Crop Insurance

Friday, August 16, 2013

Crops insurance is useful for commercial farmers

Some form of crop insurance is useful for all commercial farmers. Since their annual income is tied to the quantity and quality of their aggricultural output, the damages of uninsured crops can be considerable. Notwithstanding this, Canadian statistics show that farmers' participation in crop insurance is lower than one would expect it to be. It is possible that this will change with more of the extreme weather phenomena that occur as a result of global warming.

How does crop insurance work?

  • The Canadian government has an economic interest in the country's farmers' ability and willingness to produce food. As a result, both the federal and provintial governments share a portion of the farmers' insurance costs. If they had not done so, farmers would probably not have been able to afford insurance, and would accordingly have been reluctant to farm under such massive risk of bankrupsy. In most western provinces, farmers pay no premiums for 50% to 60% crop protection, since the governments cover losses up to that level. They pay the full premium for any insurance above that.

  • Crop insurance is an ideal partnership between government and the private sector. The governments insure crops against 50% damages, while the private sector is responsible for the rest. Since crop damages can be enormous, neither the government nor the private insurance sector would have been able to afford the risk on its own.

  • Farmers can choose various levels of coverage, typically calculated as a percentage of crop loss. The standard level of coverage is 70%.

  • Unlike most insurance where premiums are calculated with reference to the likelihood of damage, crop insurance premiums depend on the percentage of the coverage and the average long-term yield of those crops. That is, if the crops are typically profitable, and the farmer has chosen 90% coverage, his premium will be high because he wants near full coverage on valuable crops. If it is lower-yielding or covered at lower levels, it will cost less.

  • Insurers have to pay out indemnity when the actual yield falls below the long term average yield adjusted for the selected coverage level. That is, if a farmer's crops are less profitable than the long-term average due to hail or rain, the insurance pay-out is calculated according to the short-fall and the percentage of damage that he is insured against. The government will then pay its 50% to 60%, after which a private insurer will step in and pay the rest.

  • Since the premiums and indemnities are in part calculated on the long-term yield of the crops, farmers are protected against major price fluctuations due to economic factors beyond their control.

  • Crops are also covered against hail, fire, lightning and rain.

Without crop insurance, the risk of damaged or destroyed crops would have been far too high for farmers to carry. It is, thus, a way to promote low-risk farming as an occupation and thereby to secure Canada's food supply and exports.