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338.13
A46
1844
WAITE MEMORIAL BOOK COLLECTION
DEPT. OF AG. AND APPUED ECONOMICS
AVE. - 232 bOB
1994
ESOTA
UNNEATIc0
108 U.S.A.
BUFORD
•
FRB CHICAGO
sTyir4LtiIy!I
AGRICULTURAL LETTER
FEDERAL RESERVE BANK OF CHICAGO
Number 1844
September, 1993
Disaster payments and federal crop insurance
•
•
The extensive flooding that hit much of the heartland this
summer has refocused attention on federal programs that
provide financial assistance to farmers hit by a disaster.
While the damage estimates won't be finalized for some
time, it's clear that the flood resulted in sizable crop losses
for many of the affected farmers. In August, Congress
responded with an additional $2.3 billion in funding for
disaster payments to farmers. The USDA also responded
by extending the enrollment deadline for the so-called
0/92 option, a price-support program feature that will be
particularly attractive to farmers hit by a total loss on program crops like corn. In addition, the Federal Crop Insurance Corporation (FCIC) expects to make some $700 million in indemnity payments to farmers in the nine-state
region hit by flooding. These and other forms of assistance will partially cushion the financial repercussions of
the flood losses on farmers and—in turn—on the network
of lenders and agribusiness firms that support farmers.
Disaster payments will be available to all farmers who
experience a qualifying loss due to the recent floods, not
just those located in a disaster-designated county. The
coverage under disaster assistance for farmers extends to
all crops and includes both quality and quantity losses.
The parameters that define disaster benefits vary, depending on such factors as the type of crop hit by a loss,
whether or not that crop was also covered by federal crop
insurance (if available) and—for program crops—whether
the farm was enrolled in the price support program. As a
minimum, farmers must incur a loss of 35 percent of expected production in order to qualify for a disaster payment. (The minimum rises to 40 percent when the loss is
on crops not also covered by federal crop insurance).
Farmers who experience a total loss on any crop would
therefore be eligible for a disaster payment on 65 percent
of the expected production for that crop (60 percent if not
covered by crop insurance). "Expected production" for
program crops (such as corn and wheat) is defined in
terms of the established program crop yield for the applicant farm. For soybeans and most other crops, expected
production is defined in terms of the average yield for the
county in which the farm is located.
Disaster payment rates for program crops are set at 65
percent of the target price if the applicant farm is also a
participant in the price support program and 65 percent of
the loan rate if a nonparticipant. For corn, that translates
into disaster payment rates of $1.79 and about $1.12 a
bushel for participating and nonparticipating farms, respectively. The payment rate for soybeans is $3.69 a
bushel which is equivalent to 65 percent of the five-year
average market price, excluding the high and low year.
Unlike the provisions in recent years, disaster benefits for
those hit by the flood of 1993 will not be reduced by the
so-called allocation factor. As such, the disaster payment
to a farmer hit by the flood will be double the payment
made on a comparable loss to a hurricane victim of last
year. However, the maximum disaster payment to any
one farmer remains capped at $100,000. And for pricesupport program crops, the rules still preclude the making
of disaster and deficiency (target price) payments on the
same unit of production. As such, final disaster payments
to program participants will net out any overlapping deficiency payments. For corn farmers, this adjustment can
be rather sizable considering the advance deficiency
payment that was available this year.
The calculation of disaster payments can get fairly complex, in part because of the need to sort out overlapping
deficiency payments on program crops. And judging the
"adequacy" of disaster payments relative to the revenue a
farmer might expect from a normal harvest is complicated
by assumptions about such things as normal per-acre
yields, expected market prices, and government payments. However, a rough approximation would suggest
that a corn farmer who is enrolled in the price support
program and who experiences a total flood loss would
receive combined disaster and deficiency payments that
would range between 38 and 50 percent of the proceeds
that might be expected from a "normal" corn harvest.
