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Possible cuts to crop insurance

DANIEL LOOKER 01/23/2013 @ 4:32pm Business Editor

Art Barnaby is counting the ways.

No, the Kansas State University economist isn't trying to top Elizabeth Barrett Browning at writing love poems. If anything, he's advocating tough love for the most popular USDA program offered to farmers, crop insurance, by outlining nine ways to make the program less expensive or maintain it.

On a blustery Wednesday morning in Des Moines, Barnaby listed nine possible crop insurance outcomes while speaking to the Independent Insurance Agents of Iowa.

Barnaby acknowledged that crop insurance is under attack in Washington from both the right and the left. Just last Friday The Washington Post ran an editorial, "A bummer crop of subsidies," calling on Congress to reform "an increasingly wasteful program."

Barnaby isn't one of the critics. Over the past 25 years, the crop insurance has paid out roughly the same amount of money for crop losses as it takes in from premiums, he said. The federal government currently pays more than 62% of farmers premiums, on average.

"I don't think it's a subsidy," Barnaby said. The federal government pays a share of the premium, just as it pays about two-thirds of the health insurance premiums for workers under the Federal Employees Health Benefits Program. Farmers have to pay to participate, and in some states, they rarely collect.

No matter. At a cost of about $9 billion a year, crop insurance is now the most expensive USDA program for farmers, making it a big target as Congress gets back to trying to write a new farm bill in 2013.

"I think the longer it goes, the more likely we are to see cuts in the insurance program," Barnaby said.

He listed "Ten Alternative Methods to Reduce Taxpayer Cost for Crop Insurance." Barnaby actually outlined nine, leaving a tenth open for suggestions from his audience. He didn't get any.

Here are the nine:

  1. Status Quo: pass a farm bill without additional cuts. (Last year's Senate farm bill would have lowered premium subsidies for high income farmers.)

  2. Reduce the harvest price subsidy or eliminate it. In 2012, the higher harvest price was blamed by critics for increasing the cost of payouts. Barnaby said that in Iowa, eliminating the harvest price for insured crops would have cut payments to Iowa farmers in half, assuming they had a 50% yield loss. And even with the most optimistic assumptions about harvest price-based insurance payments, farmers in 2012 would have generated about 30% more revenue with a crop than from indemnity payments.

  3. Require farms that use CAT (catastrophic) insurance to pay a share of their premiums. Right now they pay only an administrative fee.

  4. Increase farmers paid premium share by 5 points, from the current average of almost 38% to 42%. That would save about $2 billion over 10 years, Barnaby said. "I always leave the back door open and the motor running," when he suggest that to an audience of farmers, he said.

  5. Lower the margins that go from USDA to approved insurance providers and agents. USDA has already done that twice, but it could happen again, Barnaby said. "It's always what have you done for me lately. I don't care what you did two years ago."

  6. Improve the underwriting and adjust the rates on the assigned risk pool.

  7. Lower USDA's administrative costs at the Risk Management Agency and Farm Service Agency.

  8. Leave crop insurance funding untouched and find savings by cutting Farm Service Agency programs, direct payments and target price programs.

  9. Eliminate crop insurance and replace it with a "free" disaster program.

In 1980, when the federal government had a disaster program at the 65% coverage level, most of the payments went to Oklahoma and Texas, Barnaby said.

Another alternative not on Barnaby's list is eliminating crop insurance completely. It that happens, farmers would likely buy only insurance for specific risks, such as hail or wind damage.

What does Barnaby think will happen?

"I don't think we'll end up with either extreme," he said, referring to total elimination or going to a program run only by USDA employees.

He also doesn't think farmers using CAT coverage will be asked to pay premiums because that program is used in states with high value fruit and vegetable crops, states like Florida, California and Michigan, home to Senator Debbie Stabenow, Chairwoman of the Senate Agriculture Committee.

"It does strike me as funny that we are giving 100% premium subsidies to some very large agricultural organizations," Barnaby said.

One San Mateo County farm in California had a $30, 247 premium subsidy on a insurance policy with $3.8 million in liability and expected revenue of $13.7 million.

Farms getting CAT coverage also would not be affected by a means test for crop insurance that was approved in the Senate's farm bill last year. Farms with more than $750,000 in adjusted gross income would have lost 15 percentage points of premium subsidy from USDA. Because farms with CAT coverage don't pay premiums, the means test doesn't apply to them.

In an interview with Agriculture.com, Barnaby said that he believes lower commissions to insurance agents and reduced premium subsidies for farmers are possible. So are changes in underwriting that would have the effect of taking more money from insurance companies.

Barnaby is working with other land grant university economists on a soon-to-be released paper that will refine ideas on ways to cut crop insurance costs in the future.

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