The ghost of the Southwest’s mega-drought continues to haunt growers even after a few rain showers this last growing season. Producers there have been used to paying dearly for each dollar of crop insurance coverage, but the cost-benefit ratio could reach a breaking point in 2015.
“Under old farm policies, lenders would look at your portfolio and see how much crop insurance guaranteed in gross revenue, than add in direct payments and that was the basis for your crop loans,” said Matt Huie, a 38-year-old crop producer from Beesville near the Gulf Coast rim of Texas. “Now we’ve seen our basis for loans erode because of drought and erosion in commodity prices.”
Texas state climatologist John Nielsen-Gammon describes prolonged drought in the Corpus Christi area as one of the two most severe in the region’s recorded history. Only the epic drought of the 1950s to the early 1960s matches it.
Huie has cut stocking rates on his cattle operation to half of what he managed 10 years ago. He tries to limit weather risk on row crops by farming across four counties with 65 miles between the furthest locations. Even with better moisture during 2014, his yields varied widely since showers added 12 inches to 13 inches during the growing season to some fields and a mere 1 inch to 3 inches to others.
In high-risk farming regions, federal crop insurance isn’t the financial cushion it offers the Corn Belt. While Midwesterners typically guarantee 80% or higher expected revenue, “nothing over 75% is offered on any crop here,” he said. Not that he could afford it anyway.
Premiums are already so “crazy high” in Texas, Huie typically only insures 65% optional unit coverage under revenue plans. Even then he normally pays $25 to $35/acre for a corn APH of 65 bushels. For the same price, someone in Indiana with a 160-170 bpa APH could buy an 85% policy, noted Cameron Silveus, an agent with the Silveus Insurance Group, who has clients in both states.
“In Texas and throughout the Southwest, dryland wheat yields have been decimated after four years of severe drought,” Silveus said. “Unlike the Midwest, growers there have not been able to insure a profit with their coverage levels. For a lot of people, it might be a negative $100/acre before insurance even begins. “
Huie and other mega-drought victims from Texas to Colorado had banked on a new 2014 farm bill provision forgiving Actual Production History (APH) yields that collapsed due to extreme weather. The APH fix forgave an individual’s actual yields in counties where planted-acre yield tumbled at least 50% below a 10-year average. Growers in contiguous counties would also qualify.
Because APHs are based on a 10-year history, the new rule would have erased Huie’s near-zero yields due to drought in 2006, 2009, 2012 and 2013. That would have lifted his 2015 cotton APH average 26% — with similar boosts for his dryland corn, grain sorghum and wheat. Establishing a realistic APH is doubly important now, since it is the basis for payments under the new Supplemental Coverage Option (SCO), an insurance rider that allows growers to buy up insurance coverage to 86% levels. Huie expects to need that option to supplement his base coverage.
Instead, USDA’s Risk Management Agency said it is overwhelmed by monumental changes in crop insurance under the new farm law that affect almost all counties and crops within the federal crop insurance program.
In July, officials said they recognized how significant the APH change would be, but announced they would not be able to implement this rule until 2016 crops.
Critics argue Congress intended to implement the rule now, not three years into a five-year farm bill. They think USDA has leeway to outsource some of its labor and software demands and can reuse the same county yield data it needed to compile SCO and the cotton industry’s STAX insurance policy.
Others argue the delay hurts growers across the country, not just Texans. Indeed, maps illustrating corn APH drop incidences show counties in good portions of the Dakotas, Kansas, Oklahoma, Texas and the Eastern Seaboard have experienced 50% yield losses multiple times in the past 20 years.
Kansas State University economist Art Barnaby noted 40 Illinois counties recorded corn yields low enough to trigger APH forgiveness in 2012. Over the past 77 years, Adams County, Ill., would have triggered the rule three times. Garfield County, Okla., wheat yields fell more than 50% only two years in that time frame, although 2014 could be a third, Barnaby added. Wheat yields in Garden City’s Finney County, Kan., tumbled more than 50% eight times since 1937, but two of those occurred in the last 10 years.
Erasing yield losses may be possible but won’t be a cheap, a University of Illinois farmdoc analysis concludes. “One aspect that the farm bill amendment makes absolutely clear is that there is no discretion on the part of FCIC when it comes to the premium charged for any producer availing themselves of this exclusion; It must be adjusted to reflect the risk associated with the adjustment. In other words, if dropping a bad year from the APH changes the risk associated with insuring the producer, which it is presumed to do, then the producer must pay for that change in the premium. FCIC has no discretion on whether to make the adjustment to the producer’s premium,” the study said.
Existing yield-plug provisions just weren’t designed for extreme and prolonged drought conditions, Huie and others argue, and that may force lenders to scrutinize farm loans more closely.
“I keep hearing about how farm equity is up at record levels nationwide after a string of record income years for grain producers. We haven’t seen any of that,” said Huie. “Our land rents are not up, and the value of land is up some, but we haven’t had crops to support a lot of appreciation. Money is not floating around down here. We owe money on everything. Many folks have been in business a long time or have other sources of income, but not me. I fondly say we have more notes than a piano.
“In recent years, our ability to protect revenue has dropped at least 40% — a 25% drop in APH since 2009 on top of reductions in price guarantees,” he added. “So all of a sudden, our ability to protect cash flow is hugely affected. This could cost a lot of people their businesses.”