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CBO Lists Ways to Carve Savings Out of Costly Crop Insurance

As Congress expanded the role of crop insurance over the past couple of decades, the cost of the federally subsidized program tripled, to $9 billion annually over the past five years. The Congressional Budget Office says that if lawmakers are worried about costs, they could alter the program to cut outlays by 25% or more, with the likely consequence of reducing participation in the largest program in the farm safety net.

Federal crop insurance, created during the Depression and reinvigorated in the 1980s, gained popularity among farmers as the government paid a larger share of the premium, making coverage more affordable. Invention of so-called revenue policies that respond to low prices as well as poor yields enhanced the appeal of crop insurance. The program also is defended as a faster and more equitable way of compensating growers for catastrophic losses than ad hoc disaster bills.

Farm groups gave priority to a strong insurance program over other farm program elements when Congress wrote the 2014 farm law. Their goal is the same with the 2018 farm bill on the horizon. Agriculture Committee leaders in Congress such as Senator Pat Roberts have voiced opposition to cuts in the program. Congress ignored President Trump’s proposals last May to make three reductions, worth a combined $29 billion over 10 years, that appear on CBO’s list of eight options.

The single step that would save the most money, an estimated $19 billion, or a quarter of the $77 billion in costs that are forecasted over the next decade, would be to end the so-called harvest price option, which indemnifies growers for losses at the harvest-time price if it is higher than the price guaranteed when the policy was sold in the spring. The option is overwhelmingly popular; three fourths of all policies purchased by growers include it. The CBO estimated insurance coverage, now around 300 million acres, would drop 2.5 million acres. As a result, it said, farmers would buy lower levels of coverage on an additional 20 million acres if their choices were reduced to yield insurance and revenue insurance without the harvest price option.

“One drawback … is that it would end subsidies for policies that producers can use to manage the risk associated with entering into a forward contract to sell crops,” said the CBO. As a way to lock in a favorable price, growers often agree, while a crop is still not yet mature, to deliver part of the harvest to a buyer later in the year. A revenue policy based on the price forecast at planting time “would not provide enough money for them to purchase replacement crops at a higher harvest price,” said the CBO.

The second-largest share of savings, around $10 billion over 10 years, would be generated by eliminating federal payment of the overhead costs of delivering crop insurance to growers, said the CBO. The so-called administrative and operating costs reimbursement is one fifth of the cost of the insurance program. If the government stopped the “A&O” reimbursement, it would create price competition among insurers to sell policies and recoup overhead expenses. At the moment, the USDA sets the premium, decides where policies for specific crops can be offered, and requires insurers to accept every customer. Some farmers, particularly smaller operators, might see higher insurance prices while others benefit from this option, said the CBO.

Some $8 billion could be saved over 10 years if the USDA paid a smaller part of premiums, said the CBO. If the premium subsidy was reduced to 47% from the current 62%, 1.5 million acres would not be insured and growers would buy lower coverage on 5 million acres, estimated the CBO.

The CBO report also estimated the effects of steps such as requiring the wealthiest operators to pay a larger share of the premium, limiting the A&O reimbursement, guaranteeing a lower rate of return to insurers and requiring a more realistic figure for a grower’s average yields, a key factor in determining indemnities.

According to the crop insurance industry, lenders and farmers commonly rely on policies as a method to financial worthiness. “Agricultural producers’ risk might be managed in ways that do not involve the government,” said the CBO, listing approaches such as diversifying crops, futures contracts to lock in prices, and off-farm income. “Even if producers could manage their risks privately, however, the expectation that they would receive supplemental assistance for significant losses might discourage” said Congress about funding that extra aid in response to natural disasters.

Coverage is offered on more than 100 crops, but the four major field crops — corn, soybeans, wheat, and cotton — account for three fourths of the acreage enrolled and four fifths of the claims paid, said the CBO.

FERN’s Ag Insider. Produced by FERN
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