Can you afford costlier crop insurance?
In India, cows are sacred. In the Corn Belt and much of the rest of agricultural America, crop insurance seems to be revered. At least that’s the impression you’d get from attending recent farm bill hearings held by the House Agriculture Committee. Farmer after farmer testifying will put crop insurance at the top of his or her list of untouchable programs.
The chairman of the committee, Representative Frank Lucas (R-OK) recently told North American Agricultural Journalists in Washington that the crop insurance industry has already given much to reducing the federal deficit. He and the leaders of congressional ag committees from both parties have opposed a line in the Obama Administration budget for 2013 that would shave crop insurance premium subsidies for farmers by two percentage points.
“Don’t kill the program by taking away the incentives to participate.” Lucas told NAAJ.
The version of a 2012 farm bill passed last week by the Senate Agriculture Committee doesn’t cut crop insurance subsidies.
In the past, you could count on the agriculture committees in both chambers of Congress to be able to convince the rest of Congress not touch a program that nearly all farmers consider a key risk management tool.
This year looks a little different.
In April, the cost of crop insurance made it into the pages of The New York Times when a report by the Government Accountability Office, the investigative arm of Congress, on that topic became public. The study was requested by Senator Tom Coburn, a fiscal conservative Republican from Oklahoma. (Coburn, you may recall, was part of the bipartisan “Gang of Six” senators who tried to find agreement on deficit cutting last summer.)
The GAO found that if the same limit of $40,000 on direct payments were applied to federal subsidies for farmer’s crop insurance premiums, it would have saved the federal government $1 billion in 2011. Last year federal crop insurance was the most expensive program for farmers, costing the federal government nearly $9 billion. Of that amount, about $7.4 billion went to farmer premium subsidies, with the rest paid to help cover insurance company costs.
Currently, the government picks up between 38% and 80% of your crop insurance premium. The average subsidy is 62% If premium subsidies were limited to $40,000, it would have affected 3.9% of all farmers who participate in crop insurance.
That may not sound like much. It’s about 4% of some 875,000 farmers who bought crop insurance last year. But it’s worth remembering that less than 10% of the nation’s 2.2 million farms have revenue of $250,000 or more, enough to be considered a commercial farm by USDA economists. And the GAO did say that the small percentage of farmers who would have been hit by a $40,000 premium cap last year “accounted for about one-third of all premium subsidies and were primarily associated with large farms.”
What seems like a “large farm” in Washington might surprise you,
In a report released this week, University of Illinois agricultural economist Gary Schnitkey, one of the nation’s authorities on crop insurance, crunched the numbers on how a $40,000 cap would have worked in recent years.
The insurable value of your crop revenue goes up with high prices, and so do the premiums. That means you’ll hit the cap sooner in years like last year. By Schnitkey’s calculation, a farm in Illinois with 1,682 insured acres would have hit the limit in 2011. In 2010 it would have taken 2,710 acres.
Schnitkey uses Illinois Farm Business Farm Management records to adjust his calculations to reflect that a portion of a typical farm in that state is on a 50/50 share rent arrangement, where the farmer would pay half of the premium. Farms that are all owned or cash rented would be affected differently.
As Schnitkey explains at one point: “A payment limit could have differential impacts on farms. Fewer acres would be required in areas of higher risk, as premiums are higher in high risk areas. Farms with higher amounts of cash rental acres will reach the dollar limit faster than farms with share rent acres. In general, total premiums are higher for higher risk situations. Since risk subsidies are a percent of total premium, farms in riskier situation will reach limits quicker than farms in less risky situations.”
But the cutoff is just over the average size of farms enrolled in the Illinois FBFM service—1,180 acres.
If a $40,000 cutoff existed, in theory, farms would pay the full cost of premiums above that level.
