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REPORT AND RECOMMENDATIONS OF THE PRESIDENT'S COMMITTEE ON CROP

INSURANCE

INTRODUCTION

Frequent severe droughts in recent years have left a trail of suffering farm families, disrupted local business, frozen credit, failure of financial institutions, and other severe consequences. These years of drought and crop failure have followed years of surplus production and glutted markets which also left a trail of failure, bankruptcy, and suffering. Crop failure and surplus production resulting from wide variability in crop yields, suggest the need for some combination of crop insurance and storage of commodity reserves. Such a plan should level out partially the economic effects of fluctuations in production, provide the farmer who suffers a crop failure with some income on which to live, and in years of surplus prevent the added supplies from lending their full force to depressing the prices of farm commodities.

Almost every year there are areas in the United States that suffer from disastrous crop failures. In recent drought years these areas have been extremely large. One of the means by which the Federal Government has granted assistance to these areas has been the seed and feed loans. Since 1921 these loans have been made available in 11 different years.

In 8 of the 11 years loans have been made in North Dakota, Montana, and .Florida. In 7 of the 11 years loans have been made in South Carolina, North Carolina, Georgia, Alabama, Virginia, New Mexico, Idaho, and Washington. In 6 of the 11 years there were loans in Indiana, Illinois, Missouri, Minnesota, South Dakota, and Oklahoma. In 5 of the 11 years such loans were made in Pennsylvania, Ohio, Michigan, Iowa, Nebraska, Kansas, Delaware, Maryland, West Virginia, Kentucky, Tennessee, Mississippi, Arkansas, Louisiana, Texas, Wyoming, Utah, Nevada, and Oregon.

In all, 36 of the 48 States have made some use of Federal seed loans in at least 5 out of the 11 years when such loans were made available. In 1932, 1934, and 1935 every State except Rhode Island obtained seed loans, and in 1933 one loan was made in Rhode Island.

In the more recent years, the Federal Emergency Relief Administration, the Works Progress Administration, and the Resettlement Administration have also contributed to Federal relief for crop disaster.

The programs of the Agricultural Adjustment Administration during the last 3 years were a large factor in caring for relief necessary as the result of droughts. For many farmers whose crops were a complete loss, the adjustment payments were the only source of income. These payments have helped farmers in drought areas through the period until a crop could be grown in a succeeding year. Purchases of cattle and sheep in drought areas under the supervision of the Agricultural Adjustment Administration also proved to be a great help in the drought years when feed supplies were depleted.

The activities of the Agricultural Adjustment Administration in administering the Bankhead Cotton Act provided a practical illustration of the benefits of a system that approaches crop insurance. Farmers who had more certificates than cotton were enabled, through county pools and a central pool, to sell those certificates to farmers who had surplus cotton. In 1934, as the result of the drought, farmers in the western part of the Cotton Belt who had lost all or part of their crop sold substantial amounts of certificates to farmers in the eastern part of the belt who had bumper crops. This provided a source of income in those years for the farmers in the western part of the belt.

HISTORY OF CROP INSURANCE

Crop insurance has long been under consideration in several countries. Various plans have been tried. It is of interest to note that one of the most complete analyses of the principles of erop insurance was made before 1888. The Japanese Government called on a German economist to make an analysis of the subject of agricultural insurance. The report is found in a book entitled “Agricultural Insurance: Notes on Agricultural Insurance in Organic Connection with Savings Banks, Land Credit, and the Commutation of Debts”, by P. Mayet, written about 1889.

The report calls attention to the desperate economic condition of Japanese farmers and the large number of farm foreclosures. It points out that agricultural relief funds cared for those who were absolutely destitute, but that they did not provide assistance until the farmer actually was reduced to want. Insurance is desirable as a protection against losses that might reduce farmers to the position of needing relief. The author of the report recommended crop insurance as part of an integrated program, including relief and commutation of taxes, as a means of meeting the problem of crop failure, irregularity of income, and frozen credits.