The lower end of the range would be more representative
for farmers that did not carry federal crop insurance on
corn. Alternatively, the upper end of the range would be
more representative of the combined disaster/deficiency
payments that a farmer with crop insurance might receive
if he elected the 0/92 option. The 0/92 option is particularly attractive to corn farmers who suffer a total, or neartotal, loss because it offers a guaranteed deficiency payment at the rate of 72 cents a bushel on 92 percent of the
payment-acreage production. Regular program enrollment offered a preliminary, 36 cent advance deficiency
payment on the full payment acreage production. However, a final settlement could adjust that rate up or down
depending on the average market price during the first
five months of the 1993/94 corn marketing year.
The federal crop insurance program offers all peril insurance on most crops in most counties. Although heavily
subsidized, usage of the program is rather modest in terms
of both the number of farmers that carry crop insurance
and the level of coverage they select. Nationwide, the
$11.3 billion in indemnity liabilities assumed by the FCIC
in 1992 were equivalent to only 13 percent of all cash
receipts from crop sales. Participation among farmers
varies widely, but tends to be higher in the Midwest.
FCIC officials note that about 57 percent of the insurable
acreage of major crops in the nine states hit by flooding
this year were covered by some level of crop insurance
last year. The corresponding shares for the three affected
District states were 11 percent for Wisconsin, 44 percent
for Illinois, and 60 percent for Iowa.
The crop insurance program offers participants various
quantity and price options for structuring their coverage.
The four quantity options-35, 50, 60, or 75 percent—
relate to the expected production of the insured crop and
are defined in terms of the historical average of actual
yields on the applicant farm—if verifiable—or the overall
county-wide yields. The 50 and 65 percent quantity options are the most heavily subsidized and therefore the
more popular choices of farmers. Indemnity payments are
made on any portion of a loss that cuts into the selected
quantity option. A farmer with 65 percent quantity coverage would receive an indemnity payment on 15 percent
of expected production if hit by losses that pulled his
actual yield to 50 percent of the historical average. The
amount of the indemnity payment would hinge on the
price option selected upon entering the program. A wide
range of price options are typically offered. For 1993, the
range for corn extended from 60 cents a bushel to $2.30 a
bushel while that for soybeans stretched from $1.50 to
$5.70 a bushel.
The magnitude of the flood-related indemnity payments to
be made by the Federal Crop Insurance Corporation this
year are still being tabulated. However, the FCIC has
projected that those payments might approximate $700
million across the nine states hit by the 1993 flood. A
large share—about $300 million—of the total is expected
to be paid to Iowa farmers. Far more modest shares of
around $10 million each are projected for Illinois and
Wisconsin. The "adequacy" of any indemnity payment to
offset the crop losses for an individual farmer hinges on
the coverage options they selected. But as an example, an
insured corn farmer with 50 percent quantity coverage at
the full $2.30 price option who suffers a total crop failure
would receive an indemnity payment equivalent to
around 35 to 40 percent of expected revenues from a
normal harvest. That coupled with disaster and deficiency payments would ease much of the financial loss
resulting from a complete crop failure due to the flood.
Unfortunately, not many farmers will have both disaster
and crop insurance benefits.
Gary L. Benjamin
Food prices expected to post moderate gain
Food prices will likely register another moderate gain for
1993 despite earlier concerns about the effect of flooding
in the Midwest and drought in the Southeast. Through
August, the Consumer Price Index (CPI) for all food averaged 2 percent above the same period a year ago. Sharp
gains in retail prices for eggs and fresh vegetables were
tempered by declines for non-alcoholic beverages and
processed fruits. Most other food categories posted modest gains. In comparison, the non-food component of the
CPI averaged 3 percent higher through August. Barring
some unforeseen circumstance, this should mark the third
consecutive year that the increase in food prices has
lagged the gain for non-food items.
The CPI for food is composed of two components—food
consumed at home and food consumed away from home.
