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Published March 31, 2014, 09:54 AM

Insurance group offers diversion help

FARGO, N.D. — A Billings, Mont., crop insurance consulting company has come up with a list of ways the Fargo-Moorhead Diversion Authority might mitigate agricultural losses.

By: Mikkel Pates, Agweek

FARGO, N.D. — A Billings, Mont., crop insurance consulting company has come up with a list of ways the Fargo-Moorhead Diversion Authority might mitigate agricultural losses.

The 17-page draft report by Watts & Associates Crop Insurance Division of Billings, Mont., offers ways to manage risk for farmers in the 32,500-acre staging area expecting more than 1 foot of floodwater with the proposed Fargo-Moorhead Diversion plan in place. The insurance plan doesn’t address another 18,000 acres with less than 1-foot impacts.

The draft copy of the study was discussed at the Diversion Authority’s agricultural subcommittee’s March meeting. It is expected to come up again at an early April meeting, which hasn’t yet been scheduled.

The report, presented by Alex Offerdahl, head of W&A’s crop insurance division, notes that “Very likely, a combination of flowage easements, drainage systems, crop insurance and even land purchase can be integrated in a comprehensive risk management plan.” The company says coping with farmers’ impacts is not “insurmountable,” but makes no specific recommendations or cost estimate. W&A is not contracted to work on the issue further at this time.

In the past, experts have offered preliminary estimates that insurance options might be $750,000 to $1.5 million for the 32,500-acre area, says Eric Dodds, of Advanced Engineering and Environmental Services Inc., of Fargo, N.D., a company working on the diversion project development.

The W&A report lists seven options.

• Private insurance product — A non-reinsured supplemental policy “rider” would attach to normal Multi-Peril Crop Insurance products. It would provide indemnities to the producers in the event they cannot plant a crop on land inundated by floodwater or if it was flooded by the project during the growing season. To compensate for future reduced guarantees and premium rate increases, it might be possible to “scale up” private product indemnities in the year of a loss by a “factor that roughly equates to the future value of those losses.”

“The premium rate for the supplemental product would be substantial,” the W&A report says. The Diversion Authority would make annual payments for the premium “into perpetuity” and costs would change with crop values. The companies could opt not to offer the policy in different years. Developing the product would cost up to $200,000, and could be done in 18 months.

• Federal Insurance Product — A new federal insurance product would be available through all insurance companies. The Diversion Authority would reimburse affected farmers for additional insurance premiums. Land would be categorized into sub-classes by the frequency of inundation and severity of a typical event.

Premium rates would vary by risk classification. It could take the U.S. Department of Agriculture three to five years to develop and sign off on it. Standard FCIC insurance covers only up to 85 percent — future guarantees would be reduced by losses from the uncovered burden borne by the producer.

• Flowage lease — The Diversion Authority could pay farmers a one-time easement to compensate for future “serial flooding losses.” Land can be “expected to be unattractive for commercial development more-or-less permanently.” Flooding that affects crops and profitability or prevents or delays planting would be covered. Uncertainty can upset forward contracting and other marketing, with effects on land value and rents.

This would be simpler because the Diversion Project would handle it alone. Farmers will be “skeptical” because of the “uncertainty of loss of productivity from year to year,” the report says. “Each flowage easement contract would be parcel and landowner specific, thus potentially resulting in a wide variety of agreements and high upfront legal and negotiation costs.”

• Land purchase — The Diversion Authority could purchase all 32,500 acres of land. Assuming this could be done, the Diversion Authority could flood the staging area as necessary.

Farms could be rented back to area farmers, generating revenue for the authority. The Diversion Authority would still have to develop a crop insurance product. Land currently is $4,000 to $7,000 per acre in the area, costing the project $130 million to $230 million, assuming landowners are willing to sell. Using eminent domain would come at “severe political costs” and legal challenges.

W&A says this option is probably impractical, although purchasing certain high-risk parcels might be worthy of consideration. W&A couldn’t offer a timeline but noted eminent domain cases “regularly stretch out for six years or more.”

• Subsidized tile drain — This could help control floodwaters and speed the drying, possibly cutting crop insurance premiums. Cost-share could be 50-50, possibly in combination with flowage easement. Impacts on wildlife and discharged water would need to be addressed. W&A estimates cost at $575 per acre if all 32,500 acres are tiled — $18.7 million.

• Self-insurance — The Diversion Authority could offer its own internal insurance coverage. This would expose it to the “vagaries of risk from season to season,” the report says. It would require reserves to cover $14 million a year in expected crop losses.

While the Authority would be more autonomous in its decisions, it would also be responsible for setting up contracts, adjusting losses, administering payments and settling disputes.

• Solution combination — No single solution among the above “provides a comprehensive risk management plan,” the W&A report says.