Understanding Crop Insurance: Historical Perspective—Part 4

Written by M. Sean High—Staff Attorney

Stabilization and Expansion

After the 1944 amendments to the Agricultural Adjustment Act of 1938 provided reauthorization for federal crop insurance, the program gradually began to show improvement.  Significantly, in 1947, for the first time, premiums collected exceeded indemnity payments on combined operations.[1] Additionally, from 1948-1952 the total surplus of premiums collected exceeded indemnity payments by $2.25 million.[2]

Perhaps more importantly, the federal crop insurance program offered many farmers a valuable tool for handling uncontrollable operating factors.  Significantly, just as drought conditions in “the 1930s provided impetus for the establishment of government-sponsored crop insurance, so did the drought of the early 1950s demonstrate the continued benefits of the program.”[3] Accordingly, “[i]n 1951 and 1952, indemnities totaled $42 million and enabled many farmers to continue operations on a scale not otherwise possible.”[4]   

Throughout the 1950s, crop insurance continued to achieve financial stability.  Of note, for every year from 1957-1961, the total surplus of premiums collected exceeded total indemnity payments.[5] 

During the 1960s, the Federal Crop Insurance Corporation (FCIC) undertook a concerted effort to expand the program’s coverage numbers.  The effect was an increase in total coverage from $271 million in 1959 to $920 million in 1969.[6] Unfortunately, along with rapid program expansion, “[p]remiums did not keep pace with liabilities and indemnities.”[7]

As a result, in 1970, the Secretary of Agriculture formed a task force, consisting of nongovernmental insurance experts, to investigate FCIC practices.[8]  Ultimately, the task force determined that FCIC had incorrectly chosen to set crop insurance premiums through the use of a countywide base.  Instead, the task force proposed that the program should set premiums “based on individual farm risks.”[9]

In 1977, the General Accounting Office (GAO) released a report supporting the task force’s assertion that the federal crop insurance program would be better served basing premiums on individual farm risks.  According to GAO, a crop insurance program “based on rates individualized by farm…[would] be more equitable because the premium rate and amount of coverage would be based on the farm’s actual yield history.”[10] Furthermore, GAO “suggested that individualized protection would particularly increase participation among low-risk producers who would enjoy lower premiums and/or higher coverage than under the existing areawide system.”[11]

In response to GAO’s recommendations, “FCIC instituted a pilot program of individualized crop insurance in twenty counties for the 1978 crop year.”[12] In 1979, the pilot program was expanded to offer individualized crop insurance in forty counties.

In 1980 federal crop insurance underwent its most dramatic expansion with the enactment of the Federal Crop Insurance Act of 1980.  Designed to become the primary tool for providing farmers with disaster protection, the legislation “removed annual limits on expansion, previously set at 150 counties and three commodities, and authorized the expansion of the program to all counties with significant amounts of agriculture.”[13] Perhaps of greatest significance, to encourage participation in the crop insurance program, the Federal Crop Insurance Act of 1980 explicitly authorized the subsidizing of crop insurance premiums.[14]

Farmer response to the new program was resoundingly positive.  As a result, in 1981 total acreage insured under the crop insurance program increased by 81%; up from 26.3 million acres to 47.7 million acres.[15]   

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[1] Federal Crop Insurance 1938-1982, Randall A. Kramer, Agricultural History, Vol. 57, No. 2 (Apr., 1983), p. 193

[2] Id at p. 194

[3] Id at p. 193

[4] Id.