It was about 30 years later that crop insurance received wide public attention in the United States, although a small experiment had been made by a private company in 1899. In 1917, three companies attempted to write insurance on small grains in the spring wheat area. This attempt at crop insurance failed partly because of the drought in the first year of its operation and partly because insurance was written after it became evident that there would be substantial crop losses. The most outstanding attempt made by private insurance companies to write essentially all-risk crop insurance on the major field crops, including cotton as well as grain, occurred in 1920. One company assumed a very substantial volume of such business and other companies showed inclination to follow its lead. This attempt again proved costly to the companies, the losses greatly exceeding the premium income. The insurance guaranteed the farmer a stipulated income per acre, which involved not only insurance of yield but insurance of price.

Some of these companies, in 1921 and in subsequent years, continued to write a limited amount of insurance most of which was on fruit and truck crops. This insurance covered mainly loans or advances to farmers secured by such crops. Only a very small amount of such insurance has been written in recent years.

In 1931 and 1932, a small company in Kansas attempted to write field crop insurance. It lost money in a year of bumper crops because of the severe drop in prices. This company also had attempted to insure the farmer against price hazards as well as natural hazards.

In all of these cases, one of the most serious handicaps was the lack of adequate crop data and a satisfactory actuarial basis upon which to base insurance rates.

The subject of crop insurance has been almost continuously before Congress and the Department of Agriculture since the time of these private experiments. Hardly a year passes that a bill is not introduced in Congress to provide for Government crop insurance. The Department of Agriculture throughout these hears has continuously received requests for information about crop insurance and has received many suggestions regarding plans for governmental handling of it. Crop insurance is therefore a subject that has had nearly 20 years of continuous public attention in the United States, although it is true that most of this attention has followed years of crop disaster.

Notwithstanding the fact that attempts at crop insurance have largely failed, the present situation not only calls for reconsideration of the whole question but also warrants the belief that a plan can be devised that will be more successful than have been the limited attempts in the past. Those attempts failed for several reasons, among which were (1) the limited area in which the insurance was put into effect thus making it subject to the danger of extensive crop failures with but a limited spread of risk; (2) attempts to insure income rather than yield losses alone, thus in effect writing insurance against price decline as well as against crop failure; and (3) inadequate data for determining degrees of risk and a satisfactory actuarial basis of insurance.

The large obligations that the Government has assumed in recent years on account of droughts and other disasters affecting farm production are one of the indications of the desirability of governmental assistance in devising crop insurance on a scale that will extend the risks over areas so large that crop failures in a single region will not result in the failure of the insurance plan. Moreover, data now available have made it possible to determine the nature of insurance and the extent of risk coverage that would seem to fall within the possibilities of a sound insurance program. Thus, the results of previous attempts at crop insurance have contributed valuable experience for new attempts and need not be regarded as conclusive evidence that the objectives of crop insurance are impossible of successful accomplishment.

STUDIES OF CROP INSURANCE IN 1936 The Agricultural Adjustment Administration in its work during the past 3 years has gathered a vast amount of data regarding acreage, production, and yields on individual farms throughout the country. These data have made possible for the first time a detailed study of crop losses and probable premium rates. Some of the significant results of such a study, including probable premium charges on individual farms, appear in the appendix.

The Bureau of Agricultural Economics early in 1936 began to analyze these data to determine whether they might provide an actuarial basis for crop insurance. Work was started in January on records of wheat farmers. Tabulation of these data early in the year indicated that reliable and dependable rates for insurance coverage and premiums might be determined. Analyses of data are now being made for cotton and corn as well as for wheat. The work, while not completed to date, provides a basis for outlining a plan of crop insurance. These data, when the analyses are completed, will be essential in the administration of any crop-insurance program.

MEETINGS WITH FARMERS AND OTHER GROUPS In conformity with your suggestion, your committee has consulted with “national farm organization leaders so that the plans can be submitted to Congress with the approval and support of the representatives of the farmers." In addition, your committee has consulted with representatives of insurance interests and with representatives of the industry warehousing farm products.

On November 5 a conference was held with representatives of stock and mutual fire and hail insurance companies. Members of this group expressed themselves as believing that any national program of crop insurance would be too, large an undertaking for private companies. They expressed willingness to cooperate if the Government undertook such a program. Pursuant to an agreement reached at the conference, the companies sent actuaries and technical experts to work with the Department of Agriculture, examining the methods used in the departmental studies and offering suggestions for their improvement.

