election and the NASS price will be used in the disaster formula. Because the NASS prices for upland cotton is 40.5 cents, the MPCI price election of 52 cents will be used in the formula for cotton disaster aid.

Yield Defined. The historical yield will be the higher of the 5 year average county yield or crop insurance�s Actual Production History (APH). The exact crop years used to calculate the county average yield have not been identified.

Crop disaster payments are subject to a per acre cap on payments that will effect all farm sizes. For most 2002 Kansas crops the sum of (1) any crop production times the seasonal average NASS price, (2) the disaster payment, and (3) the crop-insurance indemnity less the farmer paid premium cannot exceed 95 percent times the historical yield times average NASS price. Crops that have a higher MPCI-APH price than NASS will substitute the MPCI-APH price for the NASS price in the previous formula. The crop disaster payments will be reduced if the per acre cap on benefits is exceeded.

Example Kansas Dryland Corn Case Farm. An example Western Kansas corn farm with 100 bushel average yield was developed in table 1 to examine the disaster program. In this particular example, the farm was compared with no insurance purchased, 50% CAT insurance, 75% MPCI-APH, and 75% revenue insurance. A grower with nearly a total crop loss of a 99% yield loss was assumed. A total yield loss on dryland corn in the western 2/3 of Kansas is not unusual.

Disaster Aid Defined with a 99% Yield Loss. The disaster aid provided by the 65/50 program passed by Congress would pay this example grower a maximum of $65 if insured and $58.50 if uninsured. This is calculated based on 100 bushels times 65% times the MPCI-APH price election of $2.00 times 50%.

In the example in table 1 it is assumed the corn grower suffered a 99% yield loss and the cap is based on the NASS price of $2.35. The disaster aid payment based on yield loss below the trigger point times the 50% of MPCI-APH market price would generate a disaster payment of $64 versus $57.60 for the insured grower. The insured grower at 75% coverage would generate an indemnity payment on line 18 of $148 for MPCI-APH, $186.48 for CRC, $179.82 for RA-HPO, and $171.57 for �basic� RA.

The net insurance payments (less premium) plus the disaster payment plus value of the salvaged crop would generate a total value of $238.28 for CRC, $234.83 for RA-HPO, and $227.97 for RA on line 21. The maximum benefit cap is $223.25 for this grower based on 100 bushels times $2.35 times 95 percent. All of the revenue insurance products exceeded the cap and that means this grower will have her disaster aid payment reduced on line 23. There was no payment reduction for uninsured, CAT or the MPCI-APH alternatives. The disaster payments were reduced by $15.03 for CRC, $11.58 for RA-HPO and $4.72 for basic RA.

Higher Crop Insurance Coverages Reduce Disaster Aid. Figures 1, 2 and 3 shows how different coverage levels will impact the amount of dollars revenue insured growers will be able to collect on their disaster aid. For example, at an 85% RA-HPO insurance guarantee and a 99% yield loss this grower will lose 41% of the disaster payment. If this same grower had purchased a 70% RA-HPO insurance contract he\she would have lost less than 3% of the disaster aid payment.

One would have expected the reduction in disaster aid would have been greatest under CRC because CRC paid larger indemnity payments than RA-HPO. CRC paid $2.52 for lost corn production while RA-HPO paid $2.43 for lost production. The 70% and 75% CRC coverage did show a larger reduction in disaster aid than RA-HPO but not at the 80% and 85% coverage levels (figures 1 and 2). The reason is that RA-HPO premiums are lower than CRC premiums at all coverage levels for this location. Therefore, the net RA-HPO indemnity payment is higher than the net CRC indemnity payment at the 80% and 85% coverage levels even though the gross CRC indemnity payments are larger. RA with out the harvest price option insured growers with a total crop loss also suffered a reduction in disaster aid if he/she purchased coverage at 75% and greater (figure 3).

