Title Page
 Table of Contents
 History of the federal crop insurance...
 Crop yield risk index computer...
 Findings and summaries from field...
 Supplemental studies and findi...
 Conclusions and recommendation...
 Appendix A
 Appendix B

Title: Economic analysis of crop insurance in Eastern Colorado
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00073369/00001
 Material Information
Title: Economic analysis of crop insurance in Eastern Colorado
Physical Description: iv, 118 leaves : ; 28 cm.
Language: English
Creator: Moore, Jerry M
Colorado State University
Publication Date: 1964
Subject: Crop insurance -- Economic aspects -- Colorado   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
Spatial Coverage: United States -- Colorado
Statement of Responsibility: submitted by Jerry M. Moore.
General Note: Typescript.
 Record Information
Bibliographic ID: UF00073369
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 76883533

Table of Contents
    Title Page
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
    History of the federal crop insurance corporation and its operations in Colorado
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 20a
        Page 20b
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
    Crop yield risk index computer program
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 32a
        Page 33
        Page 34
        Page 35
        Page 36
    Findings and summaries from field survey
        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
    Supplemental studies and findings
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
        Page 76
        Page 77
    Conclusions and recommendations
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
        Page 86
        Page 87
    Appendix A
        Page 88
        Page 89
        Page 90
        Page 91
        Page 92
        Page 93
        Page 94
    Appendix B
        Page 95
        Page 96
        Page 97
        Page 98
        Page 99
        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
        Page 105
        Page 106
        Page 107
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
        Page 113
        Page 114
        Page 115
        Page 116
        Page 117
        Page 118
Full Text

DE 6B/fe7$



Submitted by

Jerry M. Moore

Colorado State University

Fort Collins, Colorado

4 (1:1
j cbl



This study was made possible by the Federal Crop Insurance

Corporation, which initiated a regional research project through

the Great Plains Research Council and provided part of the funds

for the study in the state of Colorado.

I wish to express my thanks to the members of my graduate

committee, especially to Dr. Peter E. Hildebrand, who was respon-

sible for me beginning work on this study and acted as my major pro-

fessor, and to Dr. L.M. Hartman, who assumed the job as my major

professor and directed me in writing this thesis after Dr. Hildebrand

began a leave of absence.

I also wish to thank Chris Andrew, who helped me in taking

field interviews and who did valuable work in analyzing data used

in the study, and Dave Holland, who developed the computer program

used in obtaining crop yield risk indices.

Also due credit for the completion of this study are the

farmers of eastern Colorado and the personnel of the Federal Crop

Insurance Corporation who attempted to answer my many questions

about the operation of the federal crop insurance program in



Chapter Page

I INTRODUCTION........................................... .1

Background................ ......... .................1

Objectives of this Study...........................2

Approach of this Study..............................3

Review of Relevant Literature........................

Format for Results of the Study.....................7


Need for Insurance ................................

Purpose of Federal Crop Insurance.................. i

History of the Federal Crop Insurance
Corporation ............. ........... .............1i

Description of Federal Crop Insurance..............13

Federal Crop Insurance in Colorado.................17

Insurance Guarantees in Colorado Counties............20

Participation in Colorado..........................21


Description of the Risk Index Study..............27

Data used in the Study.............................28

Design of the Risk Index Program.................29

Results of the Regression Analysis................31'

Risk Index Computations............................32

Comparison of Premiums............................33



Description of the Survey Schedule and Sample.....37

Summary of Survey Answers........................41

Findings from Insurable Counties...............42

Findings from Southeastern Colorado Counties...51

Implications of Survey Findings..................54


Analysis of the Cost of the F.C.I.C. to the
Government..................................... 64

The Problem of Insuring a Crop for More Than its
Value.......... ................................ 72

VI CONCLUSIONS AND RECOMMENDATIONS....................... .. 78

Conclusions from the Study........................ 78


APPENDIX A.................................................... 88

APPENDIX B................................................ 94

Chapter I



Eastern Colorado lies between the Great Plains and the

Rocky Mountains and is subject to extreme variations in climate

both between years and within years. Agricultural production in

this area, whether from dryland or irrigated farming, is subject

to wide fluctuation due largely to these climatic factors. Far-

mers have learned to use various strategies in coping with the

resulting problem of income variability. One of the more formal

types of strategies developed for this purpose is federal all-

risk crop insurance.

Federal all-risk crop insurance has been available in parts

of eastern Colorado for many years. The number of counties and

the number of crops eligible for insurance has varied and, in

some cases, counties have been withdrawn from eligibility.

Since the beginning of this insurance program, little study has

been done concerning the needs and desires of farmers in eastern

Colorado for insurance of this type. During this time period

the non-weather farm environment has undergone rapid change:

farms have been increasing in size, the level of technology has

increased, capital investment has expanded, federal farm programs

have been changed, and emphasis on various crops along with ex-

pected yields are different than during the late 1940's and 1950's.

Irrigation, which tends to alleviate production variability, has

also expanded rapidly.

Current research is needed to study federal crop insurance

under these new conditions. Analysis of the success of the fed-


eral crop insurance program in fulfilling the needs and desires

of the farmers it serves and determination of what potential far-

mers it could serve need to be made as an aid to the farmers in

the state, the agricultural communities, and the Federal Crop

Insurance Corporation. These studies should be designed to de-

termine the adequacy of federal crop insurance in the areas of

insurance availability, the need for insurance in areas not

covered, and recommendations for expansion, contraction, and

improvements of the program.

Objectives of This Study

The general purpose of this thesis is to study the economic

basis of federal..all-risk crop insurance in eastern Colorado, to

learn why farmers do or do not use the insurance and, attendantly,

to evaluate the adequacies of current operational services of the

Federal Crop Insurance Corporation.

Specific objectives include:

1. To study the history of crop insurance as a guide for

investigating current operational procedures of the Federal Crop

Insurance Corporation to discover possibilities for changes and

improvements in the program.

2. To study crops under insurance and to measure trends

and variability of yields for insurance purposes.

3. To study some characteristics of "demand" for federal

crop insurance in an attempt to identify which farmers use it the

most and why participation in the program is not greater than it is.

The Federal Crop Insurance Corporation will also be re-
ferred to as the F.C.I.C. and as the Corporation.

4. To evaluate farmers' knowledge of federal crop insurance

and their attitudes toward specific aspects of the program.

5. To learn why farmers cancel their federal crop insurance

contracts and what objections need to be overcome to make the pro-

gram more acceptable and useful.

6. To discover the use of other risk-reducing strategies,

such as reserves of feed or cash, by farmers and the relationship

of these strategies to federal crop insurance.

7. To investigate the effect other farm programs have on

participation in the federal crop insurance program.

8. To compare the cost to the government of the Federal

Crop Insurance Corporation with other government agencies to aid


Approach of this Study

An extensive review of the literature concerning the oper-

ation of crop insurance and the usefulness of crop insurance as

a risk-bearing strategy was conducted. A study was made of the

history of the Federal Crop Insurance Corporation and its present

operations were studies for the basis of evaluating current pro-

grams in eastern Colorado. Data on the past operations of the

F.C.I.C. in Colorado and statistics on present participation,

coverages, premiums, and indemnities in Colorado counties were

obtained from the F.C.I.C. Actuarial Division and from the State

Office in Denver.

A computer risk index program was formulated to measure

trends in crop yields and to compute "pure premium rates" for

yield guarantees which might be offered under the insurance pro-

gram. These computations provide a means for comparison of risks


among the counties where federal crop insurance is available and

give risk indices for other eastern Colorado counties to which the

program might be expanded.

A field survey was made to obtain farmers' opinion of federal

crop insurance and to learn why they do or do not use it. Questions

were asked of farmers to find out what changes or recommendations

they could offer to improve the program. The questionnaire was

designed to obtain information on the amount and kind of crop in-

surance appropriate for different economic and institutional situ-

ations (e.g., type of farming, tenancy relationship, etc.). Dis-

cussions were held with personnel of the Federal Crop Insurance

Corporation and with persons in farm-related businesses to further

aid in assessing the usefulness of the federal crop insurance pro-


Data from the Acturial Division of the F.C.I.C. and from the

State Office were analyzed to determine the relationship of pres-

ent operations to those of the past and to discover significant

successes and failures that might be relevant in recommending

changes in the program. Analysis of the cost of the FC.I.C. pro-

gram to the government, as compared to four other government pro-

grams that aid agriculture, was made to provide a more complete

study of the program.

Review of Relevant Literature

Frank H. Knight and G.L.S. Shackle have contributed much

to the understanding of the problems of risk, uncertainty, and ex-

pectations as related to insurance. Knight2 makes distinctions

2 Frank H. Knight, Risk, Uncertainty and Profit. (Boston:
Houghton Mifflin Company, 1921).


between the terms "risk" and "uncertainty" and indicates several

requirements of insurance although he does not frame a concise
definition of insurance. Shackle, in a common position with

Knight on the problem of expectations, contends that where the

frequency of occurrence is sufficient, the case is one amenable

to the methods of mathematical expectation as a measurable, objec-

tive, statistical risk. Such cases constitute no problem because

they can be eliminated by insurance.

Armen A. Alchian took an approach to decision-making that

is relevant to the study of insurance. Alchian states that

"profit maximization" should not be a guide to action. He says

that the task which one faces is of selecting a decision whose po-

tential outcome distribution is preferable to all others. That

is, choosing the action with the best possibilities, since there

is no such thing as a maximizing distribution.

Pfeffer contributes significantly to the role of insurance

in the theory of production. He holds that insurance is an "income-

producing" factor in that it reduces some of the uncertainty sur-

rounding economic activity, and may be translated into economic

terms quite readily. Pfeffer states that by narrowing the dis-

persion of anticipations relating to production, insurance makes

3G.L.S. Shackle, Expectation in Economics. (Cambridge: The
Cambridge University Press, 1949).

4Armen A. Alchian, "Uncertainty, Evolution and Economic
Theory, "Journal of Political Economy, LVIII (June, 1950),
pp. 211-221.

5 Irving Pfeffer, Insurance and Economic Theory. (Homewood,
Illinois: Richard D. Irwin, Inc., 1956).


more accurate planning feasible. Insurance enables the entrepreneur

to reduce the volume of nonproductive assets held for contingencies.

Nothing:of an analytical nature has been written on the oper-

ation of federal crop insurance in Colorado. Publications concerned

with the problem under study are usually in the form of government

bulletins and reports to Congress. Only a few crop insurance

studies have been made during the period which the F.C.I.C. has

been operational in Colorado. Several variations and different ap-

proaches to insurance in the Plains have been suggested. Halcrow6

presented an analysis of three types of insurance: all-risk, area-

yield, and weather-crop insurance. For each form of insurance he

indicated its adaptability to areas of the United States, stating

that the latter two forms would be best suited for the Plains.

Sanderson7 proposed a specific risk scheme for wheat crop insur-

ance based on a future yield prediction formula. It was not neces-

sary to have accurate knowledge of past yields of individual farms,

but it was admitted that "successful operation of the plan is con-

tingent on a fairly reliable knowledge of the influence of the

weather on crop yields."

Thair found that within a given area a tendency existed

for the more vulnerable farmers to subscribe to crop insurance to

a greater extent than the more fortunate ones. However, when a

low-risk area was compared to a high-risk area, no evidence was

6 Harold G. Halcrow, "Actuarial Structures for Crop Insurance,"
Journal of Farm Economics, XXXI (August, 1949), pp. 418-443.

7 Fred H. Sanderson, "A Specific Risk Scheme for Wheat Crop
Insurance," Journal of Farm Economics, XXV (November, 1943,
pp. 759-776.

8 Philip J. Thair, Meeting the Impact of Crop Yield Risks in
Great Plains Farming, North Dakota Agricultural Experiment Station,
Bulletin 392, June, 1954.


found that farmers in the high-risk area participated in greater

number than in the low-risk area; the critical factor seemed to

be the premium rate charged. Thair found that the use of crop

insurance caused long-run budgeted income for a farm to be at a

more stable, although lower, level than for a farm not employing

crop insurance.

Rodewaldl found that the farmers in north central and north-

eastern Montana prefer self-insurance to all-risk crop insurance

and that stored grain isthe most preferred method of self-insurance.

Botts1 suggests crop insurance could be provided at lower

premium costs by considering carry-over grain as part of production

from the current year in determining indemnities. As this would

limit the number of indemnities paid in years of surplus, premiums

could be lowered. He proposed that crop insurance be compulsory

for farmers receiving price supports. This plan would combine

agency and self-carried insurance in a policy offering basic pro-

tection at a low cost.

Format for Results of the Study

The purpose of federal crop insurance and a short history

of the Federal Crop Insurance Corporation are presented in the be-

ginning of Chapter II. A general description of the program and

Philip J. Thair, Stabilizing Farm Income. Against Crop Yield
Fluctuations, North Dakota Agricultural Experiment Station, Bulletin
362, September, 1950. .

1Gordon Rodewald, Jr., Crop Insurance in Montana, Montana
Agricultural Experiment Station, Circular 235, November, 1961.
11 Ralph R. Botts, "Federal Crop Insurance Tied to a Bushel-
Quota Farm Program," Journal of Farm Economics, XLIV (August, 1962),
pp. 769-780.


procedures of operation are then outlined. Next, the operations

of the federal crop insurance program in Colorado are enumerated

with a history of insurable crops and counties since 1948, and

presentation of insurable areas, insurance coverages and rates,

and participation figures at the present time. Chapter III con-

tains a description of the risk index computer program, results

of the regression analysis, and a comparison of computed premium

rates to premiums charged by the F.C.I.C.

The results of the field survey are presented in Chapter

IV, with a description of the area sampled and schedule used,

a summary of findings from the interviews, and implications of

the survey findings. Supplementary studies of the F.C.I.C. are

presented in Chapter V along with results of investigation into

problem areas uncovered in the field survey. The concluding

chapter, Chapter VI, contains a summary of findings and recommen-



Chapter II


Need for Insurance

Farmer's crops are subject to many natural hazards over

which they have no control. Often, as a result of drought or

wind, of cold or heat, of insects or plant diseases, or some other

reason, a crop is lost or severely damaged. Many times the loss

of these crops results in financial difficulties even to the extent

of having to discontinue farming. This is particularly the case

when crop failures come in a series of years.

