Does Crop Insurance Involve Moral Hazard?

[Jim Meade / Iowa City]

The term "moral hazard" has nothing to do with ethics, as in fraud or deceit.  The meaning of the term has been modifided since it was first used in the 17th century.

If someone has a car with low insurance premium, low deductible, and high likelihood of payment, the idea is the person may be a more risky operator and will more likely file small claims for minor dings and such. 

From Widipedia, "Economist Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."[2] Financial bailouts of lending institutions by governments, central banks or other institutions can encourage risky lending in the future if those that take the risks come to believe that they will not have to carry the full burden of potential losses."

Is there moral hazard in crop insurance?

Does a corn grower in Illinois have the same likelihood of a crop failure as one in North Dakota or Maine?  Do you know of anyone who grows crops on bottom ground that gets flooded regularly?  Are they farming the ground or the insurance?

As a whole, farming probably does not have much moral hazard, but when you look at certian crops in certain areas, it makes you wonder if some farmers are not accepting high risk becuase they have a good chance of being bailed out.

What do you say?  Does the system have it built in so this is figured in?

[SWMN native]

Answer:

Yes and Yes

In the Northern corn belt in MN, we have a risk/reward calculation in corn planting dates.  Plant earlier, you can plant later hybrids, use more of the growing season, and get higher yields.  Plant too early, and your corn gets frozen off.  There's expense to re-planting, and your re-planted corn is behind the corn that is planted a week later, and may be germinated, but not yet emerged when it freezes.

Solution:  Plant the earliest that crop insurance will let you:  If you get away with it, you get higher yields.  If you don't, collect crop insurance.  Heads I win, Tails you lose.

Another, back in the day, in our community, there was a 1/4 section that had a high, light 80 acres, and a low heavy wet 80 acres.  There was a string of tennants on it.  It was tricky to farm.  Finally, somebody figured out a way to insure it as two seperate farms.  In an exceptionally wet year, the high land yields well, and you collect crop insurance on the low ground.  In an exceptionally dry year the low ground yields well, and the high ground burns-up.  So, you collect crop insurance on it.

[Packard27]

Full disclosure: Veteran layman-amateur here, who has always had a great deal of difficulty in distinguishing shinola from Coca-Cola for anything pertaining to farming.

__________

Okay, so the question is, does crop insurance introduce moral hazard into farming? Let me suggest that ordinary insurance, by itself would only introduce modest amounts of moral hazard to a farming operation. This is because ordinary insurance, being what it is, would periodically adjust its coverage and premiums due to the ongoing risks and rewards of the insured. In other words, whether we are talking about a lousy farmer or a ne'er do well reckless driver, eventually the insurer cancels the policy due to undo risk. Unsurprisingly, regular insurance companies are in the business to make money.

Government subsidized insurance, of course is different. The government is usually in a position to assume a great deal more risk without worrying about having to answer to their shareholders. In subsidized insurance policies, like flood, crop, or mortgages; moral hazard increases. This occurs when you start playing with other people's money...if that makes sense?

[sw363535]

What government program does not create a Moral Hazard,,,,,,,,,, after all it is always somebody elses money.

[BA Deere]

Without the government subsidy, it would be too high priced for those with "ice cream soils" who rarely have claims, it would really really be high priced for those farming the fringe, so the government with their cheap food policy have their thumb on the scale.  But those fringe farmed cattle pasture acres are what make the difference in the carryover and ultimately the grain prices.  It`s like paying health insurance when you`re 20, single and no kids and wonder why your premiums cover the expense of couples having babies.  Well in that case, you end up getting married and having babies and some other poor unmarried 20 yr old sap is helping you out with your premiums.

But it`s kind of that way with seed corn prices too, some seed co`s furnish feed seed if you have to replant.  That`s okay if it`s a problem with their seed, but some of these crazy fools would plant in March if they could drag a planter across the field, knowing if it fails they`ll get free seed, all they`re out is their time and a little wear and tear on the planter.  But the money for their replant seed comes from somewhere, those that are sensible end up paying a little more for their seed because of them. 

[k-289]

Still  remember  the  days  when  folks  said  get  the  government OUT OF MY WAY - freedom to farm  -  aahhhh till things go a little south - then we do what call on UNCLE SAM - contact your lobbyist also ---

Also plant more corn in the high plains instead of wheat  & milo ---

[BA Deere]

Production agriculture is kind of funny these days, if the money earned from the sale of grain and livestock was all that was used to buy the machinery/toys, it`d more resemble Belarus, Russia around here. Years ago it was just the "Tractor Supply cowboys" that were accountants by day and run 5-10 cows on the weekends to justify their Ariats.   Now it`s on a bigger scale, someone with a chain of car dealerships sees the countryside as their giant sandbox...whether they really make money, they make so much peddling cars they need a hobby/business to park all that extra cash.  But they produce the bushels that go to market nonetheless.

Alot of the feeder cattle comes from 75-80 yr old farmers that rent their ground out, but keep a few cattle as a hobby...and nothing wrong with that, I may do the same one day.  But you`ve got quite a few feeders produced by retired guys that are on social security. 

Those with the gimicks such as that get their enjoyment out of their work as the Good Book says you should do.  But, who knows the real costs if these hobbiests were out of the equation.   To keep the cheap food ponzi scheme going, I suppose Uncle Sugar has to dangle a few carrots in front of the mules.   🙂

[Packard27]

Oh well, never mind any of that now. July corn just hit $4.18 and July sobeans are at yearlong highs. This is encouraging news for growers.

An incompetent (NSA, Immigration, VA, HHS, TSA, Homeland Security, etc.) and corrupt (DOJ, IRS, State Dept, FBI, EPA, etc) federal government aside, in addition to the federally fed moral hazards galore, and an exploding $19 trillion national debt; life is indeed getting better...for a few select household income brackets. ANF my friends...ANF.

So if it applies to you, just break out the champaigne and party like it is 1788 Versailles all over again. What is the worst that can possibly happen going forward?

[hardnox]

I suppose- a government safety net in general certainly does. The message has been clear- keep the pedal moderately to the metal because if things get tough the government will always come through. And that becomes self-reinforcing as everybody who matters is postured in that way.

As far as the angle that says we get a lot more acres because of the insurance guarantee, I'm not so sure. I'd guess that within 10 counties of me in any direction the amount of acres that wouldn't get farmed without insurance is so small as to approach 0 statistically. Rents might be lower on those acres but even with an implied return at 0 somebody's going to try it, and somebody after him.

I'm sure there's a bit of that on the fringe areas and it may influence how people farm it- what they plant etc.

One interesting bit of moral hazard is APH, which is effectively the new Corn Base. When prices were much higher the economic incentive was there to do a lot of stuff- most expensive genetics, fungicides etc., that may only be marginally profitable at current prices.

But if you make the switch to LISA type practices you're going to sacrifice some future guarantees.

In that regard it is moral hazrd directed to the benefit of the imput producers.

[sw363535]

BA
As I remember a healthy crop insurance industry existed long before Usda took it over and turned it over to their partners in the new "insurance" industry.