Ep. 19 Arkansas Crop Insurance Prices and High Risk Rates

[00:01] Intro/Outro
Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence, presenting conversations and analysis about risk and risk management for food and agriculture supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:20] John Anderson
Hello this is John Anderson, director of the Fryar Price Risk Management Center of Excellence at the University of Arkansas, here with another Relevant Risk podcast. Joining me here today, center co-director Andy McKenzie. Andy, how are you today?

[00:31] Andy McKenzie
I’m doing good, John. Looking forward to hearing all about crop insurance.

[00:34] John Anderson
And our colleague, assistant professor, and extension economist Hunter Biram. Hunter, how are you today?

[00:39] Hunter Biram
I’m excellent, John. How are you?

[00:41] John Anderson
I’m great. And, you know, I think maybe regular listeners of the podcast, if we have any regular listeners, might pick up on the fact that with Hunter here we’re probably talking about crop insurance and indeed we are talking about crop insurance.

[00:57] Hunter Biram
Absolutely. It’s my favorite.

[00:59] John Anderson
His favorite topic. Everybody’s favorite topic, right?

[01:03] Hunter Biram
Always.

[01:04] John Anderson
So, we’re talking here in early March and sales closing date has just passed for most Arkansas crops.

[01:12] Hunter Biram
That’s right. For all Arkansas crops February 28th is the sales closing day.

[01:16] John Anderson
So we’ve got complete information now on what people are dealing with in terms of the crop insurance landscape for the 2023 crop that is just now at the very beginning phase of being planted, probably not yet being planted in most of the state, maybe a little seed going in the ground in southeast Arkansas. So, let’s talk a little bit about prices. So, prices were established mid-January to mid-February on all our crops. What are we looking at in terms of price guarantees this year compared to last year, let’s say?

[01:50] Hunter Biram
Sure. Well in rice specifically, I know that the guaranteed price, the projected price, is $16.90 per hundredweight. That’s not going to be on a per bushel basis. If you want to convert that to a per bushel, you divide that by 2.22, which roughly comes out to about $8 and some.

[02:10] John Anderson
And that’s long range.

[02:11] Hunter Biram
That will be long range. Yeah. So that’s going to be according to the rough rice futures contract for the November contract, specifically. Soybeans sitting about the same as they were last year. They’re about I think it was around $13.60 some odd last year. It’s about the same price this year. Corn, I believe, is pretty close. So, corn, soybeans are going to be about the same. Cotton in particular is a lot lower than it was last year. I think we had close to about 90% guarantee last year. Now we’re looking at about 80% guarantee. So much lower price guarantee for cotton, but rice, very notable in terms of getting that higher price this year.

[02:48] John Anderson
So, some improvement in price on rice, pretty much status quo compared to last year on corn and soybeans and some deterioration in the price guarantee on cotton.

[02:56] Hunter Biram
That’s right.

[03:00] John Anderson
You have some information on high-risk rates that you want to talk about. So, tell us a little bit about that, about that issue and then what we see going on with rates.

[03:09] Hunter Biram
Sure. So actually, in the 2018 Farm Bill, there was put in that legislation a review of the actuarial maps. And every five years there’s a national rerating cycle. And so, we’re in 2023 and with the national rerating cycle, they’re going to be looking more closely at the actuarial maps that RMA may will be drawing up. And so, in these actuarial maps, RMA is going to be highlighting certain pieces of land in sections of land that are considered high risk. And so, high risk is going to be essentially there’s a higher chance that a loss will occur for a crop insurance. If a farmer enrolls in crop insurance, there’s more likely to be an indemnity.

[03:53] John Anderson
So, for example, this maybe would be, you know, some bottom ground is prone to flooding.

[03:58] Hunter Biram
That’s right. A prime example would be in Lawrence County, Arkansas, in particular, there are two high risk areas, one by the Black River, one by the Cache River. Very close to those as well. So, it’s not the whole county doesn’t face this race. And not every farmer that has land in that county is going to face this particular high-risk rate. Only those farmers who have land in that high-risk region.

[04:22] John Anderson
That designated area.

[04:22] Hunter Biram
That’s right, the designated area near those rivers in particular.

