Amid all the uncertainty farmers are facing this spring, they're now getting hit by a drop in crop insurance price guarantees. In response, Agriculture Secretary Sonny Perdue briefly raised the possibility that USDA could allow producers to increase coverage.
The projected prices that serve as price guarantees for revenue protection policies have fallen this spring, reflecting the ongoing slump in commodity markets. USDA has not allowed those prices to be changed since the crop insurance program was overhauled in 2000.
Perdue, speaking to reporters at the National Farmers Union annual meeting on Monday, said he’s looking into the possibility of adjusting the price guarantees in some way. "That’s one of the things we need to address, obviously, as we see that. That trend is downward. … That may be one of the things I talk to the president about,” Perdue said.
He cautioned, however, that he wasn’t sure whether USDA had the authority to “adjust those (prices) or not," and on Wednesday he told reporters that he has been advised he lacked the authority to change the prices. He said that farmers should consider paying for the harvest price option on their policies.
"I found that I don't have as much flexibility as I would love to in that regard," Perdue said, speaking after a House Agriculture Committee hearing.
Perdue’s original remarks on crop insurance come as he is also trying to tamp down farmers’ expectations for another round of Market Facilitation Program payments in an election year. In a speech last Friday at Commodity Classic, the annual meeting for corn, soybean, wheat and grain sorghum producers and the Association of Equipment Manufacturers, Perdue warned farmers against overproducing this year.
“We’ve got to look at market signals. and if we get trade, we get those exports and we don't see the markets move like we ought to, that should be a signal to all of us that we're producing too much of one commodity or the other,” Perdue said.
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Perdue’s original remarks about insurance prices raised eyebrows around the nation’s capital, in part because of concerns that adjusting the price guarantees could look like political interference. Perdue didn’t say, but presumably farmers would be charged higher premiums if allowed to buy policies with price guarantees above the market price.
The 2020 insurance prices for corn and soybeans are both at their lowest levels since 2016, according to an analysis by the American Farm Bureau Federation. The corn price is $3.88 a bushel, down 3% from last year. The soybean price of $9.17 per bushel is down nearly 4% from last year. The cotton price is 68 cents a pound, 7% under the 2019 level.
“In the case of corn and soybeans, the spring prices were among the lowest in the last decade and are likely to adversely impact farmers’ borrowing capacity in 2020,” the AFBF analysis warns.
But it would be difficult legally for USDA to change the 2020 insurance prices at this point, since the policy rules are set by contracts USDA has with the insurance companies, said Ken Ackerman, a former administrator of USDA's Risk Management Agency who is a crop insurance specialist with OFW Law. The contracts require the insurance prices to be based on futures, Ackerman said.
"If he’s looking for a long-term change, something that he would think of easing in the future, the next cycle, that’s a different matter,” said Ackerman.
Art Barnaby, an agricultural economist at Kansas State University, said that allowing farmers to buy insurance at higher price guarantees would raise a number of questions, including whether or not growers would be charged higher premiums. Such “in the money” policies, meaning that the coverage price is higher than the market, would normally be “much more expensive,” he said.
Art Barnaby, Kansas State University
Another issue: the crop insurance sales closing dates have already passed for some southern farmers. The closing dates for most spring-planted crops are generally either Feb. 28 or March 15. Presumably, farmers whose closing date has passed would have to be offered the option to get insurance at high levels.
Also, allowing farmers to buy policies at higher price levels would undermine private insurance products, he said. One such policy already is available through six companies in several states, Barnaby said.
If USDA were to raise insurance, it would discourage private insurers from serving that market. “You will force them out. Is that a good thing? It depends on whether you are a conservative or a liberal,” said Barnaby. “If you really think markets are the best way to go, you probably wouldn’t want this to happen.”
Farmers also have the ability to buy the “harvest price option” on revenue policies, which can pay out if prices are higher at harvest than they are in the spring. Barnaby thinks farmers should buy it every year, and this year is certainly no exception.
He said the harvest price option makes crop insurance a “direct complement” to farm bill commodity programs, which are designed to compensate producers when prices fall.
USDA generally determines the insurance prices each February based on CME Group futures. The drop this year reflects soft demand and expectations of increased production, said John Newton, AFBF’s chief economist.
Demand for U.S. corn “is very, very slow” at a time when USDA is projecting that farmers will plant 94 million acres this year, which would be largest area since 2016, while soybean acreage is projected to rise by 12%.
Cotton prices are in a slump because of China’s stockpiles; China currency holds more than 80% of cotton inventories, and there is uncertainty about how the coronavirus outbreak will disrupt supply chains and dampen usage, Newton said.
Despite Perdue’s warning about overproduction, President Donald Trump’s promise to provide more payments to farmers if his trade deals don’t “fully kick in” is providing no incentive for farmers to trim plantings this spring. Perdue hasn’t said how a potential 2020 MFP would be structured, but the last two version have been based on the farmer’s actual production (2018) or the farmer’s total plantings (2019).
Erin FitzPatrick, an analyst at Rabobank, is advising farmers against basing planting decision on expectations that there will be more MFP payments, but she tells Agri-Pulse that she doesn’t expect farmers to cut back despite the weak spring prices.
“Farmers like to plant their acres, so I don't think it will have too much of an impact on what farmers decide to plant; I think it will maintain the total acreage pool this year,” she said.
Amy France, who grows grain sorghum, wheat and corn in western Kansas, says she and her husband aren’t backing off their planting plans this spring despite the uncertainty. They’re optimistic that a surge in sorghum exports will materialize. Prior to the trade war, China was the biggest market for the U.S. crop by far.
“I do think absolutely we're going to … reap the benefits of this trade opening back up, and we're just hoping it's a little sooner than later,” said France, a member of the National Sorghum Producers board.
“You know, farmers are hurting but we're holding on. Barely, but holding on.”
Gary Wertish, president of the Minnesota Farmers Union, thinks another MFP payment this year is inevitable, given that it's an election year, although he says that it's not influencing his planting decisions.
"It's a political payment. We'll have another this coming year," he said. "Our concern is after that. What's going to happen after that, if we're still in depressed prices?"
UPDATED with Perdue saying he lacks authority to raise insurance prices.
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