The MPCI-APH insured grower suffered no disaster aid loss at this location. This is a high risk dryland growing area. If the MPCI-APH premiums were lower as would be the case in a lower risk growing area, then some MPCI-APH insured growers may also suffer a reduction in disaster payments if the yield loss is large.

Lower Yields Reduce Disaster Aid. Growers with a total yield loss obviously have the greatest reduction in their disaster payments with higher insurance coverage purchased. Therefore, most growers will need to suffer a yield loss over 90% before they would suffer any reduction in disaster aid, then only if they purchased high levels of crop insurance coverage. Figure 4 shows how different yield levels will impact the amount of dollars RA-HPO insured growers will be able to collect on their disaster aid. For example, an 85% RA-HPO insured grower will lose 42% of their disaster aid payments with a zero yield. If this same grower had produced 25% of a normal yield or 75% yield loss his/her disaster aid would only have been reduced by less than 1%. Revenue insured corn growers with larger yield losses obviously have the greatest chance for reduction in their disaster payments. Because the formula uses net indemnity payments the high risk growing areas will require a larger yield loss to suffer a loss in disaster payments because the larger premium is deducted first.

Disaster Aid Does Help. These �highly� insured growers are clearly better off because of the disaster aid payment being provided to them. The use of the NASS price is higher than the MPCI-APH corn price election, therefore using the NASS price increased the cap and reduced the number of corn growers that will suffer a reduction in disaster aid. However, many growers may look at their current insurance position and discover they would have been better off if they had bought the lower coverage levels. With a total yield loss clearly growers would have ended up with the same total number of dollars because they would have collected more in disaster aid payments.

So the real question is will growers view this as a windfall payment or as a message to reduce their insurance coverage levels from 75 and 80 percent coverage to perhaps 70% or changing from revenue insurance to MPCI-APH in the future. Because one can never be certain how any future disaster aid may be provided this becomes a fairly tricky question. The definition of prices used to calculate disaster aid payments under went many changes by public policy makers after Congress passed the Law. If growers could make a new 2002 crop insurance purchase decision after the disaster aid was approved they would have purchased lower coverage because the difference is made up in the form of disaster aid payments.

Lower insured growers probably should thank the growers that purchased higher levels of revenue insurance coverage. It is unlikely that policy makers would have used the higher NASS prices to set the per acre payment limit if there had not been so many corn growers who had purchased the higher revenue insurance coverages.

$80,000 Limit. There is an $80,000 payment limit on disaster aid. There will be some farmers with disaster payments below the cap but will have their disaster aid cut because of the $80,000 payment limit.

Not Defined. This analysis assumes the �all wheat� NASS price. The definition of which wheat price to use has not been settled. It is my understanding that some wheat state Senators have suggested to USDA the appropriate wheat price is the �all wheat� price as reported by NASS.

Because the MPCI-APH price election is not separated between spring wheat and winter wheat, it makes sense to use the �all wheat� NASS price to set the cap and to calculate the value of any wheat production. Also in 2001 the MPCI-APH wheat price election is higher than the NASS price. Therefore, in 2001 there would be one cap price for spring and winter wheat because there is only one MPCI-APH wheat price election. It is reasonable to assume if USDA uses a single wheat cap price in 2001, then one would also use a single wheat price cap in 2002.

It has not been reported publicly the 5 crop years that will be used to calculate the county average yield. For example, will USDA use crop years 1996-2000? One would assume 2001 yields would not be used in the county average yield because that was one of the disaster years.

Summary. Assuming the �all wheat� NASS price is used, few if any Kansas wheat growers will hit the cap on payments. The CRC payment price for a total wheat loss is $3.34 and a higher $3.60 cap means there will be few Kansas wheat growers that will hit the cap. However, this is not true in Nebraska and other wheat states. The CRC payment rate in Nebraska is $3.72 and because it is higher then the $3.60 cap price some Nebraska wheat growers will hit the cap.

