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Pressure on crop insurance

At $9 billion a year or more, federal subsidies for crop insurance are now the biggest single USDA program for farmers, making them a fat target for budget cutters. In Washington, there's talk of shaving your premium subsidies from the Environmental Working Group on the left to the American Enterprise Institute on the right.

Don't reach for more heartburn medicine yet. So far, it's just talk.

“I think the sentiment from Congress has been less inclined to look at crop insurance,” Agriculture Secretary Tom Vilsack tells Successful Farming magazine. Folks on the congressional ag committees see insurance as the linchpin for all other commodity programs, he says.

If anything, crop insurance is rolling along better than ever this year. Last year's drought doesn't yet affect rates, which USDA's Risk Management Agency is adjusting downward on corn and beans in much of the Midwest for the second year in a row. (Rates are just one factor in premiums, along with volatility and this month's average of new crop futures.)

Still, with USDA paying just over 62% of farmers' crop insurance premiums, economists are already looking for ways to keep the cost down.

“I'm guessing that there will be a fight over spending on farm programs again, and crop insurance is the only one that has any money left,” says Art Barnaby, Kansas State University economist.

Barnaby supports crop insurance. You can thank him for the revenue protection most farmers buy. As an independent contractor, Barnaby designed Crop Revenue Coverage, one of the precursors of today's revenue coverage.

If cuts to insurance must come, Barnaby proposes asking farmers to pay part of the premium if they sign up for catastrophic (CAT) crop insurance coverage (50% coverage at 55% of the price). Now they pay only an administrative fee.

But he's found little interest in that approach. Some of the biggest beneficiaries of CAT are fruit and vegetable growers.

“Where that would hit would be in California and Florida,” he says. Those populous states have a lot of votes in Congress. Another big fruit and vegetable state is Michigan, home to Senate Agriculture Committee Chairwoman Debbie Stabenow.

Vince Smith, Montana State University ag economist, is in favor of ending crop insurance. He's skeptical of many arguments for it. Today, it's virtually required for credit, but Smith points out that banks made loans to farmers before crop insurance. Before it, farmers used other ways to manage risk, like diversification. Montana wheat farms ran cattle. Cheap insurance has led to more wheat acres, he argues.

Smith, who writes papers for the American Enterprise Institute, sees crop insurance as a taxpayer subsidy to those who don't need it. “There is no socioeconomic component to justify the crop insurance program that exists in either the U.S. or in countries like Spain or Italy,” he says.

Smith proposes cutting premium subsidies for farmers back to 52% from the current 62%. That would save about $2 billion a year on premium subsidies.

“Politically, it's impossible to get rid of this stuff. At least make the farmer pay a little more,” he says. A 50-50 split of farming risks between the public and producers seems more logical to Smith.

The harvest price component of revenue coverage is expensive. If you paid all of it, the premium would be more than double that of the underlying insurance, Barnaby says. So some economists have proposed ending harvest prices.

Carl Zulauf, Ohio State University economist, has an idea that's less harsh.

Among several proposals that Zulauf has floated is one limiting premium subsidies for the harvest price to 30% of expected yield. That's close to the amount many producers typically forward-price. It's about the optimal amount, based on Zulauf's analysis of price history. It's not an idea he's pushing; it's just something to consider instead of eliminating the harvest price option altogether.

“My point was, maybe there's a middle ground here,” Zulauf says.

Unlike Barnaby, who sees a chance of cuts this year, Zulauf says, “I've always believed the next farm bill is going to be about the subsidy.” In Washington, one thing is certain: Pressure is tightening. 

Decide How Much to Insure

Another year of high winter prices means you can insure high levels of revenue, but it comes with high premium prices.

Focusing only on those premiums could be a false economy, warns Steve Johnson, Iowa State University Extension farm management specialist.

Instead, figure out the level of coverage you need to cover your costs. “Decide what you want to buy, and then decide the best way to pay for it,” he says.

On a farm with an actual production history (APH) of 180-bushel corn priced at $6 a bushel, you can guarantee revenue of $702 an acre at the 65% coverage level. At the 85% level, your guarantee is $918 per acre.

You can increase your subsidy by switching from the optional (farm) level to enterprise units (your crop acres in a county). At 65% coverage, USDA picks up 59% of premium on optional units. Insure enterprise units, and the subsidy is 80%.

You may also be able to lower cost by choosing the trend adjusted (TA) yield endorsement, he says. TA gives you credit for a higher APH, so you can insure a similar number of bushels for less.

“It's an endorsement, and you have to decide every year,” Johnson reminds. “Start with the revenue guarantee, then backtrack to trend adjustment, then look at subsidies from optional vs. enterprise units.”

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