[04:26] John Anderson
And so, you mentioned actuarial maps. So, it’s probably worth a little bit of review. When you talk about actuarial, you’re talking about how the premiums collected on the product relate to the amount that’s paid out on the product.

[04:39] Hunter Biram
That’s right. And importantly in US crop insurance, all crop insurance products are rated to be actuarially fair. So that means that that the amount of premiums collected by crop insurance companies should be equal to the amount of indemnities that are being paid out. Now, that’s before any kind of subsidy hits, which is where the government steps in and they offer a premium subsidy. So that means there’s an actuarially fair rate. But when you throw in the subsidy, actually, theoretically, producers are going to be paying less on the average in premiums relative to indemnities.

[05:16] John Anderson
So the actuarial fairness applies to the rate as it’s calculated, just the raw rate calculation, and then the subsidy is applied to that actuarially fair rate.

[05:27] Hunter Biram
That’s right.

[05:27] John Anderson
So, the farmers pay less than an actuarially fair rate for the products they get.

[05:32] Hunter Biram
That’s right. And importantly, in that rate, there are three key components. So, one part of it’s going to be called the reference rate. So, the reference rate is going to take into account production losses at the county level. So they’re going to aggregate all the losses at the county and create a county reference rate. And then there’s a second part that’s called the fixed rate. So, the fixed rate is going to have parts like you know, we call it catastrophic load. So at those very, very, very high losses they actually get aggregated up to a higher level than the county. But it’s going to be a rate that will be faced by I think now they do that catastrophic rate by region they don’t do it by state, they used to do at the state level. But anyway, they’re going to be a smaller part of that rate that going to be fixed. The third key part, which pertains to this discussion in particular is going to be the subcounty rate. And so there’s like a county, so Lawrence County, for instance, and there’s going to be a sub county, subcounty triple A, sub county triple B,  and so that triple A triple B, a lot of people think that just means, you know, triple A, you’re less risky than triple B, like as you go up the alphabet, triple D, triple E, it’s more risky. That’s not the case. The triple A, triple B and so on designation only pertains to that risk, to that watershed, for example. So triple A would be associated more with the Black River, Triple B would be associated with the Cache River in Lawrence County in particular. So, they will actually have different rates. Triple A will have its own rate, Triple B will have its own rate. You won’t have, unless you just have really bad luck, and you happen to have farmland in both of those areas. If you have farmland just inside the Triple A area, you’re going to get your reference rate, your fixed rate, and the triple A rate, the subcounty rate for that attached to it. And so that’s why there are a lot of people that are you know, I understand why they’re upset. I mean, some of these rates, that subcounty rate I’ve seen could be double of what the whole rate could be.

[07:17] John Anderson
So, the key issue here is RMA has gone through this farm bill mandated process of reviewing rates by geographic area and they’ve identified these sub county regions where actuarial experience has not been good, where the program has been paying out a lot more than it’s been taking in.

[07:40] Hunter Biram
That’s right.

[07:41] John Anderson
And so this subcounty rate adjustment is meant to make up that difference.

[07:46] Hunter Biram
That’s right. You know, these rates will be pretty high for the most part. But like you said, it’s that increase risk. I mean, these companies got to stay in business, too, so to have that actuarially fair product to help maintain that, to help them essentially collect the actuarially fair premium. But, you know, at the subsidized rate, that’s really important here. And so, what they do is they actually they’re going to take into account agronomic characteristics. Soil types, they’re going to take into account types of watersheds with the different watersheds that are in the county. They’re going to take into account satellite imagery, you know, so working with folks in RMA and they do a really detailed process and trying to figure out what these regions look like. They do account for loss history, as you just said, they look at the NRC as frequently and occasionally flooded soils. So, whenever they go to look at what the data NRC has provides, they’re going to take that into account as well, and they’re going to look at local information. So, they may chat with farmers there. They may chat with local agents as well, just to try and get, I guess, the most reasonably established boundaries on those designations.

[08:47] John Anderson
Okay. So do you have any sense how many of these areas are there in our state?

