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Timely payment of losses is an essential part of a crop-insurance plan. In case of complete loss, adjustment would be made as soon as such loss has been staisfactorily established. In case of partial loss, adjustment would not be made until after the crop has been harvested and production determined.
STORAGE As pointed out in a previous section, under the plan which your committee is proposing, the premiums would be paid in wheat or, if paid in cash equivalent, the cash would be invested in wheat. Since the premiums would exceed indemnities in years of large crops, a reserve of wheat would be built up. Figure 2 shows for seven Great Plains States (Montana, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, and Texas) how in the period from 1930 to 1935, as an example, the premiums would have exceeded the indemnities in the first 3 years. The
Difference Between Premiums and
* FIGURES BASED ON INSURANCE COVERAGE OF 75 PERCENT OF THE AVERAGE YIELD ON THE INSURED FARM
U.S. DEPARTMENT OF AGRICULTURE
BUREAU OF AGRICULTURAL ECONOMICS
wheat representing premiums paid in excess of losses would have been stored as a reserve to meet the excess of indemnities over premiums in the last 3 years.
This plan would contribute to reducing fluctuations in market supplies and prices of wheat. Wheat would be taken off the market in years of good crops since premiums in such years would exceed indemnities, and would be put back on the market only in years of poor crops when indemnities would exceed premiums. Because the reserves would be definitely held for the distinct purpose of indemnities in poor crop years they would not be a potential supply at all times on the market. The accumulation and release of reserves would be automatically regulated by the crop-insurance requirements.
Insofar as this device tended to reduce fluctuations in prices and income, wheat producers, as a whole, would be benefited. Even with this possible effect, substantial fluctuations in market supply and prices would still result from large and small annual production. Nevertheless, participants in the proposed plan would be setting aside mutually owned reserves in years of surplus production, ordinarily years of low prices, to be sold in years of short crops, ordinarily years of better prices. The price line of figure 2 illustrates how reserves stored in 1930–32 would have sold at higher prices in 1933–35.
Table 2 shows in bushels of wheat what the reserves or deficits might have been in 1930 to 1935 under such a plan. If half of the wheat acreage in each State were insured, the maximum accumulation of reserves during the years. 1930–35 would have been 72 million bushels. The maximum deficit, if years of shortage had preceded years of surplus, would have been 70 million bushels.
In any plan of wheat storage, it is probable that both country-elevator and terminal-elevator space would have to be used. It is doubtful that farm storage of wheat would be practicable in all areas. In the case of corn, if a plan should be developed for that commodity, farm storage would not only be practicable but highly desirable because a large percentage of the corn crop is fed on farms near the point of production.
If wheat reserves were stored for a long period, it would be necessary to replace old wheat with new wheat at intervals in order to avoid deterioration.
TABLE 2.- Probable amounts of wheat that would be involved in a crop insurance "in
kind” plan based on the 1930-35 experience assuming that the insurance coverage would be 75 percent of the average yield on the insured farm and assuming that half of the acreage planted to wheat in each of the States were insured
ARRANGEMENT OF YEARS-NO. 1
Method.—The method used to determine the total indemnities was to apply the average indemnity per acre per year in the sample data to one-half the acreage planted to wheat in each State in each year. Similarly the necessary premium per acre for sample data was applied to one-half the acreage planted to wheat in each State in each year. The variation in total premium is due only to variation in acreage, for the premium per acre would be the same each year. Per-acre data for a few minor wheat-producing States have not yet been completed and estimates for those States are omitted.
Maximum accumulation of reserve wheat.-The cumulative balance column shows the excess of premiums collected over indemnities paid. It so happened that in each of the years from 1930 to 1935 the indemnities that would be required increased each year over the preceding year, the smallest being in 1930 and the largest in 1935. Thus, this arrangement of years probably shows the maximum accumulation of grain that would occur in any similar 6 years, barring possible exceptions for slight variations between years in premiums collected. It should be noted that the maximum accumulation of reserves would be about 72 million bushels.
Maximum possible deficits.—Under any plan with premiums based on average experience over a period of years, it is quite possible that the losses in early years might exceed the premiums collected. The maximum deficit so incurred would have developed if the order of years had been reversed, barring possible minor variations for slight differences between years in premiums collected. It will be noted that the maximum deficit in any combination of a similar 6 years would be about 70 million bushels.
The reference made in this report to the effect which the proposed insurance plan might have on reducing fluctuations of market supply and price calls for explanation here as to wherein the plan discussed differs from other governmental stabilization attempts that have had limited success or were outright failures.
First, the influence toward greater stability of supply and price which the proposed insurance plan would tend to exercise is incidental to the plan itself and not a primary objective.
Second, under this plan no governmental agency would be in the market buying or selling the commodity for price-control purposes, whereas stabilization operations have had this as their central feature. In the proposed program the cropinsurance agency would buy commodities only at a rate and to a total amount that would equal the payment of premiums in cash by farmers. Such purchases would be made at the prevailing market price and not at an attempted pegged price. Moreover, the insurance agency would not control the sale of the wheat acquired as premium payments. The sale would take place at the independent choice of the individual farmer upon settlement of his losses. For example, a farmer who in a year of loss may be entitled to receive 500 bushels of grain to cover his losses, would be at liberty to order the sale of that amount after loss adjustment.
