Miller, Thomas A.

Walter, Alan S.

English

Texas A&M University

CROP INSURANCE AND
DISASTER PAYMENTS
Thomas A. Miller and Alan S. Walter
Economic Research Service
United States Department of Agriculture
WHAT ARE THE ISSUES?
The Agriculture and Consumer Protection Act of
1973 initiated a new program to protect producers who
have wheat, feed grain, or upland cotton allotments
against income losses due to prevented planting or low
yields for the period 1974-77. In the first two years
(1974-75) of the Disaster Payment Program (DPP) ad-
ministered by the USDA's Agricultural Stabilization and
Conservation Service (ASCS), payments totaled $840
million. Without legislative action, the DPP and associa-
ted benefits will expire after the 1977 crop. The immedi-
ate issue is whether Congress should extend the DPP in-
tact or in some modified form.
This question is only part of the broader issue of the
proper role of Government in offering risk protection
against natural hazards faced by farmers. The Federal
Government also has programs other than the DPP
which offer risk protection to farmers, as does the pri-
vate insurance industry. The Federal Crop Insurance
Corporation (FCIC) is a federally chartered agency
which has offered insurance to farmers since 1939. Even
considering all 22 crops insured by FCIC, the DPP is
still a much larger program in terms of participation and
payment or indemnities to farmers. In comparison,
FCIC paid out a total of $126 million in 1974 and 1975.
Other disaster protection is also available through
such programs as the Farmer's Home Administration
(FmHA), but most of this relief is of an emergency na-
ture and is restricted by the requirement that a disaster
be declared by the President, a Governor, or other offi-
cial. Such federal programs supplement the private in-
urance industry which has traditionally offered protec-
tion again t hail and fire, but which has never success-
fully offered multiple-peril insurance on a large scale.
'Within the broad issue of the proper role of the Gov-
ernment in providing risk protection to farmers, specific
questions relate to the type of programs that should be
available. Should both the DPP and Federal Crop Insur-
ance (FCI) continue for the program crops? Should the
Government in some way encourage the private insur-
ance industry to provide multiple-peril crop insurance?
Should provisions of any of the programs be revised?
Should the DPP be expanded to include other crops
such as soybeans, oats, or tobacco? Should the overlap
among these Government programs be eliminated? How
should the programs be structured - what should the
payment rates be, who should pay the cost of premi-
ums, and what losses should be covered?
WHY IS THIS AN ISSUE?
Farmer's increased need for disaster protection as pro-
duction costs increase, apparent inadequacies in the cur-
rent programs to meet these needs, apparent abuses or
inequities in the present programs, and the high Govern-
ment expenditures since 1974 make disaster protection
an issue. The DPP was adopted with little consideration
of how the specific provisions would work and with lit-
tle knowledge of its likely costs to the Government. It
has proven to be costly and several weaknesses in its pro-
visions have become apparent from experience gained
during the first two years of operation.
Specific problems with the current DPP are numerous.
l\1any of the provisions would not be offered in a sound
insurance program.
1. The payment rate of the larger of either one-third
of the target price or the established deficiency pay-
ment rate is considerably below costs of production.
2. While farm allotments and bases have not been
used for production control since 1973, they are still
preserved by ASCS as a basis for the DPP. Benefits are
based upon the short fall between the actual production
and the farm's base production (allotment times the
ASCS established yield) making producers without allot-
ments ineligible for benefits. Those who overplant their
allotments face reduced per acre benefits or no benefits.
3. The determination of eligibility for benefits is
based upon two-thirds of the established yield, but once
a farm is eligible, payments are based upon the entire
short fall between established allotment production and
actual production. As a result, one bushel or pound of
F-l
The Texas Agricultural Extension Service. The Texas A&M University System. Daniel C. Pfannstiel, Director. College Station, Texas
production above the critical eligibility level can make a
producer ineligible for a large payment.
4. The provision which allows producers to receive
payments if prevented from planting is difficult to ad-
minister and subject to abuse.
5. Cotton receives special treatment under the pre-
vented planting option since benefits can be received
even if another crop is planted later. If a producer plants
a substitute crop for wheat or feed grains his payment is
reduced proportional to production from the substitute
