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.

Disaster Aid Questions[1]

The disaster law says that farmers returns from disaster aid, crop insurance payments (one would think net after premiums are paid but that may not be true), and the “value” of production can not exceed the “expected” value of the crop defined as 95% times “historical” yield times “appropriate” price.  If the “appropriate price” used to set the CAP is the MPCI price election, many farmers will have their disaster aid cut as was demonstrated in an earlier paper on this WEB site. 

There are many different methods for setting the per acre CAP on disaster aid.  In the early 1990’s, USDA set the CAP based on historical yield times the MPCI-APH price election.  A recent suggestion was to use the loan rate to set the CAP.  That would lower the CAP more that if the MPCI price election was used for corn and wheat.  Using the loan rate to set the CAP would increase the number of insured corn and wheat farmers that would have their disaster aid cut. 

It appears to many observers that Congress did not want to create an incentive for farmers to buy less insurance.  Assuming Congress did not want to create economic incentives for growers to reduce their purchase of crop insurance then USDA needs to make a more liberal interpretation of the CAP.  However, a conservative CAP will create an economic incentive to reduce crop insurance coverage levels as farmers look for ways to cut operating costs.

Reducing or eliminating the negative effect on crop insurance can be done either by raising the CAP by increasing the “appropriate” price or reducing the amount of “revenue and payments” to count against the CAP, i.e. don’t count the indemnity payments that were funded privately. 

Reducing the effect of the per acre payment CAP will (may) increase budget costs but that will depend on how OMB estimated the impact of a per acre disaster aid payment CAP.

Alternatives and Questions

1.  USDA could only count the share of the crop insurance payments that were paid for by the government.  For example an 80% insurance contract had 52% of the premium paid by the farmer, therefore only count 48% of indemnity payment against the CAP.

For example, if a grower suffers a total loss caused by hail and the loss was covered with private hail insurance none of the hail indemnity would count against the per acre payment CAP for disaster aid because the farmer paid 100% of the premium cost and the government paid 0% of the premium cost.  Most people would agree that any insurance coverage paid for privately should not count against a grower’s disaster aid payment. 

However, if the same grower had purchased an 80% revenue insurance contract, he\she would have paid 52% of the premium cost and the government would have paid 48% of the premium cost.  Logic would say that if public policy doesn’t count any of the private hail indemnity that was funded 100% with private funds then USDA would also not count the part of the Federal Crop contract that was paid for with private funds.  Logic would say USDA would count only 48% of the indemnity payment that was the share of the crop insurance contract that was funded by government premium subsidies.  If USDA policy only counted the share of the crop insurance contracts funded by government, there would be few farmers (probably none) who would exceed the per acre payment CAP.

Some analysis claim the law will not allow this option.  I am not a lawyer so I have no clue.  If there is a legal problem Congress could do a technical correction.

2.  USDA could pay disaster aid based on the price selected by the grower in their crop insurance contract?  For example if a corn grower purchased a CRC contract he\she would be paid 50% of the CRC payment price of $2.52 versus $2.00 using MPCI.  The MPCI insured corn grower would be paid based on 50% times the $2.00 MPCI price election.  If so, what price would USDA use for GRP?

3.  USDA could set the CAP based on 95% times the historical yield times the price election in growers’ crop insurance contracts times 50%.  For example a CRC insured corn grower’s CAP would equal 95% times the grower’s historical yield, times $2.32 (or $2.52 CRC harvest price?).  The MPIC insured corn grower would use $2.00 to set the CAP.

4.  Will the premium be deducted from the crop insurance payment before USDA deducts the payment from the CAP?  In some other FSA loan programs they use the gross payment.

5.  Will the disaster aid be paid based on the insurance units or by farm serial number?

6.  Will USDA deduct crop that was not harvested?  For example the insurance adjuster says there is 3 bushels left in the field but the grower does harvest it.  Will those bushels be deducted from the CAP? 

7.  What price will be used to calculate the production value deducted from the CAP?

8.  A grower who planted milo on failed wheat acres and also had the milo fail, will the grower receive disaster aid on both crops?  If the grower receives insurance payments for both wheat and milo will both payments be deducted if the grower receives only one disaster aid payment? 

9.  Could USDA use the highest insurance price to set the CAP?   For example could one use the CRC harvest price of $2.52 to set the CAP on corn?

10.  How does USDA deduct Group Risk Plan payments?  Those insurance payments will not be paid until the county yield is reported.

11.  Will prevented planting payments be subtracted from the CAP?  I am guessing yes but the insurance payment is less therefore, I would expect few growers to hit the CAP with prevented planting.  I am also assuming prevented planted acres will receive disaster aid payments.  Is that true?

12.  Have AGR growers been paid?  Will they have a separate CAP for each crop that is combined into the AGR crop insurance contract?

13.  Many fruit and vegetable crops are dollar contracts so what price will be used to set the CAP. 

14.  In 2002 over half of the Kansas wheat and corn insured acres were covered with
revenue insurance at 70% and higher.  It is lower for milo and soybeans.  A 70% or greater revenue insurance contract combined with a 70% or greater yield loss will start to reduce disaster aid if the traditional method is used to set the CAP.

Summary.  There are clearly more questions than answers about disaster aid.  There are also many different methods for setting the per acre CAP on disaster aid.  In the early 1990’s, USDA set the CAP based on historical yield times the MPCI-APH price election.  If that same formula was used on the current disaster aid program, growers with high level of crop insurance coverage will have their disaster aid payments cut.  This is a major debate in Washington and I am sure includes input from the commodity and farm organizations.