Today's farmer has a tremendous investment in his growing

crops. With modern commercial methods of farming, the operating

costs alone are high--it takes money to pay for fertilizer, seed,

fuel, irrigation water, insecticides, harvesting, and labor.

Many farmers have to borrow to put this investment into the crop.

Loss of that investment often means inability to repay the loan.

This often exhausts a farmer's credit, leaving him without means

of financing for subsequent crop years. Crop insurance improves

his credit because he can offer it as collateral and use it to

pay off his loan if his crop fails.

The farmer who does not have to borrow may be in a stronger

financial position but he risks the money taken from his cash or

feed reserves to produce his crop. If the crop fails, he must

dig deeper into his reserves to produce the crop for the following

year. By protecting his present investment with crop insurance,

he can protect his accumulated reserves.


Purpose of Federal Crop Insurance

Insurance is a device designed to meet the problem of risks.

Crop insurance spreads the losses over many persons exposed to

these risks; it spreads the losses over many areas; it spreads

the losses over many years. Crop insurance enables the farmer

to substitute a regular annual premium cost for irregular losses.

Crop insurance may be looked upon not only as protecting

the investment but also as stabilizing income. Persons with highly

fluctuating incomes who cannot build up adequate reserves must

adjust their standard of living to their present income. This is

particularly true of low-income farmers who have little ability

to borrow. Crop insurance can assure these farmers some purchasing

power every year.

The Declaration of Purpose of the Federal Crop Insurance Act

states, "It is the purpose of this title to promote the national

welfare by improving the economic stability of agriculture through

a sound system of crop insurance and providing the means for re-

search and experience helpful in devising and establishing such


John N. Luft, manager of the Federal Crop Insurance Corpor-

ation, has said that its goal is to provide the largest number of

farmers with the best possible insurance protection. The F.C.I.C.

is now committed to the job of guaranteeing a farmer coverage

equal to his normal operating expenses (usually referred to as

"out-of-pocket" costs) in raising the crop.

1 Federal Crop Insurance Corporation, Federal Crop Insurance
Manual (F.C.I.C., U.S.D.A., June, 1960), p.2.


History of the Federal Crop Insurance Corporation

The original Federal Crop Insurance Act was enacted in 1938,

This action followed a long period of frequent and severe droughts

in the 1930's. There was no private insurance available on crops

except against hail damage and against damage from fire in some

areas. The original Act provided only for the insurance of wheat,

which became available on the 1939 crop, and had been in opera-

tion for three years before insurance on cotton was added. Losses

in the early years were heavy, with indemnities exceeding premiums

in each of the first five years, 1939-1943.

As the result of heavy losses in the first four years, the

appropriation of 1943 provided sufficient funds only for liqui-

dation. Insurance was thus suspended for 1944 but reinstated for

1945 on the basis of an amendment to the Federal Crop Insurance

Act, adding insurance on flax and providing authority for experi-

menting with insurance on other commodities. As a result of the

new legislation and other changes made in the insurance and its

operation, the financial experience improved greatly on wheat and

the experience on flax, tobacco, and corn was quite satisfactory.

However, large losses occurred on cotton insurance in 1945 and

1946 and, although a profit was made in 1947 recovering part of

these losses, Congress had reviewed the operations in the light of

the 1945 and 1946 experience and had decided to reduce the program

to one of an experimental type.

This limited and experimental approach went into effect with

the 1948 crop and had only 375 county programs, compared to the

2,400 in 1947. A new period in the history of the Corporation :r-


begun at this time and, therefore, the year 1948 is considered to

be the first year of the present operation. Congress has reviewed

the program periodically and has authorized gradual expansion of

the number of counties where insurance is offered and the number

of crops which are covered.

The legislation establishes the Federal Crop Insurance Cor-

poration as an agency of the United States Department of Agricul-

ture and provides for a Board of Directors appointed by the Secre-

tary of Agriculture, composed of the manager of the Corporation,

two other employees of the Department of Agriculture, and two

persons experienced in the insurance business who are not otherwise

employed by the Government. The Act also authorizes capital for

the Corporation intended to serve as a revolving fund and sets

up the basis for insuring of crops. The operating organization

was set up as a Corporation so that it might operate somewhat as
a private insurance company.

The Act specifies a "reasonable" reserve; however, as Congrecs

periodically reviews the F.C.I.C. operations it changes its mind

on what is a "reasonable" reserve. The present aim of the F.CIoC.

is to have a reserve of approximately 10% of its assumed liability,

but the goal has not been reached. The reserve is now approxi-

mately $20 million above operation since 1948.

Reports of 1963 operations show federal crop insurance was

available in 1,085 counties in the United States, 2,378 crops

were insured (an average of 2.2 crops in each county), and 470,000

Federal Crop Insurance Corporation, Federal Crop Insurance--
A Description (F.C.I.C., U.S.D.A., October, 1959), p. 4.


endorsements were in effect. The total liability assumed exceeded

$480 million. The premium income was $30 million (up from $17

million in 1960) and indemnities exceeded $24 million.

The operation is presently being expanded into approximately

100 new counties and 3 new crops each year as well as adding cover-

ages on new crops in counties of previous operation. Although

there are approximately 2,000 agricultural counties in the United

States, further expansion will be limited due to poorer agriculture

in the higher-risk counties where the F.C.I.C. is not now operative.

Description of Federal Crop Insurance

Federal crop insurance is an "all risk" crop insurance; that

is, it is set up to protect against all natural hazards of growing

crops that might result from weather, insects, or diseases. Federal

crop insurance has paid indemnities to farmers for over one hun-

dred causes of loss, even paying for crop losses caused by a short-

age of irrigation water supply due to mechanical failures of pumps.

It does not however, cover losses due to poor management practices,

neglect, or theft.

The insurance is available to farmers on a voluntary basis

for which they pay premiums according to the guaranteed level of

coverage available and the risk area in which they operate. The

coverages available to farmers are determined statistically from

historical yield data and weighted to account for risks present

between areas. The coverage offered is approximately sixty per

cent of the normal yield, which is considered approximately equal

to production costs. All premium and indemnity rates are deter-

mined actuarially to give the farmer all the coverage possible


while averaging out the losses to the Corporation over time. Ad-

ditional coverage is added to cover harvesting expenses if a crop

sustains partial damage but is still harvested by the farmer.

F.C.I.C. premiums differ from other insurance mainly in

that there is no "load" included to cover such items as sales and

administrative costs; the federal government appropriates money

for these to encourage participation. Congress does provide for

some premium income to be used to meet salaries and travel allow-

ances for making loss adjustments. Since 1948, the F.C.I.C. has

paid out approximately 95< in indemnities of each $1 collected

in premiums; the remainder is held in reserve for contingencies.

Federal crop insurance is available to producers of insur-

able crops on the basis of their share in the crop. An owner-

operator may insure his entire crop, while a landlord or tenant

may insure only his share in the crop. Each farmer who buys federal

crop insurance has an insurance contract directly with the Federal

Crop Insurance Corporation, as the local and state offices which

handle and service the contract are administrative only. This

contract consists of the application for insurance, the insurance

policy with applicable crop endorsements, the county actuarial

table, and associated maps. The application itself includes on

its face a premium note which promises to pay the premium annually.

If the insured has insurance on more than one crop, he receives a

standard policy plus a separate endorsement for each crop. Risk

areas within the counties and the crops eligible for insurance are

determined by the Corporation. Often there are several different

risk areas within a county and frequently there are high-risk


areas within a county rated as "unclassified" in which no insur-

ance is available.

On each insurable crop, closing dates are established after

which no new applications for insurance in that year will be ac-

cepted. These closing dates are considerably in advance of the

normal planting dates for the insurable crop so that not too much

can be known about the soil moisture and crop prospects before

applications for insurance coverage are made. In the face of ex-

treme adverse growing conditions, sales may even be stopped before

the closing date.

An insurance contract can be canceled on any or all crops at

the end of any crop year before the cancellation date. The cancel-

lation date, for the Corporation and the insured, is usually set

several months in advance of the closing date. The insurance is

sold as a continuous contract and remains in force until it is can-

celed by one of the parties. This automatic renewal feature of the

contract makes selling less expensive for the Corporation and adds

stability to its volume of business. It also assures that the

farmer will not forget to carry the insurance as he does not have

to apply for it each year.

The farmer has the responsibility of filing an acreage report,

containing the number of acres, the insured's share in the crop,

and location of the crop, with the Corporation as soon as he has

completed the planting of his crop acreage he wants under insurance.

This report forms the basis of the insurance coverage guaranteed

by the Corporation and the premium charged the farmer for that

crop year. If part or all of a crop is destroyed early, the farmer


is expected to replant his crop while it is practical to do so

or the acreage will not be insured. The insurance contract takes

effect upon the planting of the crop and covers it against all

natural hazards until the crop is harvested or the end of the in-

surance period, whichever is earlier, as set forth in the crop


When losses occur they must be reported to the Corporation

through the local office. An adjuster will then visit the farm,

inspect the acreage, and act on disposition of the acreage accord-

ing to the decision made by the insured. If the insured chooses to

plant to a substitute crop or put the acreage to another use, con-

sent will be given by the adjuster after an appraisal is made of

any unharvested or potential production. If the acreage has been

harvested, the amount of harvested and appraised (if any) produc-

tion will be determined.

Indemnities are paid on losses whenever the yield falls below

the guaranteed production level. The number of units of loss (bu-

shels, pounds, etc.) is the amount the actual or appraised produc-

tion falls below the guarantee. The price per unit which was se-

lected by the insured (from three price elections available) is

applied to the number of units of loss to determine the total in-

demnity dollars. If the insured acreage is harvested, an additional

allowance (of so many bushels, pounds, etc.) is made in excess of

the guarantee to offset harvesting expenses. Only the production

in excess of this allowance is counted against the guarantee in

determining losses.


A relatively important feature of the crop insurance con-

tract that is becoming more widely used is the collateral assign-

ment provision by which a farmer may assign his right to an indemnity

for a crop for any year under the contract. This is done by exe-

cuting a form prescribed by the Corporation and, if a loss occurs,

the indemnity for the loss is paid by joint check to the farmer

and the creditor who has the assignment. This provision of the

insurance contract has helped many farmers to improve their credit

and obtain otherwise impossible loans.

Federal Crop Insurance in Colorado

Federal crop insurance operations in Colorado have been marked

by many changes, some of them probably among the most significant

in the recent history of the Federal Crop Insurance Corporation.

Since 1948, federal crop insurance has been available in a total

of twenty-five of Colorado's sixty-three counties, but the present

number of counties in which insurance is offered stands at only

fifteen. Reflection upon the fact that the Corporation has ex-

panded its present national operations into three times the number

of counties in which it operated in 1948 points out the unique

position of Colorado's experience with federal crop insurance.

Each cancellation of insurance from a county by the Corpor-

ation was made of economic necessity, but some of the contractions

in the program appear to have been extremely drastic measures.

This is especially true of the cancellation of insurance in six

counties in 1955. Removal of these counties from the eligible

list followed catastrophic loss experiences by the Corporation due


to extreme drought conditions of the middle 1950's,but it was done

in contradiction of earlier published statements that the insurance

would not be withdrawn.

All wheat insurance in Colorado is on non-irrigated, summer-

fallow, winter wheat. Insurance on corn, beans, and spring barley

is available only on irrigated crops. Multiple-crop insurance

(covering more than one crop under the same contract) was available

in several counties during the period of 1950-1956, but all crops

have been carried under separate endorsements from 1957 to date.

A summary of the counties and the crops on which insurance was

first offered or was canceled, in chronological order since 1948,


1948: Insurance was made available on wheat in Adams, Arapa-
hoe, Baca, Kit Carson, Logan, Phillips, and Weld
counties. Insurance was available on beans in Elbert

1949: Insurance was canceled on beans in Elbert County after
the 1949 crop year.

1950: Insurance was made available on wheat in Elbert, Prowers
and Sedgwick counties, on beans in Dolores and Weld
counties, and on multiple-crop in Conejos and Morgan

1951: Insurance was made available on wheat in Cheyenne,
Lincoln, and Washington counties, on beans in Monte-
zuma, Montrose, and San Miguel counties, and on mul-
tiple-crop in Otero and Weld counties.

1952: Insurance was made available on wheat in Boulder, Kiowa
and Larimer counties and on multiple-crop in Las Animas

1953: Insurance was made available on wheat in Yuma County.
Insurance was canceled on beans in Montrose County
after the 1953 crop year.


1954: Insurance was canceled on wheat in Boulder County
after the 1954 crop year. Insurance was canceled
on beans in San Miguel County, but part of the bean-
producing area in San Miguel County had insurance
available from Dolores County.

1955: Insurance was canceled on wheat in Baca, Kiowa, and
Prowers counties and on multiple-crop in Conejos,
Las Animas, and Otero counties after the 1955 crop

1956: No changes.

1957: Insurance in Morgan and Weld counties was changed from
multiple-crop to separate insurance endorsements on
wheat, corn, beans, and barley.

1958: Insurance on winter barley was added in Phillips county.

1959: No changes.

1960: Insurance on irrigated corn, beans, and barley was
added in Larimer County.

1961: No changes.

1962: Insurance on irrigated corn, beans, and spring barley
was added in Boulder and Logan counties. Insurance
was canceled on beans in Dolores and Montezuma counties
after the 1962 crop year.

1963: Insurance on corn, beans, and barley was added in Sedg-
wick County, insurance on winter barley was added in
Logan and Phillips counties, and wheat insurance was
renewed in Boulder County.

1964: Insurance on corn, beans, and barley was added in part
of Washington County. Insurance was canceled on
summer-fallow spring barley in Larimer, Morgan, and
Weld counties.

After insurance on beans was canceled in Dolores and Montezuma

counties (in southwestern Colorado) following the 1962 crop for

reasons of high administrative costs, poor participation, and heavy

losses, all federal crop insurance remaining available in Colo-

rado is in the fifteen northeastern counties. New crops are being

added to the insurance program but no plans have been made for ex-

tending the program into any new counties or for re-entering any


counties previously canceled from the program.