Four representatives of the insurance companies met with representatives of the Department of Agriculture to analyze certain proposed insurance and actuarial procedure. They also made available to the Department reports of their own experience in this field. All of this was most helpful in developing the plan herein recommended.

As the proposed plan presents problems of storing the commodities insured, your committee met and conferred with warehousemen engaged in the storage of commodities for which possibilities of crop insurance were being considered. Suggestions were made by some representatives that storage space in the case of wheat could be obtained at one-half the usual commercial rates if the storage facilities were to be used continuously. The warehouse representatives expressed themselves as willing to cooperate. They were of the opinion that available storage space was ample for the present.

Your committee met with representatives of the national farm organizations on October 17. It was decided that a larger meeting should be called on November 7, at which representatives of other farm organizations and the farm press could be present. “A resolution was adopted on November 7 by the assembled representatives which reads:

"Resolved, that the primary need of agriculture is adequate prices and we, therefore, urgently recommend the strengthening of the present program to maintain parity income as an aid to the stabilization of supplies of farm products in the interest of both producers and consumers. We recommend a permanent program of surplus storage and commodity loans, with voluntary crop insurance in the cases where a practical program can be devised. No program of storage or insurance can be permanently effective, however, unless coupled with some effective means of controlling production and distribution of farm produce.”

It was apparent to your committee that wheat producers and their representatives participating in this conference, manifested deeper interest in crop insurance than did producers of other commodities. However, interest in crop insurance on the part of spokesmen of producers of cotton, corn, tobacco, and vegetables was clearly evident. Following this meeting, your committee received numerous requests from wheat growers and their representatives that they be given a special hearing. Hence the committee met with representatives of the wheat organizations on December 2. At that meeting the wheat producers and their spokesmen went on record as favoring a system of crop insurance combined with a system of commodity loans on grain in storage. A copy of their recommendations is included in the appendix of this report.

A GENERAL PLAN FOR WHEAT CROP INSURANCE Your committee, as a result of its study and conversations with the various groups mentioned, has concluded that a crop-insurance program should be developed by the Government. It believes that such a program should apply at first only to wheat.

In view of past failures of crop insurance where an attempt was made to insure price, it is believed that payment of both premiums and losses should be in kind or cash equivalent. Such a plan would have the effect of storing up reserves of wheat in years of large crops and releasing them on the market in years of crop failure. This would tend to reduce the fluctuations in the market supply and the fluctuations in price of wheat. Further, it would provide the country with assurance that in case of severe crop failure a reserve supply of wheat would be available.

The committee believes that the administration of any plan of crop insurance should be assigned to the Department of Agriculture where the opportunity exists for integrating this function with other duties and functions of that institution. Local administration of the program should be largely intrusted to the county and local committees established by the Department in cooperation with State agencies for the administration of the Agricultural Adjustment and Soil Conservation and Domestic Allotment Acts. These committees have demonstrated their ability in local administration of farm programs.

The amount of insurance on any farm would be determined by the average yield on that farm. The farmer would be insured a yield up to some predetermined percentage of his average yield. If his yield should be less than the specified premium, he would be indemnified for the difference between what he actually produced and the amount of the insurance. This plan would not provide excessive insurance for the farm that has low average yields, nor would it provide too limited coverage for the farm that has high yields. Indemnities in certain cases might be paid in wheat; or, if more practicable, the wheat might be sold and the cash forwarded to the farmer. As an alternative the farmer could be granted a participation certificate to sell as he saw fit, but he would bear any storage costs after the time set for loss settlement.

The premium charged for this insurance.would also be in terms of bushels of wheat. The farmer, under favorable circumstances, might pay his premium in kind by delivering wheat to a local elevator authorized to receive such wheat. The wheat would then be stored in that elevator or shipped to some other point for storage. Because it might often be impracticable to pay premiums in wheat, the farmer should have the option of payment in cash equivalent. In that event the insurance organization would accept cash from the farmer and buy wheat for storage at some convenient point.

Your committee is of the opinion that the premium rate should be determined on the basis of two factors—the loss experience on the individual farm insured and the loss experience of the county or area. The two factors should be given equal weight as a rule but exceptions may be made where injustices arise because of the short period for which data are available. The adjustment of the premium rate by the county or regional average is felt to be necessary because the experience of the 6 years, 1930–35, on one farm may not be representative of local risks. The principle of basing the premium on both area experience and farm experience has brought favorable comment from both farm and insurance groups.