Third, the crop-insurance agency under the proposed plan would not operate so as to invite arbitrary pressure to buy and sell at selected times because the rate of acquisition of the commodity would be dependent wholly upon the acreage covered by crop insurance contracts and the premium rate specified in the insurance policy. Moreover, the sale of the commodity would take place, as indicated above, at the choice of individual participating farmers, at a rate which likewise would be governed largely by the degree and extent of crop losses incurred by producers.
It is clear, therefore, that the stabilization feature of the proposed plan while potentially important is only incidental to the objectives of crop insurance and that it does not invite arbitrary manipulation. Ultimately the stabilization feature of crop insurance paid “in kind' might attain considerable significance.
CONSIDERATIONS OF PUBLIC POLICY The question naturally arises as to whether crop insurance should be a private or public enterprise. Private companies have tried all-risk crop insurance, but after repeated losses have practically retired from the field. Crop insurance on a large scale would probably be a larger enterprise than any one company or group of companies would now desire to underwrite. This is borne out by statements of executives of representative insurance companies with whom your committee has conferred.
It is clear that any comprehensive program of crop insurance, combining yield insurance and storage of commodity reserves, would be outside the field of private insurance. It appears to your committee that crop insurance must be integrated with other farm programs in order to serve its purpose most fully. It thus seems to be a function which should be performed by public agencies.
The program of crop insurance recommended in this report is not conceived of as a substitute for any farm program now being administered by the Department of Agriculture, but as supplementary to other programs. This crop insurance plan is intended to meet, in part, the problems arising from fluctuations in production. It is not intended to meet problems of production adjustment and soil conservation. A program of crop insurance should be closely integrated with other programs. Participation in adjustment and soil conservation programs or the following of equivalent farm practices should be required for eligibility to participate in crop insurance. It is sound practice for any insurance organization to refuse insurance to those who do not take reasonable precautions against avoidable hazards.
A crop insurance program, even for wheat only, should reduce to a considerable extent the necessity that has existed in the past for seed and feed loans, drought loans, and similar relief. It should reduce the need for Federal programs such as were carried out in the drought areas by the Federal Emergency Relief Administration and the Works Progress Administration. It should reduce and perhaps eliminate some of the temporary situations that required help from the Resettlement Administration. Crop insurance should assist many wheat farmers to help themselves in such emergencies. The Government would be justified in contributing toward the administration and storage costs in a crop insurance program, because insurance would reduce the need for assistance from Federal agencies. (See appendix pp. 29 and 30.)
The benefits to the consumer and the people at large would also justify public contribution. A reserve supply of wheat to meet years of crop failure is a public benefit that cannot be overlooked. Furthermore, the consumer as well as the farmer would be benefited by more stable prices that such a system might bring about. In addition, more stable farm income is unquestionably of significance to the public at large.
Crop insurance would undoubtedly be of real value to banks, insurance companies, and other institutions extending farm credit. It would be of vital importance to the farmer in maintaining his credit following a crop failure so that he might borrow for production needs in subsequent years.
Wheat crop insurance would probably find its greatest usefulness in the Great Plains States, where it is perhaps needed the most because of the wide fluctuations in yields, and where most of the Nation's wheat is produced.
1. That a plan of crop insurance for wheat be recommended to Congress for consideration at an early date so that it may be put into effect on the 1938 crop.
2. That administration of any crop insurance program be a function of the Department of Agriculture, coordinated and integrated with the other programs and functions of that Department.
3. That in view of the public interest in crop insurance, including a greater degree of stability of supplies and income, and reducing prospective special measures of relief to distressed areas, the costs of storage should be borne by the Government, together with all overhead costs of administration. Adequate funds, should be made available to the administering agency to meet requirements for:
A. Overhead administrative expenses.
C. Reserves adequate to meet extraordinary needs such as might arise out of a series of low yields during the early years of operation of the program.
4. That any proposed legislation provide for:
B. Employing the farmer's own average yield as determined from a representative base period, as the basis of insurance coverage.
C. Insurance of only a designated percentage of the producer's average yield.
D. Determination of premiums on the basis of individual and regional loss experience. · E. Payment of premiums and indemnities in kind or cash equivalent.
F. Holding insurance reserves in the form of the stored commodity for which the insurance is written.
G. Writing of insurance, adjustment of losses, and general local administration through local committees or boards of directors.
5. That the premiums charged the insured be such as actuarial studies and accumulated experience indicate are necessary to cover crop losses for a period of years.
6. That the administering organization be authorized to require a minimum amount of participation in the crop insurance program from counties or regions before the insurance will be sold therein.
7. That storage of wheat reserves for insurance purposes shall be made in Federally bonded warehouses or State-licensed warehouses that satisfactorily meet requirements or in other ways that will adequately protect the interests of the Government and the farmers insured.
8. That crop insurance research be continued by the Department of Agriculture in order to facilitate administration of any crop insurance program that may be instituted.
LETTER FROM THE PRESIDENT OF THE UNITED STATES TO THE SECRETARY OF AGRICULTURE APPOINTING CROP INSURANCE COMMITTEE
THE WHITE HOUSE,
Washington, September 19, 1936. Hon. HENRY A. WALLACE,
Secretary of Agriculture, Washington, D. C. DEAR MR. SECRETARY: The Government's long-time drought and land use program should be completed and put into operation at the earliest possiblo moment and immediate steps are to be taken with this objective
I am appointing two committees of representatives of Federal agencies to head up this work, to confer with farm organization leaders and others on the problems, and to develop specific programs.