[08:55] Hunter Biram
That I don’t know. I just know that some counties may not even have one, but some may have two or three. I have seen a triple A, triple B, triple C in some counties, but each county will have its own set of designations. So, a triple A in Lawrence, that could be Black River and you see a triple A in the county next door, that triple-A will not also be the Black River, it could be the Cache River.

[09:20] John Anderson
Will just be that county’s high risk determined area.

[09:23] Hunter Biram
That’s right.

[09:24] John Anderson
Okay. And these rates you know the challenging thing with stuff like this from a farmer perspective, it’s not a real incremental change. Right. The way I understand this, this area let’s say you’re in an area that’s determined to be high risk, this load gets applied to your rate and it applies this year. It wasn’t there last year, now it’s there this year.

[09:48] Hunter Biram
It’s very noticeable. It’s very noticeable. I’ve heard of some rates doubling and a few even tripling, depending on where they’re out, it could be very significant.

[09:57] John Anderson
And this is something this designation stays in place. This is not a one-year thing, correct?

[10:02] Hunter Biram
That’s right. Stays in place, as far as I know, for another five years until they go back.

[10:05] John Anderson
Until they go through this exercise again five years from now.

[10:07] Hunter Biram
That’s right.

[10:08] John Anderson
And I think obviously, you’re talking about something like the Cache River, the Black River. The assumption would kind of have to be that these designations don’t change very quickly. Right. I mean if it’s high risk now.

[10:19] Hunter Biram
Slow changing process.

[10:20] John Anderson
Will it not be higher risk next time we go through this exercise?

[10:23] Hunter Biram
It could be different. I mean, I looked at the maps before they updated them. And some of them were very peculiar, like, I’ll just stick to Lawrence County. I thought it was very interesting. Some of the high-risk land actually was in the western part of the county, not close to the Black or the Cache River, but there are some parts near the Black and Cache River that did not have any kind of high-risk designation. So, I had some farmers come up to me and say “I didn’t have any of my land in high-risk last year. Now almost all of it is in high risk.” And so, you’re seeing a big shift not only in that rate, but just in where those boundaries are for those designations. Big changes.

[10:58] John Anderson
Difficult management challenge for a farmer who now you know, last year had no land in this high-risk designation and now has a significant chunk of their land in high-risk designation. You know, the budget that you had last year for crop insurance is basically irrelevant now. Correct?

[11:14] Hunter Biram
Yep. It could be way different. I mean, if you had $15 per acre premium, let’s say you could be looking at $30 per acre and just depending on…

[11:22] John Anderson
For the same coverage.

[11:23] Hunter Biram
For the same coverage, exact same coverage, you know, because you have to pay that high-risk rate for your buy ups, 75% revenue protection, you still got to pay. You’re paying the premium 75%, you got to pay the higher risk if you are in the high risk designated area.

[11:37] John Anderson
Right. So, and I know you’ve heard from stakeholders about this issue, you know, what kind of adjustments are farmers making? Are they buying down or are they just going to swallow the extra coverage depending on what kind of crop they’re planning there and the value they perceive in that crop. There are a lot of factors to work through when you see this kind of rate change. So, tell us a little bit about how farmers are kind of stepping through that decision.

[12:01] Hunter Biram
Well, I’m going to give you the greatest economist’s answer of all time. It depends. It really does. It depends. The first thing I’ll talk about is you may have heard about the emergency relief program ERP payments as a result of coronavirus and what was happening with pandemic assistance. Part of that ERP payment, you had to, as a farmer, agree that you would enroll in at least 65% buy up from the next two years. And so, this was done before the high-risk changes were done. And so, you’re seeing a lot of farmers in a way, their hands are kind of tied.

[12:38] John Anderson
They have to buy at 65%.

[12:40] Hunter Biram
At least 65%.

[12:41] John Anderson
Because they took the ERP.