crop.
On the positive side, the DPP has been beneficial and
may have kept numerous farmers out. of bankruptcy
during unfavorable crop conditions. Many farmers like
the program because it offers disaster protection with-
out a premium cost. Farmers in high risk areas where
FCr is unavailable now have protection against natural
crop hazards - with the increased specialization of farms
and higher costs of production, this protection is impor-
tant as a means to guard against loss of income.
The DPP is in a sense in competition with the FCrC.
Farmers eligible for the DPP may be less inclined to pur-
chase Fcr than if the DPP were not available. However,
not all producers are able to purchase FCr since the en-
abling legislation requires FCrC to operate a sound pro-
gram with authority to refuse insurance where the risks
are exceSSIve.
As a result, FCr is not offered in many counties or
even in areas or to producers within counties where the
risks of crop failure are high. Even where available, FCr
has a low level of participation with only about 17 per-
cent of the eligible acreage of wheat, corn, barley,grain
sorghum and cotton insured in 1976.
The private insurance industry has misgivings about
both the FCr and the DPP because such programs may
hurt their present or potential sales. Private industry has
long been interested in providing multiple-peril coverage
of crops and has attempted to do so in the past. How-
ever, these efforts have been unsuccessful because of the
una ailability of reinsurance to spread the risks over
time, lack of data on which to base rates, and having to
compete with the FCrC which receives a Treasury appro-
priation to cover administrative and operating expenses.
Policy Alternatives
A wide range of options may be considered for adop-
tion through new legislation.
1. Renew the DPP without modifying any of its pro-
visions in the 1973 Act.
2! Allow DPP to ·expire and allow the FCIC to con-
tinue operating under its present charge. Disaster pro-
tection would then be the same as before the 1973 Act
was passed.
3.. Encourage the private insurance industry to offer
multiple-peril crop insurance. This might be accom-
plished by offering FCIC reinsurance to help spread the
risks over time.
4. Terminate the DPP and expand the FCrC program.
Under this option, FCr coverage would be made nation-
wide for the program crops and the now minimal effort
at selling and promoting FCI would be expanded. Gov-
ernment premium subsidy could be used to increase the
'articipation in the program.
5. Amend the DPP provisions to make the protection
more in line with the needs of producers and to remove
some of its unsound provisions. This includes the un-
equal treatment between cotton and the other crops
with respect to the prevented planting provisions and
the problems associated with making a payment of at
least one-third of the maximum possible payment on the
basis of a threshold farm yield.
6. Eliminate the current overlap between programs.
This could be accomplished in a number of ways such as
requiring the purchase of FCI if available in order to be
eligible for disaster payments or not offering the DPP to
producers who were eligible to purchase FCr.
7. Expand the emergency loan program offered by
FmHA and the gisaster assistance offered by other agen-
cies to reach more producers.
Consequences
The results of any action taken by the Congress will
affect the extent of coverage of natural disasters that
are faced by farmers, the rate at which they are indemni-
fied, and the costs of this protection to taxpayers. The
ability of farmers to purchase inputs and obtain credit
in years of low crop yield are substantially dependent
upon the level of disaster protection provided.
To the extent that benefi ts are capitalized in the land
values, any governmental role in financing the program
could affect the prices paid and received for land. Farm
income protection is important not only to farmers but
also to their communities.
Beyond the farm gate, the impact of farmer disaster
protection on consumers is difficult to evaluate. How-
ever, there is evidence that reducing the risks associated
with crop production· would increase the supplies of
food and reduce food costs in the long run.
F-2
Educational programs conducted by the Texas Agricultural Extension Service serve people ofall ages regardless of socio-economic level, race, color, sex,
religion or national origin.
Cooperative Extension Work in Agriculture and Home Economics, The Texas A&M University System and the United States Department of Agriculture
cooperating. Distributed in furtherance of the Acts of Congress of May 8, 1914, as amended, and June 30, 1914.
10M-I-77 AECO 2


Crop Insurance and Disaster Payments.

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Crop Insurance and Disaster Payments.

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Crop Insurance and Disaster Payments.

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