Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

ARE WINTER WHEAT GROWERS BETTER PREPARED FOR THIS DROUGHT THEN THE 1996 KANSAS DROUGHT?[1]

In order to consider that question, the following analysis includes the seven most western Kansas counties of Cheyenne , Greeley , Hamilton , Morton, Sherman , Stanton , and Wallace counties.  These counties border Colorado and represent some of the dryer locations in 2002.

There has been a major shift to higher coverage crop insurance levels in these seven Kansas counties currently under severe drought stress compared to the insurance coverage levels during the 1996 drought.    In 1996, CAT represented 43% of the insured acres.  In 2002, the percent of insured acres under CAT had declined to 4% (figure 1). In 1996, the buyup coverages of 65% and less declined from 56% of the insured acres to 29% of the insured acres in 2002.  In 1996, the percent of the insured acres with coverage levels of 70% and greater represented less than 1% of the insured acres.  While in 2002, 67% of the acres were insured at coverage levels of 70% or greater.  Therefore, one would have to conclude that farmers are clearly in a better risk management situation to cover this year’s drought then the one in 1996.

The dollar amount of coverage also greatly increased from 1996 to the current 2002 drought.  In 1996, there was 13.6 million dollars of CAT coverage on this seven county wheat crop.  The 2002 CAT coverage has declined to slightly over a million dollars of coverage.  The dollars of coverage in 1996 was 42.4 million dollars for coverage levels of 65% and less.  By 2002, buyup coverage for 65% and less declined to 17.6 million dollars (figure 2).  By contrast the dollars of coverage written at 70% and greater increased from 366 thousand dollars in 1996 to 49.5 million dollars in 2002 (figure 2).

There was also a shift in acres insured to higher coverage levels as presented in figure 3.  The net acres insured under CAT in 1996 were 403 thousand acres.  CAT insured acres have declined to 34 thousand acres in 2002.  The insured acres decreased from 527 thousand to 237 thousand acres insured at buyup coverage levels of 65% and less.  The net acres insured at 70% and greater in 1996 were just 3,300 acres.  That has increased to 544 thousand acres in 2002, with insurance coverages of 70% and greater. 

Not only has this coverage increased shifting from CAT and 65% and less buyup coverage to 70% and greater coverage but most of that increase has also shifted to revenue insurance [revenue insurance includes Crop Revenue Coverage (CRC) and Revenue Assurance (RA)].  In 2002, 85% of the insured acres were covered under revenue insurance.  Revenue insurance provided 89% of the total dollars of wheat coverage for these seven county regions of Cheyenne , Greeley , Hamilton , Morton, Sherman , Stanton , and Wallace counties.  Revenue insurance accounted for 91% of the total premiums paid for wheat crop insurance in this seven county region and captured 90% of the crop insurance subsidy provided in this region.  There was no revenue insurance offer on 1996 wheat (figure 4).

Summary.  Clearly, farmers are better prepared to handle this drought damaged wheat crop then they were in 1996.  This is largely because of the major shift to higher coverage levels and greater purchase of revenue insurance coverage.  If the final loss ratio numbers follow a similar trend to 1996, this seven county region will collect about 30 to 40 million dollars in indemnity payments.  By contrast, the 1996 crop collected 21 million dollars in indemnity payments for this seven county region.  The final loss statistics will not be known for approximately 6 months but if the damage is similar to 1996 these are not unreasonable estimates.

There were fewer acres insured in 2002 then were insured in 1996.  There are two possible reasons.  The first reason is there maybe more uninsured farmers in 2002 than in 1996.  The other possibility is that there were fewer acres of wheat planted in this seven county region, therefore fewer acres would be insured.  It is likely that the reduction in insured wheat acres is probably caused by both factors. 

Because there are uninsured acres these farmers will probably favor some form of ad hoc disaster payments on the 2002 wheat crop.  Those farmers that are insured will still not generate revenue equal to 100% of their expected crop value, because these crop insurance contracts have a 25 to 30% deductible.  Therefore, these insured farmers will also not generate income that would match a normal crop income.  Presumably, any ad hoc disaster payments will be added to the crop insurance payment as was done in the past and effectively cover the deductible in the insurance contracts.  Those that purchase no insurance would have to rely totally on the ad hoc disaster payments or simply refinancing their existing operation. 

It is possible that Congress will not provide any ad hoc disaster aid on the 2002 crop.  Some of the western states have been lobbying for an ad hoc disaster program, but the legislature currently does not have the necessary support for passage.