[12:42] Hunter Biram
Because they took the ERP payment. Now these were independent events, these were totally independent events, but they were very poorly timed and very poorly communicated. So that’s the first rub, is that they got to get at least 65% if they took ERP. But there are a couple options. And I think the number one thing that people have done is they have reached out to RMA, and they have offered up a written agreement. So, in that written agreement, what can be done is as long as you can prove with documentation, I mean, you could be taking pictures of improvements to your land that would help prevent that risk of a flood happening. If you can show that the loss history is just not there, if you can show where your land is in relation to the river, anything that you can do to prove that this is really not high-risk land RMA most likely will honor that. And you know, one thing that’s really important right now is if you as a producer, if you don’t know that you’re in the high risk or maybe you know this, this is news to you and we are past sales closing, you’re not totally up the creek. You have until I think it’s called the acreage reporting date until about; I think it’s July or June 15th. So, you have until the summer to get the written agreement file. However, from who I talk to within the industry, the agents, the crop insurance agents that I speak with, they tell me get it done sooner, as soon as you can, because the closer you get to that deadline, the less likely it is that you’re going to get that written agreement looked at. Because, RMA, they’re going to be like, “We don’t have time. We don’t we don’t have time to look at this now.” And so, there’s a very small chance that you’ll get it honored. So, the sooner you get that written agreement put in, the better. I’ve heard that some farmers will do most of the work. I’ve heard a lot of crop insurance agents will do a lot of the work on that end as well. So, if you’re a producer listening, reach out to your agent and see what they can do for you.

[14:35] John Anderson
So put your case together as quickly as possible and get that in front of RMA.

[14:40] Hunter Biram
That’s right. And I think a third alternative that not many people have talked about is there’s actually, excuse me, a high-risk coverage endorsement that you can look into that I believe is separate than the written agreement. So, you got the ERP problem, you got written agreement, then you have the high-risk endorsement, I think are the three types of responses to consider.

[14:57] John Anderson
Okay. So even within this structure, at least some possibility for some flexibility.

[15:07] Hunter Biram
Hands aren’t totally tied. They’re not totally tied. There are things that you can do.

[15:11] John Anderson
But make your case right now.

[15:13] Hunter Biram
That’s right.

[15:14] John Anderson
Don’t wait until July.

[15:15] Hunter Biram
Yeah. Right now.

[15:16] John Anderson
Yeah. Okay. That’s really good advice. So, you know, those old, those yield histories, any documentation of structures or practices to mitigate the effects, all those things are fair game.

[15:29] Hunter Biram
Absolutely. Pictures. I mean, whatever you can do, put together the best case possible and try and convince RMA that your land is not high risk.

[15:39] John Anderson
Good advice, particularly for people who are kind of tied down by their ERP participation it sounds like.

[15:46] Hunter Biram
That’s right.

[15:47] John Anderson
Okay. So, anything else in the crop insurance world we need to be aware of as we start into the early season here?

[15:54] Hunter Biram
Yeah, that’s probably the top issue in crop insurance in Arkansas. I know this is going to be nationwide, but in Arkansas I’ve been out and about at producer meetings and a lot of very upset people that just don’t know what’s going on. There hasn’t been a lot of communication. So, understanding why this is happening is very important. And then just knowing that you’re not totally out of the loop, I mean, you can totally reach out to your crop insurance agent to try and mitigate what that increased cost looks like. Even if you are held up by the ERP requirement.

[16:23] John Anderson
Good advice. Andy any comments? Questions?

[16:28] Andy McKenzie
I just got some basic questions here just on crop insurance. And I’m thinking again, I know you’re going to say it depends potentially, but I mean, you know.

[16:37] John Anderson
I’ll be disappointed in him if he doesn’t.

[16:39] Andy McKenzie
I mean, I’ve heard that maybe our farmers in Arkansas participate less in crop insurance in other parts of the country. Is that true? And then is there a variation in participation across our different commodities, on different row crops?

[16:56] Hunter Biram
Those are great questions. So, when we think about participation, there’s two ways to think about it. You can think about it in terms of total acreage, or you can talk about the buy up. So really, I think most all of our acres are insured at this point. It’s just the buy up. So, when I’m talking about buy up, I’m talking about 50%, 55%, 60%, 65%, 70%, 75%, 80%, 85%, those eight coverage levels and not buy up and not 50% cap. There is a 50% catastrophic coverage. It’s different than 50% buy up. So, it’s got to be 50% buy up.

