No other state has California’s wealth of fertile land, where one-third of the nation’s vegetables and two-thirds of its fruit are grown. If you’re planning on going into farming in California’s Central Valley or in any other region of the U.S., your head might be spinning as you try to make sense of how international trade wars can affect agribusiness.
In this post, we consider soybeans and the current trade war with China to show how crop insurance protects farmers from loss of revenue due to extreme factors like catastrophic weather and a changing international landscape.
Soybean Farmers and China
The trade war between the U.S. and China during 2018 and 2019 reminds us of just how vulnerable farmers are to external factors. When the U.S. raised duties on Chinese goods in the summer of 2018, China retaliated by imposing a 27 percent tax on U.S. soybeans sold to Chinese private companies. In turn, many of these companies looked to other countries, primarily Brazil and Argentina, for their purchases.
In an attempt to bring back business, U.S. soybean farmers, who were most deeply affected by the trade war, slashed their prices by about 20 percent. As negotiations continue the relationship between U.S. soybean farmers and Chinese companies still has not fully recovered.
Subsidized Multi-Peril Crop Insurance
Since the Great Depression, the U.S. government has known that when our farmers suffer, we all suffer. The loss to many Americans’ livelihoods and our economy can be devastating. In an attempt to offer some protection from loss of revenue, the government provides various types of subsidized multi-peril crop insurance (MPCI) through the Federal Crop Insurance Program.
While crop insurance receives mixed reviews for its long-term benefits to farmers, it’s optional additional protection that can keep them from altogether losing their farms.
What Crops Are Covered
Farmers can obtain MPCI to protect from future losses due to low yield or a market price drop. Farmers are guaranteed revenue for crops like corn, grain sorghum, soybean, and barley, as well as about 80 specialty crops including California’s top crops: grapes, almonds, apricots, avocados, strawberries, walnuts, tomatoes, and pistachios. Additionally, the 2018 Farm Bill amended hemp so that it’s no longer considered a controlled substance, and hemp will be an insurable crop under the federal program starting 2020.
How Costs Are Shared
Private insurers approved by the government, referred to as approved insurance providers (AIPs), sell MPCI policies. Farmers can choose between individual crop and whole-farm policies. The government shares the premium with the farmers (taking on about 60 percent of the cost), covers the AIP’s administrative costs, and reinsures the AIP should a loss exceed the total premium paid. Currently, about 15 AIPs offer subsidized crop insurance policies.
Farmers can choose catastrophic risk coverage, which is 100 percent subsidized and insures loss in excess of 50 percent of crop yield at 55 percent of the market price. Or at a premium, they can purchase buy-up coverage and have 50-85 percent of their crop yield insured at 60-100 percent of the crop’s market price. In the case of soybeans, in 2019, its insurance price fell to $9.54 per bushel (down 62 cents from 2018) due to the Chinese tax increase on U.S. soybeans in 2018.
What’s Next for Soybean Farmers
About $8 billion of public money is spent every year on the Federal Crop Insurance Program. While this money is meant to protect farmers when they suffer revenue loss from a price drop, in 2018, the Trump administration, through the Market Facilitation Program (MFP), allocated another $12 billion to farmers who suffered export sales losses due to retaliatory tariffs from the ongoing trade wars. In 2019, it added another $16 billion.
Let’s look at our soybean farmers again, taking all this into consideration. Should they lose revenue in 2019 due to trade disputes, they have a few alternatives. They can:
- Turn to their subsidized crop insurance policies
- Cash in on their private policies*
- Collect from the MFP**
- Hold out in the hopes that the market recovers and sell their warehoused crop later at the full asking price.
- Rest a little easier with a forward contract. Farmers with forward contracts (which are incentivized by some types of federal crop insurance) were able to lock in pricing and export quantities before the trade war with China hit, escaping its effects.
*There are private, non-subsidized, revenue protection policies available for farmers, such as production cost insurance (PCI). PCI policies provide a fixed dollar amount per farm acre. The premium depends on the farm’s 5-year performance. This type of policy is attractive because it can insure at 100 percent of production (instead of up to 85 percent) with much higher coverage limits. Additionally, it operates like whole-farm revenue protection, so virtually any crop can be insured.
**The MFP subsidy rate for 2019 is $2.05 per bushel, which covers less than half of farmers’ losses, and there is a cap on how much money a farmer can receive. By the way, there is some controversy in regards to how the government allocates the MFP subsidy. As reported by the Los Angeles Times, though most U.S. farms are small, “bailout payments are based on acreage in production, and therefore the largest share will go to the biggest farms.”
Have questions about your agriculture insurance?
This case study in soybeans is meant to simplify the concept of crop insurance for any farmer. But there are many other complex considerations that go into creating an efficient insurance program for agribusinesses. Crop insurance is just one aspect. Reach out to Newfront to learn more about insurance solutions and risk management strategies that will support your success in farming.