Kansas State University agricultural economist Art Barnaby is well aware of corn growers’ struggles this year as they deal with blistering summer heat and drought. But after crunching the numbers, he believes that some estimates of this year’s U.S. crop losses are premature and might be overstated.
Barnaby, who is a risk management specialist with K-State Research and Extension, gathered historical data from crop insurance participation going back to 1988 – the last big drought year in the Corn Belt. He then calculated the estimated premium for the 2012 corn crop and plugged the loss ratio for 1988 into the 2012 numbers.
“State by state, the numbers won’t be so accurate because in 1988, some crops were better and some worse than this year, but in the aggregate, it generated a $10 billion underwriting loss on corn. That is a large loss, there’s no question about it, but it’s less than 10 percent of the USDA budget and the insurance companies are expected to pay some of the loss. A big chunk of that budget is food stamps and other feeding programs.”
Barnaby’s $12 billion to $15 billion estimated underwriting losses for all crops and all states is well under recent industry estimates of $20 billion to $40 billion in losses. Based on the most recent crop condition reports the estimate is likely to be closer to $15 billion, he said.
In estimating what this year’s underwriting losses might be, he looked at the historical national crop loss ratios, which are indemnities divided by unsubsidized premiums. The two largest national loss ratios were 2.71 in 1988 and 2.19 in 1993 for all crops combined. It would require a record national loss ratio of 3.0 to generate a $21 billion underwriting loss. However, much has changed since 1988. The insurance pool is much larger and there are more crops in the pool. Corn is about 40 percent and soybeans are about 20 percent of the pool, which means 40 percent of the pool is in other crops. Because the USDA’s Risk Management Agency (RMA) averages all crops together across the country, it will be difficult to generate a national loss ratio over 3.00.
“There is some question if the 2012 crop has had enough damage to generate a national loss ratio on corn equal to 1988,” Barnaby said. “The most current USDA data suggest the losses are worse in Indiana but not as severe in Iowa and Minnesota. It is rare for the national loss ratio to exceed 2.00. That has only happened twice in the last 25 years, and it is also rare for a state loss ratio to exceed 5.00 where the insurance companies have a stop loss in their reinsurance agreement. The rare year was 1993 when the national loss ratio was over 2.19 and Minnesota’s all crop loss ratio was 6.10. Therefore, any suggestion the underwriting losses will exceed $20 billion is premature. The 2012 underwriting losses will likely be between $10 and $12 billion. If we assume no rain for the next month then a $15 billion to $20 billion loss is possible and it would be a record loss ratio. The $15 billion scenario seems more likely with each crop condition report.