The threat to crops is high.
The U.S. Drought Monitor today said moderate to severe drought expanded to 64 percent of the lower 48 states in the week ended yesterday, up slightly from the previous week. Yesterday, the Department of Agriculture designated 76 more counties as natural-disaster areas, bringing the total to 1,369 in 31 states -- 44 percent of those in the entire country. The USDA last week said 88 percent of the nation’s corn crop and 87 percent of soybeans were in drought-stricken areas, making the conditions the worst for farmers since 1988.
Higher commodity prices mean higher insurance payments to farmers, who are able to buy policies that are linked to the price of their crops at harvest time. Theoretically, that means growers, who often insure 70 percent to 75 percent of their crop, can end up with a bigger payday if their crop fails and prices rise than if they harvest their full expected crop while prices are stagnant.
The price of corn, the biggest U.S. crop, closed yesterday at $7.88 a bushel on the Chicago Board of Trade, up 20 percent from March 1, as the planting season was getting under way. Soybeans gained 22 percent in that period and wheat 36 percent.
And the higher the indemnities, the greater the share that the government chips in, protecting the companies such as ACE and Wells Fargo from overwhelming losses. The government also takes a share of underwriting profits.
Insurers aren’t protected from all losses.
“Drought conditions in the U.S. are impacting our crop- insurance business and will affect our earnings in the second half of the year,” Evan Greenberg, chairman and chief executive of ACE, said in a statement July 24.
Gabriel Boehmer, a spokesman for Wells Fargo, said “it’s ‘‘premature to speculate on the effects the drought will have’’ on the company” He said Wells Fargo recognizes “the vital role crop insurance plays in helping our country sustain an agricultural industry that delivers a stable, affordable food supply.”
Farmer groups say criticisms of the program are misplaced, because crop insurance has achieved its goal of reducing risk and lessening dependence on emergency bailouts that also cost billions.
After last year’s drought in Texas and flooding in the Midwest, “for the first time in my memory, we did not have any serious legislative effort at an ad hoc disaster bill,” Bob Young, the chief economist of the American Farm Bureau Federation in Washington, said in an e-mail.