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Subsidized crop insurance: the next ag boondoggle?

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Stephanie Paige Ogburn | Jun 20, 2011 05:00 AM

Over the past few weeks, the House of Representatives has been hacking away at the budget for the U.S. Department of Agriculture. The dollars cut and kept in these negotiations set a baseline for the spending in the 2012 Farm Bill debate, and since the farm bill is the primary way agriculture policy is determined and federal food and ag dollars are doled out, this first round of budget negotiations matters.

But this most recent debate has left out a crucial piece of the farm spending puzzle: the ever-increasing chunk of taxpayer dollars subsidizing crop insurance. Insurance spending reform seems off the table right now, for reasons I'll get to shortly. First, some background:

For as long as I've been tracking the debate over farm spending, direct payments to farmers have been a big target of reformers. This pot of money goes to farmers regardless of crop prices or acres planted. The budget crisis is finally making the issue of direct payments come to a head; as well it should.  (Although the latest House budget back-and-forth didn't end up cutting direct payments, it's likely they'll come under attack as the budget debate continues.)

But what this debate, perhaps willfully, ignores is the growing role subsidized crop insurance has come to play in farm payouts

In 2000, with the passage of  the Agricultural Risk Protection Act, government increased the subsidy it paid for crop insurance. Farmers previously could buy insurance in two ways -- based on projected yields, or projected revenues. Prior to 2000, insurance based on price projections wasn't as highly subsidized and cost more, so many farmers didn't buy it.  This new act upped the percentage of the premium the government would pay for both kinds of policies, making the more expensive revenue-based insurance a lot more affordable, because taxpayers were footing more of the bill.

But as crop prices go up, policies based on revenues start to get a lot more expensive. The University of Missouri's Food and Agricultural Policy Research Institute projects that insurance will jump from 17 percent of the ag budget in the last ten years to 54 percent in the next decade [PDF]-- a payout of around$ 6.4 billion a year.

Those in the ag community confirm that farmers are increasingly reliant on revenue-based crop insurance. It's a pretty good deal: a farmer can insure his corn at $7 a bushel with a subsidized insurance plan, and if the price drops to $5 a bushel at sell time he still gets an insurance payout (insurance isn't usually 100 percent of the value; more in the 65 percent range) and makes money, because $5/bushel corn is a decent price.

But it's not just farmers who do well on this system. 16 private insurance companies are approved to play the federally-subsidized crop insurance game. And they're subsidized, too, against any losses they may incur. They also get their administrative and operating costs paid for by the feds. And their agents make a commission based on how pricey of a policy they sell; not on a per policy basis. So if they sell a policy to a farmer at $7/bushel as opposed to $5/bushel, they get more money, even though the policy is the same. The taxpayer pays more money twice, because s/he's subsidizing a higher premium and also a higher commission.

The current system also has a couple significant conservation disincentives:

First, most farm programs come with some basic level of required conservation. So in order for a farmer to receive funds, s/he also has to agree not to undertake tilling practices that increase soil erosion by, say, plowing up marginal land or turning under strips of grass between fields that help prevent erosion, or filling in wetlands on his or her property. If the USDA finds a farmer has violated the conservation measures stipulated in order to receive such payments, they can fine the farmer or decide not to pay him or her the subsidy.

Crop insurance is exempt from these conservation compliance measures. This worries Brad Redlin, who works on agriculture policy for the Izaak Walton League, a conservation group. "People are anecdotally telling us... 'If I essentially leave the federal farm program except for farm insurance then I can essentially do whatever the hell I want. I can get quite a bit of taxpayer money and I don't have to ensure I am conserving my soil or I can't drain a wetland,' " says Redlin.

plowingSecond, crop insurance treats marginal or native prairie land the same way as all agricultural land. So right now, with commodity prices high, farmers can plow up a piece of marginal land or native prairie that has never been in production (probably because it is marginal), get insurance on it for 30 bushels/acre of wheat at $9/bushel, and even if they see yields far below that because it's marginal land, because rates are generally set on what's average for the county they live in, they'll make some money off it.

Redlin's group is trying to pin down exact figures from hard-to-get USDA data, but estimates this could be happening at rates of 50,000 acres of native, untouched land, per state, per year in states like Montana and the Dakotas.

"It could be 700,000 acres in a year," he says.

 Brian Depew, of the Nebraska-based Center for Rural Affairs, confirms this suspicion.

"We're seeing that in sort of northeast, north-central Nebraska, a lot of land that was in grass is coming out and it really shouldn't be."

Indeed, farm state senators and representatives, along with agriculture secretary Tom Vilsack, have all made strong noises in support of crop insurance, while acknowledging that direct payments may be on the table for cuts. It's a savvy move on their part. Since farmers are now turning to insurance as a way of protecting themselves against losses, many of them care less and less about items like direct payments. So while the farm lobby will make noise against any sorts of cuts, it seems likely they'll cave here and there, as long as they  keep crop insurance.

This may be a good strategy for farmers' bottom line, but it's got high costs -- for taxpayers and for conservation.

Stephanie Paige Ogburn is HCN's online editor. She writes frequently about the business of agriculture.

Image courtesy Flickr user justin s.

Steve Griffin
Steve Griffin
Jun 20, 2011 10:08 PM
1. UM's FAPRI projections are a very poor methodology to project federal crop insurance program costs since they do not anticipate the wide variablity of prices and yields that trigger crop insurance payments. The USDA's Federal Crop Insurance Corporation has had gross loss ratios of less than 1.0 for nearly 10 years (i.e., the cost to the taxpayer has been significantly less than anticipated.)
2. Farmer costs (land rent, taxes, fuel, fertilizer, seed, etc.) rise with commodity prices.
3. The USDA does not cover all losses, but shared with private insurers per a reinsurance agreement.
4. With the 2011 Standard Reinsurance Agreement, insurers reimbursement for A&O and agent's commissions are capped at assumed "normal prices"--eliminating any windfall of high commodity prices even though the cost of administration increases with high values.
5. All administrative and operating costs are not reimbursed by USDA. Most insurers must earn underwriting gains (net loss ratios less than 100) in order to break-even.
6. Land that has not been cropped in the last three years is not eligible for crop insurance except by special written agreement. Cropland whose Conservation Reserve Program (CRP) lease is expiring is eligible by special written agreement approved by RMA at reduced coverage.
7. Sodbuster and swampbuster compliance is not required for crop insurance (it was an administrative nightmare when it was forced more than a decade ago), but farmers do lose SURE payments, direct payments, disaster assistance, etc. making crop insurance compliance redundant.

Finally, crop insurance is a risk management tool that encourages best management practices.

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