US farm insurance policies

THE US farm safety net has three pillars: federal crop insurance, farm commodity programmes, and disaster assistance. Under the 2014 farm bill, the projected cost of these three pillars is $8.8bn, $4.2bn, and $0.5bn, respectively. Actual costs will differ because these are counter-cyclical programmes which cost more in bad years for farming than in good years.

FEDERAL CROP INSURANCE Federal crop insurance is the centrepiece of the US farm safety net. It makes available subsidised crop insurance to producers who purchase a policy to protect against losses in yield, crop revenue, or whole farm revenue (including livestock producers to a limited extent).

The producer selects a coverage level and absorbs the initial loss themselves. For example, a coverage level of 70pc has a 30pc deductible initial loss (for a total equal to the expected value prior to planting the crop). Policies pay out for an individual farm loss in yield or revenue.

Policies are sold to producers by private insurance companies. Producers pay a portion of the premium which increases as the level of coverage rises. The federal government pays the rest of the premium (62pc, on average, in 2014) and covers the cost to insurance companies of selling and servicing the policies. The government also absorbs some of the losses of insurance companies in years when payouts to farmers are particularly high.

Around 1.2m policies are purchased annually, providing nearly $110bn in insurance coverage. More than 120 commodities are insurable. For major crops, more than three-quarters of the US planted area is insured under this programme.

SUPPLEMENTARY COVER OPTION The 2014 Farm Act authorised a new Supplementary Coverage Option (SCO) to help producers to cover the deductible loss on farm crop insurance policies. Farmers can now purchase a second policy on the same acreage, with the amount of coverage related to the liability level and approved yield for the underlying policy.

Unlike the underlying policy, which is triggered where there is an individual farm loss in either yield or revenue, the SCO is triggered when there is a county-level loss in yield or revenue (not an individual farm loss). So it is possible for a farmer to receive an SCO payment even where he or she has not made a claim under the underlying policy, and vice versa.

For example, for a revenue insurance policy, the SCO option begins to pay when county average revenue falls below 86pc of its expected level.

The full amount of the SCO coverage is paid out when the county average revenue falls to the coverage level of the underlying policy (assume this is 70pc). This supplementary option therefore provides protection for up to 16pc of the value of the crop. The premium for this policy is covered by a 65pc subsidy.

DAIRY MARGIN PROTECTION PROGRAMME This new insurance programme introduced in the 2014 farm bill makes payments to participating milk producers when the national margin (average farm price of milk minus an average feed cost ration) falls below a producer-selected margin. Producers elect how much of their historic production will be covered and at what margin, between $4 and $8 per hundredweight.

Insuring the milk margin at the lowest level only requires payment of a nominal administrative fee. Elections above $4 per hundredweight require payment of an additional premium above the nominal base fee. To date, only dairy producers who enrolled at the $6 through $8 margin trigger coverage level have received payments.