Figure I shows the approximate areas in the fifteen counties

where wheat insurance is now available in Colorado. Figure 2

shows the approximate areas of the seven counties in which insur-

ance on the irrigated spring crops--corn, beans, and barley--is

now available. The areas of cross-hatching indicate areas that are

designated "non-insurable" by the F.C.I.C. In addition to the areas

indicated on the figures, there are also scattered smaller areas

(some as small as one-quarter of a section) shown as non-insurable

on the individual county risk area maps that are too small to iden-

tify on the scale used here.

Insurance Guarantees in Colorado Counties

Wheat guarantees were raised in eight counties for the 1965

crop year and premiums were reduced for the same level of insurance

in two additional counties. Most counties experienced an increase

in premiums along with an increase in the bushel guarantee but

there was still a decrease in the premium/coverage ratio in a total

of nine counties and the increases in guarantees should help satisfy

the complaints of some farmers who say the coverage available is

too low.

Corn guarantees were raised in all six eligible counties in

1964 (in addition, the northwest corner of Washington County was

made eligible for corn insurance). The bushel guarantees were

raised from six to ten bushels in each of the counties to a high

of a 50-bushel guarantee in Risk Area 3 of Morgan County. However,

the premiums were also raised in all six counties, with some being

increased by as much as $1.00 per acre over the 1963 rates. Overall,

Figure 1. Areas Eligible for Non-irrigated Wheat Insurance
II Insurable Areas E Non-insurable Areas

Figure 2. Areas Eligible for Irrigated Corn, Bean, and Barley Insurance
] Insurable Areas m Non-insurable Areas


the premium/coverage ratio ranges from 10.0 to 13.8 per cent. The

net results of the changes were to lower the premium/coverage ratios

only slightly, with an actual increase in two counties, but the

significant increase in guarantees should satiate some of the de-

mand by irrigated farmers for higher coverages.

Tables I-IV, on the following pages, give the coverages and

premiums available in each risk area of the eligible counties for

insurance on the 1965 wheat crop and on the 1964 irrigated crops

of corn, beans, and barley.

Participation in Colorado

The F.C.I.C. compiles final participation summaries of con-

tracts in force for all programs in each insurable county in the

nation. Included in these summaries are estimates of the per cent

participation by farmers, based on total potential insurable crops.

Figures for the 1963 crop year show that participation in Colorado

varied from 17 and 18 per cent in Washington and Cheyenne counties

respectively, to 67 per cent in Weld county. These figures indi-

cate that participation in all insurable counties in the state was

approximately 40 per cent in 1963. The participation fell in 1964

and the 1963 totals of 4,446 contracts in force and 7,997 crops

insured were not maintained.




Prices Per Bushel, One of Which
Bushel Shall be Elected by Insured
Risk Guarantee $. 1.50 $ 2.00 $ 2.50
County Area Per Acre a Premium Rate Per Acre

Adams 1 6.5 $ 1.60 $ 2.10 $ 2.70

Arapahoe 1 6.5 1.70 2.20 2.80

Boulder 1 7.5 1.80 2.50 3.10

Cheyenne 1 5.0 1.70 2.20 2.80

Elbert 1 5.0 1.60 2.10 2.70

Kit Carson 1 5.0 1.70 2.20 2.80

Larimer 1 7.0 1.60 2.10 2.60
2 7.0 1.80 2.40 3.00

Lincoln 1 4.0 1.30 1.80 2.20
2 4.5 1.50 2.00 2.50
3 5.5 1.80 2.50 3.10

Logan 1 8.0 2.10 2.80 3.50
2 8.0 2.10 2.80 3.50
3 11.0 2.10 2.80 3.50
4 10.0 2.10 2.80 3.50

Morgan 1 5.5 1.40 1.90 2.40
2 6.5 1.40 1.90 2.40

Phillips 1 11.5 1.80 2.40 3.10

Sedgwick 1 12.0 1.80 2.40 3.00

Washington 1 6.0 1.70 2.30 2.80
2 8.0 1.70 2.30 2.80
3 10.0 1.70 2.30 2.80

Weld 1 6.0 1.60 2.20 2.70
2 7.0 1.60 2.20 2.70

Yuma 1 6.0 1.80 2.40 3.00
2 8.0 1.80 2.40 3.00
3 10.0 1.80 2.40 3.00
a The bushel guarantee on wheat insurance is increased 1.5 bushels
for any acreage from which 1.5 or more bushels per acre are harvested.
The price of $2.00 per bushel is applicable to any contract where
an election has not been made by the insured.




Prices Per Bushel, One of Which
Bushel Shall be Elected by Insured
Risk Guarantee $ 1.00 $ 1.20 $ 1.40
County Area Per Acrea Premium Rate Per Acre

Boulder 1 40 $ 4.10 $ 4.90 $ 4.80

Larimer 1 34 3.80 4.50 5.30
2 44 3.80 4.50 5.30

Logan 1 35 4.30 5.10 6.00

Morgan 1 37 5.10 6.10 7.10
2 42 5.10 6.10 7.10
3 50 5.10 6.10 7.10

Sedgwick 1 39 4.70 5.60 6.60

Washington 1 38 4.70 5.70 6.60

Weld 3 34 4.50 5.30 6.20
4 45 4.50 5.30 6.20

a The bushel guarantee on corn insurance is increased 3.0 bushels
for any acreage from which 3.0 or more bushels per acre are harvested.
The price of $1.20 per bushel is applicable to any contract where
an election has not been made by the insured except in Boulder, Logan,
and Weld Counties where the price of $1.00 per bushel prevails.




Prices Per Pound, One of Which
Pound Shall be Elected by Insured
Risk Guarantee $ .05 $ .06 $ .07
County Area Per Acre a Premium Rate Per Acre

Boulder 1 820 2.90 3.50 4.10

Larimer 1 700 2.80 3.40 3.90
2 950 2.80 3.40 3.90

Logan 1 700 2.60 3.20 3.70

Morgan 1 700 4.10 4.90 5.70
2 900 4.10 4.90 5.70
3 1200 4.10 4.90 5.70

Sedgwick 1 710 2.70 3.20 3.70

Washington 1 750 2.80 3.40 3.90

Weld 3 800 3.40 4.10 4.80
4 1000 3,20 3.80 4.40

The pound guarantee is increased 100 pounds for
from which 100 or more pounds per acre are threshed.

any acreage

The price of $.06 per pound is applicable to any contract
where an election has not been made by the insured.




Prices Per Bushel, One of Which
Bushel Shall be Elected by Insuredb
Risk Guarantee $ .75 $ 1.00 $ 1.25
County Area Per Acrea Premium Rate Per Acre

Boulder 1 21 $ 1.90 $ 2.50 $ 3.20

Larimer 1 19 2.00 2.70 3.40
2 25 2.00 2.70 3.40

Logan 1 17 1.70 2.30 2.80

Morgan 1 17 2.60 3.50 4.40
2 22 2.60 3.50 4.40
3 26 2.60 3.50 4.40

Sedgwick 1 16 1.60 2.10 2.70

Washington 1 18 2.80 2.40 3.00

Weld 3 17 2.10 2.80 3.50
4 23 2.10 2.80 3.50

a The bushel
from which 2.0 or

guarantee is
more bushels

increased 2.0 bushels for
per acre are harvested.

any acreage

b The price of $1.00 per bushel is applicable to
where an election has not been made by the insured.

any contract

cLmu 11 a i cci.--or eignt or rne wenty-six counties; however, all
estimated trends were used in the program whether they are signifi-
cant or not.


Contracts in force for the 1964 crop year total 4,127, with

7,159 crops insured under separate crop endorsements on these con-

tracts. The number of contracts in force range from 113 in Elbert

County to 784 in Weld County, with a total of 2,319 crops insured

in Weld County. The following table shows the total contracts in

force and the crops insured for the 1964 crop year.



S Total Crops Insured
County Contracts Crops Insured
Wheat Corn Barley Beans Tote.

Adams 174 174 174

Arapahoe 121 121 121

Boulder 153 24 116 102 87 329
Cheyenne 119 119 119

Elbert 113 113 113

Kit Carson 365 365 365

Larimer 232 35 163 122 181 501
Lincoln 199 199 199

Logan 439 340 146 197 168 851

Morgan 227 30 236 158 176 600
Phillips 397 396 100 496

Sedgwick 243 206 35 84 41 366

Washington 309 281 26 20 27 354

Weld 784 484 614 463 758 2319
Yuma 252 252 252

Totals 4127 3139 1336 1246 1438 7159


Chapter III


Description of the Risk Index Study

Three separate, but related IBM 1620 Computer programs were

written for the purpose of analyzing crop yield data and determin-

ing measures of risk appropriate for use in crop insurance ac-

tuarial work. The combined program was patterned after risk index

programs from Montana and North Dakota Agricultural Experiment

Stations but is designed to estimate trend in yields and account

for any trend in making estimates of risk. Estimates of yield

trends were obtained from a regression analysis and estimates of

yield variability were then computed to determine what are called

"pure premium rates."

These "pure premium rates" are used as the theoretical insur-

ance premiums which would be necessary to guarantee a specified

level of crop production. As federal crop insurance indemnities

are paid only when yields fall below some guaranteed level, an

estimate of the standard deviation of the observations which fall

below the regression line is used to compute the average distance

these observations fall under a specified level. This average

distance these observations fall under the regression line is the

"pure premium rate" which should be charged to insure a guaranteed

level of production, and the premiums collected by the insurer

should equal indemnities paid in the long run.

Federal crop insurance can be considered to be 40 to 50
per cent deductible insurance because the guarantees offered are
usually 50 to 60 per cent of the long-term mean yields, as this
level. isa considered to be adequate to meet average production


These risk indices can be used to make comparative analyses

of yield variability and necessary premium rates between counties

included in the insurance program at the present and in determining

whether an insurance program is feasible in counties not now covered

by federal crop insurance. Comparisons can also be made between

insurance rates and coverages offered by the F.C.I.C. in its pres-

ent operations and those computed by the risk index program.

Data Used in the Study

The data used were taken from the yearly publication, Colorado

Agricultural Statistics, of the Colorado Crop and Livestock Re-

porting Service for the years 1940-1943 and 1948-1960, Published

data were not available for the years 1944-1947 but these data

were obtained from the files of the Colorado Crop and Livestock

Reporting Service in Denver. The input data used were the number

of planted acres and the production, in bushels, for twenty-six

counties in eastern Colorado. Data were collected for non-irri-

gated winter wheat in these counties for all years reported2 and

were coded and punched on IBM cards for use in the program. The

program was run on wheat data only since wheat is the major crop in

eastern Colorado and the main crop insured under the federal crop
insurance program.

2A few counties did not plant enough wheat acreage in some
years to appear significant in the data; therefore, no production
entry was made for these years although the year was counted in
the program.

3Data were also collected on non-irrigated barley, irrigated
beans, irrigated corn, and irrigated grain sorghum for all years
in which data were reported but only a limited risk index program
could be run on these crops.


Design of the Risk Index Programs

Program I computes the weighted mean yield per planted acre,

by counties, for each year for which data were reported. The results

are in the form of \n) y--t, where the nt is the number of planted

acres in year t, and yt is the average yield per acre in year t.

In Program II, a linear regression analysis is performed on

the mean yields for each county. The dependent variable is yield

and the independent variable is the year in which the yield occurred.

The least squares solution is based on the regression model

ytj = c+pt + et.
= (oc+ p ) + p(t t) + et.,

where ytj yield on the j-th acre in year t with j = 1, 2, ...,

nt and t = 1, 2, ..., k, and where
Z nt t
t = t=l

The estimates of"-t + pt and p can be expressed solely in terms

of yt The program gives the following results for each county:

(1) A weighted mean year, k
n "t Yt
(2) A weighted mean yield, (.c+ PT) y = t=
2 nt

(3) A weighted regression coefficient,

Sb =
p= b =

n t (t- t) (t y)
t t
k 2
nt (t t)

(4) An estimated regression line, y = y + b (t F).

Program III computes the mean, variance, and standard devia-

tion for the county average yearly yields from the results obtained

in Programs I and II. Next, using the weighted estimates from Pro-

gram II as constants in the regression equation, an estimate of the

variance about regression is computed for the unweighted data. This

estimate of variance is:
k _

S = t=l
k 2

A negative standard deviation is then computed, using only

those observations (yt) which fall under the estimated regression

line: k
E (yt y.)
k 2

Finally, an average of the distance these observations fall

under the regression line is found:

k ^ A2
E l t)

This measure of the average distance that the observations fall below

the estimated mean is the "pure premium rate". Then, in order to

determine the "pure premium rate" for any other possible level of

insurance guarantee, consecutive values of one are subtracted from

the weighted and unweighted means until the weighted mean is re-

duced to less than one, and at each new value a new "under standard

deviation" and mean is computed. Theoretical premium rates can

A test value was also found by dividing the weighted regression
coefficient by the square root of its variance. (This value is dis-
tributed as a "Student's" t with k-2 degrees of freedom, assuming
the null hypothesis that P= 0.) Significant trends are present at
the 95% confidence level in six of the fifteen insurable counties
and in a total of eight of the twenty-six counties; however, all
estimated trends were used in the program whether they are signifi-
cant or not.


then be determined from the resulting computations for any speci-

fied level of coverage, either in bushels (such as 8.0 or 10.5):or

as a percentage of the mean (such as 50% or 60%).

Results of the Regression Analysis

Figure 3 gives the estimated weighted mean yields and the

weighted regression coefficients computed by the risk index pro-

gram for wheat in twenty-six counties of eastern Colorado. In the

fifteen counties covered by federal crop insurance, the mean yields

range from 10.50 bushels per acre in Cheyenne County to 21.53 bu-

shels per acre in Sedgwick County, with the regression coefficients

ranging from .059 in Yuma County to .534 in Phillips County. In

the additional eleven counties which were included in the study,

the estimated mean yields range from 2.67 bushels per acre in

Otero County to 19.56 bushels per acre in Jefferson County, with

a range in the regression coefficients from -.936 in Bent County

to .069 in Pueblo County.