[5] Id at p. 195

[6] Id at pp. 195-196

[7] Id at p. 196

[8] Id

[9] Id

[10] Id at p. 197

[11] Id

[12] Id

[13] Id at p. 198

[14] Id

[15] Id at p. 199

Understanding Crop Insurance: Historical Perspective—Part 3

Written by M. Sean High—Staff Attorney

Growing Pains

With the passage of the Federal Crop Insurance Act of 1938, federal crop insurance was initially only available for wheat planted in 1939.  To administer the crop insurance program, the enacted legislation created the Federal Crop Insurance Corporation (FCIC), an agency within the United States Department of Agriculture.  Accordingly, FCIC was to be managed by “a board of directors appointed by the Secretary of Agriculture.”[1]

The first version of federal crop insurance was “authorized for wheat planted for harvest in 1939” and provided coverage for losses resulting from “drought, flood, hail, wind, winterkill, lightning, tornado, insect infestation, plant disease, and such other unavoidable causes as may be determined by the Board.”[2] This initial version of federal crop insurance, however, did not prove to be successful.

In the first year of its offering, the crop insurance program made indemnity payments to nearly one-third of all the 165,775 enrolled farmers.[3]  Significantly, overall national participation in the program was relatively low which led to these indemnity payments greatly exceeding the total premiums received.[4] While participation in the program would gradually increase in 1940 to 360,596 farms and in 1941 to 371,392 farms, these relatively low enrollment numbers resulted in the program losing money each year as indemnity payments made to farmers continued to exceed the total amount of premiums collected.[5]

In 1941, the federal crop insurance program was expanded to include coverage for cotton.  Subsequently, in 1942 and 1943, crop insurance results for cotton and wheat mirrored those for wheat alone as “[i]ndemnities greatly exceeded premiums during both years.”[6] As a result of these poor performances, in 1943, Congress passed legislation that “prohibited the FCIC from writing any new crop insurance policies after 31 July 1943.”[7] Nevertheless, the suspension of the crop insurance program would prove to be temporary.

In late 1944, in an attempted to correct the problems with the original version of crop insurance, Congress passed legislation that amended the Agricultural Adjustment Act of 1938.   The result of the amendment was not only a restoration of crop insurance, but an expansion the program.

Under the 1944 amendment, FCIC was authorization to provide crop insurance coverage for not only wheat and cotton, but also for flax crops.  Additionally, policies could now be written to “include losses resulting from frost, fire, excessive rain, snow, wildlife, and hurricane.”[8] Importantly, coverage was restricted to certain designated counties and FCIC was given the power “to refuse to sell insurance in high-risk areas.”[9]

Significant to achieving the goal of expanded program participation, the new legislation authorized FCIC to begin implementing “experimental crop insurance programs for ‘corn, dry beans, oats, barley, rye, tobacco, rice, peanuts, soybeans, sugar beets, sugar-cane, timber and forests, potatoes and other vegetables, citrus and other fruits, tame hay, and any other agricultural commodity, if sufficient actuarial data are available.’”[10] Immediately, FCIC began offering crop insurance “on a trial basis in 1945 for corn in fifteen counties and tobacco in twelve.”[11]      

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[1] Federal Crop Insurance, Randall A. Kramer, Agricultural History, Vol. 57, No. 2 (Apr., 1983), p. 188

[2] Id.

[3] Id. at p. 189

[4] Id.

[5] Id.

[6] Id. at p. 191

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at p. 192

Understanding Crop Insurance: Historical Perspective—Part 2

Written by M. Sean High—Staff Attorney

Movement towards Federal Legislation

In 1932, “at a time of near collapse of the agricultural economy,” President Franklin Roosevelt named Henry A. Wallace as Secretary of Agriculture.[1] In 1936, under the direction of Wallace, the United States Department of Agriculture (USDA) began to actively investigate the possibility of a federal crop insurance program.  Significantly, research regarding wheat yield results, collected from individual farms led USDA to make a preliminary analysis that “wheat data could provide an actuarial basis for crop insurance.”[2]   

Meanwhile, in both 1934 and 1936, large portions of the U.S. agricultural sector experienced significant difficulties due to widespread drought.  The effects of these adverse weather conditions caused the general public to become increasingly interested in the possible benefits that could be achieved through the use of crop insurance.[3]  As a result, crop insurance was listed among the campaign issues of the 1936 presidential election.[4]