On corn, the CRC payment price was $2.52 and the NASS cap price is $2.35. Because the CRC insurance payment price is higher then the cap price there will be some corn growers that will hit the cap.

Glass Half Full. Using the higher of the NASS price or the MPCI price election is clearly �farmer friendly�! Without this change the cap would have been lower. Even with a cap farmers will receive some (in most cases all) of the disaster payment. So farmers are clearly better off to have disaster program. Even in the worst case scenario where corn farmers lose 40% of the disaster payment, would growers prefer 60% of something or 100% of nothing?

QUESTIONS FROM READERS AND COMMENTS

I, as a Montana Wheat Grower, read with growing trepidation your article entitled, "Somebody in Washington Loves Kansas Wheat Growers". The further I got through the article, the clearer it became to me that Kansas has a lot more pull than Montana when it comes to dealing with the people and the machinery in Washington D.C.

We here in Montana have been STUCK in a mind numbing drought going on 6-7 years now, while Kansas has had what, 1 or 2 years of sub-par wheat production, and yet WOW, 2002 crop year is where all the loss is at?

In 2001, on my farm in Montana , I harvested less than half of my wheat acres, and the rest was not worthy of harvesting.

Yet if I savvy from your analysis of the prices that are going to be used in determining payment caps for disaster, prices used for production and prices used for indemnities paid, I as a CRC purchaser in 2001, will feel like a heel because I was STUPID to try and manage my own risk as I will be severely penalized when it comes to figuring the payment caps!!

In Montana, we were paid $3.34 (the 2001 CRC price was $3.31) a bushel on our CRC spring wheat policies in 2001, and that is what we will have to use in figuring our indemnity that counts against our disaster cap, yet the price used in the payment cap will be $2.80? Where is the logic here? As far as the price used with actual production, that is irrelevant to me, AS I HAD NO PRODUCTION!!!! I took it upon myself to buy up my coverage as I had CRC at 75%, while a lot of other producers choose to sit in the coffee shop and whine about this and that and from what I read in your analysis I would have been better off to be in town with the rest of the whiners doing nothing, had the same low level of coverage and expenditure, and paid for all the coffee myself!!!

Please don't feel I am "shooting" the messenger so to speak, I really do follow your work and appreciate what you do.

Thanks,

Montana Wheat Grower

Dear Montana Wheat Grower,

I am not so sure Kansas wheat growers have the Washington connections that you suggest (however, most Kansans would agree they are pretty good). It is more of a case that the numbers worked out for Kansas this time and remember the final decisions for disaster aid have not been finalized. It is true the wheat payments are lower for 2001 wheat losses than 2002 because the prices were lower. The problem with a national program is there are many different types of wheat and markets for wheat. Kansas hard red winter wheat normally has a higher price than soft red winter wheat but it is all counted as winter wheat. Pacific Northwest winter soft white wheat normally has a higher market price than Kansas wheat. So the �all� winter wheat price does not really fit Kansas either and MPCI-APH only has the one price.

Most reasonable people would agree this per acre payment cap in a National program is not easy to define and there is only one MPCI-APH wheat price election that is now a part of the disaster payment formula (durum wheat has a separate MPCI-APH price election). This is just wheat; now add all of the fruits and vegetables that are covered under disaster aid and one starts to understand the problems that USDA is facing. The per acre payment cap clearly competes with high levels of crop insurance and complicates life at USDA. It also complicates decision making for farmers.

Analysis for a 2001 Montana Wheat Loss. The 2001 NASS �all wheat� price was $2.78 and the MPCI-APH price election was $2.80 and one would use $2.80 because it is higher. That price would set the cap, value of production and disaster payment rate. The 2001 wheat disaster payment rate is lower $1.40 ($2.80 MPCI-APH 2001 price election times 50%) versus 2002 disaster payment rate of $1.575 ($3.15 MPCI-APH 2002 price election times 50%).

