The problem the farm community faces right now is a lack of understanding by the general public concerning the plight of the family farm. We (the farming community) have lost touch with the general public.
They see us receiving large government payments and asking the government for aid in times of drought, floods and other forms of natural disaster. They see us receiving insurance payments for our losses and also receiving a government payment. I would like to put these questions in terms that the general public can understand.
Consider the hypothetical: You have just purchased a house for $200,000 and your lender requires you to insure the house for at least the amount you owe against the home. Suppose you pay down 20 percent and have a loan of 80 percent ($160,000). You decide you want to insure the house for the full $200,000 to protect your investment.
You contact your agent and tell him you want to insure your new house for $200,000. He tells you no problem and insures your house for $200,000 at an affordable rate. Time passes and maybe you have no problems except for a hailstorm that damages your roof and you collect on the replacement cost of the roof with a small deductible.
Five years go by and the value of your home has gone up. You decide to increase your insurance coverage. You call your insurance agent and he looks at your home and he says replacement cost is now $250,000. He writes a new policy at $250,000 at an affordable rate.
Then a tornado destroys your home. You had made a very wise decision and now you collect on the $250,000 insurance policy and rebuild your home just as it was without having to add more money. The agent writes you a new policy for $250,000 on your new home at an affordable rate.
I’ll use a wheat crop, 1,547 acres, for this example.
Seed $16.00 x 1547 acres = $24,752.00
Fertilize $60.00 x 1547 acres = $92,820.00
Labor $12.00 x 1547 acres = $18,564.00
Land $20.00 x 1547 acres = $30,940.00
Equipment $15.00 x 1547 acre = $23,205.00
Harvest $18.00 x 1547 acres = $27,846.00
Hauling $10.56 x 1547 acres = $16,336.00
Fuel $10.00 x 1547 acres = $15,470.00
$161.60 per acre cost
Assume a production history of 44 bushels per acre and a rate established by a risk management agency of $3.90 per bushels.
You tell your insurance agent you want $249,933 coverage on your 1,547 acres of wheat. He says he’ll see what he can do. You have a 44-bushel average yield and at 65 percent coverage and $3.90 you’ll be paid $111.54 per acre for a complete loss. The premium will cost $9.17 per acre. So you’re looking at 44 bushels per acre x 65 percent = 28.6 x $3.90 = $111.54 x 1,547 acres = $172,552.38
Cost of insurance $ 9.17 X 1547 acres = $ 14,185.99
You have a $249,933 investment and can receive only $158,366.39, leaving you a net loss of $ 91,566.61. You may assume you’ll have no harvesting and hauling cost if you have no crop. But the appraiser rates your crop at 8 bushels. He’ll reduce your insurance payment by 8 bushels per acre. Now you have to decide to harvest or take the deduction on the insurance payment.
Suppose you make 30 bushels per acre due to dry weather. You do not collect insurance because you made more than the 28.6 bushels guarantee. You still have to pay the $14,185.99 premium. And assume the price is better at harvest and you get $4.20 a bushels for the wheat.
Here’s the math: 30 bushels x $4.20 x 1,547 acres = $194,922.00
Insurance premium - 14,185.99
This will leave you a loss of $ 69,196.99.
If you compare the house insurance to the crop insurance the effective rate is 8.2 percent.
The numbers look like this: $250, 000 x 65 percent = $162,500 x 8.2 percent = a $13,325 insurance premium per year on a home that cost you $250,000 and you can get only $162,500 in coverage.
Why would a farmer take such a financial risk? No one makes him do this for a living. The farmer is like the men (and women) serving in the military. They love their families and their country and are willing to sacrifice.
Farmers love the land, their country, and are proud to be help feed their fellow Americans at a price cheaper than in any other country.
This is a big concern for me, that we may have to depend on food from other countries. We know what happens when we depend on other countries for fuel. I do not want to see food prices follow the same pattern. That’s why it’s so important for family farmers to survive.
The farm bill currently in place is not perfect, but we need a safety net to protect the financial stability of family farmers. The direct payments received by farmers are not that great. In the example above the net income would be only $15, 532.20.
Do the math again: 44 Bushels x $3.90 x 1547 acres = $265,465.20 – expenses ($249,933) = $15,532.20
I almost forgot the $14,185.99 insurance premium. This leaves you a net profit of $1,346.21 on 1,547 acres of wheat. The direct payment on this example would pay $14 per acre for a total of $21,658. Without the government programs we could not survive. When we have disaster years such as 2005 and 2006 with drought, that reduces yields by 50 percent to 65 percent we don’t have to do the math to see the family farmer is in financial distress.
Family farmers do not like disaster payments or government programs, but need them to survive. The alternative of depending on other countries for our food supplies is an option that none of us want for our children.
We need to restructure our crop insurance to protect our investment without having to depend on government to pass a disaster aid bill. It must be affordable and fair to all types of farmers based on individual expenses for the crops they raise. It should have clauses for fraud with heavy penalties for those who misuse the system. Enforcement helps keep insurance rates affordable.
I could keep writing but the main purpose of this letter is to let the general public know the plight of the family farmer. If I have done that, then I have accomplished my goal.
Kenneth Wright is a farmer in Hunt County, Texas