The large negative regression coefficient in Bent County re-

sults from the fact that mean yields for the years 1944-1949 ranged

from thirteen to nearly twenty-six bushels per acre while in the

succeeding eight-year period from 1950-1957 the mean yield was

never above two bushels per acre. The next three years were again

above the 21-year mean but the years 1950-1957 still caused the

trend in yield to be highly negative during the period under study.

A longer time period would undoubtedly show a smaller but still

negative regression coefficient.

This negative regression coefficient points out the effect

the drought years of the 1950's had on the yield trend during the


study period. Several other counties have similar negative re-

gression coefficients for the same reason although it appears that

Bent County is the only one which was greatly affected by the time

period selected for the study. Inclusion of yield data which are

available for the years since 1960 would probably change any re-

sults only slightly since most county yields for the last four

years have been a little below the long-term average.

Risk Index Computations

Selected pure premium rates computed by the risk index program

for wheat yields in eastern Colorado counties are given in Appendix

A, pages 88 93 The computations in Part I are for the fifteen

counties now covered by federal crop insurance with possible in-

surance guarantees and the corresponding pure premium rate that

would be necessary to insure the guaranteed level. The tables in-

clude the computed unweighted mean yield (in bushels) for the county

and then lower levels derived by a consecutive subtraction of one

bushel from the unweighted mean yield. The various levels of pos-

sible guarantees are given from the mean down to levels between

3.0 and 4.0 bushels or until the pure premium rate reaches zero.

For example, the computations for Cheyenne County show that the

pure premium rate to insure the mean of 10.56 bushels per acre is

2.81 bushels and a rate of .52 bushels would have to be charged

to insure a guarantee of only 3.56 bushels per acre, and in Sedg-

wick County the pure premium rate of only .88 bushels would insure

the mean of 21.44 bushels per acre while any level of insurance

below 13.00 bushels per acre would require a zero premium since

the unweighted mean yields have never fallen below this level.








Figure 3. Results of Regression Analysis on Wheat Yields
Top figures indicate weighted mean yields, in bushels per acre. Figures in parentheses
indica e weighted regression coefficients. Counties insurable with the FCIC are outlined.


Interpolations can be made to determine the pure premium rate rele-

vant for levels of exact bushels and half-bushels which are the

common coverages of insurance offered.

The computations in Part II are for the additional eleven

counties in eastern Colorado which were included in the study but

which do not have federal crop insurance available at this time.

The computations on these counties can be compared to the similar

data for counties now eligible for insurance as a criterion in

deciding to expand or change the program.

The pure premium rates are computed from actual data but are

strictly theoretical and, as is the usual case, differ greatly

from what are the actual premiums. The difference in the pure

premium rates computed for a county from the actual premiums charged

for insurance by the F.C.I.C. stems from the fact that all of the

farmers in a county do not participate in the program and the ones

that carry the insurance are often in the higher risk category

than the average. Nevertheless, the computations can be usefully

interpreted to compare coverages and rates among counties and to

determine premium rates necessary to insure specified levels of

guaranteed production.

Comparison of Premiums

A comparison of premiums charged by the F.C.I.C. to those

computed by the risk index program is given in Table VI. The

data are for wheat insurance in the No. 1 risk areas of each county.

The F.C.I.C. premiums used are those for the middle price selec-

tion--the $2.00 per bushel coverage--for the 1965 crop year. The

dollar premiums of the F.C.I.C. were converted to premiums as a


percentage of the insurance coverage by multiplying the per acre

guarantees by the $2.00 price level and dividing this into the

premium rates. The pure premium rates computed by the risk index

program were also converted to premiums as a percentage of the

insurance coverage by dividing the pure premium rates by the

per acre guarantees. This conversion put the two measures on the

same basis and facilitated comparisons between the theoretical

premium rate and the actual premium rate.

A quick look at the table shows that the computed premium

rates are, for the most part, far lower than the actual premium

rates in effect for the 1965 crop and, according to the risk index

computations, there should be no premium at all charged for the

level of insurance available in Lincoln, Phillips, and Sedgwick


The difference between the overall level of the premium/cover-

age ratio of the computed premiums and the actual premiums results

from the fact that the computed risk indices are county averages

and therefore give lower premiums ratios than the F.C.I.C. cover-

ages and rates which are affected by the level of participation

in each county. A county with a small percentage (say 10%) of

the farmers participating in the program will undoubtedly have

a greater proportion of higher-risk farms under insurance and

the risk of loss will therefore be higher than in a county with

greater participation (say 50%) where the average risk of loss

for the farmers in the program is closer to the norm for the

entire county. The F.C.I.C. premiums must also include "loading"

for unmeasurable risk, catastrophes, reserves, and contract pro-


visions such as large acreage discounts and good experience dis-

counts; these "loads" cause the premiums to be higher than any

theoretical or actuarial calculations.

In order to better compare the two rates, the average F.C.I.C.

premium rate was calculated to be about 3.3 times that computed

by the risk index program. Using this average differential as a

rough standard, the premiums charged by the F.C.I.C. for wheat

insurance in Cheyenne and Kit Carson are much lower than is prob-

ably necessary, and the premium ratio in Lincoln, Logan, Phillips,

Sedgwick, and Yuma counties are definitely on the high side.




Risk Area
I Wheat


for $2/bu.

Risk Index
as Percent Risk Index
of "Pure Pre-
Coverage mium" (bu.)

As Per-
cent of






Kit Carson


























$ 2.10




























































- -


Chapter IV


Description of the Survey Schedule and Sample

The survey schedule was designed to obtain farmer's general

opinions of crop insurance and learn specific things such as the

extent of their knowledge of crop insurance, desirable and objec-

tionable features of the program, reasons for dissatisfaction if

they had canceled an insurance contract, and strategies used to

reduce risks other than crop insurance.

The original plan of the survey was to interview a proportional

number of farmers presently carrying federal crop insurance and

those not carrying federal crop insurance, weighted by the number

of farmers in the county, the number of those carrying, and the

number not carrying. However, it was discovered from F.C.I.C.

records and through contact with farmers in the field that the

number of farmers who had never carried federal crop insurance was

very small as almost all farmers who are eligible have carried it

at one time or another in their farming experience. It was then

necessary to proportion the sample between those farmers who are

presently covered by federal crop insurance and those who have

carried it in the past but are not covered by it at the present.

Although a few never-carriers were interviewed in a trial

survey, it was found that interviewing farmers who had canceled

the insurance was a more satisfactory arrangement of gathering

information as those farmers were much more well informed re-

garding the F.C.I.C. program and could give more information about

it. Also, through these interviews with previous carriers, it was


possible to discover reasons for cancellation of the contract and

learn objections concerning the aspects of the program with which

the farmers were dissatisfied.

The preliminary schedule was patterned after an earlier schedule

from North Dakota and refined during a GP-8 sub-committee meeting in

Denver. The resulting schedule was then adapted to fit the F.C.I.C.

operation in Colorado and the types of farming which the survey was

to cover. Additions and changes were made in order tha different

questions could be asked of the different groups within the Colorado

study area. These additions included a section for those who now

carry federal crop insurance, a section for previous carriers of

the insurance, and a section for those who have never carried federal

crop insurance. Also, a fourth category of farmers is present in

Colorado--there are some counties in the southeastern part of the

state in which the insurance was canceled by the Corporation after

sustaining severe losses during the 1950 drought--and a special

schedule had to be developed for the farmers in this area.

A copy of the schedule is in Appendix B, pages 94 117. Parts

A, I, I-a, and III were used in interviews with present carriers of

federal crop insurance, Parts A, I, I-b, and III were used in inter-

views with previous carriers where the insurance is still available,

Parts A, I, I-c, and III were used in interviews with farmers in

eligible areas who have never carried the insurance, and Parts B,

II, and III were used in interviews with farmers in southeastern

Colorado who carried federal crop insurance before it was canceled
by the Corporation. A description of the different parts of the

field schedule and their purposes follow:


Part A. Data sheet on present carriers of federal crop insurance;
completed in the State Office before interview to help
locate the subject and furnish history of experience.

Part B. Data sheet on previous carriers of crop insurance; pre-
vious experience and reason for cancellation were taken
from files in the State Office to help furnish partici-
pation background.

Part I. Section of personal data and insurance questions asked
in all interviews with farmers in counties where federal
crop insurance is now available to learn thoughts and pref-
erences about the insurance.

Part I-a.

Part I-b.

Part I-c.

Part II.

Part III.

Section attached to Part I for use in interviews with
farmers who are presently carriers of federal crop insur-
ance to find out why they use the insurance and the things
they like and do not like about it.

Section attached to Part I for use in interviews with
farmers who previously carried federal crop insurance
but who have canceled it to find out why they dropped it
and what they do for protection instead.

Section attached to Part I for use in interviews with
farmers who have never carried federal crop insurance
to find out how much they know about the insurance and
why they do not use it.

Section of personal data and insurance questions asked
in all interviews with farmers in counties where federal
crop insurance was available in the early 1950's, but
was canceled by the Corporation, to find out what they
do for protection now and if they would be interested in
federal crop insurance if it was made available to them

Section of questions about the farm and farming operations
used in all interviews to get operating expenses, crop
yields, debt structure, and risk situations as they
might apply to crop insurance.

For purposes of the sample, a random selection of present car-

riers was made from files in the State Office with proportional weigh,

ting by the number of contracts in force in each county. For the

sample selection of those who had canceled, names were taken from

the inactive cards on file in the State Office. This sampling was

limited to those farmers who had canceled in the past two years in


order that they would be more familiar with the present program and

would be more likely to still be in farming. All interviews were

restricted to operators or owner-operators since landlords could not

provide needed information regarding actual farming practices, crop

yields, expenses, etc.

Considerable difficulty was encountered in contacting the

farmers to be interviewed and in arranging appointments with them

in order to complete the schedule. The length of the schedule re-

quired that the farmers spend one hour, on the average, in answering

the questions, and with farmers usually very busy during the summer

it was sometimes inconvenient for them to take time for the interview.

The length of the schedule did not, however, seem to be too detri-

mental to the interview since the farmers usually took adequate time

to answer all the questions after the interview began even if they

had not planned on such an extensive questionnaire. Some farmers,

whether users of the federal crop insurance or not, were excep-

tionally interested in crop insurance and related programs and spent

several hours discussing the situation further.

Most farmers were favorably receptive to the interview after

the purpose and scope of the study were outlined to them (and after

it was made clear that the interviewers were only interested in

information from the farmers and not trying to sell them anything).

The fact that this was a study undertaken by a department of Colo-

rado State University, and not the F.C.I.C. itself, seemed to aid

in gaining cooperation of the interviewees since most farmers in

the state are interested in research information from the University

which helps them in their operation.


It was found that advance mailing of part of the schedule (the

general information and insurance questions) facilitated the comple-

tion of some of the interviews. This mailing, along with an intro-

ductory letter, helped familiarize the farmers with the questionnaire

in advance of the interview although they did not answer many of

the questions on their own. In all cases the mailings were followed

up by fieldmen approximately one week later who went over the first

part to clarify any questions and then got responses to the remainder

of the questionnaire. Telephone calls, to set up appointments with

farmers in advance, proved to be a saving of time and mileage in

making arrangements to talk with farmers.

Summary of Survey Answers

The interviews resulted in answers obtained from approximately

150 farmers in each of the fifteen counties in northeastern Colorado

where federal crop insurance is now available and from the five

counties in southeastern Colorado where it had been available for

different lengths of time until 1955. Complete schedules could not

be taken from all persons selected by the sampling process as some

are no longer engaged in farming or are landlords only at the present

time and some farmers did not have the time to answer all the ques-

tions because of the urgency of farm work.

Compilations were made on the results of schedules from present

carriers and previous carriers taken together because these schedules

were taken from similar farmers and came from the same fifteen county

area. This large grouping was divided into sub-categories of.car-

riers vs. previous carriers and irrigated vs. non-irrigated for

comparison purposes. The schedule taken in southeastern Colorado


counties were summarized independently and those findings are pre-

sented in a separate section of this chapter. Answers from the

schedules that are not summarized here were such that no analysis

was possible or that nothing was noted that is of significant in-


Findings from Insurable Counties

A total of 105 schedules taken from present carriers and pre-

vious carriers had all necessary information completed and were

used as the basis for summaries. These were composed of 61 sched-

ules from present carriers and 44 from previous carriers. The

Schedules from the present carriers were divided between 33 irrigated

farmers and 28 non-irrigated farmers, and the previous carriers

were divided 19 irrigated and 25 non-irrigated; thus of the 105

schedules, 52 were from irrigated and 53 from non-irrigated farmers.

The average age for all groups interviewed was from 49 to 51

years of age with the exception of the irrigated farmers who had

canceled whose average age given was 45.6 years. Approximately

ninety per cent of each group indicated that their future plans are

to continue farming. (Those who canceled their insurance because

they had quitefarming were eliminated from the survey by the sampling

process.) Twenty per cent of the present carriers, as compared to

only five per cent of the previous carriers, indicated formal edu-

cation beyond the high school level.

Almost all farmers interviewed feel they need a diversified in-

come. The methods most selected as the best ways to obtain diversi-

fication (some gave more than one answer) were:


1. Growing several crops 80

2. Use of livestock 76

3. Off-farm work 29

When asked about their best way to obtain a stable income, diversi-

fication was mentioned by a majority (33 of 44) of the previous

carriers of insurance while diversification plus crop insurance was

mentioned by most (39 of 61) present carriers. The most popular

arrangements to distribute income throughout the year or from one

year to the next were:

1. Selling produce over the year (e.g., wheat) 61

2. Off-farm employment 26

3. Regular sales and payments (e.g., dairy products) 24

Seventy-six farmers said they have livestock tied in with their

farming operations, with three-out-of-four present carriers compared

to two-out-of-three previous carriers saying so. The main

uses of livestock listed were providing additional income, stabil-

izing income, and supplying food for the home. When asked about

drawbacks to increasing their livestock, farmers mentioned "shortage

of feed and pasture" most often, with non-irrigated farmers empha-

sizing lack of good pastures as their main problem; irrigated far-

mers (who usually fatten cattle in feedlots) also stressed "uncer-

tainty of future prices of livestock and feed." Three-fourths of

all farmers with livestock indicated they would continue to raise

livestock even if they could have a satisfactory income without it.