In the studies of yields and variability of yields it has been discovered that in some counties, or sometimes on individual farms, accidents like hail, insect infestations or floods, that occur perhaps once or twice in a generation, have resulted in higher losses per acre for the 6 years than would appear to be justified if a longer base period were used. It seems obvious that local committees should be given discretion within limits to handle such cases, and outside of those limits the Department of Agriculture should be given discretion to make adjustments within certain limits. If later experience proved that the circumstances were not exceptional but a part of the normal hazard to be expected, the special adjustments would be withdrawn.

The principle of basing premiums on a combination of the loss experience of the individual farm and the loss experience of the county or area is illustrated in table 1. It is to be noted that in the case cited as an example in this table, indemnification would have been required in 1932 and 1934, a total of 8 bushels per acre for the 6-year period, or an average of 114 bushels per acre per year. This example assumes insurance against a reduction in yield below 75 percent of the average for the farm.

It is felt that a plan of this kind will not transfer the losses of incompetent and shiftless farmers to the more competent and industrious farmers. Nor would farmers on good land be required to pay the losses of farmers on poor land. Further, wheat areas of high and regular production would not have to pay the losses of wheat areas of low and uncertain production. Thus the plan proposed would not encourage expansion in agricultural production in areas where risks are commonly great.

The studies of sample farms show wide differences among the various regions in costs of crop insurance for wheat. In some areas long recognized as good farming territory the costs appear low, while in other areas the costs appear high. In

fact in some areas the costs appear to be prohibitive. These studies, particularly when data are available for a longer period than 6 years, would provide an adequate method of defining areas where the average income because of crop losses is insufficient to maintain even a minimum standard of living. This is a significant byproduct of the study that bears on local, regional, and national land-use policies.

TABLE 1.-An illustration of the procedure suggested for determining the amount of

insurance and the premium charge for a single farm

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This procedure was followed for 75 sample farms in each county. However, in combining the individual farms to obtain a 6-year county average indemnity per acre a slightly different procedure was used. First the average indemnity per acre for all 75 farms in 1930 was determined, weighting each indemnity by the wheat acreage planted on the farm. The same procedure was followed to find the county average indemnity per acre in each year. Finally the county average per acre indemnities for all 6 years were averaged without weighting. Acreage weights were not used in combining the 6 years because to do that would assume that in future years the same combination of high or low indemnities with large or small acreages would be repeated as occurred in the years 1930–35.

Assuming that the 6-year county average indemnity per acre was determined to be one bushel, the method recommended for determining the annual premium on the above farm would be as follows:

Bushels Average annual indemnity per acre for farm ---

--------------------------. 173 Average annual indemnity per acre for county-----

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Total.

--- 242 Suggested annual premium per acre for this farm, 243 bushels-2=1% bushels.

The accompanying map (fig. 1) shows, by counties, the average annual cost per acre in bushels of insuring the yield of wheat up to 75 percent of the average yield for the insured farm. Figures numbered 3, 4, and 5 in the appendix show in more detail the cost of insuring crops in five widely separated counties representing typical wheat-producing areas. These figures show that the problem of insuring the wheat crop is not the same in all areas. Necessary premium rates vary with insurance coverage in a different manner in the different areas.

The details of operation of the plan suggested may be illustrated as follows: At or about the time of seeding, a wheat farmer, if he desired, could apply to his local committee for a crop-insurance policy. The committee would determine from past records of his farm the amount of insurance in bushels per acre to be granted, and the premium to be charged. The committee would check the acreage planted and the quality of land in wheat as compared with land that had been in wheat in base years. Immediate payment of the premium would not be required if a lien on the crop or other security were given.

An attempt should be made to work out a plan of premium payments that will permit farmers to pay premiums for as much as 5 years in years of large crops. This would have the advantage, dealt with more fully in the next section, of contributing to the working of the principle of the ever-normal granary. By paying premiums in years of plentiful production, an additional outlet for surplus wheat would be furnished, thus contributing to greater stability of prices in those years.

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