[17:28] John Anderson
50% buy up would allow you to access preventive planning coverage, for instance, even though you’ve only got that 50% coverage level for a total.

[17:36] Hunter Biram
And you get the total, you get 100% of the projected price guarantee, I believe that’s a smaller percentage with the cap. So our buy up is sitting around, most people enroll in between 65% and 75% coverage. The most popular coverage all across the U.S. is about 75% across the whole U.S. There are some patterns where I see up in the Midwest and the Midwest in particular, you see more 80%, 85% being the most popular, largely driven by lower premium rates, I think it’s largely driven by that. And here, like I said, more than 65%, 70%. But in my research, I’ve shown that 80% is actually optimal in the South, in spite of the relatively higher premiums, 80% is still a better option for Arkansas producers. By crop is it any different? That’s a tough question. I would say, I think the last data that I saw was say that soybeans tend to have higher coverage levels in terms of participation. They participate in higher coverage levels, producers do, and corn not as high because corn rates are a lot higher. It’s a lot more risky to grow corn that is soybeans. It’s got to make a good stand. It’s got to withstand wind if there’s any kind of wind risk. Rice, rice coverage levels, they tend to be probably in between corn and soybeans. But for the most part, the soybean rate, the premiums for soybeans are so low relative to the other crops that you see a lot more buy up happening in soybeans.

[19:11] Andy McKenzie
That make sense. So, you know, if you’re just talking, let’s say the average farmer who’s got some sort of mixture of beans and rice and corn, would you recommend getting into crop insurance? I’d say a 75% level.

[19:28] Hunter Biram
Absolutely and I’ve had farmers come up to me and just ask like, “hey, do I need to split up how I’m covering my crops?” And I’ve been saying for the most part, 80% on soybeans with enterprise unions, on revenue protection and then 75% on corn actually just because of those higher rates. Like I said, and what I’ve looked at, 75% is going to be the best probably for corn for the most part, especially if you have non irrigated land. But even with irrigated land, 75% percent for corn, 80% for soybeans. And I looked at 80% for rice as well.

[20:00] Andy McKenzie
So, it really should be an important part of a farmer’s risk management toolkit then.

[20:05] Hunter Biram
Absolutely. You know, and Andy, I know you and I have been looking at with your grad students some really cool stuff with how we can incorporate crop assurance into our whole risk management toolkit. It’s not just one tool, it’s one of many tools, but we’ve looked at using it in your for-pricing strategies because it helps you to be more aggressive with those revenue guarantees. You get more confidence in pricing, more bushels. So that’s something that, like I said, crop insurance only one tool. It is a very important tool. I think producers should be using it as a form of risk management and it can be used with your marketing strategies, it can be used with your ARC and your PLC. In fact, I strongly encourage using it with your ARC and PLC.

[20:43] John Anderson
And, you know, an important point to bear in mind when we talk about this is that it is a subsidized product. So again, we quibble with the rates all the time. That’s part of what we get paid to do is quibble with the rates. But if they are even close to actuarially fair and then the subsidy is applied on top of that, it is a good buy and Andy to relate it to kind of your world. If you think of somebody purchasing a put option, a harvest time put option, and that option is efficiently priced according to a Black-Scholes model or whatever model you want to use, and somebody steps in and says, “Hey, I’ll cover a third of that premium for you.” You would think that’s a fantastic deal.

[21:27] Andy McKenzie
Yeah, I can see that.

[21:28] John Anderson
Yeah, that’s kind of what we deal with in the insurance. And again, maybe we have less confidence in the actuarial fairness of those rates than we do in the efficiency of option prices. But it’s the same idea you got an instrument that that’s priced awfully close to where the market should be, and then somebody picks up about a third of that premium for you. That’s an instrument that you probably want to use in your risk management strategy. Is that a fair way to put that Hunter?

[21:54] Hunter Biram
That’s great, John. That’s great. I totally agree. Put option is always, I think in terms of price protection and price guarantee, that seems to be the parallel, the best parallel to make with crop insurance.

