Cost-of-production insurance coming on line

When two people buy car insurance, who usually pays the highest premium? The person who has had three accidents in the last year or the one who has never had a mishap?

That's one of the premises behind a new crop insurance concept that proponents say could lower coverage costs for farmers who consistently make better crops and eliminate some of the abuse that has plagued crop insurance programs.

“It's our feeling that the farmer who never files a claim should not have to pay the same premium as the guy who files a claim every two years,” says Joe Davis, president of AgriLogic, Inc., a consulting firm based in College Station, Texas.

Earlier this year, AgriLogic received a contract from the USDA Risk Management Agency to develop the ground rules for a new cost-of-production insurance program.

“I can guarantee that this won't be the best policy for everyone in this room,” he told farmers attending a meeting in Greenwood, Miss. “Other options may be better. But it's the best policy if you are farming for a profit rather than farming for the insurance.”

Davis was in Greenwood to explain the new program and get input from area farmers and Extension agents about how a pilot program for cotton should run. Ray Young, a crop consultant from Winnsboro, La., and one of the originators of the cost-of-production insurance concept, accompanied him.

“We started working on this more than two years ago,” said Young, chairman of the Federal Land Bank Association of North Louisiana and a member of the Coalition of American Agricultural Producers, the umbrella organization for a group of farm credit institutions that support the concept.

“It has been a very long process in which we have encountered a number of obstacles that we never anticipated,” he said. “To say it has been frustrating would be too kind a word.”

Young said members of the Farm Credit Council of the Farm Credit Bank of Texas first began talking about a new insurance program in March of 1999. The Land Bank Associations in Alabama, Louisiana and Mississippi are members of the Texas Bank.

“We knew that the mandatory catastrophic or CAT coverage was not doing us much good,” said Young, who also grows cotton on a farm near Winnsboro. “We wanted a plan that would be more farmer-friendly, something that would meet our needs and get the fraud and abuse out of the system.”

Later that year, the Farm Credit Council members met with Bob Odom, commissioner of the Louisiana Department of Agriculture and Forestry, and a former president of the National Association of State Departments of Agriculture (NASDA). Odom subsequently brought NASDA on board in support of the concept.

In simple terms, cost-of-production insurance is a concept that allows producers of all commodities (crop and livestock) to insure 70 to 90 percent of actual, documented variable costs of production and land expense. Thus, the most that a producer can lose in any one year is 10 percent of these costs and any other costs not covered.

“Cost-of-production insurance is designed to provide a safety net to protect growers from the loss of inputs,” said Davis. “It is not a revenue enhancer.”

Using an automobile analogy, Davis displayed a slide of an older model car. “If this is your car and you have a crash, do you get this car back?” he said, flipping to a slide of a late model, luxury automobile. “No, you get your old car back plus the loss of the cost of your deductible.”

To calculate their coverage under cost-of-production insurance, farmers would prepare an estimate of their expenses for a specific crop. (AgriLogic is currently authorized to develop programs for 12 crops, including corn, cotton, soybeans, wheat, rice, sugarcane and several fruits and vegetables.)

Farmers can also insure fixed costs and land costs, but the latter would be capped at certain levels. (Example: $400 per acre for variable expenses + $100 per acre for fixed cost + $100 per acre for land cost = $600 total cost of production.) The grower can insure from 70 to 90 percent of these costs in increments of 5 percent.

If disaster struck early in the season and the producer spent only $100 per acre on the crop before it was lost, the maximum indemnity would be 90 percent of $100 or $90. Producers could be required to show records of expenditures to be paid for a claim.

“Cost-of-production insurance is designed to provide a safety net to protect growers from the loss of inputs. It is not a revenue enhancer.”

Why not insure for a 100 percent loss of production expenses? “The originators of the concept felt that farmers should have some risk in the program,” says Davis. “Also, the computer projections show that when you get above 90 percent coverage, it becomes very expensive.”

Davis expects the government would match farmer contributions to the program “dollar for dollar.” Losses could stem from low yields or quality losses due to weather problems, low prices or other factors.

Farmer returns for adjusting losses would include crop receipts and loan deficiency payments, but not Agricultural Market Transition Act or AMTA payments, disaster payments or the proposed counter-cyclical payments in the House Agriculture Committee-passed farm bill.

Farmers would have to insure all of their acreage in a county as a single unit under cost-of-production insurance. Irrigated and dryland acres would be treated the same except that irrigated acreage would carry a higher production cost.

“Under this program, cotton is cotton,” said Davis. “Irrigated and dryland cotton would be treated as one commodity. You would not insure for different practices. Again, we feel this limits the chances for fraud and abuse.”

Because coverage would be issued on costs of production, each farmer's premium would be individually rated. “Some say that farmers don't want individual ratings; that they prefer coverage based on county averages,” says Davis. “We say the better farmers do because it will reduce their premiums.”

Besides the Farm Credit Bank of Texas, the Western Farm Credit Bank, AgFirst Credit Bank, AgAmerica Credit Bank and the National Association of State Departments of Agriculture are supporting the program. Together, the organizations have spent about $1.5 million developing the concept, said Young.

2001 targeted for pilot program

If all the i's can be dotted and t's crossed, farmers in selected counties could participate in a cost-of-production insurance pilot program for cotton in 2002.

“Cotton is on what the USDA Risk Management Agency is calling a fast track,” says Ray Young, crop consultant and farmer from Winnsboro, La., and a member of the Coalition of Agricultural Producers (CAAP).

“We're up against some very hard and fast deadlines for the 2002 signup for crop insurance, but if we can get everything to fall into place, we think we can make it work,” says Young, whose CAAP group represents several farm credit banks and state agricultural commissioners.

For that reason, the CAAP and AgriLogic, Inc., a College Station, Texas-based consulting firm, have conducted a series of meetings across the Cotton Belt, seeking input from farmers about what should be included and not included in a cotton pilot for cost-of-production insurance.

The proposed pilot program would be conducted in Coahoma, Leflore and Yazoo counties in Mississippi and Concordia, East Carroll, Franklin and Tensas parishes in Louisiana. Selected counties in Alabama, Arizona, California, Georgia, North Carolina and Texas would also participate.

CAAP and AgriLogic will continue to receive comments about cost-of-production insurance through Sept. 30. For more information about the program or to make comments, click on their Web-site at

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