Just before the U.S. House of Representatives was set to vote on a Farm Bill amendment that would’ve crippled crop insurance, a Kansas State University economist sent key policymakers a note alerting them to a new study that shed light on the negative impact of reducing revenue insurance coverage.
The study he circulated was not produced by Kansas State, but its contents were so timely and so significant, that he felt compelled to help its authors at the University of Illinois spread the word.
That paper, by Illinois professors Gary Schnitkey and Jonathan Coppess, examined how farmers use revenue crop insurance tools like the Harvest Price Option (HPO) to help them forward contract their commodities.
“Recent criticism of crop insurance suggests that amendments could be placed in the Farm Bill to curtail HPO coverage,” the authors wrote. “As a result, understanding farmers pre-harvest hedging activities is important.”
Very little information existed about how farmers use these kinds of techniques, so Schnitkey and Coppess began their work with a survey of Midwest growers.
“Survey results indicate that farmers use what can be termed prudent hedging strategies prior to harvest for marketing their crops,” the authors explained. In fact, the survey found that 84% of Midwest farmers hedged a portion of their anticipated crop.
The study succinctly explained how it works:
Pursuant to a forward contract, a farmer agrees to deliver grain to a country elevator or processor at some point in the future, often near harvest time, but based on futures market prices at the time of the contract. This legally-binding contract locks in the price for the delivered grain as a hedge against lower prices at the time of delivery. While advantageous to the farmer in terms of protecting against lower prices, it also comes with risks that prices will increase, often as a result of lower yields for the crop nationally. In extreme situations, a farmer with significant yield losses may not have enough bushels to fulfill the contractual obligations and will need to purchase bushels to make delivery; bushels purchased in such a situation could well be at a higher price than the farmer contracted.
And that’s where HPO comes in. Farmers pay more for the insurance option. It indemnifies losses at harvest-time prices rather than planting-time prices, enabling farmers to purchase enough commodity off the open market to fulfill their forward contract.
Without access to HPO, as some agricultural opponents are advocating, farmers would reduce pre-harvest hedging, the study found, and introduce even more risk into farming. This is particularly troubling considering the survey also found that the farmers who most use these techniques also report to obtain the bulk of their families’ incomes from the farm.
“In other words, those impacted the most by this policy change (eliminating HPO) are those who most rely on farming for their family income,” the study concluded. “Congressional efforts to limit HPO would increase risks to farmers.”
Lawmakers in the House overwhelmingly defeated the amendment designed to harm crop insurance, though it still needs to pass the Farm Bill. The Senate is slated to begin its Farm Bill deliberations soon, where critics are again expected to attack HPO and other components of farmers’ primary risk management tool.