The Montana wheat analysis assumes a 35 bushel APH (use county yield if higher) and a Montana CRC planting price of $3.31 and a harvest price of $3.10 for spring wheat in 2001[5]. Those numbers were used to generate tables 2 and 3. If USDA uses the 2001 �all wheat� price for setting the cap and value of production then the cap will cut the payment for 75% CRC insured growers assuming a 95% yield loss (table 2). If USDA uses the 2001 NASS spring wheat price to set the cap ($3.06) then the reduction in disaster aid is smaller but there is still a cut (table 3).

Most insured growers agree they are better off with the disaster aid. While it appears that some Montana wheat growers will not receive the full payment, 50% of something is still better than 100% of nothing.

If Montana wheat farmers could make the 2001 crop insurance decision today, clearly they would buy less coverage. The cap is a real problem if public policy makers want farmers to buy higher levels of crop insurance coverage.

Crop insurance is a more certain program and most claims are paid much faster than any disaster aid. Some insured farmers will likely be upset if the cap cuts their disaster aid payment but will still buy crop insurance because they can not count on future disaster programs. Even if there is a disaster program it may not look like this one.

Count Only Taxpayer Funded Indemnities. An alternative cap is for USDA to only count the share of the insurance indemnity payment that was paid for by taxpayers. The share of the insurance contract that was paid for by farmers should be treated as private insurance and that share of the indemnity payment should not count against the cap. For example, farmers paid 45% of the 75% crop insurance coverage premium therefore 45% of any indemnity payment should NOT be counted against the disaster payment cap because it was funded with private dollars paid by farmers. USDA is counting 100% of the indemnity payment against the cap but only funded 55% of the insurance payment. If this approach had been used few if any (probably none) farmers would have had there disaster aid reduced for buying crop insurance. That would have added to budget costs and some Washington analysts argued that the law did not allow that approach.

Many farmers would agree with you this cap is a �bad� policy for highly insured growers. However, highly insured growers must also suffer a severe yield loss before their disaster aid will be reduced. Montana wheat growers with a 50% yield loss are unlikely to exceed the per acre payment cap. Also the insured grower with a 35% yield loss often will suffer a greater financial loss than an insured grower with a 100% yield loss, but this disaster program provides no help for the 35% loss.

Thanks for the question.

ART

Comments, Comments and More Comments on CRC Removal

Introduction. In a recent Ag Update, it was suggested there was no reason to have multiple revenue insurance products on the market. It was also suggested that Crop Revenue Coverage (CRC) should be removed from the marketplace where there is an available Revenue Assurance (RA) contract on the same commodity. One could certainly reach the same conclusion that Income Protection (IP) should also be removed from the market, where it directly �competes� with one of the variations of the RA contract which is currently available.

The logical reasons to remove CRC or IP are simply: 1) it would simplify and reduce the program�s administrative costs because it reduces the number of options that need rating software; 2) it would simplify the number of products that require training for crop insurance agents; and 3) it would prevent farmers from adversely selecting on the Risk Management Agency�s (RMA) federally reinsured crop insurance products based on premium costs.

Because these revenue coverages are available under RA, public policy makers could eliminate the IP and CRC contract without removing any available risk management tools from growers. The only exception is that the CRC contract does allow for a written agreement, while RA does not allow a written agreement. This minor discrepancy should be easily fixed if the insurance company that owns RA would simply agree to the change.

The premium costs are quite variable between these various revenue products even though RA Harvest Price Option (RA-HPO) and CRC are virtually the same guarantee on wheat, corn, and soybeans. Yet, as has been demonstrated on this web page, premium rates can vary widely (see �What Happened to My CRC Rates?� at: http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf03/crc03.pdf ). Note that

RA with no price option (RA-NPO) and under an enterprise unit is the �same� guarantee as IP.

