What’s Ahead for Crop Insurance

The public crop insurance program available to Ontario corn farmers is far superior to that offered only a few years ago.

But the needs have also changed. Risks have increased as per-acre costs have grown and margins shrunk. Crop insurance must continue to evolve.

The typical full-time cash crop producer in Ontario now farms 500 to 3,000 acres. Crop insurance is not as well suited for these folks. The probability of payouts is smaller as acreages increase and as the farm land base is spread over greater distances, but this is not generally reflected in lowered per-acre premium costs or offsetting benefits.

If 10 farmers each farm 100 acres and one is hailed out, crop insurance pays. But if one farmer farms all 10 properties, then no payout occurs (assuming average crops on the other 900 acres).

One solution involves surcharge/ discount adjustments by which premiums are altered to reflect claim history. Such adjustments exist and work well in Ontario. Their value was enhanced in 1998 when new participants were allowed to qualify immediately for discounts, based on yield history data provided through market revenue insurance records. Not surprisingly, this resulted in an increase in enrolment.

But there are some practical restraints to the use of surcharges and discounts. If both discounts and surcharge percentages are very large, then there is the risk that some farmers will be hit with very large and unfair crop insurance bills because of really bad luck (such as hail storms which hit in successive years and freak rainfall patterns). And even where higher surcharges may be more legitimate (high losses associated with farming riskier land and/or riskier farm management practices), the political pressure from those who will pay more for crop insurance can exceed that coming from those whose bills will decline. While there may be room to increase the surcharge/ discount limits beyond those which exist now (a maximum 20 per cent discount, and 10 per cent surcharge), this is not the solution.

The “optional unit coverage” program used in the U.S. represents a better approach. With the U.S. Multi-Peril Crop Insurance (the most common form), all sharecrop farm units are automatically separated from the base farm unit in calculating farm yields and crop insurance benefits. And where there is a distinct separation between farm units – and if good records exist for individual farm yields – farmers have the option of enrolling these separate units as separate entities for corn crop insurance purposes. A condition is that all of the corn acreage grown by any participating farmer must be enrolled in crop insurance, even if there are several optional units.

A joint committee, involving representatives of Ontario grain and oilseed groups and AGRICORP is making plans for implementing such a program, at least on a pilot-project basis, in 1999. This would represent a major step forward, and should encourage substantially increased enrolment by full-time cash crop farmers, as well as by livestock producers who grow large crop acreages.

A major problem with the present structure and function of AGRICORP is that the amount of revenue received by the corporation from governments to administer crop insurance is not tied to the number of crop insurance contracts issued. Indeed, there is an inherent disincentive: additional contracts mean additional service costs, and less revenue per contract serviced. A major restructuring of the AGRICORP agreement with governments is needed.

Any new agreement must allow for – and encourage – improvements in efficiency. This reality faces every organization in the public and private sector. Real costs for basic functions must go down. And if crop insurance is able to eliminate a large number of programs for minor horticultural crops, as these crops come under the purview of a revamped Self-Directed Risk Management (SDRM) program, there should be savings as well.

But the new AGRICORP-government agreement must also include incentives, and the potential for increased operational income, with increases in the amount of business generated (i.e., number of crop insurance contracts issued).

Our guess is that this should not be a major impediment federally, given the very low costs for crop insurance administration in Ontario, (relative to coverage provided, compared to other Canadian provinces). The authority seems to reside with the Ontario Ministry of Agriculture, Food and Rural Affairs. However, good proposals are needed from AGRICORP – and good consultation with farm groups – to initiate the process.

And what about the crop insurance goals of OCPA?

Only about 55 per cent of the Ontario corn acreage is presently enrolled in crop insurance. This is not enough. It leaves the provincial corn industry too vulnerable to large-scale weather problems, such as those which occurred with drought in 1988, and cold weather in 1992.

OCPA would be far more satisfied with enrolment in the range of 75-80 per cent - recognizing that some farmers do not need insurance to survive total crop failures, and others will never buy, regardless of price and quality.

Changes such as those outlined here could go far in meeting this objective.
Breezes for change are blowing. They need to become strong winds!