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Economists See Risks in Trump Crop Insurance Cuts

Proposal weakens crop insurance program, experts say.

Farm state members of Congress don’t support the Trump administration’s 2019 budget proposals for crop insurance, but ag economists take them seriously enough to analyze their effects on farmers and insurers.

Last year, for example, Kansas State University economists Art Barnaby and Mykel Taylor looked at a proposal to limit premium subsidies to $40,000 per farm and estimated it would take as little as 1,500 crop acres in some areas to max out subsidies.

This year, the White House proposals released this week are different. But Barnaby still sees a potential to weaken the crop insurance program.

The Trump budget for USDA would reduce the average premium subsidy from the current 62% to 48%. And it would deny coverage to producers with more than $500,000 in adjusted gross income (AGI).

The crop insurance program costs about $8 billion each year, making it an attractive target for budget cutters in Washington. The Trump budget projects a savings of at least $2.2 billion each year from shrinking the premium subsidy to a 48% average. Savings from an AGI means test are modest, ranging from about $50 million to $100 million a year.

“I actually think in the whole thing, the [AGI] means testing is the biggest problem,” Barnaby told Agriculture.com this week.

“Unlike other government programs, if you start making changes, you get unintended consequences of people choosing not to be in the program. You lose your lowest risk producer,” Barnaby said. “It screws up the actuarial soundness of the program.”

Limiting government support to smaller farms may sound like a fairer approach to some, but the reality is that larger farms seem to cost the crop insurance program less.

The crop insurance industry has argued that if larger, lower risk farms drop out of the crop insurance program, premiums will go up for the smaller farms that remain in it.

Academics hadn’t tested that argument, until two Mississippi State University economists recently looked at 10 years of yield data from USDA’s Risk Management Agency.

“From a yield standpoint, the biggest farms are less risky than the smaller ones,” one of those economists, Keith Coble, told Agriculture.com

Coble and economist Brian Williams looked at yield histories of 109,423 corn units (an insured portion of a farm) and 127,096 soybean units on farms in 29 states, including nearly all of the Corn Belt.

For corn, they found that the estimated payments for yield losses under policies covered at the 75% level dropped from $10.44 per acre for farms with policies consisting of 100 acres to less than $7 per acre for farms with more than 4,000 acres of corn in a policy.

Coble said that premiums farmers pay for crop insurance already reflect this. If a farm’s yield history is above its county average, it pays a lower premium.

For the study, Coble used a price of $4 an acre for corn.

Most farmers don’t buy crop insurance for yields alone, instead choosing revenue policies that provide a guarantee based on yields and price.

Coble said the differences between small and large farms would be dampened if the economists had looked at revenue coverage because loss payments from that type of insurance are based on commodity futures prices. Those prices are the same for all farms buying insurance.

Barnaby pointed out that crop insurance so far has been modeled after the insurance business and differs from disaster payments and other USDA programs to help farmers.

“That gets back to an interesting question. Is this a welfare program or an insurance program?” he asks.

 

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