Imagine that you’re a young tobacco and grain farmer in Kentucky. Despite low commodity prices and a tough agriculture market, you’ve been doing alright. As a beginning farmer, you’ve relied on trusted advisors, access to reliable credit and strong farm policies for support. You’ve mitigated risk with smart decision-making and a solid crop insurance policy that provides protection and peace of mind at a time when there’s no room for loss.
Now, imagine you are planning to put in a new crop, but you’ve had to drop your coverage level because the premium is no longer affordable. You manage to buy the seed and other inputs you need to plant and care for the crop, despite limited access to credit, but it’s a catastrophic year. Severe weather destroys your entire crop and you have a limited safety net in place to mitigate risk. The success you’ve realized in past years is gone with one turbulent season, and you have no choice but to walk away from farming.
With a strong, affordable safety net in place, this scenario is merely a cautionary tale. But with recent proposals to slash budgets for federal crop insurance programs, this could become a reality for young farmers, who won’t have access to the resources that protect them from market and weather volatility.
Crop insurance through the years
Putting a crop in the ground is risky business. Without crop insurance to protect investments, it would be nearly impossible for farmers to succeed. Federal crop insurance was first authorized by Congress in the 1930s to help agricultural communities recover from the effects of the Great Depression and Dust Bowl years. The program expanded and evolved over time to protect farmers from losses due to adverse events such as inclement weather and market downturns. Today, farmers must purchase crop insurance to be eligible for certain farm loans and government disaster benefits. National Crop Insurance Services reports that in 2016, 1.2 million crop insurance policies were sold, protecting more than 130 crops on more than 290 million U.S. acres. Those crops had an insured value of $100 billion.
The crop insurance program hasn’t come without pushback from those outside agriculture. Budget cuts to the federal program have been proposed by several administrations over the years, but have been soundly rejected by Congress. Recently, we’ve seen a proposal to cut federal crop insurance programs by $29 billion over the next decade. These destructive cuts would be catastrophic for farmers, rural economies and the agricultural industry. And those who stand to be most affected are young and beginning farmers with limited cash reserves who rely on crop insurance to access credit.
Budget cuts could change the risk pool
Crop insurance is actuarially sound, meaning that including more participants (and more acres) in the program spreads risk, which keeps premiums and costs down for all participants. One of the current proposed budget cuts would cap crop insurance premium subsidies at $40,000 (there is currently no limit) for growers with an adjusted gross income (AGI) of $500,000 or less. Producers above that income level would lose premium subsidies completely.
Without subsidies to help pay premiums, lower-risk established farmers with large operations may be inclined to opt out of purchasing crop insurance. Depending on where the AGI limit is set, more than half of U.S. acres could be left unprotected by proposed cuts. This puts more pressure on the program and on younger, higher-risk farmers who’ll be left funding it. In short, cuts to crop insurance would be detrimental to farms of all sizes, not just the large ones.
Crop insurance helps rural economies
At Farm Credit, our mission is to secure the future of rural communities and agriculture, so policy decisions that support a stable future align with our core purpose. Crop insurance is a cornerstone of U.S. farm policy. It keeps the pool of farmers large and provides a safety net to ensure their investments are protected. In a time when rural economies are struggling and the average age of farmers is rising, we must have strong policies and support to continue producing affordable food, fuel and fiber for a growing population.
The success of young farmers depends on affordable, reliable crop insurance and access to credit. Today, the average age of a farmer is 58, and 78 percent of principal farm operators have been on their farms for more than 10 years. In the coming years, many of these farms will need to be passed on to a younger generation who’ll likely face more risk with tighter margins and lower cash reserves to cushion them through tough years. Affordable crop insurance will make it possible for the next generation to maintain financial stability during difficult times.
Crop insurance doesn’t help only farmers. A trickle-down effect supports all of agriculture and even those outside of rural communities. Since 2000, farmers have paid $50 billion out of their own pockets for crop insurance. In turn, they were able to secure capital that ultimately was reinvested in their communities through the acquisition of labor, products and services.
In the absence of affordable crop insurance, the cost of crop losses would fall directly on taxpayers. Agriculture accounts for 5 percent of the U.S. economy and 10 percent of U.S. employment, so it’s easy to see why a stable agriculture sector is good for everyone.
What can you do?
We’ve seen four consecutive years of declining farm income. The U.S. Department of Agriculture predicts that in 2017, farmers will take home half the pay they did in 2013. Current budget and farm bill discussions are more important than ever to ensure that reliable, affordable crop insurance and financing options remain in place to protect farmers, especially those now stepping up to take on the risk-intensive business of farming. Remember to stay informed when it comes to ag policy decisions and stay connected to what’s going on in Congress.