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Renewing Crop Insurance Debate

If you thought the public debate about the cost of crop insurance ended when the 2014 farm bill was passed early this year, think again. Monday, the Minnesota-based group, the Land Stewardship Project, released the first of three white papers to show “How a Safety Net Became a Farm Policy Disaster.”

The paper, “Crop Insurance-The Corporate Connection,” looks at the $90 billion projected overall ten-year cost of the program and the amount going to cover administrative costs of crop insurance companies, which is now capped at $1.3 billion a year.

"Through crop insurance, they've privatized the profits and passed the costs onto the public," said Paul Sobocinski, a crop and livestock farmer in Wabasso in southwestern Minnesota who works on policy issues for LSP. "There is a lot of money in this, and not enough accountability or transparency."

The study, which was based mainly on USDA online reports that were accessed this month, shows that the second-biggest portion of federal costs for crop insurance, administrative reimbursements to insurers, accounted for 21% of all costs in recent years. Premium subsidies for farmers accounted for 72%.

LSP said Monday that,  “As a result of the significant subsidies crop insurance corporations receive, they consistently generate profits that are considered far above the reasonable rate of return as calculated by economic experts. Between 1989 and 2009, crop insurance companies averaged a 17% return on equity at a time when the “reasonable” rate was under 13%, according to an analysis done for the USDA. In 2009 alone, crop insurers enjoyed an astounding 26% rate of return, more than double what was considered reasonable by the industry standard for that year.”

The 2014 Farm Bill expands crop insurance with a new program called the Supplemental Coverage Option and another for cotton farmers, which is part of the reason why the Congressional Budget Office projects almost a doubling of the program’s costs compared to decade of 2003-2012. Those costs drew plenty of criticism in Washington from small-government groups that want to reduce taxes, as well as the Environmental Working Group. Some economists at land grant universities have also questioned the federal spending on crop insurance.

When asked why LSP is putting out a report now, Sobocinski told Agriculture.com that his group wanted to bring the study out in a calmer environment after the farm bill was passed and to “give people some time to reflect on it, to think about it and get ready to build some type of reform.”

“For those of us who are farmers, if we don’t look at how we fix this ourselves, the taxpayers will do it and farmers will be hurt,” he added.

Sobocinski buys crop insurance for the corn, soybeans, wheat and oats he grow in his diversified farm, and recently it’s been at some of the highest coverage levels, he said. But he also has livestock, including hogs raised for Niman Ranch, which helps reduce risks.

When asked about solutions, he said one possibility would be to have the USDA sell crop insurance, as it did before 1980. “Something could be done about the excessive profits,” he said. “In terms of the [federal]budget, it needs to be more sustainable.

Crop insurers may not always be quite as profitable as some federal statistics make them seem, said Art Barnaby, a Kansas State University economist who is an authority on crop insurance.

When insurers have underwriting losses that are paid by USDA’s reinsurance program run by the Risk Management Agency, that shows up, he told Agriculture.com. When those companies bring in more premium dollars than they pay in indemnities, an underwriting gain, part of that goes into the federal treasury and isn’t counted in the same statistics.

“The bottom line, the federal government counts the underwriting losses but they don’t count the underwriting gain, so they tend to overstate the cost to the federal government,” Barnaby said.

There have been years when companies did quite well, and part of that comes from what Barnaby sees as a flaw in how premium rates are set. They’re tied to futures prices for new crop corn and soybeans during the month of February, but they’re also tied to the volatility of those prices, which Barnaby says doesn’t match up very well with whether or not the insurer winds up paying farmers for revenue losses. In 2009, that unusually profitable year for insurers, the price volatility for corn futures in February was 37%, Barnaby pointed out. In the year of the 2012 drought, volatility was 22%. For 2014, it was 19%.

“If they (LSP) want to argue that premium rates aren’t right, I’m there. I agree with them,” Barnaby said.

There’s evidence, however,  that even though the federal government spends a lot on reimbursing crop insurance company costs, that still doesn’t cover everything, according to a 2012 article co-authored by Keith collins, the USDA’s former chief economist who now works for National Crop Insurance Services, a trade group for the crop insurance industry.

“In a typical insurance program, policyholders would pay for the cost of delivery as part of their premium,” says the article in Crop Insurance Today. “Under the Federal crop insurance pro­gram, FCIC (the Federal Crop Insurance Corporation) pays this cost directly to AIPs (approved insurance providers) on behalf of producers. This works to the benefit of taxpayers and to the disadvantage of AIPs in that pay­ments have been below actual delivery expenses by an average of over $250 million per year during 2005­-2009.”

The cost of the crop insurance program isn’t the only problem that LSP sees. The other two white papers the group plans to release will point out that most of the benefits from crop insurance go to a small minority of farmers, that crop insurance puts beginning farmers at a competitive disadvantage, and that crop insurance is “a major vehicle for using public funds to concentrate agricultural wealth in this country.” The other reports will be posted on the LSP Crop Insurance web page. 

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