(Reuters) - The drought ravaging America's prime farmland is having an unexpected consequence that could shape the future of agricultural finance: in some cases, farmers who have amped up their insurance coverage may be giving up on their crops early rather than to trying to save them.
Anecdotal evidence and economic assumptions suggest that a record number of farmers are likely preparing to file insurance claims this year, opting to plow under their withered crops -- some without bothering to administer the costly pesticides and weed killers that might help salvage a dwindling harvest.
Call it "moral hazard" in the heartland: with the growing use of federally backed crop insurance, a shift toward larger policies and newer schemes that protect revenue, some experts say farmers may now be better off claiming a total loss than eking out a shrunken harvest -- a move that could exacerbate a 50 percent surge in corn prices by further reducing supply.
"Why spend money trying to save a crop when every bushel of crop you save is then going to reduce the indemnity that you would otherwise receive?" said Vince Smith, an economist at Montana State Universitywho has been critical of the program.
"The higher level of coverage means that you need a small shortfall in yield in order to be eligible for an indemnity payment, so these moral hazard effects come into effect more frequently," he said, referring to the economic theory in which one party may take excessive risk to the detriment of another.
Indemnified losses are likely to significantly exceed last year's record $10.7 billion, experts say, a sum that will be shared by the government programs that subsidize the dozen or so specialist crop insurance firms that sell the policies.
Consumers across the world will also pay at the grocery store: as more farmers give up, the corn crop shrinks, propelling prices even further beyond last year's $8 a bushel. Some analysts began revising down their crop estimates this week on the basis that millions of acres may not be harvested at all.
As it plays out, the trend may have far-reaching implications in Washington, where Congress is in the final furlong of hammering out a multiyear farm bill -- the cornerstone of which was expected to be an expanded insurance scheme, something that now faces even greater scrutiny.
GROWING SHARE
The growth in crop insurance is well documented. A decade ago, insurance covered about 75 percent of the U.S. corn crop; last year it covered 85 percent of all planted acres.
But more importantly, farmers have also been shifting toward policies that offer a greater level of protection.
In 2004, farmers who took out policies at 75 percent or more coverage represented less than 40 percent of the total sum of insured acres. By last year that share had risen to 63 percent, according to U.S. Department of Agriculture Risk Management Agency (RMA) data compiled by Thomson Reuters Lanworth, a natural resources intelligence firm.
While it is too early to see any definitive evidence of the total indemnity costs, early data supports anecdotal reports of greater activity. As of July 16, insurance indemnities for all crops stand at $446 million compared with $230 million at this time a year ago, according to RMA data.