Economic Tidbits

Crop Insurance Protects Financial Health

Federal crop insurance is a popular tool in Nebraska crop producers’ risk management toolbox. Under the program, premiums are paid by farmers and subsidized by the federal government. Underwriting gains and losses are shared between the federal government and private companies. Table 1 shows the acres covered under crop insurance in Nebraska between 2007-2023 along with other data on the program. Acres covered ranged from 14.1 million acres in 2007 to 25.1 million acres in 2023. Cumulative premiums paid by Nebraska farmers totaled roughly $4.5 billion and averaged 42 percent of the total premiums paid between 2007-2023. Nebraska had underwriting gains (premium exceeded indemnity paid) every year but three: 2012, 2022, and 2023, years marked by drought. And, in nine of seventeen years, premiums paid by farmers exceeded the indemnity paid. A cumulative underwriting gain of $3.9 billion has been realized over the period. 

TABLE 1. NEBRASKA CROP INSURANCE DATA

Source: Federal Crop Insurance Corporation

The goal of crop insurance is to help producers mitigate risks outside their control like extreme weather, pests, and price declines. It seeks to provide financial certainty, income stability, and the means to secure financing during uncertain times. A recent paper examined the program’s effectiveness in achieving these goals by studying how participation affects agricultural loan delinquencies. Written by Daemyung Lee, an economist with North Carolina State University, and several co-authors, the paper uses insurance and agricultural loan delinquency data from 1994-2015 from 994 midwestern counties, including Nebraska, to examine links between crop insurance and loan delinquencies. The researchers found “that counties with higher levels of crop insurance participation tend to have statistically lower rates of agricultural loan delinquency.”

Daemyung and co-authors write, “Overall, our empirical results indicate that crop insurance is an effective tool in mitigating farm financial stress by helping reduce the likelihood of loan delinquencies in agriculture. This is evidence that the US crop insurance program is working effectively to protect the financial health of agricultural operations in the presence of unexpected adverse income shocks.” The results explain why crop insurance remains a popular tool with Nebraska crop producers. It also explains why crop producers are lobbying elected officials during the ongoing farm bill discussions to keep it in the risk management toolbox. 

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