Crop Insurance: A New Battleground

As the Senate works on crafting the 2012 farm bill amid concerns about the federal deficit, it seems certain that there will be a reduction of or an elimination of some of the existing farm programs. With 2011 farm income reported at record high level of $98.1 billion and farmland values up 85% since 2003, established farmers have been doing very well. Federal farm programs that provide direct subsidies to farmers to supplement their income are hard to justify.

Concerned about a "safety net" for farmers, many are looking to crop insurance for a reconfigured way to deliver financial support.

Insurance certainly seems like a reasonable way to address the risks inherent in farming.  But, as they say, the devil is in the details, and some of the details coming out about federal crop insurance may be a surprise to those outside of the agricultural community.

This is not like your homeowner's insurance.  Policies are either production-based (insuring for a crop loss) or revenue-based (insuring for a decline in revenue based on either crop loss or price).

Premium subsidies allow farmers to buy insurance at a greatly reduced rate. In 2011, the government paid an average of 62% of the premium cost, for a total cost to the government of $7.4 billion.

The government also pays administrative and operating expenses to insurance companies to cover their expenses for selling and servicing crop insurance policies, further reducing premiums. In 2011, the government paid $1.3 billion to these insurance providers for their costs.

The Congressional Budget Office estimates that under the existing program, the federal government’s crop insurance costs going forward will average $8.9 billion per year. And, unlike federal farm programs, there is no conservation requirement connected to participation. There is also no "payment limitation" to limit the support that an individual farmer can receive.

The GAO recently released a report that is causing a firestorm of commentary.  This report, Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining, was requested by Senator Tom Coburn to help Congress identify "opportunities for reducing the cost of the crop insurance program."

One idea discussed in the report is to reduce the percentage of premium subsidies provided. The GAO concludes that if premium subsidies had been "reduced by 10 percentage points for all farmers participating in the program . . . the federal government would have saved about $1.2 billion in 2011."

Another idea discussed in the report is to place a cap on the amount of premium subsidy that the government will provide to any one farmer, an idea modeled on the "payment limitations" imposed imperfectly on the receipt of farm programs.

GAO selected $40,000 as an example of a potential subsidy limit because it is the limit for direct payments, which provide fixed annual payments to farmers based on a farm’s crop production history. Had such a limit been applied in 2011, it would have affected up to 3.9 percent of all participating farmers, who accounted for about one-third of all premium subsidies and were primarily associated with large farms. For example, one of these farmers insured crops in eight counties and received about $1.3 million in premium subsidies. 

As you can imagine, there are many people involved in agriculture that are commenting on the report.  Michael Scuse, USDA Under Secretary for Farm and Foreign Agricultural Services prepared the USDA response to GAO.  National Crop Insurance Services issued a press release criticizing the report. The National Sustainable Agriculture Coalition discussed it in their blog, GAO Report Triggers Crop Insurance Debate.  Others are sure to follow.

For a critical analysis of the current crop insurance models, in particular revenue insurance, as applied to beginning farmers, consider the editorial recently published in the Minneapolis Star Tribune, The Seed Money of Destruction by Brian DeVore of the Land Stewardship Project.