Farmers in a key region of the United States (Iowa, Nebraska, South Dakota, Wyoming) relied on their investment in crop insurance to weather the effects of severe drought in 2012. At the same time, the indemnity payments helped communities and states avoid some of the angst that would have accompanied significant crop and revenue losses.
Insurance payments not only helped ensure that most farmers will be able to plant another crop in 2013, the indemnities also produced a significant impact beyond the farm gate. According to a study by two well-respected economists, indemnity payments generated an off-farm economic impact of nearly $2.2 billion across Iowa, Nebraska, South Dakota and Wyoming. That figure includes $721 million of labor income that preserved 20,900 off-farm jobs in the region.
What would have happened in both rural and urban communities if farmers hadn't been protected last year?
Dr. Brad Lubben, an ag economist, and Dr. Eric Thompson, an economist, conducted the study, underwritten by Farm Credit Services of America, a leading farm lender in the four-state area. Thompson specializes in research on state and local economic growth and on economic impact analysis. Lubben focuses on policy and risk management in agriculture. Both are faculty members at the University of Nebraska-Lincoln.
"This research helps us answer the question: 'What would have happened in both rural and urban communities if producers had not been protected by crop insurance during the severe drought last year?'" says Doug Stark, president and CEO of FCSAmerica. "The study shows that while crop insurance is critical for farmers, in years of significant loss it also helps stabilize jobs and incomes off the farm as well. Indemnity payments replace some of the income that farmers would have earned from a more normal crop, enabling them to continue investing in their businesses and households."
Key findings of the study looking at the effects of crop insurance:
* Farmers paid $885 million in premiums during 2012 to insure nearly 54 million acres across Iowa, Nebraska, South Dakota and Wyoming, or 85% of insurable planted acres for principal crops.
* Through March 4, 2013 farmers in the four states had received a total of $4.482 billion in indemnity payments for the 2012 growing season (April 2012 through March 2013).~~~PAGE_BREAK_HERE~~~
* Farmer purchases of goods and services attributable to the indemnity payments are estimated to yield nearly $2.2 billion in off-farm economic impact across the region. That includes $1.0 billion in Iowa, $780 million in Nebraska, $386 million in South Dakota and $4.7 million in Wyoming. The difference between the total net payments and the regional economic impact reflects savings by farmers and economic impact outside the four-state region, which was beyond the scope of the study.
* The economists estimate the number of off-farm jobs saved by farmers' investment in crop insurance total 20,900 across the territory, including 9,650 in Iowa, 7,450 in Nebraska, 3,750 in South Dakota and 50 in Wyoming.
Metro areas feel the effect, too -- a positive impact beyond the farm gate
"What's interesting is the number of jobs that would have been lost without crop insurance," Stark notes. "Indemnity payments replace some of the income lost to drought, so money continues to flow throughout local economies as producers use the payments to support their households and businesses. And metropolitan areas benefit as well as rural communities. For example, net crop insurance indemnity payments saved an estimated 114 jobs in Omaha and Lincoln, and 129 in Des Moines, according to this study."
The ability to partially manage external risk with insurance is essential to managing family farms and farms in general and to make the types of major investment required in modern, efficient agriculture operations, the study's authors report.
"On a more practical level, crop insurance is critical for agricultural producers and their communities during years when drought or other natural phenomena damage or destroy crops," Lubben and Thompson wrote. "The income from crop insurance payments can play a key role in stabilizing local economies both in the year of the drought and in subsequent years. In ag states such as Iowa, Nebraska, South Dakota and Wyoming, crop insurance can also play a key role in stabilizing the statewide economies."
Crop insurance has become a fundamental risk management tool for most farmers
According to Stark, "Most farmers purchase crop insurance every year, understanding they may have losses resulting in claims only a few times in their careers. Crop insurance has become a fundamental risk management tool for most operators.~~~PAGE_BREAK_HERE~~~
"Critics of federal crop insurance seldom consider the substantial economic impact of indemnity payments beyond the farm gate," he notes. "Farmers do indeed rely on crop insurance as a key risk management tool, but crop insurance also creates economic stability for communities and families near and far." Despite the 2012 drought's severity, there has been no clamor for an ad hoc disaster program. "Crop insurance is doing the job for which it is intended," he adds.
About the authors of this study:
* Dr. Eric Thompson is director of the Bureau of Business Research and an associate professor of economics at the University of Nebraska-Lincoln. He specializes in research on state and local economic growth and on economic impact analysis. He has authored or co-authored two dozen articles published in economic journals, primarily on state and local economic growth. He has served on the faculty of West Virginia University, the University of Kentucky and the University of Nebraska-Lincoln. He is a past president of the Association for University Business and Economic Research.
* Dr. Brad Lubben is Extension assistant professor, policy specialist, and director of the North Central Risk Management Education Center at the University of Nebraska-Lincoln. He has 20 years of experience as an Extension economist and policy specialist and has been at Nebraska since 2005. His expertise is in the area of farm policy and risk management and includes research and education activities related to farm policy development, farm bill proposals, and producer decision making under risk as well as classroom instruction on agricultural policy development and issues.
About Farm Credit Services of America: FCSAmerica is a customer-owned financial cooperative proud to finance the growth of rural America, including the special needs of young and beginning producers. With nearly $20 billion in assets and more than $3 billion in members' equity, FCSAmerica is one of the region's leading providers of credit and insurance services to farmers, ranchers, agribusiness and rural residents in Iowa, Nebraska, South Dakota and Wyoming. Learn more here.