Ferd Hoefner, policy director of the National Sustainable Agriculture Coalition, forwarded a link to the group’s blog post about organic price elections for crop insurance.
The blog post also contains a link to a USDA Risk Management Agency report to Congress about the agency’s progress toward completion of organic price elections for all insurable organic crops.
From the NSAC blog post, a primer on the issue:
What are Organic Price Elections?
Many organic producers are currently disadvantaged compared to conventional farmers because organic price elections have not been established for all insurable organic crops. This means that, should an organic producer suffer a loss, he or she would receive a payout rate at the conventional price, which is generally considerably lower than the organic price. USDA has issued organic price elections for several crops, but not all.
USDA’s Progress on Organic Price Elections Currently, there are sixteen crops with organic price elections available. Compared to 2013, USDA has doubled the number of organic price elections available for the 2014 crop year, but this still leaves many organic producers unable to insure other crops at prices that reflect the organic premium.
Current Organic Price Elections include:
• almonds (California only)
• fresh apples (Idaho, Oregon, and Washington only)
• avocados (California only)
• blueberries (all types in California; Early to Late highbush type in Oregon and Washington)
• Concord variety grapes (Oregon and Washington only)
• cotton (non-ELS)
• mint (peppermint)
• pears (Oregon and Washington only)
• fresh stonefruit (freestone peaches, nectarines, fresh apricots and plums in California; all fresh stonefruit in Idaho, Oregon, and Washington)
• processing tomatoes (California only)
The blog post from NSAC and the 11-page RMA report will bring readers up to date on the work towards more robust organic price insurance options. But is there a danger in these crop insurance products, the “moral hazard” of producers farming the government instead of their furrows? Read this NPR report of several years ago about “Farm Fraud and the South Texas Watermelon disaster” for a look in at how insurance cheats brought down the watermelon pilot insurance program.
On the issue of organic price insurance, the USDA RMA report states:
RMA would purposely set organic price elections conservatively (when referenced against the data available) to avoid inducing moral hazard and market distorting behavior. Consequently, the organic price elections may fall short of insured producers’ coverage expectations. To do anything beyond this scope may introduce moral hazard behavior into the Federal crop insurance program. For example, a price election that substantially exceeds the actual market-determined pre-harvest/farm gate value creates a serious potential for fraud and market-distortion by interfering with producers’ decision-making processes. There becomes an incentive to produce more of that commodity since a key factor in planting decisions is a producer’s assessment of the expected financial security that attaches to production of the crop, relative to alternative crops. The increased production can in turn affect supply-and-demand interaction, and ultimately, market prices.
Such behavior undermines our ability to offer actuarially sound insurance products since indemnities can accrue due to perverse financial incentives rather than to insured-peril loss events. This is not to say differences between realized season average pre-harvest/farm gate values and RMA price elections do not occur, because RMA is limited in its ability to predict future market behavior. However, RMA is able to minimize the frequency and severity of disparities between price elections and season average pre-harvest/farm gate values when we are equipped with quality price data that provide accurate depictions of what prices have actually been and allow us to assess likely market outcomes for the upcoming crop year.
TK: Can the USDA deliver a useful, actuarially sound crop insurance product for growers that won’t roil organic supply and demand? Not an easy task, but the confidence and approach of the USDA RMA so far is impressive. Perhaps organic growers will trade all their yesterdays for a tomorrow with that kind of risk management tool.