De minimus yield and deflation of production history are instances where current crop insurance may fall short

The 1994 and 2000 reforms of federal crop insurance boosted farmer participation in USDA's farm safety net. As a result of bigger premium subsidies and other incentives, 46 percent of total U.S. crop value was being insured by 2002-2004.

"The reforms worked in Kansas," said Art Barnaby, extension agricultural economist, Kansas State University, who authored the Crop Revenue Coverage insurance program. "Since 1989, insured acres in the state have more than doubled and dollars of coverage have tripled."

Back in 1980, when Congress passed the Federal Crop Insurance Act, a major goal of government was to eliminate disaster assistance programs. And, by 1995, nearly 80 percent of eligible acreage was enrolled in some form of crop insurance. Still, since 2000, Congress has authorized four ad hoc disaster programs (covering six crop years) for a total of $10 billion in disaster aid, usually triggered at crop losses of 35 percent or greater.

Now, the Bush Administration is calling for reforms that would require all commodity program participants to buy crop insurance. But there has been heated debate about whether insured producers now have "adequate" coverage and at what premium cost. Several rifts in the safety net make crop insurance less of a disaster risk management tool than it might otherwise be.

One of these is the de minimus yield phenomenon.

"De minimus refers to the condition where the value of the crop standing in the field is less than or equal to the cost of harvesting it," said Barnaby. "For example, if the crop is damaged to below a 5-bushel yield, most growers consider it not worth harvesting. But if the producer has insured the crop with a 75 percent guarantee, his crop insurance payment is reduced by a few bushels de minimus, he only collects perhaps 70 percent. With many private hail insurance contracts, once the loss exceeds 90 percent, the crop adjuster calls it a total loss and indemnifies the grower at the covered amount. Many producers wonder why APH (actual production history) based insurance does not do the same thing.

"De minimus is a rare feature and comes into play only in isolated cases," Barnaby added. "But it can be an issue in arid regions, especially these past several years of chronic drought." For the past 15 years, 40 percent of federal crop insurance claims were the result of dry weather.

Alex Offerdahl, then a K-State graduate economics student, studied de minimus yields in Kansas, North Dakota, Montana and Texas and came up with a couple of options that might be developed to correct the situation.

For producers interested in a constant revenue stream at all indemnifiable yield levels, a de minimus add-on could be developed. This option would be based on the concept that producers who purchase the additional coverage would be indemnified as if their crops were zero bushels per acre for all appraised yields of 5 bushels or less per acre. The add-on option would be relatively inexpensive, because the probability of a de minimus event also is quite low.

For producers more interested in reducing premiums, a premium discount option would better meet their demand. This option would work based on the idea that a producer who selects the option would receive a reduction in the overall level of indemnity payments; he would be indemnified as if his crop were 5 bushels per acre for all appraised yields of 5 bushels or less. Under this option, the cost of crop insurance premiums would be reduced slightly.

"Where [these] options were available, producers could evaluate the risk they face and make improved risk management decisions," wrote Offerdahl. "While the preliminary research has been conductedÉsubstantial additional work is required before these products can be offered for pilot testing by the Risk Management Agency."

Another hole in the safety net can be caused by prolonged drought or other adverse conditions which lower a farmer's actual production history (APH).

"We've seen that happen during the past several years, when Great Plains farmers have suffered from a prolonged shortage of rainfall," said Barnaby. "This drought has led to a corresponding decline in APHs, which affects crop insurance coverage levels."

Growers with, say, 3 years of "shallow" losses may be worse off financially than growers with one total crop failure followed by normal yields, he noted.

"In that case, growers must cover harvest expenses in all 3 years of a shallow loss, net crop insurance payments are relatively small and ad hoc disaster assistance provides no help," Barnaby added. "At the same time, APH goes down steadily.

"You could substitute "T" yield [transitional yield] for APH, but if you use it, you pay a higher premium," he continued. "In effect, as yield goes down, insurance premiums go up. There have been several proposals to cover this issue, and K-State is studying ways to adjust APH for several years of low yields. It's an issue that needs to be addressed. APH-based crop insurance works very well for a total loss or a near-normal crop, but it provides less protection for multiple years of shallow crop losses."

Washington will have a chance to patch these and other holes in the crop safety net. Debate on the 2007 Farm Bill begins next year.