Insurance Alarm Bells
Crop insurance programs are starting to accommodate new knowledge about farmland resiliency. Expect coverage to change and conventional production premiums to ramp up.
A recent look into insurance and moral hazard concluded that even though opting out might feel dangerous, it’s actually more counter-cultural than it is financially risky. Now’s a good time to re-run the math on self-insuring, with premiums on the rise nearly everywhere.
Today’s research from To Graze provides an excellent look at crop insurance dynamics, highlighting alarming projections made by a Lloyd’s of London modelling exercise. The report also looks at where payouts are landing, based on data collected by the Environmental Working Group (EWG) from the USDA’s Risk Management Agency (RMA).
EWG goes on to report that indemnities for drought increased from $325 million, to $1.65 billion, between 1995 and 2020. This is a compelling reason all by itself for crop insurance to manage risk in new ways.
Flipping Incentives
For the sake of argument, let’s assume government agencies realize spending taxpayer funds to incentivize high-input monocropping isn’t sustainable, and shift to protecting climate-resilient land management practice adoption instead. In this case, crop insurance premiums might rise in step with a farm’s carbon intensity, and decline in exchange for biodiversity restoration.
It is not hard to imagine how shifts like this could flip the script for farmland management economics, in particular in North America where practices known to cause soil depletion, water scarcity and nutrient runoff are all in some way perpetuated by government crop insurance. In fact, it would seem almost urgent for insurers to shift how they cover crop loss… in order to protect themselves.
In the meantime, there are plenty of examples of farmers opting out of crop insurance even at the subsidized rates. They see firsthand how biodiversity creates resilience to drought and heavy rains better than insurance can, and realize that they no longer need it.
This begs the question: what role should crop insurance play in post-industrial agriculture?
Harmonization
As Civil Eats reported recently, there may be changes coming soon in how the RMA provides coverage for climate-friendly land management practices such as intercropping and managed grazing. This is necessary to harmonize incentives between agencies because currently crop insurance penalizes these practices, while the National Research Conservation Service (NRCS) – another branch of the USDA –subsidizes them.
The same discrepancy in government funding is happening in Canada, for example with Ontario’s new Resilient Agricultural Landscapes Program. It will flow federal-provincial funding through the Ontario Soil and Crop Improvement Association (a non-profit) to subsidize natural grassland establishment, perennial biomass, warm season pastures, reduced tillage, tree and shrub planting, water retention features and wetlands. Some of this money will go to farmers taking crop-insured fields out of high-intensity monocropping.
Summary
To Graze’s author Niall Haughey goes on to conclude that “looking at land values by soil quality is critical for sustainable agriculture as the ultimate incentive.” Insuring fields for better practices and penalizing those that cause negative environmental externalities will be a significant part of the overall fix.
It is true that carbon asset offtake markets are “a long way off from paying a genuine premium for sustainable produce,” according to Niall, but the markets for carbon intensity (CI) scores are advancing, backed by data reporting from farms on fertilizer and pesticide applications, crops seeded, yields, fuel used (diesel and natural gas), manure applications, tillage, and cover crops not harvested. Tax credits coming into play in the fall of 2024 through the Inflation Reduction Act (IRA) in the U.S. will amplify the momentum.
Finally, here in Canada, commercial programs offering up to $100/acre are turning up in different regions, sometimes under pilot projects, for different crops going to various buyers. The one thing they all have in common is that they’ve been designed to help corporations gather data on Scope 3 emissions, and to earn ESG points for supporting practices that will demonstrate reductions in the years ahead.