Eighty per cent of the farmers interviewed were in debt and said

their principal creditors (in order of frequency mentioned) are

banks, the Production Credit Association, the Federal Land Bank,


and the Farm Home Administration. About half indicated they had

tried to get long-term credit; all were able to except four--two

irrigated farmers who have canceled federal crop insurance, one non-

irrigated farmer who has canceled, and one non-irrigated farmer who

carriers insurance. Only 30 of 105 said they could live throughout

the year and produce a crop the next year without borrowing if they

experienced a total crop failure.

Twenty-five farmers answered that they had experienced large

unforeseen expenses in the last five or ten years; seventeen of these

are irrigated farmers who are probably more vulnerable to large

losses (e.g., failure of irrigation well). About half indicated

they are more able to stand a crop loss now than they were five

or ten years ago, mainly because of a better credit rating or more

equity in their farm. Less than half answered that they are more

willing'to assume risk now than five or ten years ago, usually

because of age or increased family responsibility. When present

carriers were asked their financial status at the time of their

first crop insurance contract, nine replied "insecure", forty-two

"fairly secure", and ten "well-secured" (nine of whom are irrigated

farmers). When the same question was put to previous carriers, eight

(mostly non-irrigated farmers) replied "insecure", twenty-seven

"fairly secure", and nine "well secured."

When farmers were asked to name what they considered to be the

main hazards facing their crops, hail was named by 83, drought by

58, wind by 28, and winterkill by 13. Only 9 of 61 present carriers

answered that they would carry federal crop insurance if it did not


cover hail risks. Thirteen of the present carriers (mostly non-

irrigated farmers) vs. only five of the previously insured farmers

carry private hail insurance regularly, and nearly all other far-

mers stated that they do not carry hail insurance because of almost

prohibitive rates.

Over one-half of the present carriers said they believe that

federal crop insurance has filled a need of farmers, but only 16

of the 44 previous carriers indicated so. To find reasons for

using federal crop insurance, things liked about it, and things

disliked about it, specific questions were put to each group. When

present carriers were asked why they use federal crop insurance they

gave the following answers, with some giving more than one:

1. To protect investment 42

2. To insure staying in farming 18

3. To insure adequate family living 10

4. To improve credit rating 10

5. Believe in the principle of insurance 9

Previous carriers were asked why they had used federal crop insur-
ance; they answered:

1. To protect investment 26

2. To insure staying in farming 15

3. To insure adequate family living 8

F.C.I.C. records of causes of damage show drought and wind
are the main hazards, but the survey showed that farmers fear hail
the most.

2To another question, 50% of all farmers answered that they
think farmers take federal crop insurance expecting to have crop
failures, but only 3 of 105 had answered they "expected poor yields"
when giving reasons for taking out insurance.


To get an enumeration of reasons for cancellation, the previous

carriers were asked why they dropped out of the program; the main

answers given were:

1. Coverage too low 29

2. Premiums too high 203

3. Dissatisfied with adjustment 10

4. Prefer to take a chance 6

They were then asked what they did for protection against unfore-

seen losses after canceling their insurance, and the following an-

swers were given:

1. More livestock 10

2. Grain reserves 6

3. Hail insurance 5

4. Cash reserves 3

Most of the others who canceled indicated they did nothing for pro-

tection against losses. A similar question was asked of the present

carriers to find out what strategies they would employ if federal

crop insurance ceased; the responses were:

1. Hail insurance 18

2. Livestock 12

3. Grain reserves 9

4. Cash reserves 7

All farmers were asked why they think participation is not

greater than it is, and the following reasons were given:

1. Coverages are too low 60

2. Premiums are too high 37

Fifteen of these answers were from non-rrigated farmers.
Fifteen of these answers were from non-irrigated farmers.


3. Lack of knowledge about federal crop insurance 264

4. Farmers prefer to carry their own risk 23

Fifty-five per cent of all farmers interviewed thought they

knew enough about federal crop insurance. A higher percentage of

the previous carriers said they had enough knowledge about federal

crop insurance, but such answers by some of them just meant that

they knew all they wanted to about the insurance. Only one-fourth

of all those interviewed have ever attended a meeting at which fed-

eral crop insurance was discussed. When the present carriers were

asked how they learned about federal crop insurance, thirty-six

said from salesmen, eleven from other farmers, five from publi-

cations, and three from personal inquiry; however, only eleven indi-

cated that they have been personally contacted by a representative

of the F.C.I.C. since they took out insurance.

The non-irrigated farmers covered in the survey can insure

only summer-fallow winter wheat, but the irrigated farmers have the

possibility of insuring three irrigated crops in addition to non-

irrigated wheat on some of their farms. The thirty-three irrigated

carriers surveyed have insurance contracts with 25 endorsements on

corn, 21 endorsements on barley, and 18 endorsements on beans. When

asked about other insurance desires, the sixty-one carriers named

nine crops they would like to be able to insure, with non-irrigated

barley the most frequently mentioned (by eight farmers) and non-

irrigated corn and irrigated sugar beets next (by four each). Only

Twenty-two of these twenty-six answers came from farmers
who now carry the insurance.


one-fourth of the present insureds would prefer multiple-crop insur-

ance. In responses to questions seeking insurance desires from

previous carriers, non-irrigated milo and barley were the most often

mentioned crops, but by only five and four farmers, respectively.

Complaints of low coverage was the most frequently voiced

objection to the program; two-thirds of all farmers interviewed

said that the basic coverage on their farm is too low. Less than

forty per cent think a total insurance indemnity would meet their

production expenses. Only thirty-four per cent think the insur-

ance covers all costs on small farms, whereas seventy-six per

cent think that it should cover all costs on these farms. One-

half of those interviewed believe federal crop insurance should

be subsidized, with about two-thirds answering that the government

should pay part of administration expenses and 39 of 105 farmers

saying they think that federal crop insurance should guarantee

farmers some income above expenses.5

Ninety per cent like the opportunity to select a premium-

indemnity level (all carriers but one indicated this is a desir-

able feature); about two-thirds prefer the medium level while

almost one-third prefer the high level. Forty-three per cent

would prefer a variable yearly premium based on actual annual

yield, so that they would pay higher premiums in good crop years

but lower premiums in poor crop years. About two-thirds of those

interviewed answered that they -have'p id more in prermiaisitha.n
they received in indemnities although records from the F.C.I.C.

Responses from most farmers indicated that they are not
familiar with the present policy.


show ihat the average farmers ii "Colorado is ahead of the

Corporation on an indmnity-premiumr basis. Cnly 20 of 61 pres-

ent carriers th~fnk premiums on their farm are too high but-23

of 44 previous carriers complained of this.

Premium discounts for good experience were understood by

only 33 of the present carriers; most of those who said they did

not understand them are irrigated farmers which indicates that

wheat farmers are the principal ones affected by the discounts.

Approximately 35% said they are now eligible for premium dis-

counts and 55% indicated they would favor a cash discount for

early payment of the insurance premium. Two-thirds of those

previously insured said they understood premium discounts, but

some still believed that interest payments on late premiums are

still in effect.

Farmers differed on the time of year they wanted loss pay-

ments to be made, but several raised complaints about the exces-

sive length of time between inspection of loss claims and dis-

bursement of indemnity checks. Most presently insured farmers

thought that loss adjustments were about right and stated that

any indemnities received had not affected their income taxes.

Nearly one-third of the previous carriers indicated they thought

loss adjustments were too low.

All 105 farmers answered they are aware that insurance con-

tracts are automatically renewed unless canceled. Over 60% of

the present carriers favor this feature against only 30% of the

previous carriers, and several farmers stated that the difficulty

in canceling was their most important objection to the program.


Only twelve farmers indicated they would favor a contract sold for

a definite number of years.

Almost sixty-five per cent of all farmers expressed a prefer-

ence for being able to have individual contracts on land that is

separated (even though this would certainly increase the premium

rates), with a higher percentage of previous carriers saying so.

Only eighteen answered that they think both the landlord and the

tenant should be able to insure the entire crop, but the reasons

given for these answers show tenancy conflicts to be an important


About one-half of the present carriers usually operate under

the Feed Grain Program, as compared to only one-third of the pre-

vious carriers. Only four of the twenty-eight non-irrigated

carriers indicated the 1964 Wheat Referendum would have changed

their insurance plans if it had carried. Two-thirds of all far-

mers do not want the Federal Crop Insurance Corporation and other

farm agencies combined into one program, but many farmers expressed

a desire to have F.C.I.C.. offices with the Agricultural Stabili-

zation and Conservation Service (A.S.C.S.) county offices so they

could transact all their business in one office and obtain infor-

mation and regulations easier. Slightly over one-half of all

farmers interviewed think that a farmer should be allowed to in-

sure only allowed acreage, but nearly all were against limiting

participation in the insurance program to only those in farm

programs or making participation compulsory in any way.


Findings from Southeastern Colorado Counties

Five counties in the southeastern part of Colorado come under

a special heading and constitute a special case as far as F.C.I.C.

operations in the state are concerned. Insurance in these coun-

ties was canceled in 1955 by the F.C.I.C. after heavy losses had

been incurred in the preceding years. The insurance coverage

had been on wheat in Baca, Kiowa, and Prowers counties, and on

multiple-crop in Las Animas and Otero counties.

Several farmers and businessmen were interviewed in each of

these counties to learn about the operation of federal crop in-

surance when it had been available, to find out what had been done

for protection after the insurance was canceled, and to determine

the need and desire for insurance protection at the present. A

sample of farmers who had carried the insurance when it was avail-

able was drawn from records of the F.C.I.C. for the use in inter-

views on the assumption that farmers with previous experience

could supply better information about the insurance that was

available and are more able to assess the role that insurance

could play in their operations today. Complete schedules were

not taken from all farmers contacted since some of them whose

names were drawn from 1955 records have retired from farming or

do not have any acreage under cultivation in their present oper-

ation. Some of these persons not now active in farming were able

to furnish useful information concerning the previous operations

of federal crop insurance in their areas however.

Eleven schedules were completed in Baca, Kiowa, and Prowers

counties from non-irrigated wheat farmers and five schedules were


completed in Las Animas and Otero counties from farmers who had

had multiple-crop insurance. All farmers indicated that they now

carry several types of insurance other than crop insurance but

only two carry private hail insurance with any regularity and

only one said that he had carried both hail insurance and federal

crop insurance when the latter was available.

When the farmers were asked what they did to protect them-

selves after federal crop insurance was canceled by the F.C.I.C.,

four said they initiated or increased livestock operations, two

said they went to hail insurance, one said he increased his farm

size, and nine answered that they did nothing. Of the non-irri-

gated farmers who mentioned livestock, most explained that in

dry years, when they needed crop insurance the most, their live-

stock usually had to be decreased because of dry pastures and

therefore offered very little income protection against crop


Most of the farmers interviewed consider that they need a

diversified income and ranked the use of livestock as the best

way to obtain diversification. (Three-fourths of the farmers

interviewed had livestock which they indicated were mainly for

extra income although livestock were also important for utiliza-

tion of rough land.) "Growing of several crops" ranked second

as a method of diversification and amplifies the fact that the

non-irrigated areas are dependent on one crop--wheat.

Fifteen of these sixteen farmers believe that federal crop

insurance filled a real need of farmers in their area and, although

only eleven said their attitude toward government programs was


favorable, all of these fifteen farmers said they would be inter-

ested in federal crop insurance if it were made available again.

Twelve answered that they believe federal crop insurance should

be subsidized by the government and six of these answered "it

should guarantee farmers some income above expenses."

The general reaction of all farmers interviewed in this study

area was one of rebellion against government farm programs. Some

of this feeling is due to resentment toward the Federal Crop In-

surance Corporation for "raising premiums every year" and then

"cutting off our insurance after it was abused by 'suitcase'

farmers." Farmers in this area are also confused by the multitude

of government programs with which they have been confronted and

by the many requirements and various options under each program.

On the other hand, most farmers indicated that they had lived off

the F.C.I.C. and the Soil Bank Program during the 1950's and some

stated that "there would be no wheat farmers in southeastern Colo-

rado today if it had not been for federal crop insurance."

Since any insurance that might be offered by the F.C.I.C.

in the future would possibly have to be sold on a long-term con-

tract in order for the Corporation to be in a position for its

actuarial computations to be effective, farmers were asked if

they would be willing to take a contract for a definite period

of years. Three-fourths of them said they would be, with the

majority of them willing to accept a five-year contract.

All farmers interviewed indicated that they would like to be

able to select a premium-indemnity level and they prefer a medium

or high level of coverage. Ninety per cent of them would prefer

variable yearly premiums, i.e., they would like the opportunity

to pay more for the insurance when they have good crops if they

could have the opportunity to pay lower premiums in poor crop

years. Farmers in this area know that they have many poor years

but that when they have a good year it is really a "bumper" crop;

and most of these farmers would be willing to pay higher premiums

in the "bumper" crop years because they have "extra" incomes in

these years.

The interviewees were evenly divided on their answers of

whether crop insurance should be available only to those under

federal farm programs or not, and were divided 3:2 in favor

of farmers being allowed to insure only allowed acreage. Most

comments on the administration of the program were of the nature

that it should be limited to "acceptable" farmers and the con-

census of opinions was that the farmers in this area need a

"simple, strict, low-administration program."

Implications of Survey Results

A lack of knowledge about provisions of the F.C.I.C. appears

to be the most serious cause of misunderstanding and disagreement

between farmers and the Corporation. A number of cancellations

have occurred because farmers did not understand regulations

that caused them to lose insurance coverage and indemnity pay-

ments or because they thought the program had been misrepresented

to them. Several farmers indicated that more farmers would par-

ticipate in the program if they had more information about it.

