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Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

Disaster Aid Check May Not be in the Mail for Your Farm[1]

Introduction.  Congress recently passed an Omnibus Budget Bill that included 3.1 billion dollars ear marketed for agricultural disaster relief.  This version of disaster aid for crop growers is similar to past disaster aid programs but with a reduced payment rate.  The coverage level in the disaster program is 65% of historical yield meaning that growers will need to suffer yield losses greater than 35% before triggering payments.  For production lost below the guarantee growers will be paid 50% of the MPCI-APH price election or 45% if uninsured.  Past disaster programs paid 65% of the MPCI-APH price election for lost production or 60% if uninsured.

This version of disaster aid will provide no payments for yield loss that causes the largest financial loss for insured growers.  Also growers with large yield losses combined with high levels of crop insurance coverage will have their disaster aid reduced unless a more liberal definition of the per acre dollar cap is applied than past payment cap definitions.

Provides No Help for Insured Growers’ Financial Largest Loss.  The largest financial loss for an insured grower does not occur at a zero yield but at a 35% yield loss.  The worst outcome for an insured grower is to produce a short crop of a 35% yield loss, market price increase just above the counter cyclical strike price, which eliminates the counter cyclical payment and loan deficiency payments, and leaves fewer bushels to sell at the higher price.  In addition the insurance payment will be relatively small because the deductible and the premium are deducted before any indemnity payment is made to the grower.

Example Corn Case Farm.  An example corn farm with 133 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 a significant 35% yield loss, no counter cyclical payment, and no LDP payment was evaluated. [2]  However, growers would receive the direct payment and the net insurance payment after premiums are paid. 

Even with “high” coverages of crop insurance the insured grower will receive relatively small indemnity payments.  The result for a CRC\RA-HPO insured grower was over $59.73 per acre loss as presented in table 1, line 32.  If this same grower had suffered a total yield loss, the insured grower would have a net loss of $46.73 rather than $59.73 (table 2, line 32).  Under a total loss the grower saves the harvest expense so he/she is actually better off with a zero yield than with a 35% yield loss. 

The reason this occurs with a 35% yield loss, is because the first dollars of indemnity payments go to pay the premium.  Therefore, as the yield loss becomes more severe growers are no longer deducting any premium from the payment.  In addition, the revenue insurance is based off of a zero basis, while many growers as assumed in this example, operate with a price that is less than the Board (The example assumes 15 cents under the Board cash price for grain sold).

Benefit Cap.  In addition, there is a benefit cap on the payment that was not in recent disaster aid programs.  The benefit cap is limited to 95% of the expected crop “value”.  In the past, the crop value was defined as historical yield times the MPCI-APH market price.  Assuming this same procedure is used by USDA the cap will be 95% times historical yield times MPCI-APH market price election.  From that cap growers will be required to deduct their crop insurance indemnity payments, actual crop “value” produced, and disaster payments.  There is also a requirement that growers who accept disaster aid are required to purchase crop insurance for the next 2 years at levels above CAT. 

Disaster Aid Defined with an 80% Yield Loss.  The disaster aid provided by the 65/50 program passed by Congress would pay this example grower a maximum of $86.65 if insured and $77.98 if uninsured.  This is calculated based on 133 bushels times 65% times the MPCI-APH price election of $2.00 times 50%. 

In the example in table 3 it is assumed the corn grower suffered an 80% yield loss and the cap is based on the MPCI-APH $2.00 price election.  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 $53.99 versus $59.99 for the insured grower.  The insured grower at 75% coverage would generate an indemnity payment on line 27 of $146.68 for MPCI-APH and $184.82 for CRC\RA-HPO.  The net CRC\RA-HPO insurance payment (less premium) of $175.35 plus the disaster payment of $59.99 plus value of the salvage crop of $63.18 would generate a total value of $288.65 for the revenue insured grower on line 30.  The maximum benefit cap is $253.27 for this grower based on 133 bushels times $2.00 times 95 percent.  That means that the grower will have his disaster aid payment reduced by $35.38 on line 32.  His net revenue is $291.69 leaving this grower $26.13 short of the expected revenue. 

Lower Yields Reduce Disaster Aid.  Figure 1 shows how different yield levels will impact the amount of dollars CRC\RA-HPO insured growers will be able to collect on their disaster aid.  For example, a 75% CRC\RA-HPO insured grower will lose $75.91 and a 75% MPCI-APH insured grower will lose $26.92 in disaster payments with a 100% yield loss.  If this same grower had produced only 30% of a normal yield, the 75% MPCI-APH insured grower would receive the full disaster aid payment while the CRC\RA-HPO insured grower will lose $15.12 in disaster aid payments.  Insured growers with larger yield losses obviously have the greatest reduction in their disaster payments.

Higher Crop Insurance Coverages Reduce Disaster Aid.  Figure 2 shows how different coverage levels will impact the amount of dollars CRC\RA-HPO insured growers will be able to collect on their disaster aid.  For example, at an 85% revenue insurance guarantee an 80% yield loss this grower will lose $59.99 in disaster payments.  If this same grower had purchased a 70% revenue insurance contract he\she would have lost less than $17.74 per acre in disaster aid reduction payments.  Growers with an 80% yield loss obviously have the greatest reduction in their disaster payments with higher insurance coverage purchased.

Disaster Aid Does Help.  These “highly” insured growers are clearly better off because of the disaster aid payment being provided to them.  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 significant yield loss clearly one 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 65 or 70 percent coverage in the future.  Because one can never be certain how any future disaster aid may be decided this becomes a fairly tricky question.  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.

Redefined the Cap.  Public policy makers could redefine the per acre cap on disaster aid.  For example, the payment cap could be defined as historical yield times 95% times a price that is higher than the MPCI-APH market price.  The law says to use “appropriate price” to define payment cap.  Other alternative price measurements for corn might include a futures price, National Agricultural Statistics Monthly (NASS) price, CRC harvest price, or other higher price. 

If the corn CRC harvest prices were used to define the payment cap, then the example case farm’s cap would equal $319.12 (133 bu. yield times 95% times $2.52) versus $253.27 using the MPCI-APH market price (133.3 bu. yield times 95% times $2.00).  If the CRC harvest price of $2.52 were used to set the cap, then the example insured case farm with an 80% yield loss would have no reduction in disaster aid paid.  Growers with 80% and 85% revenue coverage combined with a severe yield loss will still exceed the higher cap.

How to define the cap on disaster benefits will be the major issue decided by USDA.  It is reasonable to assume the commodity groups will try to get USDA to use the highest price possible to define the cap.  It is also reasonable to assume some policy makers will try to use the MPCI-APH market price to define the cap as was done in the past.  The major argument for using the MPCI-APH market price is to reduce USDA budget costs.  Also the disaster aid program is being paid from other USDA program budgets, and it is reasonable to assume those USDA managers will try to limit disaster aid payments because it will cut into their budgets.