[22:05] John Anderson
The other thing I like to point out to people and when we talk about risk manager generally and I think we probably don’t bring this into the crop insurance conversation enough is that people really need to make a very intentional assessment of their ability to withstand risk because I think with crop insurance, we do tend to focus a lot on premium. And is the premium right, is the premium too high, is a premium too low? Really a lot of producers I think would be better served to think more about how much risk can they stand. Because if you really can’t stand a 65% loss and you can avoid that with crop insurance, even if that premium fairly high, that might be a really good deal for you. That might be the decision that keeps you in business as opposed to you going out of business. And so, let’s quibble over where this premium is 5% high or too low. We really ought to be thinking about what level of loss can I survive and how to avoid that kind of loss.
[23:08] Hunter Biram
Absolutely. I think it’s important to understand that insurance is a risk transfer. It does not make you whole. I mean, we have 85% coverage, it’s as high as you can go now, leaves you a 15% deductible because if there was 100%, I mean, what kind of incentive is there to produce? I mean, I’m going to get it, I’m going to get a payment. I mean, why would I produce? So, it’s a risk transfer. And basically, the concept is, is when we buy insurance, I mean, it could be auto insurance, home insurance, we’re willing to take small losses every month in the form of premium in order to avoid that really catastrophic loss, that big loss like when a tornado blows our house down. Heaven forbids that that happens, but we’ve taken these small losses and when that really big one hits and we need to have a place to stay and get another house, we’re going to have some money sitting there waiting for us. So, you know, I don’t think most farmers would want to see their crop fail. I don’t think that they would want that to happen. It’s just like we don’t want our house to get blown away. I don’t think that we want that. So, insurance again, risk transfer, willing to take those small losses in the form of premiums and subsidize premiums, highly subsidized premiums at that in order to avoid those losses. And it could be shallow losses, too. I mean, the big losses, the cat loss, that’s complete loss, but at 75% when you have more than 26% of loss or 25% loss can be 26% you know, you’re starting to get some coverage there. So, I mean, we’re talking about coverage at deep levels and its shallow levels, too, right.

[24:36] John Anderson
No that’s a good point. And, you know, to the premium point, I like your comment there about this being a, you know, a risk transfer. And we take that that periodic small loss in terms of premium to avoid the big loss. Now with that being said, we always want that small loss to be as low as it can possibly be.

[24:58] Hunter Biram
That’s very true. Absolutely.

[25:10] John Anderson
And there’s absolutely, I have absolutely no problem with somebody complaining about insurance premiums being high. Great let’s look at them.

[25:07] Hunter Biram
I complain about that all the time.

[25:08] John Anderson
Exactly.

[25:10] Hunter Biram
Health insurance.

[25:11] John Anderson
Again, we get paid to quibble about these rates and we will certainly do that. Let’s ruthlessly evaluate these things and find the lowest rate we possibly can. But acknowledging that something has to be paid, there does have to be some transfer there. That’s a really good point to keep in mind. Anything else, Andy?

[25:33] Andy McKenzie
I think Hunter has pretty much answered all my questions there.

[25:36] John Anderson
All right. Good information and some good advice in these high-risk areas. Be aware, farmers, how you’re affected by that and get your plan together now to try to mitigate that or offset that if you can at all. Now’s the time to be acting.

[25:55] Hunter Biram
That’s right. The sooner the better. Get those get the paperwork together, reach out to your crop insurance agent. They’re going to know what to do. I know several, probably almost every crop insurance agent, at least in Arkansas, probably across all country, but in Arkansas, I know that they’ve been looking at this.

[26:09] John Anderson
Put that crop insurance agent to work.

[26:10] Hunter Biram
And that’s absolutely right. That’s absolutely right.

[26:13] John Anderson
Hunter, good information, good advice, as always. Thanks for joining us.

[26:17] Hunter Biram
Thanks for having me on. Had a lot of fun.

[26:18] John Anderson
All right. This is the Relevant Risk podcast. Thanks for joining us.

[26:23] Intro/Outro
Thanks for listening to the Relevant Risk podcast, a production of the Fryar Price Risk Management Center of Excellence and the Department of Agricultural Economics and Agribusiness within the University of Arkansas system. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville, and Research and Extension activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.