The CPI for food consumed away from home averaged
about 2 percent higher through August of this year, similar
to the gain recorded for all of last year. In comparison,
the at-home index posted an average gain of less than 1
percent in 1992, the smallest annual increase since 1967.
The rate of gain has increased to slightly over 2 percent
this year, but is still quite modest by historical standards.
The moderate increase recorded by the at-home index is
attributed to ample food supplies as well as weakened
consumer demand deriving from sluggish economic conditions. Furthermore, consumers are thought to have
altered their purchasing patterns away from the more
expensive food items that have undergone comparatively
more processing.
Meat and poultry prices have a considerable impact on
the CPI for food consumed at home since they account for
a significant portion of the average consumer's food dollar. Retail beef prices averaged about 4 percent higher
during the first eight months of 1993 after showing little
change the prior year. The increase stems mostly from a
lower level of production. Pork prices—on average—
posted a modest gain of 2 percent as production showed
little change from last year. The percentage increase in
retail poultry prices this year is about the same as for beef.
But unlike beef prices—which were supported by dampened supply—the strengthening of poultry prices has
been driven by the ongoing upward trend in per-capita
consumption.
Egg usage per capita rose last year for the first time since
1979 as production gains weakened prices and stimulated
Average annual percent change in retail food prices
1982-91*
1992
Jan.-Aug.
1993
2.0
Food
3.8
1.2
Food away from home
4.1
2.0
1.7
3.7
0.7
2.2
3.1
-0.1
3.6
3.2
-4.7
2.2
4.1
Food at home
Beef & veal
Pork
Poultry
3.6
-0.1
Fish & seafood
4.7
2.3
2.8
Eggs
2.9
-10.6
11.3
Dairy products
2.7
2.7
0.9
3.6
-1.4
0.0
7.7
-5.0
0.0
5.6
2.3
8.1
Processed fruits
3.5
4.5
-4.8
Processed vegetables
3.0
0.2
0.9
3.2
2.9
0.2
4.7
3.9
3.3
Nonalcoholic beverages
1.7
0.2
-0.3
Other prepared foods
n.a.
2.2
2.5
Fats & oils
Fresh fruits
Fresh vegetables
Sugar & sweeteners
Cereal & bakery products
*Average annual compound rate.
Source: Bureau of Labor Statistics and U.S. Department of Agriculture.
•
demand. Conversely, per-capita production declined this
year while prices recovered. Through August, retail egg
prices were up an average of 11 percent over same period
a year ago. In contrast, dairy product prices have averaged only 1 percent higher this year. Milk production is
not expected to keep pace with population growth this
year but price increases have been restrained by lackluster
gains in commercial disappearance.
Fresh fruit and vegetable prices have demonstrated a good
deal of volatility again this year. The seasonal nature of
production and its vulnerability to adverse weather sometimes leads to temporary supply disruptions and large
swings in retail prices. In partietrlar, lettuce prices-an
important component of the CPI for fresh vegetablesposted sharp gains last spring as flooding in Arizona led to
significant production losses and field work in California
was delayed by wet weather. Consequently, the CPI for
fresh vegetables has averaged 8 percent higher through
August of this year. In contrast, fresh fruit production has
escaped major supply disruptions this year and retail
prices have averaged about the same as a year ago.
•
Processed fruit prices were down nearly 5 percent through
August as compared to the same period a year ago, primarily due to a larger Florida orange crop and improved
juice yields. On the other hand, processed vegetable
prices have shown little tendency to increase despite a
production decline. Weak prices and ample stocks
prompted a cutback in the acreage devoted to processing
vegetables earlier this year and production was further
affected by weather-related problems in the Midwest that
caused a decline in harvested acreage and yields. However, the stocks that prompted the acreage cutback have
served to keep a lid on retail prices, which were up approximately 1 percent through August.