A misunderstanding between F.C.I.C. personnel and farmers

can be a sore spot with a farmer and cause him to think that


federal crop insurance has been misrepresented, Responses

from farmers indicated that the F.C.I.C. in Colorado is still

laboring under a handicap imposed on it by some poor represen-

tation in previous years. However, the entire line of admini-

strators, secretaries, salesmen, and adjusters seems to have

been upgraded in the past few years and that the quality of work

is steadily being improved. Most salesmen have been put on

salaries, rather than commissions, to reduce the temptation to

misrepresent the program to a farmer for the purpose of getting

another name on an application form. Salaried personnel are

probably a benefit to farmers and to the Corporation as fewer

misunderstandings appear under this type of administration. It

may not be the most economical method of selling however, and

may not even be advantageous over-all. A notable contradiction

to this approach of selling is exemplified by the one private

agent remaining in the state: his county has a high percentage

of eligible farmers participating in the program and frequently

has the lowest cancellation rate.

Adjusters who are local farmers are definitely an asset

to the Corporation in the form of lower expenses and to farmers

in the form of local representation and knowledge of local farming.

However, it is imperative (and a common practice of the F.C.I.C.)

to bring in outside adjusters to handle claims in time of a

serious or widespread disaster.

A repeated inference from farmers surveyed is that insurance

guarantees are thought to be too low. This is an objection which

might be expected, without much justification, when it is con-


sidered that federal crop insurance attempts to cover only basic

operating costs; however, it is true, in most cases, the coverage

that has been determined as a percentage of past yields is too

low to cover the higher operating expenses that the farmer of

today encounters in trying to produce higher yields. Coverages

are so low in some areas that a farmer can sustain, what is to

him, a crop failure but his yield is still not low enough to re-

ceive an indemnity payment.

Variable yearly premiums based on actual yields are frequently

mentioned as a desirable feature that might be incorporated into

the F.C.I.C. operations. Farmers seem to be willing to pay

higher premiums in their better years if they could then pay

lower premiums in poor or below average years. This would be ad-

vantageous to farmers in years when their yields, and therefore

incomes, are lower than average but still not low enough to

qualify for any insurance indemnity. These are the years when

the premium payment is extremely difficult to meet and when the

farmer would most value the opportunity to wait and make up the

premium in a better year.

A variable premium plan would help counteract the problem

of "the ability to pay" by allowing a farmer to pay a (say) 20%

(4-bushel) premium from a 20-bushel harvest and the same 20%

(but only 2-bushel) premium from a 10-bushel harvest. The cov-

erage could remain the same over the contract period and the

premium could be actuarially set from the average expected yield.

The farmer would be guaranteed of the coverage in poorer crop

yields yet have the opportunity to pay lower premiums when he


could less afford to pay them out of lower than normal crop yields.

The extra premium a farmer would pay in better than average years

would be more easily paid from "unexpected" profits,

This plan of premium payment based on actual yields also

gains favor in the sense that it would aid farmers in shifting

higher expenses to years of higher tax liabilities. An advan-

tage would result in poorer years when expenses would be lower,

thus allowing the farmer highest possible returns from a poor

crop to invest in the succeeding crop.

The farmer who carries federal crop insurance uses different

criteria in deciding whether or not to carry private hail or fire

insurance on growing crops. Insurance offered by private com-

panies can be bought to cover the entire value of the insured

crop (against hail or fire only) whereas federal all-risk crop

insurance is designed to cover only operating expenses involved

in growing the crop. As a rule, private insurance is carried

only when the prospects for an exceptionally good crop are evi-

dent. Therefore, there is not much conflict or competition be-

tween federal crop insurance and private insurance since farmers

may use neither, either, or both, according to their particular

situation and desires.

Farmers' use of risk-bearing strategies, other than formal

insurance programs, appears to be limited. Diversification is

the most popular and widely practiced risk-bearing strategy but

the natural limitations of diversification place a severe handi-

cap on its success in providing a steady income for farmers (e.g.,

drought conditions which cause crop losses usually result in feed


and pasture shortages for livestock operations, which were mention-

ed by farmers as their best method of diversification). Grain

reserves are used by a large number of farmers but offer only

limited protection against a lost crop and almost no protection

against a series of poor crop years. Cash reserves are nearly

non-existent in the high cost-demanding operations of today's

farmers, and reserves of credit are usually greater than reserves

of unused cash.

Although the present Wheat Program passed by Congress has

definite "insurance" features, farmers indicated that any fed-

eral wheat legislation would not affect their desires for crop

insurance as they consider any other type of "insurance" as

just more "frosting on the cake." It appears that the main effect

of a Wheat Program is only a reduction of acreage under insurance

when wheat allotments are reduced.

There are many arguments for closer coordination of the

Federal Crop Insurance Corporation with the Agricultural

Stabilization and Conservation Service. Both are government

agencies under the Department of Agriculture and are operated

for the benefit of nations farmers. Closer coordination of the

local offices would result in a more convenient service to the

farmers they serve. A combined operation of the two agencies at

the right level would make for more economical operation and

eliminate duplicative functions. A lessening of conflicting

policies and synchronization of program deadline dates would

result in smooother operations for all parties concerned.


The F.C.I.C. now uses A.S.C.S. acreage measurements in many

cases and their serial photos on occasion. The F.C.I.C. also uses

the A.S.C.S.'s payment programs to collect delinquent premium

accounts, and in some counties, by agreement, the A.S.C.S. collects

current premiums for crop insurance. Closer cooperation and

elimination of acreage measurement duplications could result in

savings of time and money in adjusting loss claims.

The field survey showed that farmers in the southeastern

counties previously insured believe strongly in federal crop

insurance--some of them would not be farming today if it had not

been for F.C.I.C.--and most of them would like to have insurance

coverage available again. These farmers would like to give the

insurance a chance to work; they would be willing to pay for it

and most of them would accept long-term contracts. These reactions

show the permanence of the plans that the farmers in this area

have and their determination to stay in farming.

There were several implications in the survey responses that

the insurance program in these counties was abused. Part of this

abuse was credited to poor administrative practices which allowed

farmers to sign up for the insurance or increase their acreage

under insurance coverage in the face of drought and part of the

abuse can probably be attributed to farmers who were in desperate

need of some source of income to keep them in farming. However,

most of the high losses were due to drought and high winds that

hit hard in this area in the middle 1950's.


Problem Areas Uncovered in the Survey

Several problem-areas were discovered within the operations

of the Federal Crop Insurance Corporation which should be discussed

briefly to provide a critical review of the program and to suggest

topics for study and, hopefully, improvement in the future.

The lack of knowledge and understanding of the insurance by

the insured farmers (which has been mentioned previously but which

merits further elaboration) is a major problem for the Corporation.

Some of the more serious (and expensive) failures of understanding

by farmers include: (1) do not know of all losses that are covered,

(2) do not know that losses must be reported for appraisal of un-

harvested or potential production and that written consent must be

obtained before a crop can be destroyed, (3) do not know provisions

for harvesting, (4) do not know provisions for planting substi-

tute crops, and (5) do not know of cancellation dates.

The F.C.I.C. does not have adequate informational sources to

furnish notices of specific changes within the program to insured

farmers nor does the Corporation notify farmers of cancellation

dates unless changes are made in the program. The problem is not

necessarily the quantity or frequency of dissemination of informa-

tion, but rather the form and methods which are used to inform

farmers of pertinent facts and changes which should affect their

insurance program.

Interviews from previous carriers indicated that insurance

cancellations can result when conflicts of interest occur among

the Corporation, tenants, and landlords. Some tenants lose all or


part of their crop insurance indemnity when the landlord does

not carry insurance and forces the tenant to replant a lost crop

or plant a substitute crop (in order that the landlord receives

some rent), thereby preventing the tenant from receiving an

indemnity on the first crop or causing him to lose fifty per cent

of the indemnity from the F.C.I.C, This same thing can happen if

the insurance adjuster gives consent for a low yield to be des-

troyed for planting to a substitute crop or for insurance indem-

nity but the landlord requires the crop to be harvested in order

that he will receive some rent. Also, many tenants would like to

be able to insure all of a crop if they incur practically all of

the operating expenses in growing it. When no solutions to the

tenancy problems are found, participation in the crop insurance

program is undoubtedly lowered and all parties involved suffer.

A serious problem in F.C.I.C. operations in Colorado (which

resulted in probably millions of dollars of losses to the

Corporation in the middle 1950's) stemmed from the reluctant use

of authority to close sales "in the face of drought." It is a

well-documented fact that insurance applications were accepted in

several drought counties, in increasing numbers, up to the final

day of sales after experiencing heavy losses in the preceding years

and with extremely poor prospects for seeding the next crop appar-

ent. Several persons interviewed mentioned a "block-long line of

farmers at the salesman's office" signing up for insurance before

the cut-off deadline at Burlington, in Kit Carson County, in the

middle of the drought years of the 1950's. This situation if


probably handled adequately at the present 6 but the State

Director might also need the authority to stop taking applications

for insurance in uncertain times and then re-open sales at a later

date if it appears feasible.

Some interviews with farmers revealed situations in which

farmers can take advantage of federal crop insurance, and the

Corporation might thereby incur unjustified losses. The F.C.I.C.

is set up to insure what is planted "with intent to harvest for

grain," but farmers in some counties who plant corn which normally

goes for silage--because the growing season is too short to produce

good corn for grain--can insure for grain and stand a good chance

of collecting an indemnity. This occurs mainly in the northern

and mountain counties where farmers can receive a 100% indemnity

on their corn for grain and then still cut fifteen tons of silage

for use as feed. There are also hedges available to farmers

resulting from differences in deadline dates of the F.C.I.C. and

the A.S.C.S. programs. For example, wheat farmers who collect

from the F.C.I.C. on early wheat losses can then cut back on their

wheat acreage under the Wheat Program until June 10 and receive

diverted acreage payments on the same acreage for which they

received insurance indemnities.

6For example, 1965 wheat crop sales were closed June 2,
1964--twelve weeks before the deadline date of August 31--
in Cheyenne, Kit Carson, and Lincoln Counties.


Another problem was discovered that has already caused

complaints of misrepresentation, complaints of poor adjustments,

even insurance contract cancellations, and promises to be an

underlying factor in future cases of dissatisfaction by farmers.

The problem is the potential danger involved in insuring crops

for more than their market value. When the situation exists that

the insurance indemnity for (say) a 10-bushel an acre loss is

worth more than the crop produced by a 10-bushel per acre yield,

it is certainly an explosive area as far as insurance losses,

adjustments, guarantees, and indemnities are concerned.7

7This problem is explored more fully in a section of
Chapter V.

Chapter V


Analysis of the Cost of the F.C.IC. to the Government

Any attempt at determining the economic success of a program

must contain an analysis of the cost of that program, which can

be compared to programs with similar objectives to approach a

conclusion of whether or not the program is economically justi-

fied. Such a study was made to compare the cost of the F.C.I.C.

operations in Colorado to the costs of other government programs

that aid agriculture.

Since the F.C.I.C. operations cover only field crops in

Colorado, comparisons were made with government programs closely

related to this area. Five main programs were examined to de-

termine their loss or net cost to the government. The programs

compared to the F.C.I.C. were those administered by the Agri-

cultural Stabilization and Conservation Service, including the

Conservation Reserve Program, the Acreage Reserve Program,

the Price Support Program, and the Sugar Beet Program.

The study covered aid to twenty counties in eastern Colo-

rado, including the fifteen counties where the F.C.I.C. is now

operative and five counties where it previously offered insur-

ance. The analysis was on a county basis, by years, from 1948

through 1962. 1948 was selected as the first year of the

time period for analysis since this year coincides with the

operation of the F.C.I.C. in Colorado after its reorganization.

The results of the analysis are summarized in Table VII.



Federal Conserva- Per Cent
Crop tion Acreage Price F.C.I.C.
Insurance Reserve Reserve Support Sugar Beet is of
County Corporation Program Program Program Program Total Total

Adams* $ 36,891 $ 683,240 $1,967,806 $ 4;988,450 $ 1,628,878 $ 9,305,265 .40%
Arapahoe 94;755 1,327,992 1,036,776 2,268,878 10,129 4,738,530 1.96
Baca 2,473,536 4,880,809 5,750,929 7,495,819 291,634 20,892,727 11.84
Boulder 16,845 37,567 442,855 1,116,594 1,564,641 3,178,502 .53
Cheyenne 880,236 4,246,834 3,656,311 3,325,191 --- 12,108,572 7.27
Elbert 61,043 782,509 976,988 2,245,941 --- 4,066,481 1.50
Kiowa 1,713,670 6,548,019 6,092,555 3,934,119 --- 18,288,363 9.37
Kit Carson 1,444,802 4,276,437 -- 7,813,254 212,189 13,746,682 10.51
Las Animas 392,739 1,260,777 397,583 650,106 214,889 2,916,094 13.47
Larimer* 28,234 247,535 494,304 1,959,124 4,742,422 7,471,619 .38
Lincoln 364,772 2,579,397 7,518,059 4,098,420 --- 14,560,648 2.51
Logan 180,705 43,470 1,169,931 6,082,936 5,049,061 12,164,693 -1.49
Morgan 398,068 1,709,668 56,978 5,518,807 11,027,487 18,711,008 2.13
Otero 279,805 408,996 387,131 1,333,627 2,683,414 5,272,973 5.31
Phillips 434,766 32,048 1,070,930 6,217,250 -- 6,885,462 -6.31
Prowers 1,237,491 2,817,877 6,414,965 6,680,119 1,486,270 18,636,722 6.64
Sedgwick 310,501 51,301 670,225 4;254,771 2,130,224 6,796,020 -4.57
Washington 99,535 1,530,331 2,802,503 9,094,008 429,539 13,955,916 .71
Weld* 1,344,777 2,335,477 2,730,153 17,926,109 36,986,194 61,322,710 2.19
Yuma* 9,581 1,501,208 1,973,661 7,988,669 479 11,454,436 .08
Totals $ 9,931,646 $37,301,492 $ 45,610,643$104,992,192 $ 68,637,450 $ 266,473,423 3.07%

a Counties presently insurable under the F.C.I.C. are denoted by (*).


The computations for F.C.I.C. net costs were taken from the

"Insurance Experience" data for the Corporation in Colorado.

