November 28, 2012 / 11:36 PM / 7 years ago

UPDATE 1-US cuts crop insurance rates for soybeans, rice despite drought

* Corn, cotton, sorghum, spring wheat rates revised too

* USDA will phase in changes to cushion drought impact

* Agency expects little impact on 2013 planting decisions

By Charles Abbott

WASHINGTON, Nov 28 (Reuters) - The U.S. government has ordered crop insurers to charge lower premiums to soybean growers for the second year in a row as part of rate revisions for six major crops, even as many farmers collect on claims following this year’s severe drought.

The changes are part of an Agriculture Department project to improve the actuarial soundness of the crop insurance program, which is federally subsidized but privately run.

Lenders often require insurance or other collateral to be pledged by farmers to assure repayment of farm operating loans. USDA pays 62 cents of each $1 in premiums, which totaled $11 billion this year.

USDA’s Risk Management Agency on Wednesday said that the revised rates are not expected to affect planting decisions among various crops in 2013.

The new rates will be phased in “to limit year-to-year premium changes and potential increases due to losses experienced in 2012 as a result of drought,” the agency said.

Indemnities for crop losses could hit a record $20 billion this year following the worst drought in half a century, analysts say, double the mark set in 2011. So far, $6.3 billion has been paid out on insurance policies.

“Typically, companies are not cutting rates following a pretty big hit,” said agricultural economist Art Barnaby of Kansas State University. He said the adjustments raise the question if USDA made adequate allowance for infrequent but severe losses, like this year.

Overall, premiums for soybeans will fall by 6 percent and for rice by 8 percent for 2013 crops while the premium for spring-planted wheat will rise by 4 percent.

Corn, cotton and grain sorghum premiums will decline in the core growing states for those crops but will rise in outlying states. The same pattern applies to soybeans, rice and spring wheat.

For example, soybean rates will drop by 9 percent in Illinois and Iowa, the top growing states, while the overall reduction is 6 percent.

Rates for corn will rise by more than 10 percent in the northern Plains and drop as much as 6 percent in the heart of the Corn Belt even though there would be little net change.

In the end, premiums paid by farmers will drop by about 1 percent and the impact on crop insurers “is expected to be similarly small,” said USDA.

Crop insurance is sold by 15 companies including subsidiaries of ACE Group, Wells Fargo, Deere & Co and QBE. USDA sets the rates, guarantees farmers access to coverage, and shares the risk of losses.

This year, the program could lose $10 billion, the first loss in a decade.

“Coming on the heels of a record drought season, the USDA informed us ... that those rates will undergo changes in 2013 based on crop and growing region,” said Tom Zacharias, head of National Crop Insurance Services, a trade group.

RMA rolled out an initial round of rate revisions this year, by reducing rates for corn by 7 percent and soybeans by 9 percent.

The National Corn Growers Association termed the revisions “real reform” that narrow the gap between premiums paid by corn growers and their claims record. Corn policies generated $4.3 billion in premiums this year, 39 percent of all premiums.

RMA administrator Bill Murphy said the revisions, which are based on decades of actuarial data, are intended to assure rates are appropriate and fair.

Among other things, the revisions put more weight on the experience of recent growing seasons and refine premiums to reflect conditions within specific weather districts, rather than state-wide or regionally.

Insurance is a small part but vital part of the cost of growing crops. In Illinois, it is from 5 to 7 percent of the cost of production for corn and soybeans, according to a University of Illinois economist.

Farmers can expect a rate increase if they make a claim because of drought losses, said Kansas State’s Barnaby, a crop insurance expert, notwithstanding USDA’s decision on premiums. Growers qualify for less coverage because their multi-year average yield goes down during bad years and rates rise as yields fall.

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