The rating of RA and CRC is a different issue. Under current rating methods RA-HPO on corn is cheaper than CRC and yet the coverage is nearly identical. In addition, it is difficult to explain some of the rate reductions that were applied to corn in counties that have suffered underwriting losses. By contrast, rate increases on Nebraska irrigated corn CRC contracts by 25 percent are also difficult to explain. Even more difficult to explain is situations where RA-HPO premium rates are less than MPCI premium rates.

KSU WEB page readers sent Emails. The suggestion to remove Crop Revenue Coverage (CRC) from the market received numerous email responses from readers. Thanks for taking the time to write. Most of the comments were negative, but one would assume that the people who agreed that duplication of revenue insurance is not necessary merely saw no reason to write.

Many of the email writers who did not agree with the suggestion to remove CRC and IP from the market had strongly-worded messages. I appreciate all of the comments that were sent to me because they force me to think more clearly about the issues involved with these changes to crop insurance and disaster assistance programs provided through the Farm Service Agency. Hopefully, these questions will also help public policy makers to think more carefully about some of the proposals that are coming forth at USDA.

While people may disagree about the future of CRC, there are many other public policy changes that will have greater financial implications for insurance agents, farmers, and insurance companies. Therefore, these issues do become very contentious. However, readers may want to consider my response to their comments and questions before they reach a final judgment. Most insurance specialists will recognize what is in the best interest of both growers and taxpayers before making a final judgment on any public policy. There are bigger crop insurance issues for the industry than duplication of insurance products. For example, those issues will include: the direct marketing discounts of crop insurance, the proposed reduction in the expense reimbursement, and a new standard reinsurance agreement. Many insurance specialists could easily add to this short list of issues.

For those who do not agree with the reduction in number of revenue products, the good news is that I don't get to the make the decision. Crop insurance agents and others can sleep well knowing that Washington policy makers do not follow the writings of a university professor.

Reader Questions, Comments and my Response.[6]

1. We need a good revenue product for the Pacific Northwest . In Washington we do not have RA available on either wheat or barley. We have IP and CRC for wheat and only IP for barley. I would like the RA-HPO available on wheat and barley in all states including the PNW before we eliminate the other revenue products. We also need to keep the regional price structure that is available in the PNW that is available in IP and CRC at least for wheat. We need a regional price structure for barley and not based on 85% of corn.

I appreciate being on your e-mail list, the information is very valuable.

Thanks

Washington Grower

Dear Washington Grower,

I agree that RA-HPO needs to be made available in States that only have CRC or IP. I also agree that modifications need to be made to revenue insurance to fit niche markets. The perfect contract has not been built for all farmers.

The CRC is now duplicated by RA-HPO and it allows farmers to adversely select between the two products. Crop insurance is a public-private partnership so one must be careful how private market rules are applied to the crop insurance program. If it were a private market, then the premiums would be the same on both products. If RMA would make the RA available and then allow add-on or options to be developed for niche markets that would work.

ART

2. I'm moving virtually ALL of my corn customers to RA from CRC this year because of the premium savings. Send the CRC insured farmers to me and I'll tell them about RA.

Insurance Specialist selling RA

Dear Insurance Specialist,

I am glad to hear you are looking out for your customers and getting them the best deal. I have received several horror stories where farmers have had trouble even getting an RA quote. When they have received a quote the RA-HPO premiums saved them more than a dollar an acre.

ART

3. In my home county using the average expected yield as reflected by the GRP policy. Straight comparison between CRC versus RA with no options selected. At 65% and 70% RA is lower.

But at 75%, 80% and 85% CRC is lower. At the higher levels, it's significantly lower.

Personally, most of my clients are insuring their soybeans using GRP based on the low spring price and the fact that they rarely have claims that are under the 70-75% levels. They want to insure against area-wide catastrophic loss and the GRP is better suited to indemnify them more in that case.

The 2002 year was a classic example. People with CRC or RA on beans in most of my counties didn't receive a fraction of the GRP indemnity payment that they received on ALL of their planted acres. My agency will be paying out a lot of dollars in GRP indemnity payments this year; mostly on beans.

