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Obama proposes crop insurance cuts again

DANIEL LOOKER 04/10/2013 @ 3:30pm Business Editor

When the White House today released its proposed federal budget for fiscal year 2014 (which starts in October) it included cuts for premium subsidies for farmers for crop insurance.

The Obama administration made a similar proposal last year. Congress didn't approve that budget and nothing came of it.

But, if it's a sign of changing sentiment inside the Beltway toward USDA's crop insurance program, it might be worth noting that the budget released today would:

  • Drop the rate of return for crop insurance companies from 14% to 12%. USDA support for companies that deliver insurance to farmers currently aims  to assure a 14% ROI. Critics, including Iowa State University economist Bruce Babcock, have argued that the 14% target is overly generous when compared to the rest of the insurance industry. That would save $1.2 billion over 10 years. (The Administration also proposed this change a year ago.)

  • Cap reimbursements of administrative costs to companies, based on 2006 premiums instead of the higher 2010 premiums, saving almost $1 billion in a decade. (This is also a repeat from last year's budget.)

  • Cut the subsidy rate of farmer premiums by 3 percentage points. Subsidies vary by the type of coverage and the level of coverage, but they currently average more than 62% of premiums, meaning farmers pay, on average, less than 38% of the cost of policies. (Last year the Administration proposed a cut of 2 percentage points.) This change would bring the greatest savings from tweaks to insurance: $4.2 billion over a decade.

  • This year's budget has a new idea for insurance cost savings: Decrease premium subsidies for producers by another 2 percentage points if the harvest price option (HPO) is included in your revenue coverage. Most producers using revenue coverage do buy insurance that includes the HPO, which is no longer an option but is included in standard revenue coverage. (You have to opt out of what used to be the HPO).

This change means that the total subsidy cut for many producers would be 5 percentage points. Cutting subsidies for harvest price coverage also has a big effect, trimming $3.2 billion from a decade of spending.

Crop insurance continues to have strong support among members of the Senate and House agriculture committees. Leaders of both the Senate and House committees told North American Agricultural Journalists this week that they want to strengthen insurance in any farm bill that's drafted this year.

However, the ag committees don't control all aspects of spending. Programs without mandatory funding are often trimmed back by appropriations committees.

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