The decline in processed vegetable production underscores the concern raised in recent months regarding the
effect of the summer weather on food prices. Though the
wheat harvest is up slightly, corn and soybean production
is expected to be well below a year ago as millions of
acres were destroyed or will suffer reduced yields. Therefore, one might reasonably expect the shortfall in grain
production to support price gains for meat as well as for
processed products-such as fats and oils, cereal and
bakery products, and sweeteners-that use corn or soybeans as raw material. However, most analysts agree the
impact on food prices will be minimal. Despite the decline from last fall's banner harvest, current projections
indicate the corn and soybean harvest will be near the
1989-91 average.
The retail price index for fats and oils has not demonstrated a consistent trend this year with gains and declines
being about equal. The CPI for sugar and sweeteners
declined during the summer while the average level
through August was nearly unchanged from the same
period a year ago. In contrast, retail prices for cereal and
bakery products rose during the summer months and
averaged about 3 percent higher for the January through
August period. However, the effect on the CPI for food at
home is limited by the small proportion of food expenditures accounted for by cereal and bakery products.
Mike A. Singer
AGRICULTURAL LETTER (ISSN 0002-1512) is published monthly
by the Research Department of the Federal Reserve Bank of Chicago.
It is prepared by Gary L. Benjamin, economic adviser and vicepresident, Mike A. Singer, economist, and members of the Bank's
Research Department, and is distributed free of charge by the Bank's
Public Information Center. The information used in the preparation
of this publication is obtained from sources considered reliable, but
its use does not constitute an endorsement of its accuracy or intent
by the Federal Reserve Bank of Chicago.
To subscribe, please write or telephone:
Public Information Center
Federal Reserve Bank of Chicago
P.O. Box 834
Chicago, IL 60690-0834
Tel. no. (312) 322-5111
Selected agricultural economic indicators
Percent change from
Latest
period
Prices received by farmers (index, 1977=100)
Crops (index, 1977=100)
Corn ($ per bu.)
Hay ($ per ton)
Soybeans ($ per bu.)
Wheat ($ per bu.)
Livestock and products (index, 1977=100)
Barrows and gilts ($ per cwt.)
Steers and heifers ($ per cwt.)
Milk ($ per cwt.)
Eggs (0 per doz.)
Consumer prices (index, 1982-84=100)
Food
Production or stocks
Corn stocks (mil. bu.)
Soybean stocks (mil. bu.)
Wheat stocks (mil. bu.)
Beef production (bil. lb.)
Pork production (bil. lb.)
Milk production* (bil. lb.)
Receipts from farm marketings (mil. dol.)
Crops**
Livestock
Government payments
Agricultural exports (mil. dol.)
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)
Value
Prior
period
Year
ago
Two years
ago
August
August
August
August
August
August
142
122
2.20
77.40
6.36
3.01
1.4
3.4
-0.9
0.3
-3.2
5.6
2
4
2
12
18
0
-2
-8
-6
9
12
14
August
August
August
August
August
162
48.00
75.70
12.60
61.3
0.6
2.8
0.7
-1.6
6.4
1
7
1
-7
14
3
-8
6
2
-3
August
August
145
141
0.3
0.4
3
2
6
4
June 1
June 1
June 1
August
August
August
3,709
683
529
2.06
1.39
10.7
35
-2
12
4
1
0
24
-6
-39
-1
7
3
N.A.
N.A.
N.A.
4.1
5.7
-2.7
May
May
May
May
13,530
4,757
7,827
945
-5.2
2.6
2.4
-52.8
9
5
10
30
4
-6
14
-11
July
July
July
July
3,080
91
43
108
-2.1
18.0
8.5
19.3
-6
-38
2
6
5
-44
6
27
August
August
August
August
3,394
2,521
873
619
-16.0
-16.3
-15.2
5.6
3
1
8
5
1
8
-14
9
Farm machinery sales (units)
Tractors, over 40 HP
40 to 100 HP
100 HP or more
Combines
N.A. Not applicable
*21 selected states.
**Includes net CCC loans.
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