Agents need to be telling farmers what ALL their options are and providing advice based on the facts & policy performance instead of just trying to sell the policy with the largest commission revenue.

Insurance Specialist selling RA

Dear Insurance Specialist,

Same answer, I am glad to hear you are looking out for your customers and getting them the best deal.

4. I'd say an inverted market in a short crop year is probably the best reason to leave CRC on the market. It allows each individual farmer to evaluate the risk versus the premium price and make his own informed decision.

Insurance Specialist

Dear Insurance Specialist,

There are a large number of academics who will argue the market is efficient and there is no gain from what you are suggesting. I am not in full agreement with that argument but I am not sure it is relevant in this case. Lets assume you are right about the inverted market in a short crop year. The long run expected payout is the same for CRC and RA-HPO. Therefore, at signup one would need to know which year was going to have the inverted market, and even if they did know they would have to know they were going to have a crop loss in that year. Seldom does the price fall enough to trigger payments with an average yield, the exception was the cotton CRC contract. I did compare past revenue insurance payouts based on a harvest price using the October versus November average CBOT corn price and it is posted on the WEB at: http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf02/harvestp.pdf

ART

5. Of course leave CRC on the market. If their agent refuses to show them RA then the farmer is free to select a different agent that will look out for his best interests instead of his own wallet. You can't protect a person from themselves. This is America where everyone has the right to make right and wrong choices.

Insurance Specialist selling RA

Dear Insurance Specialist,

You will get no argument from me on freedom of choice. RMA is the regulator and we expect regulators to make sure the customer is being offered products that are priced �fairly�. Most insurance regulators would be accused of not meeting their mission if they approved a nearly identical offering but at a higher premium. Most policy makers would hold RMA to a higher standard because they are the regulator, set most of premium rates and approve the others, and are the reinsurer of last resort.

ART

6. Why do you feel the need to protect the farmer from himself? I'd say RMA and research analysts like yourself need to spend more time educating the farmer to go to a different agent who looks out for their best interest rather than trying to limit their choices of coverage.

Insurance Specialist

Dear Insurance Specialist,

If you want a �free� market, that will work too. If we closed down USDA and FSA, eliminate Farm programs, FmHA loans, disaster loans, disaster payments, direct farm payments, counter cyclical payments, conservation reserve program payments, crop insurance, experiment station, extension service, lay off all USDA employees, close the county FSA office, etc., Iowa will still be planted to corn and Kansas will be planted to wheat. There would be some marginal acres go out of production but most of the acres would be planted.

However, land values and cash rents will drop by 50% and that will offset the loss of government support. The fall in land values is the reason public policy is not going to a �free� market because the financial pain to reach a �free� market is too large for policy makers to accept. For the same reason crop insurance is not going to be eliminated either.

No need to send me any �cards and letters� on this issue because a �free� market is not a public policy that is acceptable to most farmers and public policy makers.

Please read the next comment where I am doing too much educating.

ART

7. Art, I just read your article in the Omaha World Herald. I want to tell that your article is true but missing some very key facts. I am an agent writing both RA & CRC. While in fact RA is cheaper in certain areas and at certain levels, the end result can be very costly in a loss situation. As you know, (I hope), RA & CRC's harvest price is set at a different time. RA insured growers last year saved a few cents an acre on premium but lost 8 cents PER BUSHEL on corn in his loss settlement. I know some people think, from false reports; agents who service Federal Crop Insurance are getting �fat off the hog�. Where in fact it takes a lot of work to make sure we have all the facts about each program to offer the best product to our producers.

Now, your article, suggests farmers should rush in to their agents & switch from CRC to RA. It is articles like yours, without all the facts, that give this worthy program a bad rap. Give our nations food suppliers, crop agents, some credit, & get your facts together before writing such an article that could jeopardize RMA's efforts in producing the best product for our farmers.

