Drought conditions impacting crop insurance costs

Cotton farmers across the High Plains and Rolling Plains of Texas fight the rain, wind, and blowing sand of spring to get the crop in the ground and watch it grow. But too often lately they are watching it wither.

“We aren’t used to having a rotation of both crops being hard each year,” says Sutton Page, a cotton and wheat farmer from Jones County, Texas. “What’s normal in a dry year is having either a bad wheat crop or a tough cotton crop, but having multiple years, back-to-back, where conditions don’t allow for much profit in either crop operation makes it tough.”

Climbing Costs

Extreme weather, such as the drought in Texas, is not just wearing on the spirit of American farmers. It is also leading to more crop insurance claims and increased cost for the taxpayer, insurance provider, and farmer. A Stanford University study published in 2021 analyzed the impact of warming temperatures on the cost of crop insurance from 1991 to 2017, and found it contributed to more than 19% of the $141 billion in losses covered by the federal program in that time frame.

In addition to farming, Page is an independent insurance agent. In his area, he has seen premiums go up in recent years, he says, but it hasn’t become untenable for farmers yet.

“If you’re filing claims every single year, as a producer, you are going to get to a point where it’s not feasible to take out 70% of your APH [average production history] to make it work; you may only take 50%,” he says, explaining this would be an extreme scenario and most farmers strive to harvest a crop when they can to maintain a strong APH.

“When you do have a year like we had last year...that’s when you want your APH to be as healthy as possible,” Page says.

However, he has noticed the cost of hail coverage where he farms has more than doubled in the past decade. Hail coverage is not federally subsidized.

“It gets harder and harder to sell it, and it’s hard for me to buy it, personally,” he says. “But if I have a really good wheat crop out there, I’m going to buy it.”

Increased Risk

Furthermore, rising costs are making it more difficult for some farmers in high-risk areas to obtain coverage at all, experts say.

“When the insurance company can’t get enough premium, the farmer has a hard time getting insurance because nobody wants to write it in the area that they’re in,” says Peter Johnson, executive vice president of Alliant Insurance Services, a specialty brokerage firm that offers crop insurance.

Multi-peril crop insurance premiums, which are federally subsidized, are set each year by the USDA Risk Management Agency, but Johnson cites a two-year lag in the premiums keeping up with actual costs.

“We are required by law to provide premium stability to producers and cannot increase premium rates by more than 20% from year to year,” says a USDA spokes- person. “This means there are instances where we can update the premium rate to its target in one year and in other cases it may take longer.”

Insurance providers operating in an area cannot legally deny coverage to a farmer, but Jim Korin, president of NAU Country Insurance, says he has heard rumors of providers pulling out of areas because the cost of the risk is too high.

“That is not something we’ve done at NAU Country,” he says. “In fact, we’ve expanded our writings to make sure we take care of those farmers.”

As a nationwide company, NAU Country can stay profitable when there is prolonged drought in Texas, for example, because other areas of the country do better and make up for the loss.

While it has become more challenging to find coverage in some areas, Johnson notes Alliant has not had a client go without be- cause other insurance providers “step up.”

“The concern is if the trend continues, the approved insurance providers that are willing to step up may reach capacity and there could be limited insurability,” he says.

Korin expects the Risk Management Agency to raise rates over the next couple of years, which he says will help the situation, although it still makes things harder for the farmer. He also says widespread participation is key to program affordability.

“The more crops, the more farmers you cover, the better chance you have of long-term success,” he says. “This is a taxpayer-funded program, and for the program to succeed, we have to include all the farmers we possibly can, and the pooling concept of insurance will make the rate more affordable.”

Protecting an Essential Program

While the changing climate has posed challenges for all involved, sources agree the program is worth maintaining.

“I don’t know of any cotton producer right now that does not take out any federal crop insurance,” says Page. “In the past, probably 20 years ago, I knew some guys. If they felt like it was going to be a wet year, they didn’t take it out. It’s not a risk nowadays that a farmer can take.”

Korin says his company has hosted visitors from many countries looking to learn from the success of U.S. crop insurance.

“We’re truly the envy of the world, and it’s because our government decided in the ’30s, ’40s, and ’50s that a safe and affordable food [supply] was part of our national security,” he says. “Think about the COVID years, when you went to the grocery stores and there wasn’t anything on the shelves. If that had happened for lengths of time, six months, a year at a time, there would be outright chaos.”