Tropical Systems Spin Up Mid-South Crop Insurance Rates
Farmers in Arkansas, Louisiana, and Mississippi pay four to six times more for crop insurance than their counterparts in the upper Midwest, and Hunter Biram wanted to know why.
It’s a question that’s been in Biram’s head since his dissertation days at Kansas State University.
Now a Ph.D. Extension economist for the University of Arkansas System Division of Agriculture, Biram — along with co-authors Micah Cameron-Harp, agricultural economist, and Jesse Tack, professor of Agricultural Economics, both of Kansas State — have some answers.
The result of their research — Measuring the Impact of Hurricane Incidence on Agricultural Production Risk Using Insurance Data — was published in late July in the field’s top journal, the American Journal of Agricultural Economics.
“I began to study the price of crop insurance across the United States, and what I noticed was, there were vast differences in prices between what folks in the South and primarily the Mid-South would pay versus those in the upper Midwest,” says Biram. “One thing that I begin to think about and do some research on is what’s different about the Mid-South?”
Biram began to delve into the differences in rates between Arkansas, Louisiana, and Mississippi versus Illinois, Indiana, Ohio, Iowa, and parts of Minnesota.
“I’m not saying that the rates in the Mid-South should match those of the Upper Midwest,” he says. “But we’re talking about rates that are four, five, six times higher than that of the Upper Midwest.”
“There’s a 2-cent per $1 of liability rate in the Upper Midwest, where a similar situation in the Mid-South could be more like 15 or 16 cents per dollar of liability. There’s a significant difference.”
Hurricanes and Production Risks
“Obviously, everybody faces similar price volatility from global markets, things like the Russia and Ukraine conflict among others,” he continues. “But one thing that’s unique in the Mid-South is the incidence of hurricanes. We’re so close to the gulf.”
Biram says that while hurricanes don’t explain everything, “I began to dig a little big deeper to find what portion of that price is going to be attributed to hurricane incidents. That’s what this study attempts to do: What is the impact of hurricanes on production risk.”
Production risk generally translates into crop insurance premium rates.
“While premium rates drove the question, it’s really more of a symptom,” he explains.
While the Upper Midwest may weather tornadoes and the occasional derecho, the frequency and scope of damage are different than that of hurricanes.
Biram limited the study to named storms that made landfall in Louisiana and Mississippi because they are “most likely make an impact on Arkansas.”
Crop Insurance Gaps
In 2021 alone, hurricanes caused $145 billion in property damage, making it the third most costly hurricane season and seventh to see 10 or more $1 billion-dollar events, according to the National Oceanic and Atmospheric Administration.
Between 2002 and 2021, the Mississippi Delta region of Arkansas, Louisiana, and Mississippi experienced 30 hurricanes and tropical storms. Several storms, degraded to tropical depressions, meandered their way across Arkansas, affecting areas not covered by a hurricane-specific insurance called the Hurricane Insurance Protection – Wind Index endorsement, or HIP-WI.
HIP-WI is offered by USDA’s Risk Management Agency. There’s also an add-on that covers tropical storms.
The full value of the HIP-WI Endorsement is paid if a county, or adjacent county, is within the area of sustained hurricane-force winds from a named hurricane based on data published by the National Hurricane Center.
Above and Below the Eligibility Line
In Arkansas, the eligible counties are bounded by the Louisiana border to the south, Union County to the west, up through Cleveland and Jefferson counties, with Lee and Monroe counties being the northernmost of the eligible counties in Arkansas.
“We’ve shown that the portion of hurricane incidence is, for the most part, not too different from above the HIP-WI eligibility line as it is below,” Biram said.
Looking at wind and water damage to four crops: cotton, corn, rice and soybeans, “the portion of the base premium rate attributable to hurricane damage is greatest in counties closer to the coast and then typically decays moving inland, which is expected as hurricane systems lose power as they move inland,” the researchers wrote.
“There are counties in northeast Arkansas that are higher than parts of Louisiana — especially in the case of cotton. It’s very clear in cotton and in soybean but not so much in rice and corn,’’ Biram says.
“The proportion of the rate can be quite large, reaching a high of 92% for cotton and 42% for soybeans. The impacts for rice and corn are much smaller with highs of 29% and 9%, respectively.”
Cotton tends to be vulnerable because boll formation and opening happen during hurricane season. Cotton and soybeans are less likely to incur prevented planting losses which are more prevalent in corn and rice.
“I think the next step would be to visit with the Risk Management Agency and other policy makers to find a way to help farmers in northeast Arkansas manage hurricane risk,” says Biram. “I know it sounds interesting to think that we need to manage hurricane risk in northeast Arkansas.”
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