Thanks,

Ticked Off Insurance Specialist

Dear Ticked Off Insurance Specialist,

I have read the article in the Omaha World Herald and the basic facts are correct.

You are correct the gross corn indemnity was more under CRC this year. RA-HPO paid more on winter wheat this year in Kansas and Oklahoma with a total loss. CRC and RA-HPO paid exactly the same on soybeans. In some cases the net crop insurance payments for RA-HPO on corn were greater than CRC because of the lower RA-HPO premiums.

However, over the long run, the expected payout on corn is the same whether you measure the harvest price based on October (CRC method) or November (RA method). In 93, 95, 96, 99, and 2001 RA-HPO would have paid more than CRC. In 98 and 94 they would have paid the same. The biggest payment differences were in 93 when RA-HPO would have paid 25 cents more and 1975 when CRC would have paid 22 cents more. The long run average payment difference is essentially zero.

Because one cannot predict in which year the October price will give a higher payment, I think my advice is correct and it is in the best interest of farmers to buy the lower priced contract. Your observation is based on 1 year; my recommendation is based on 28 years of data.

A study was done to evaluate the difference in indemnity payments before the CRC corn harvest price was changed from November to the October average CBOT December corn price. The results are post on the WEB page: http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf02/harvestp.pdf

CRC made the change from the November to the October average price to reduce administrative costs because that will allow corn and soybean losses to be adjusted at the same time and not require a second trip to the farm.

I always appreciate emails from readers and I am happy to correct any errors, but this is one case where the facts appear to be correct. Most reasonable insurance people would agree because of the new higher corn CRC premium rates, RA-HPO is the better buy on corn.

ART

8. Art, Thought I'd let you know how impossible it is to get help to change to RA-HPO here in our county. I have been e-mailing other farmers about CRC versus RA-HPO. One farmer called his local agent and was told I (or you) didn't know what we were talking about and that the whole county would have to suffer a loss before he could collect. Of course, if they can play dumb until 5:00pm today they have it made.

Tick Off Farmer

Dear Farmer,

It is the GRP contract that is tied to county yields.

ART

9. RMA Approved Discounts and Commission Cuts by one crop insurance company is an attempt to ruin the businesses that has taken agents 25+ years to build. I just wanted to see what you thought about the PDP plan (Premium Discount Plan) that was approved by the RMA in favor of one company. I guess what I don't understand is why they are able to �rebate�[7] insurance premiums in some states and not in others, this simply isn't fair! I am also very surprised that RMA is allowing them to advertise a reduced premium with no service loss. It is very clear that this is a reduction in agent premium and means more money for the insurance companies.

Insurance Specialist Upset with PDP

Dear Insurance Specialist,

I am not sure PDP means added profits for the competing insurance companies because the other companies without the PDP are not happy with the discounts either. Most agents have argued the discounts are coming from agents� commissions. The PDP also adds �fuel� for those in Washington that want to reduce the expense reimbursement. Agent commissions vary widely depending on where one is writing insurance, the size of the agent�s book and the historical loss experience on that book also affect agent commissions.

There are other factors. For example, in high risk areas, RA-HPO is less expensive than MPCI. Companies cannot set the insurance rate so if the product is underrated and the expense reimbursement rate is set by Congress, then the only way companies can cover their share of underwriting losses is to cut agent commissions. The lower premium also reduces the expense reimbursement.

Am Ag went under and another company withdrew from North Dakota . A �joint venture� between two large companies was just announced. One company will assume the retail part of the market and the other will provide the reinsurance. It is unclear if the company providing the reinsurance will retain its SRA. The number of insurance companies writing crop insurance has been reduced by more than 50% since 1986. Fewer companies mean fewer people bidding for agents, just like any other market. If all companies stop writing Federal Crop there will be only one buyer of agent services and that is RMA. These activities do not suggest an industry with wide profit margins.

