THE GOOD, THE BAD, AND THE UGLY — Farm Bill News, April 2024 — The Dirt

FINANCIAL INCENTIVES AND DISINCENTIVES IN CROP INSURANCE:

Challenges for Small-Scale, Diversified Growers

COMPENSATION STRUCTURE

Crop insurers are typically compensated through commissions or percentages of the overall crop insurance contract. This means they earn a portion of the premiums paid by the farmer for the insurance coverage.

INCENTIVE STRUCTURE

The incentive for insurers lies in maximizing their commissions, which often correlates with the size and simplicity of contracts. Insuring a larger farm with fewer crop varieties is more financially appealing because:

·       The insurer avoids the additional paperwork and workload associated with each additional crop, which minimizes complexity and administrative burden.

·       Smaller, diversified farms with multiple crops on fewer acres (e.g. 30 crops growing on five aces) require more paperwork and effort for relatively smaller commission returns.

Preference for *Large-Scale Farms

Given these factors, insurers are more likely to prefer working with larger commodity farmers who:

·       Have larger acreage but fewer crop varieties (e.g. 300-acre commodity farmers who only grow three or four crops a year).

·       Offer larger, simpler contracts that generate higher commissions with less administrative overhead.

Disadvantage for Small-Scale, Diversified Growers

In contrast, insurers are less likely to prefer working with small-scale growers with diversified crops on limited acreage due to:

·       Higher paperwork and administrative burden for each crop.

·       Smaller overall contracts with lower insurer commissions due to their scale and diversification.

*Acknowledgement: Please note, we are not disparaging large farms that grow a small number of crops. We are incredibly proud to be a part of Georgia’s rich agricultural heritage and community. We are merely searching for — and advocating for — insurance solutions that equitably safeguard the interests of organic farms cultivating many, diverse crop varieties.