Crop insurers could face first loss since 2002 on U.S. drought

July 19, 2012 10:31 AM

July 19 (Bloomberg) -- Crop insurers may face their first underwriting loss since 2002 as the worst Midwest drought in more than two decades threatens the U.S. harvest, according to Iowa State University’s Bruce Babcock.

“The only way they would make a profit is if they saw this disaster coming, because of the low water tables and the low soil-moisture levels at the beginning of the season, and they opted to minimize their exposure in the Corn Belt,” Babcock, an economics professor at the Ames, Iowa-based university, said today. “But the companies have made money year after year after year maximizing their exposure to risk in the Corn Belt because it’s been such a good run of years.”

Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers’ premiums for so-called multiperil coverage, which protects against a loss of revenue or production as a result of drought, hail, wind, frost or other natural causes. Prices for the policies are set by an agency within the Department of Agriculture.

Crop insurers including Ace Ltd., QBE Insurance Group Ltd. and Wells Fargo & Co. will probably face higher costs this year as farmers make claims, Fitch Ratings said in a report yesterday. Private insurers sell and administer multiperil crop insurance in the U.S. In return, the federal government backstops the firms with payments and reinsurance.

Taxpayers may ultimately be responsible for 50 percent to 80 percent of underwriting losses, given the severity of this year’s drought, Babcock said during a media event hosted by the Washington-based Environmental Working Group, which advocates reducing subsidies for growers.

Crops Stressed

Temperatures will approach 100 degrees Fahrenheit (38 degrees Celsius) from Texas to South Dakota through July 28, intensifying crop stress as corn finishes reproducing and soybeans begin to set pods and fill them with seeds, World Weather Inc. said in a report.

Soybean futures for November delivery rose 2 percent to $16.53 a bushel at 12:41 p.m. on the Chicago Board of Trade, after reaching a record $16.7375. Corn futures for December delivery gained 0.4 percent to $7.8725 a bushel in Chicago, after rallying to $7.99. The record for a most-active contract was $7.9925 on June 27, 2008.

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