Service is something that cannot be measured by government. In the private sector, if service is poor, customers move to a competitor. If crop insurance were moved back to USDA with no private sector selling, loss adjusting, etc., then it becomes a take it or leave it offer for farmers no matter how poor the service.

ART

10. Take the whole damm crop insurance program off the market.

Uninsured Grower

Dear Grower,

If crop insurance were taken off the market, that would leave two options; a standing disaster program or the �free market�. Disaster programs favor high risk growing areas because disaster aid is nothing more than �free� crop insurance and high risk areas will collect more of the claims. However, under a �free� crop insurance program high risk growers will contribute nothing to the program costs.

As for the �free market� approach, the economics will work but it is politically unacceptable. See my comments above.

11. I agree with you that it does not make sense to have two competing revenue products. I don't agree with RMA that the RA rating is correct. There has always been a movement within FCIC to change the rating structure away from the old MPCI-APH program. I think your colleagues along with FCIC came to some agreement that the approach for rating RA was correct. There has always been the thought among the company that owns RA, some commodity organization, professors, and others that the coverage did not have to offer both up and downside coverage. I think they found out very quickly that they could not sell one way coverage; bingo RA-HPO.

Bottom line I think you are correct, one revenue product, I think RMA is wrong in their choice but as they say we have no vote..

Insurance Professional

Dear Insurance Professional,

Most of the academic community has accepted the RA rating method as being correct and RMA has accepted that conclusion. The increase in the CRC rates now makes it more expensive than RA-HPO on most farms. RMA also set the 2003 soybean MPCI price election over the market and that will move farmers away from revenue insurance. After last year�s soybean result, farmers may not be so fast to move from RA to MPCI-APH this year.

If RMA would make the RA contract available in Nebraska and others states there is no reason to leave CRC on the market. I did not come to this conclusion easily but given the RMA imposed rate increase on CRC, it is no longer relevant. If you put the interest of farmers first, there is no other conclusion. How can public policy makers leave CRC on the market when they know farmers can buy the same coverage for less premium in an RA-HPO contract? Is it ethical for RMA to leave CRC on the market when they know RA-HPO provides unlimited coverage for less premium?

Whether the RA contract is actuarially sound is another question. I don�t think it is in North Dakota and some other locations but my academic colleagues have concluded that I am wrong. Loss experience will tell the final story, but only the private sector will suffer the loss. Any RMA loss will be covered by the taxpayer.

I am not willing to concede that RA is a superior product to the CRC contract. The initial RA contract was substantially different than the CRC contract but with the changes made to RA in 2000 it essentially became a clone of the CRC contract.

Many CRC critics have simply taken the position that CRC sold because insurance agents made higher commissions and insurance companies made higher profits with the CRC contract. Given the level of participation in CRC, I don�t think farmers have bought the contract simply because of agents and companies. I think many farmers do prefer replacement-revenue coverage and have demonstrated so with their pocketbooks and for 7 years now. If this was not the preferred coverage then it really made no sense for RA to make the changes that were made in 2000.

ART

12. In my opinion CRC is slightly over-rated in a few places.... nothing significant.... RA-HPO is definitely under-rated almost everywhere.... all crops and levels.... but that's just my humble opinion, what do I know?

Insurance Professional

Dear Insurance Professional,

I think CRC is over rated on York county, Nebraska irrigated corn (and similar counties). However, it does not matter because RA-HPO is an unlimited liability and the premium is lower. If the soybean market were to hit $15 on the CBOT, RA-HPO would take a number of insurance companies under. If all of the companies go under, then USDA would need to take over the program.

ART

13. Art, old buddy.... those of us in Nebraska (God's Country) don't have an RA-HPO alternative. Maybe the same with Wisconsin and a few other RA free states....

Insurance Specialist

Dear Insurance Specialist,

That is the story. Irrigated Nebraska corn farmers are paying higher premiums because of the CRC rate increases, while in North Dakota