April 8, 2011 / 9:49 PM / 7 years ago

US crop insurers eye big profits, big risks in 2011

* Record premium of $11 billion for crop insurers

* High grain prices, more acres boost premiums

* Insurance also face big risks if weather harms crops

By Christine Stebbins

CHICAGO, April 8 (Reuters) - U.S. crop insurers appear set to reap a bonanza this year with premium income expected to jump about 45 percent to a record $11 billion amid soaring prices for the main row crops like corn, soybeans and cotton.

But with record premiums and high commodity prices, comes big risk if bad weather harms the nation’s crops and farmers cash in on the policies.

“The bigger premium is, the bigger the potential for losses are and the bigger the potential gains for the companies -- it just depends on the weather,” Keith Collins, consultant for the U.S. crop industry and former USDA chief economist, said in an interview.

This year has three big risks -- too wet in the north, too dry in the south and huge price volatility.

“Whether they have a good year will depend on how many losses they have. Chances are they will have a good year but there is always the possibility of a drought or something else,” said University of Illinois economist Gary Schnitkey.


Graphic of U.S. crop insurance premiums:


FACTBOX: U.S. crop insurance companies [ID:nN08124847]


This year’s $11 billion in crop insurance premiums would surpass the previous record of nearly $9.9 billion set in 2008 -- another year of soaring commodity markets -- provided Mother Nature cooperates.

“Premiums in the crop insurance business are going to be a function of the crop price being insured,” said Tom Zacharias, National Crop Insurance Services (NCIS) president. “We’ve seen this dramatic run-up. So there is going to be a resulting run-up in premium that farmers pay.”

Corn Cc1 and cotton CTc1 prices set new record highs this year and prices for other commodities have soared since this time last year.

Those skyrocketing commodity prices boosted the cost of crop insurance premiums by as much as 100 percent from 2010, insurance consultants said.

In 2010, more than 1.1 million crop insurance policies were written, covering 256 million acres and about $80 billion worth of crop production. Policies in 2011 are expected to cover another 10 million acres, according to NCIS, the crop insurance trade group.

Those rates are set by the federal government, the primary reinsurance agent, with 15 privately held companies servicing the program -- all charging the same rate -- a food security policy to ensure farmers a safety net against natural disasters and/or falling crop prices.

The federal government pays about 60 percent of the premium for farmers through its subsidies, industry sources said. The government capped returns for insurance companies for 2011 at 14.5 percent and made insurers cover more indemnity risk.

USDA commissioned a study in 2010 that showed that over the past 21 years, crop insurance companies averaged a 17.0 percent return when the average reasonable rate for that period was 12.7 percent, the agency said last June.

The House Budget Committee Chairman proposed to slash farm spending by $30 billion over 10 years to tackle the giant federal budget deficit -- including having farmers pick up a greater portion of the tab for crop insurance. [ID:nN05117794]

Reporting by Christine Stebbins; Editing by Lisa Shumaker

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