The worst U.S. drought since the 1950s may trigger record crop insurance payouts, concentrated in corn-producing states led by Illinois, Indiana and Missouri.
Industry payouts from companies including Ace Ltd. (ACE), American Financial Group Inc. (AFG) and Wells Fargo & Co. (WFC) may reach a record $25 billion this year, according to Kansas State University. The BGOV Barometer shows where insured losses may be the biggest based on declines in corn production.
Corn yields, measured in bushels per acre, dropped by more than a third from the average of the previous five years in Missouri, Illinois and Indiana, and the U.S. Department of Agriculture this month projected yields nationwide may decline to a 17-year low of 122 bushels an acre.
The drought pushed the price of corn, the nation’s most valuable crop, to a record $8.49 a bushel in August, further driving up insurance payouts. Many crop insurance payments cover revenues based both on the magnitude of lost yields and the price of the crop at harvest. Corn futures for December delivery traded in Chicago closed up 1 percent at $7.455 a bushel today.
Farmers can choose to protect up to 85 percent of revenue with insurance, and “the coverage in most of the central Midwest states runs a little higher than the U.S. averages,” Keith Collins, a former Agriculture Department chief economist who now works with National Crop Insurance Services, said in an e-mail.
Of 96.9 million acres planted to corn, 67.2 million were covered by revenue protection, Collins said.
Under the crop insurance program, taxpayers cover roughly 60 percent of premium costs, with the government making a profit in years when it pays out less in premiums and losing money by subsidizing payouts in years of crop losses. Higher commodity prices mean larger payments to farmers, who are able to buy policies that are linked to the price of their crops at harvest time.
Among the nation’s top 15 corn-producing states, only Texas and Minnesota saw their productivity increase this year compared with their five-year average. Missouri yields fell 44 percent below the average and Illinois declined 42 percent. Indiana, South Dakota and Kansas all fell more than 30 percent. Iowa, the nation’s top corn-grower, declined 19 percent.
More than $2 billion has been paid out as of Oct. 9, according to Overland Park, Kansas-based National Crop Insurance Services, with corn, wheat, cotton, soybeans and pasture suffering the most damage. Farmers will be spending $4.1 billion to buy more than 1.2 million policies insuring 281 million acres, according to the group.
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