Levi A. Russell
Assistant Professor & Extension Economist
Department of Agricultural Economics
Texas A&M AgriLife Extension
Corpus Christi:
This article summarizes the loss ratios and number of acres insured for four of the major crops in Texas in 2013 and 2014. The four crops covered in this article are corn, cotton, grain sorghum, and wheat. The insurance policies discussed are RP and RP-HPE.
It’s important to understand the loss ratios I’ve calculated in the table below. The loss ratio is calculated by dividing the indemnity payment received by the farmer by the premium paid by the farmer. The premium paid by the farmer is the total premium net of the subsidy paid by RMA. If the loss ratio is equal to 1, then farmers on average received indemnities equal to the premium they paid. If the loss ratio is more (less) than 1, then farmers on average received more (less) in indemnities than they paid in premiums.
Loss ratios for most crops in Texas are typically higher than the national average. This is because rainfall on the major crop-producing areas of the state is more variable than in other heavy crop-producing states. An exception is corn. Since a large percentage of the corn production in Texas is irrigated, we are likely to see lower loss ratios. In fact, the average loss ratio for corn in Texas fell 47.6% from 2.1 in 2013 to 1.1 in 2014. The national average in 2014 was much higher at 2.66. The relatively low loss ratio in 2014 was due to slightly higher yields and a small rebound in prices leading up to harvest. Insured corn acres fell about -1.4% from 2013 to 2014.
Cotton loss ratios for 2013 and 2014 were substantially higher than the 2014 national average. However, loss ratios for Texas cotton fell from 4.86 in 2013 to 3.29 in 2014, a decline of about -32%. This was due mostly to higher cotton yields in 2014. Insured cotton acres jumped nearly 7% from 2013 to 2014.
Grain sorghum loss ratios fell, on average, more than cotton. The average grain sorghum loss ratio fell -62% from 4.71 in 2013 to 1.78 in 2014. This was due to an increase in average yield. Insured grain sorghum acres fell only -2.4%.
Wheat loss ratios in Texas averaged substantially higher than the national average and increased about 1.8% from 5.13 in 2013 to 5.22 in 2014. Yields were similar across the two years state-wide and prices were relatively stable. Insured acres fell about-1.8% for wheat in Texas.
The numbers presented here indicate that crop insurance was a profitable proposition, on average, for producers in Texas in 2014. Since the 2014 Farm Bill made significant changes to farm programs, essentially treating program payments like insurance indemnities, it will be interesting to see how crop insurance coverage levels and loss ratios change over the next three years. If you would like to examine your insurance decisions in future years in light of the new program, please visit https://decisionaid.afpc.tamu.edu/ to make use of the Texas A&M Agriculture and Food Policy Center’s decision aid.