These data include a debit or credit listing for each crop

insured by years and by counties. The total program for the

counties under observation showed a loss or net cost to the

government of $9,931,646 at the close of the 1962 crop year.

The conservation Reserve Program was initiated in 1956,

with 1960 being the last year to sign a contract with the govern-

ment to lay land idle for a specified length of time, not to

exceed ten crop years. Also included in this program were small

grants-in-aid to individual farmers for performing various con-

servation practices. The Conservation Reserve payment was

$9,082,353 in Colorado for 1962 and this is close to the aver-

age payment for the last three years. The table includes the

total payments to counties for the years 1956 through 1962.

The Acreage Reserve Program is another part of the Soil

Bank Program, under which the Conservation Reserve Program can

be classified. This program began in 1956 but continued as

such only through 1958 for land that had been in wheat. Par-

ticipation under this program was in the form of one-year con-'

tracts to decrease land planted to wheat. There was no similar

program for the years 1959 or 1960 which removed specific crops

from production.

The Price Support Programs of the A.S.C.S. are under super-

vision of the Commodity Credit Corporation. The specified pur-

pose of the C.C.C. is to function on a price set by the govern-

ment for those commodities under support. Farmers can, in effect,


sell the commodity on a loan basis to the C.C.C. and are assured

at least this support price as set by the government for their

commodity. If the price should rise above the support level, the

farmer can sell the commodity on the open market and has no

obligation to the government. This is an insurance feature for

farmers in that they are guaranteed the support price or better if

they participate in the program, but the government stands to lose

money when the price is low if it has to assume title to the

commodity that has been taken over by way of the C.C.C. loan

operations. This loss is figured as the difference between the

market price and the support level plus those costs involved in

handling and storing the commodity.

Cost of the Price Support Programs used in this study had to

be estimated as data are not available in a form that can be

evaluated to arrive at the net cost to the government by commod-

ity by county, and by years. The method used to estimate the

cost to the government of these operations for the fifteen-year

period was from national production data for each commodity under

support and the loss cost to the government for support of a

given commodity. The average cost per unit of the commodity was

then applied to the county production figures to obtain a measure

of the cost of the program each year on a county basis.

For comparative purposes, calculations were made on the

county totals of the loss costs of all programs under considera-

tion and the net cost of the F.C.I.C. was computed as a per cent

of the total. The resulting computations show that F.C.I.C. net

costs as a per cent of the total loss costs are not very significant


in most of the twenty counties. In only three counties--Las

Animas, Baca, and Kit Carson--were net payments by the F.C.I.C.

greater than ten per cent of the total loss cost to the government,

while four of the twenty counties covered by federal crop insurance

have paid more in premiums to the F.C.I.C. than they have received

in indemnities.1

An accurate measure of benefits derived from the Federal Crop

Insurance Corporation is impossible because of the intangible

assets gained from insurance, such as peace of mind at the present

and security of plans for the future. However, numerous benefits

are evidently received from federal crop insurance and this is

attested to by the number of farmers voluntarily participating in

the program. Federal crop insurance does not provide as much cash

income to farmers as other agricultural programs, but it does

furnish considerable benefits at a low cost to the government--it

composes only 3.07% of the net cost of government programs includ-

ed in the study. Further support must be given to the Federal

Crop Insurance Corporation as a sound economic program when it is

realized that net costs to the government incurred from the program

in Colorado have been generally off-set by net profits in other

parts of the nation, whereas other agricultural programs have

certainly made no net profits in their operations.

iThe four counties in which the F.C.I.C. shows a net
gain in premiums over indemnities--Logan, Phillips, Sedgwick,
andYuma -are all included in the five counties shown by the
risk index program to have premium rates relatively higher than
necessary to pay for the coverages available.


Analysis of Problem Areas in Southeastern Colorado Counties

References to problems of the counties of southeastern

Colorado, which had insurance available until the Corporation

experienced disastrous losses and was forced to cancel the

insurance program from the area in 1955, appeared and reappeared

throughout this study of the federal crop insurance program.

When the F.C.I.C. withdrew insurance from this area the farmers

who had previously been covered and had counted on it for future

protection had nothing to fall back on. When the entire program

was canceled in five counties--Baca, Kiowa, Las Animas, Otero,

and Prowers--without previous notice,bad feelings and mistrust to-

ward the Corporation and even toward other government programs

resulted. Apprehensions about the program also developed in

surrounding counties and a hostile attitude toward the federal

crop insurance program was evident in many areas of the state

where farmers were interviewed.

The losses suffered by the Corporation in these counties were

tremendous; approximately six million dollars more was paid in

indemnities than collected in premiums during the years 1948-1955.

($2.47 million was lost in Baca alone over this period, with the

greatest losses occurring during the last four years.) The

question often asked is whether the F.C.I.C. could have recovered

some of its losses from these counties by keeping the insurance

program in effect in this area.

Insurance premiums in this area were increased after nearly

every loss to the Corporation, but the repeated high loss ratios,

even with these increased premiums, indicate that it would have

taken a combination of higher premiums, steady participation, and

average or good crop years to regain earlier losses. It is argued

that the wheat producers in this area (who accounted for most of

the losses) were "sold" on the federal crop insurance program in

1955 and most of them could have been counted on for participation

in following years, even with slight rate increases. This appears

to be true and it is also true that several good years followed

in which the Corporation would undoubtedly have made up some

losses, but poor crop yields in the 1960's again stress the fact

that it may be impossible to provide equitable insurance coverage

in this high-risk area. It is also recognized that when farming

prospects grow better (as they did in this area after 1956), many

farmers will cancel their insurance and the participation necessary

to recoup losses falls.

Interviews taken in the field survey turned up repeated

references to "abuse" of the insurance program when it was opera-

tive in this area. Farmers in near-by counties mentioned incidents

of insured farmers in these areas seeding wheat on land with no

subsoil moisture that could not possibly support a crop. There

were even accusations made that farmers had pulled wheat drills

across their land with little or even no seed in the drill boxes,

reported the "planted" acreage for insurance coverage, and then

waited for their insurance indemnity checks as income from their

wheat "crop".

When farmers in these previously insured counties were

interviewed, similar accusations were made but the blame for the


abuse of the insurance was placed on insureds who did not live on

their land but who showed up to "farm" the land only during seed-

ing time and then left the crop to blow away. Numerous complaints

of these farming practices by the present farmers in these counties

who are considered to be good farmers led to a study of experience

data from these in an attempt to determine if any one group of

insureds should be held responsible for the reported abuses of the


For purposes of this analysis, records of crop insurance

experience were obtained from the files in the State Office to

determine if higher indemnities may have been received by insureds

who did not live on their farms and who therefore did not expend

as much time and money to raise or save crops during poor years.

The analysis was made on the participation and premium-indemnity

records of contracts in Baca County, which experienced the heaviest

losses under the program.

All insureds in Baca County and in neighboring towns of Kansas

and Oklahoma were considered to be residents living close enough

to their farms to give it normal attention required during the

year and all insureds outside this area were grouped as absentee

farmers. The total number of contracts written in the Baca County

insurance program was 692; the division for the analysis resulted

in 565 being classified as resident farmers and 127 as absentee


The absentee farmers were approximately 18% of all the insureds

but accounted for only 9.47% of the total premiums paid in the

seven years included in the study, which indicates they had smaller


average acreages under insurance than did the resident farmers.

The totals computed from the years 1949-1955, inclusive, indicate

that the loss ratio (indemnities divided by premiums) for the

absentee farmers was 2.95 compared to 2.55 for the resident farmers

and 2.58 for the total of both groups. The total indemnities of

the absentee farmers was 10.69% of the total and they received

11.45% of the net indemnities over premiums.

These figures appear to partially substantiate the case

against the absentee farmers of abusing the insurance. The claims

against them are further substantiated by analysis of the experi-

ence data for 1955, the last year of F.C.I.C. operation in Baca

County. The total loss ratio for this year was only 1.22, but

the absentees' was 2.74, and the net indemnities received by the

absentee farmers composed 47.34% of the total although the premiums

paid by them were only 7.66% for that crop year.

The Problem of Insuring a Crop for More than its Value

Price selections available on federal crop insurance, which

permit a farmer to select a price level to be applied on the

production guaranteed for his risk area, were initiated by the

F.C.I.C. to offer farmers more dollar protection against crop

losses without raising guaranteed levels of coverage. Although

the insurance is sold as guaranteed bushels of coverage, a farmer

translates the bushels into dollars, according to the price selec-

tion made, to see if his expenses would be covered; and the farmer

is usually aided in this computation by the crop insurance salesman

or representative. This is a common procedure and a dangerous one:


therein lies the beginning of a paradox which can be extremely

perilous to the operation of the present crop insurance program.

The problem involved is that of insuring crops for more than

their market value. This problem is illustrated with the

following example on wheat insurance, although the problem exists

on other crops also.

When today's wheat farmer figures his high production costs

for seed, fuel, labor, depreciation and repairs on machinery, and

the costs of summer-fallowing the high percentage of his land

that does not come under allowed acreage, in addition to his

harvest costs and paying the insurance premium, he usually wants

the highest possible insurance coverage in order to protect his

investment in the crop. Then, when a farmer selects the $2.50 per

bushel as his price on his (say) 10-bushel guarantee, he some-

times thinks he is assured $25.00 per acre income. But that is

not the case. The farmer is not insured for $25.00 worth of in-

come if he has to make it from his wheat crop. The reason is

that the farmer will be paid $25.00 per acre only if he has a

total loss and collects the insurance indemnity. This problem

stems from the fact that the market price for wheat in Colorado

is approximately $1.25 per bushel2 and if the farmer produces

11.5 bushels per acre (1.5 bushel over his basic guarantee

that is added if he incurs harvest expenses) that he sells for

this price, he receives an income of only $14.38 per acre. He

2The average farmer receives considerably more than this
for his wheat crop from certificates and diversion payments
under federal farm programs, but he receives these even if he
collects an insurance indemnity.


still has to pay his harvest costs out of this total that he

would not have had to pay out of the $25.00 insurance indemnity.

As seen above, the insured farmer will be better off, dollar-

wise, with no production rather than making his guaranteed level

of production or a little more; he will also save the expense of

using his combine and other machinery and the land will be in

better condition for the next crop (with more soil nutrients and

moisture) than if a crop had been harvested. Therefore, the

farmer is much better off, ironically and illogically, by

experiencing a total crop loss and collecting the insurance

indemnity than he is by producing the yield for which he was

insured. Actually, the farmer in this case would have to produce

a wheat crop yielding about 22 bushels per acre (equal to $25.00

per acre after paying harvest costs of approximately $2.50 per acre)

to be as well off as if he sustained a loss, had yield of 0 bushels,

and collected on his insurance.

An analysis was made of the price levels selected by wheat

farmers to get a measure of the size of the potential problem

which exists. No summaries are kept by the F.C.I.C. of the price

selections made by insured farmers but a compilation was made of

the price selections that had been recorded on processed applica-

tion forms in the State Office. A count of selections made in

1963, by farmers who had been insured before the price selections

were available, showed that 327 farmers had selected the $2.50

per bushel price and 40 had selected the $1.50 per bushel price.

The remaining contracts, on which no price selections had been


made, were set by the F.C.I.C. at the middle price of $2.00 per

bushel. A complete enumeration was made of the wheat contracts

sold for the 1964 crop year and the price selection distribution

taken from the summaries of application forms was: $1.50 13,

$2.00 204, $2.50 350. Two of the counties with marked trends

toward the highest price selection were Cheyenne County (with no

selections of the $1.50 level, 8 of the $2.00 level, and 47 of

the $2.50 level) and Kit Carson County (also with no selections

of the $1.50 level, 16 of the $2.00 level and 116 of the $2.50


A simple average of the price selections on the 1964 sales

gives a mean of $2.30 per bushel for all contracts sold in 1964.

The 1965 sales are not completed as this is written (although

sales were closed early in Cheyenne, Kit Carson, and Lincoln

counties) but a count made of application forms through August 1,

1964, in the State Office showed that of the price selections

recorded, 6 were at the $1.50 level, 147 at $2.00, and 80 at $2.50;

a simple average of these selections shows the mean to be $2.16

for the 1965 sales.

Computations from these figures, when all other contracts

not accounted for are set at the middle price of $2.00 per bushel,

show the average wheat contract in force in Colorado has a price

of about $2.10 per bushel in effect on all loss claims. This

price is approximately $.85 per bushel above the present market

price of $1.25 per bushel. This differential of $.85 per bushel

is the average amount of money farmers will lose on every bushel


of wheat that is harvested from insured acreage that does not

yield the guaranteed level (and this lower income will cause farm-

ers to have doubts about the value of crop insurance.) This prob-

lem takes on monstrous proportions when the millions of bushels of

wheat under insurance is considered.

The problem also exists on other crops which are insured for

more than their market value. To get an estimate of the average

prices in effect on other insurable crops in Colorado, a compila-

tion was made on the price selections record for 1964 sales of

irrigated crops in Weld County.3 The price selections recorded

for 1964 sales of barley insurance were: 0 at the $.75 per

bushel price level, 18 at the $1.00 level, and 10 at the $1.25

level; 1964 sales of bean insurance were: 1 at the $.05 per

pound price level, 21 at the $.06 level, and 119 at the $.07

level; and 1964 sales on corn insurance were: 7 at the $1.00 per

bushel price level, 69 at the $1.20 level, and 16 at the $1.40


When the average price selections are compared to the market

prices for these crops to determine if the problem is present, the

average of $1.09 per bushel for barley contracts included in the

study shows to be slightly above the market price of $.95 per

bushel and the average of $6.85 per hundred-weight ($.0685 per

pound) for bean insurance is considerably above the market price

3Price selections for the 1964 sales were the best obtainable,
and figures were used from Weld County since it has more insurance
contracts in force on irrigated crops than any other county in the


of $5.65 per hundred-weight; therefore the problem is present

with barley and bean insurance also. The average insurance price

for corn of $1.26 per bushel is below the market price of $1.40

so the problem does not exist with corn insurance because insured

farmers have an incentive (of an additional $.14 per bushel) to

harvest for sale on the market rather than to collect on crop


This problem must be solved if the crop insurance program is

to be successful and operate satisfactorily. This potential

problem is present with every farmer who is insured for more than

the market price of his crop. The problem is evident any time a

farmer suffers a partial loss and receives less from his harvested

crop than he would have received from an insurance payment instead.