Here’s one example from Schnitkey:
“To illustrate premium setting, take a 2012 Revenue Protection (RP) policy at an 80% coverage level for a 400 acre enterprise unit having an 187 Trend Adjusted Actual Production History (TA APH) yield. This product has a total premium of $33 per acre. The risk subsidy is $22.44 per acre ($33 total premium x .68 risk subsidy). The farmer-paid premium is $10.56 per acre ($33 total premium - $22.44 risk subsidy)”
In other words, at the 80% coverage level, USDA pays 68% of the premium cost. That’s what you could potentially lose if you got more than $40,000 in premium subsidies.
It’s important here to point out that the GAO report used a $40,000 cap as an example of one way to lower crop insurance costs. It’s not out there as an amendment or piece of proposed legislation yet.
The Environmental Working Group mentioned the GAO study recently when it came out with its own proposal to just have USDA provide everyone with 70% revenue protection and allow farmers to buy private coverage above that.
EWG also likes the idea of putting a cap on premium subsidies, but, according to the group’s press secretary, Sara Sciammacco, “We support payment limits for premium subsidies, but we haven't proposed a specific dollar limit.”
Another approach to crop insurance limits comes from the National Sustainable Agriculture Coalition, which represents groups that work on conservation, small farm and beginning farmer issues in Washington.
“We have suggested the phase out begin with a 50% reduction in the subsidy percentage at $1 million in production and phase out to no subsidy at two and a half times that amount,” NSAC’s website says. “At all levels, all farms would have access to insurance. The only thing that would change would be the share of the premium paid by the taxpayer.”
To me, that sounds like a more sophisticate and reasonable approach to limiting crop insurance costs. But my own calculations, cruder than those of Schnitkey, also suggest it would start to affect relatively small commercial grain farms.
If you assume the same 187-bushel trend-adjusted corn yield Schnitkey used, and the 2012 insurable value of corn at $5.68 a bushel, that $1 million in production would come from 941 acres, if a farmer owned or cash rented that land. A complete phase-out wouldn’t be that far from the examples Schnitkey cited for a $40,000 cap.
On a recent trip to Washington, I had dinner at a fund raiser with a group of people with very different views on crop insurance. On one side of me was a young woman from a farm in northeast Nebraska who believes that her father unfairly competes with much larger operations benefiting from crop insurance subsidies. On the other side, was an attorney who works with the crop insurance industry, who sees viable insurance as an essential tool for commercial farms.
My hunch is that the reformers who want larger farms to pay more for crop insurance won’t succeed this year, if Congress manages to pass a farm bill.
Representative Collin Peterson, the ranking Democrat on the House Agriculture Committee reinforced that hunch last month when he spoke to members of North American Agricultural Journalists in Washington.
Peterson pointed out that a recent standard reinsurance agreement between USDA and the private insurance companies that sell crop insurance cut some $6 billion in subsidies to the industry.
“I’m told by some of the companies if we go too far here, that we could see a mass consolidation in the industry, Peterson said, “…that we could end up with two companies. If we screw this thing up that’s what will happen”
Peterson said he’s unwilling to make big changes in crop insurance until Congress can evaluate how the industry and the program is affected by rerating of crop insurance. Starting this year, corn and soybean farmers in the Midwest are seeing a slight drop in premiums due to rerating, while producers in Texas, Colorado and other higher risk areas have seen an increase.
“We have no data on how all those changes have played out,” Peterson said.
Peterson seemed reluctant, too, to tie conservation compliance to eligibility for crop insurance, another goal of reformers who think it was a mistake to break that requirement in 1996 farm legislation.
But Peterson did hold the door open for changes to the subsidies for farmer premiums.
“I think the more salient questions about crop insurance is looking at the subsidies, are we at the right level?” he asked.
That’s a question that number crunchers of all political stripes – from the Obama White House to Representative Paul Ryan’s House Budget Committee have been asking ¬– and answering with proposals for lower subsidies.
If there’s a 2013 farm bill, it may not have a $40,000 cap or a $1 million revenue phase-out, but I’ll bet you’ll be paying at least a slightly larger share of premiums.