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Local weather Change Will Drive Up Crop Insurance coverage Prices – jj
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Local weather Change Will Drive Up Crop Insurance coverage Prices

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For corn, soybeans and wheat, the model also projects continued movement out of dryland and into irrigated production to mitigate losses, especially for corn in soybeans, where dryland yield declines could be reduced or even reversed and pushed back to higher yields under irrigation, ERS stated. The model shows a significant increase in irrigated acres in Nebraska, Iowa, Missouri and South Dakota areas all around the Missouri River watershed.

Commodity prices rise with lower acreage and production. Under RCP 8.5, ERS projects average corn prices would increase by about 25% over baseline while soybean prices would rise by more than 50%. “Because average prices are driven by average production, the most pessimistic climate models in terms of yield show the largest increases in price.”

The higher prices also imply larger liabilities to be covered, which is a major driver for cost increases for revenue protection insurance policies.

Premium changes

With risk increases for both yield and price risk, premiums increase as well, with premiums changing “most substantially for soybeans,” in most areas of the country, ERS stated. Government exposure could shift as soybean production moves to other parts of the country as well.

Corn will also be affected by substantial increase in yield risk and the increase in corn prices. ERS highlights Kansas and Nebraska as places that could see higher premiums due to lower acreage because of related yield declines. Yet, because of lower numbers of insured acres in those states, the government’s exposure and costs could decline.

Changes will be less significant when it comes to premiums for winter wheat, in which the price changes would be smaller and more localized.

Insurance premiums paid and government subsidies for premium overall could decline in some parts of the country, partly because production for that crop has shifted out of the area.

For corn costs the baseline is 76 million acres insured at a total program costs of $6.847 billion. Under RCP 4.5, the average costs of corn for the insurance program could increase 2% to $6.875 billion to cover 76 million acres. Under the hotter RCP 8.5 scenario, those program costs go up 21% annually to $8.79 billion.

For soybeans costs, the baseline is 56 million acres insured for $1.99 billion in costs. Under RCP 4.5, the program costs go up 41% to $2.8 billion to cover the same amount of acres. Under the RCP 8.5 scenario, the average costs for soybeans would jump 100% to $3.98 billion.

Surprisingly, costs of insurance program for wheat only shifts less than 1% under either scenario.

The report doesn’t take into account how much crop insurance demand could change due to higher premium rates, though the authors note that farmers would likely demand less insurance at higher premium prices, but buy more insurance as the value of the crop increases. Already, farmers in low-risk areas buy higher coverage levels, but farmers in high-risk areas insure a larger fraction of their ground than farmers in low-risk areas.

Other risk factors

The study notes that the work doesn’t include some unmodeled risks, notably what changes in weather conditions will translate into when it comes to pests and diseases. Climate change would increase exposure to both pathogens and pests, the report stated.

Other considerations not factors would include ethanol demand and irrigation (water availability), as well as possible changes in the program design of crop insurance through the farm bill. Lawmakers have already made changes to crop insurance due to climate challenges, such as provisions that allow producers to drop a disaster year from the Actual Production History though yield exclusion.

A full copy of the report can be found at https://www.ers.usda.gov/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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