While both of the presidential candidates in 1936 expressed their support for the concept of crop insurance, they disagreed on structure and implementation.  President Roosevelt favored a “government-sponsored program,” while his Republican opponent, Governor Alfred M. Landon of Kansas, “believed a private approach was preferable.”[5]   

Shortly after Roosevelt’s 1936 presidential victory, the President’s Committee on Crop Insurance released a report recommending the establishment of a federal crop insurance program that applied to wheat only.  According to the report, a federal crop insurance program should “be administered by the USDA with policies sold by local committees or boards of directors who could require minimum levels of participation before offering insurance in a given county or region.”[6]

Based on the findings of the President’s Committee report, on March 30, 1937, the U.S. Senate passed a crop insurance bill to establish the President’s Committee’s recommendations.  In time, U.S. House of Representatives included legislation “nearly identical to the Senate bill” as part of the Agricultural Adjustment Act of 1938.[7]  As a result, the Federal Crop Insurance Act (FCIA) was enacted on February 16, 1938 for the purpose of “promot[ing] the national welfare by alleviating the economic distress caused by wheat crop failures due to drought and other causes, by maintaining the purchasing power of farmers, and by providing for stable supplies of wheat for domestic consumption.”[8]

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[1] Federal Crop Insurance 1938-1982, Randall A. Kramer, Agricultural History, Vol. 57, No. 2 (Apr., 1983), p. 184

[2] Id. at p. 185

[3] Id.

[4] Id.

[5] Id. at p. 186

[6] Id. at pp. 186-187

[7] Id. at p. 188

[8] Id.

Understanding Crop Insurance: Historical Perspective—Part 1

Written by M. Sean High—Staff Attorney

Introduction

Today, the Federal Crop Insurance program provides many farmers with an essential risk management tool that offers possible protections against unavoidable losses suffered do to fluctuating prices, harsh weather, disease, and pests.  Through the payment of a fixed amount of premium per acre, crop insurance allows participating farmers to shift these unavoidable production risks onto an insurance company, and as a result, better handle the often adverse conditions associated with agricultural production.  Nevertheless, for much of U.S. history, farmers did not have access to this valuable safety net.    

Born out of the financial difficulties of the Great Depression, federal crop insurance became a reality with the passage of the Federal Crop Insurance Act of 1938 (FCIA).  Prior to FCIA, while various private insurers offered farmers the ability to purchase hail insurance coverage, “no private company had successfully operated an ‘all-risk’ [multiple-peril] crop insurance program.”[1]  

In 1917, three private insurers, located separately in North Dakota, South Dakota, and Montana, independently attempted to write multiple-peril crop insurance policies.  Unfortunately, each “compan[y] suffered heavy losses because of a drought and because their ventures covered an area too small to adequately distribute their tasks.”[2]

In 1920, the Hartford Fire Insurance Company (Hartford) offered farmers an insurance policy providing coverage for crop prices and yields.  The venture proved to be unsuccessful as U.S. corn prices dropped significantly from the 1919 price of $1.50 per bushel to the 1920 price of $0.64 per bushel.[3]  Additionally, the price of U.S. wheat dropped from the 1919 price of $2.19 per bushel to the 1920 price of $1.32 per bushel.[4] As a result of these dramatic crop price declines, Hartford suffered a substantial financial loss as payments to these policy holders exceeded the collected premiums by $1.7 million.[5]

While these few private companies attempting to sell crop insurance policies were not successful, farmers continued to struggle with their unavoidable production risks. Significantly, according to 1922 United States Department of Agriculture (USDA) statistics, from 1909-1918, crop losses resulting from conditions such as “drought…insect infestation…frost, excessive moisture, diseases, pests, and hot winds” amounted to an average annual loss of $2.6 billion.[6]   

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[1] Federal Crop Insurance 1938-1982, Randall A. Kramer, Agricultural History, Vol. 57, No. 2 (Apr., 1983), p. 181

[2] Id., at 182

[3] Id.

[4] Id.

[5] Id.

[6] Id.