California Drought, Nebraska Hail, and Record-Breaking Corn Belt Production

August 14, 2014

The U.S. agricultural sector is having a very interesting year from a meteorological and financial standpoint. Unfortunately there is no precipitation relief for drought-ridden California, but it's not all bad news for crops there. And Nebraska has had a couple of bad hail events so far, but overall the crops in that state are doing all right. In the Corn Belt, the main grain crops are heading toward a record-breaking production year, which can have significant loss implications for insurance and reinsurance-who knew you could potentially lose money in a record-producing year?

California Drought

The rainy season in California is long over, and most of the state is in an Exceptional Drought according to the latest U.S. Drought Monitor. Farmers and cities are fighting legal battles overwater rights, and agricultural production of input-intensive/highly irrigated specialty crops, such as fruits and vegetables, has suffered. But the California agricultural sector has proven very resilient: wells are being drilled at a record pace to supply the required irrigation to high-value orchards across the state.

Interestingly enough, the drought has not slowed the increase in almond acreage despite the fact that the almond tree is a thirsty one. California produces more than 80% of the worldwide almond crop, which commands a price premium in global markets. Also surprisingly, the highly irrigated cotton and rice crops are faring very well. In fact, 85% of the cotton crop and 80% of the rice crop are in Good or Excellent condition according to the latest USDA report.

Hail damage to corn in Nebraska
(Photo by Ron Seymour, UNL Extension)

Nebraska Hail

On July 9, a severe hail event damaged corn and soybeans in central Nebraska. At this time of year, corn is tasseling and soybeans are blooming-the most critical stages of development. An analysis of the event using our new U.S. Crop Hail model results in a total loss in the range of USD 35 million to USD 65 million for the crop insurance industry in Nebraska.

Record Corn and Soybean Production Expected in the Corn Belt

The scuttlebutt among farmers, traders, insurers, and risk managers is that 2014 is going to see record-breaking corn and soybean production. We have been following the development of this crop from the beginning of the season in our CropAlert® Growing Conditions Reports. Unfortunately, this expected surplus of corn has already led to a substantial drop in the price of the December corn contract on the futures market.

Currently, the December futures contract for corn stands at $3.70. This is a 20% decrease from the projected price of $4.62 determined by the Risk Management Agency (RMA) during the discovery period of February 2014. When we analyzed the current scenario(corn yields 5% above normal, and corn price drop of 20% with respect to the projected price) in our U.S. MPCI model, the resulting outcome for the industry was a loss ratio post-Standard Reinsurance Agreement (SRA) of 94%. This loss ratio could become worse if the price drops even further and more revenue-based policies trigger an insured loss. Stay tuned.

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