This situation is at the base of many complaints and cancellations

although most farmers don't figure it out in dollars and cents

but just think that the Federal Crop Insurance Corporation has

not given them what they thought they were guaranteed and what

they had paid for. Although the solution to this problem may be

difficult or impossible to conceive, as substitution of higher

bushel guarantees for the higher price selections are not feasible

or actuarially possible in many areas, it is imperative to attempt

to correct the practice of insuring crops for more money than they

are worth.


Chapter VI


Conclusions From The Study

Most farmers in the state of Colorado need some protection

against the unforeseen hazards that are present in the high-risk

areas characteristic of farming in the Great Plains' states.

Federal all-risk crop insurance offers such protection to a large

number of farmers in fifteen counties of eastern Colorado. This

insurance is administered by the Federal Crop Insurance Corpora-

tion which attempts to offer farmers as much insurance as possible

for a reasonable premium.

The F.C.I.C. operations in Colorado are comparatively stable

now after experiencing a history of considerable changes in the

program since 1948, particularly in regard to the areas in which

the insurance has been available. The program can probably be

characterized as having progressed and improved through a long

period of trial and error. The program has operated and changed

on the basis of trial and error because of the difficulties in-

volved in trying to operate an insurance program covering several

crops, in various agricultural areas, against many risks, during

severe droughts, and for nuMerous- farmers in the state, each with

different farming operations and individual needs and desires.

Findings from the field survey indicated that farmers use

federal crop insurance mainly to protect their investment and to

insure that they stay in farming. Most of the farmers presently

insured said that they have to have something to protect themselves


and that federal crop insurance is the best thing available.

Analysis of survey schedules revealed there is no particular

group of farmers that use the insurance more than any other group

and there is no "type" of farmer (i.e., irrigated, non-irrigated,

diversified, specialized, etc.) who benefits more than others from

using the insurance. However, "poorer" farmers stand a chance of

receiving greater indemnities from an equal level of coverage than

do "better" farmers.

Very few farmers interviewed use private hail insurance,

mainly because of high premiums, but those who do are just as

likely to also carry federal crop insurance as those who do not.

The use of other risk-bearing strategies--such as diversification,

fetd reserves, or cash reserves--appears to be widespread in pracal

twice but limited in effectiveness as furnishing income protection

in poor crop years and even more so in a series of bad years.

Classification of any of these informal risk-bearing strategies as

self-insurance is probably a misnomer, since the principle of in-

surance is to transfer the burden of risks to some other party,

but they must be considered as voluntary methods of meeting risks.

Reasons for cancellation of insurance contracts discovered in

the survey indicate that lack of knowledge and understanding of

the program is a serious problem. A lack of adequate knowledge

about the program by all farmers is a hinderance to participation,

and misunderstanding of policies and regulations by insured farmers

frequently lead to insurance cancellations. A number of complaints

(each one of which has been the reason for at least one farmer

dropping out of the program) were voiced by farmers during


interviews, including the following: (1) coverages are too low,

(2) premiums are too high, (3) cannot collect losses on individual

fields, (4) adjustments are slow in being made, (5) receive no

payment, even partial, to pay for re-seeding destroyed crops, (6)

tenant can insure only two-thirds of crop even though he has all

the operating expenses in it, (7) have no personal contact with

insurance representatives, (8) do not know of changes in the

program, (9) are not reminded of cancellation dates, (10) do not

like distance to district offices (which are over ninety miles

from some farmers), and (11) do not receive money equal to in-

surance guarantee from harvest of a poor crop.

Other federal farm programs affect participation in the

federal crop insurance program very little, but acreage under

insurance is affected when allotments of crops under insurance

are reduced. It appears that the federal government aids insur-

ance policy holders more than other farmers in making loans (i.e.,

an insurance-carrying manager is a better risk). Most farmers and

businessmen recognize that the collateral assignment feature of

the insurance policy is extremely beneficial in securing short-

term loans. Some would go even further with it and combine

federal crop insurance with federal loan agencies to assure repay-

ment of loans and to give lower interest rates to farmers.

It can be hypothesized that the farmers remaining in south-

eastern Colorado counties today are those who were in the best

financial position during the 1950's and who are determined to

continue farming in that area. These farmers, in general, would

be those who have done a good job farming and,therefore,would not


have abused the insurance program. The farmers in this area need

and want wheat crop insurance; they are willing to pay for it.

The problem is whether it is actuarially and administratively

possible to offer insurance coverage in this high-risk area. The

problem is compounded further by low wheat prices and higher oper-

ating costs involved in producing wheat today.

The risk index program computed mean yields on wheat to be

from 10.5 to 21.4 bushels per acre in insurable counties, with

trend coefficients ranging up to 0.5 bushel in these counties.

Estimated mean yields ranged from only 2.7 to 19.6 bushels per

acre in eleven other counties of eastern Colorado on which the

program was run, with six of these counties showing negative

trend coefficients. A comparison of computed "pure premium rates"

to premiums of the F.C.I.C. showed that the wheat insurance pre-

miums in Cheyenne and Kit Carson counties are too low for the

coverage offered, and the coverage available in Lincoln, Logan,

Phillips, Sedgwick, and Yuma counties should be offered at lower

premium rates.

A comparison of the cost to the government of the F.C.I.C.

with other agricultural programs showed that F.C.I.C. net losses

as a per cent of the total loss cost to the government for all

programs were not very significant in most counties of eastern

Colorado in which the F.C.I.C. has operated. Only three counties

showed F.C.I.C. net losses to be greater than ten per cent of all

costs of the programs under study, while four of the twenty counties

have paid in more in premiums to the Corporation than they have

received in indemnities.



General policy recommendations, which have not necessarily

come out of this study but which seem important to carrying out

the changes implied in the study results, are listed below.

1. The Federal Crop Insurance Corporation should be made

a permanent agency by Congress. This would allow for more

continuity of operation by eliminating constant shifts in policy

caused by changes in political administrations. Congress would

still have control over the budget for the administration of the

F.C.I.C. and would review its operations annually, but the long-

term laws of insurance would have a better opportunity to work

successfully under a permanent program.

2. The Federal Crop Insurance Corporation should retain its

experimental approach in insuring crops in new areas and in offer-

ing insurance on crops not previously insured. The Corporation

should be constantly alert in satisfying complaints about the

program and in incorporating improvements into its operations.

3. Research programs should be developed within the F.C.I.C.

for self-analysis and appraisals as well as making use of research

studies and information from outside sources. A continuous program

of self-evaluation and recommendations concerning policies and

procedures by administrative personnel, salesmen, and adjusters

would be the best foundation for discovering problem areas and

possibilities for improvements in the program. Experienced

employees of the Corporation can usually offer more useful criti-

cisms and recommendations concerning the F.C.I.C. operations than

outside agencies or individuals who must cope with the enormity of


the operations and labor under the handicap of unfamiliarity with

policies and regulations. However, all studies by outside

agencies must not be eliminated since the inevitable problem of

"not being able to see the forest for the trees" will arise.

But it is recommended that future studies by outside agencies or

research groups be confined to limited problem areas so that

intensive study will be possible and specific solutions can result,

thereby making the studies beneficial and economically profitable

for the F.C.I.C. and more manageable by the study group.

4. Although no definite solution to the problem of lack of

knowledge and information may exist, efforts should be directed

at furnishing clear, concise, and important information to the

farmer that will not prove burdensome for him to read or com-

prehend and at the time when farmers need more information and

have time to digest it. Examples of this would be furnishing

information to all eligible farmers after disastrous crop years

and informing insured farmers of changes and deadlines in the

program considerably before the effective deadlines and planting

dates so they will have ample time to make good decisions.

Insured farmers should be notified of cancellation dates and all

changes in the program. Dissemination of additional information

to farm-related businesses and to the general public could ad-

vance the acceptance and use of federal crop insurance.

5. The federal crop insurance program should be oriented

more toward being a "farmer's program"; after all, farmers are

the most important factor in determining whether the program


works satisfactorily or, even, if it works at all. Farmers

should be convinced that it is their program and impressed with

the fact that their cooperation is necessary to make it work for

them. Personal contact with farmers should be increased, as

insurance requires service. Part of the F.C.I.C. research

program could be composed of soliciting criticisms and suggestions

from farmers themselves--as an aid to the Corporation and a long-

run benefit to farmers. Possibly the use of farmers on advisory

boards at the local level, similar to the county committees of

the A.S.C.S., would improve relations between the Corporation and

farmers and result in a mutual communication of ideas between the


6. The Federal Crop Insurance Corporation should consider

closer ties with the Agricultural Stabilization and Conservation

Service. Unification of sign-up and cut-off dates of the F.C.I.C.

and the A.S.C.S. would help eliminate hedges available to farmers

and would make it easier for farmers to comply with the programs

under these agricultural agencies. The F.C.I.C. could probably

make more use of the A.S.C.S. "normal farm yields" in up-dating

coverages and rates and expanding its program into new counties.

The use of common offices or at least the location of offices in

the same place would better serve the interests of the farmers

in the program. Certainly the degree of combination is debatable,

but closer coordination with the A.S.C.S. on the local (county)

level might result in smoother and more economical operations for

the F.C.I.C.


7. Insurance guarantees available to farmers should be

reviewed periodically and higher coverages offered where they are

warranted. Low coverages are one of the most frequent complaints

voiced by farmers and, consequently, higher coverages should im-

prove the program in the minds of farmers and result in greater

participation. Higher coverage should be given to farms and

farmers with higher established production records; this would

encourage better farming practices and discourage those antici-

pating crop failures if they realized they might not be eligible

for the higher insurance guarantees. The insurance program suffers

from heavy participation by higher-risk farmers and some of these

marginal farmers must be eliminated from insurance availability

by use of ineligible lists to improve the program for others.

8. Present carriers of insurance should be allowed to cancel

their contracts up to the deadline for sign-up by new carriers.

At the present, carriers of wheat insurance, for example, are

discriminated against because they have to cancel their contracts

by March 15 if they do not want the insurance, whereas wheat sales

for new carriers do not close until August 31. Possibly both dates

could be changed and made to coincide.

9. Since the program is experimental in nature, an experi-

ment should be made with long-term contracts. Writing contracts

on a long-term basis would eliminate farmers from collecting

indemnities in one or a few years and then canceling the insurance

when better crop prospects were apparent. Higher coverage would

be possible under long-term contracts because of lower adminis-

trative expenses, and actuarial determinations of coverage would


be given a longer period of time to achieve the "norm" in actual

experience. Possibly a few counties in southeastern Colorado

(where farmers have indicated they would be willing to accept

long-term contract) could be used as test area for such an ex-

perimental program; this would give farmers in this area an j,

opportunity to have insurance coverage, which is not now avail-

able, and might prove to be a successful part of the F.C.I.C.


10. Loss adjustments should be made as promptly as possible

and special efforts should be made when the magnitude of losses

is large or extends over a several-county area. Adjustments on

farms that are relatively far removed from the district offices

are sometimes delayed in being made and should receive quick

processing after the visit to the farm has been made by the

adjuster. Extremely large losses should be given special attention

because the magnitude of the loss makes it that much more important

to the insured involved. Many farmers need indemnity checks soon

after the time of a loss to enable them to finance and plant a

substitute crop.

11. The separation of units should be restricted as much as

possible. This is in opposition to the wishes of farmers (who

sometime want each field carried separately and sometime even

want parts of a field insured separately), but insuring fields

under separate contracts can work to the detriment of sound

actuarial work if this division of units is used as a selling

point to entice big producers into the program.


12. Areas which might be pursued in future study and research,

with the aim of improving the program, should include (1) the

consequences of insuring crops for more than their value, (2) the

difficulty of insuring low-priced wheat, (3) the possibility of

offering insurance on a long-term basis in southeastern Colorado,

(4) the possibility of incorporating into the program variable

premiums and/or coverages based on individual farm yields, (5) the

merits of district offices and state salesmen vs. insurance agents

on a county basis, (6) the possibility of more cooperation between

the Federal Crop Insurance Corporation and the Agricultural

Stabilization and Conservation Service on the county level, (7)

the possibility of allowing State Directors to "hold" sales at

times of poor crop prospects and then re-open them when feasible,

(8) the influence of federal crop insurance on a farmer's credit

position, and (9) the possibility of combining federal crop

insurance with federal loan associations for the purpose of low-

ering interest rates and assuring repayment of loans.





Part I. Counties Now Insurable With The F.C.I.C.

Unweighted Possible Pure
Mean Yield Insurance a Premium
County (Bushels) Guarantees (Bu.) Rate(Bu.)















Kit Carson















Lincoln 15.81 15.81 2.84
14.81 2.39
13.81 1.98
12.81 1.67
11.81 1.37
10.81 1.07
9.81 .84
8.81 .64
7.81 .44
6.81 .26
5.81 .11
4.81 .01
3.81 .00
Logan 17.12 17.12 1.92
16.12 1.57
15.12 1.28
14.12 1.00
13.12 .73
12.12 .49
11.12 .29
10.12 .18
9.12 .14
8.12 .09
7.12 .04
6.12 .00
Morgan 12.95 12.95 2.30
11.95 1.87
10.95 1.53
9.95 1.29
8.95 1.05
7.95 .81
6.95 .57
5.95 .38
4.95 .21
3.95 .14
Phillips 20.12 20.12 2.22
19.12 1.80
18.12 1.41
17.12 1.07
16.12 .74
15.12 .43
14.12 .18
13.12 .05
12.12 .00


















a Possible insurance guarantees listed include the unweighted mean
and lower levels derived by consecutive substraction of one bushel
from this mean until a level under 4.0 bushels is reached or until
the corresponding pure premium rate reaches zero.


Part II. Counties Not Now Insurable With-The F.C.I.C.

Mean Yield





El Paso


(Bu.) Rate (Bu.)

















University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs