April 2, 2015

Federal money woes bring attention to crop insurance

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Flag in front of soybean acres

Darrell Hoemann/CU-CitizenAccess.org

A flag waves in front of soybean acres on July 3, 2014. Since the start of February, the federal crop insurance program has come under fire multiple times. The Government Accountability Office highlighted the program in two reports, while the White House targeted it in its budget proposal.

The average yearly amount of taxpayer money funding the highly subsidized federal crop insurance program has more than doubled in just over a decade.

From 2003 through 2007, the government spent an average of $3.4 billion per year on crop insurance, according to U.S. Department of Agriculture data.

From 2008 through 2013, the government spent an average of $8.4 billion annually.

The USDA’s crop insurance program is administered by the Risk Management Agency and is widely regarded as the main safety net for farmers. Agriculture officials say the increased funding has helped growers protect themselves from disastrous weather and unfavorable market conditions, such as unforeseen drops in commodity prices.

“Crop insurance is vitally important to farmers,” said Doug Goehring, North Dakota Department of Agriculture commissioner. “Agriculture is one of the most important industries in the nation.”

But the program – a key topic during the 2014 Farm Bill discussions – is under attack again for being inefficient and expensive.

In a report to Congress released in March, the Government Accountability Office recommended reducing the subsidies on crop insurance premiums going to high-income farmers. Such cuts would save the federal government and taxpayers tens of millions of dollars at a time when the nation’s budgetary pressures are ever increasing, the accountability office concluded.

In a separate report released in February, the same independent and nonpartisan watchdog agency recommended increasing insurance rates for farmers growing in historically high-risk areas, such as Texas, South Dakota and Goehring’s North Dakota.

“Most of the detractors from current programs will not be happy until all support for agriculture is eliminated,” said Steve Pringle, associate director of government affairs for the Waco-based Texas Farm Bureau.

The reports from the accountability office followed a recent White House budget proposal that also targeted the crop insurance program for billions of dollars of cuts.

“If the public policy goal is to eliminate any support for the production of agriculture in the United States, consumers must also accept that they don’t care where the food and fiber come from,” Pringle said.

Insurance payouts are managed by 19 approved private companies, which include agribusiness giants Monsanto, John Deere and Archer Daniels Midland. The government takes on billions of dollars in costs because it subsidizes the majority of premiums and pays for all administrative expenses those companies incur.

Farmers pay 38 cents for every dollar of insurance premiums.

Taxpayer dollars make up the rest.

Administrative expenses totaled $1.35 billion in 2013, the most recent year with full crop insurance data available.

“As the largest producer of cotton in the United States and a major producer of wheat, corn, and sorghum, Texas farmers heavily depend on crop insurance to manage their risk,” Pringle said. “Those people that advocate for increased premiums don’t appreciate the importance of production in high-risk areas and [don’t] realize the delicate balance that has been created with the last two farm bills.”

Costs outweigh premiums in high-risk areas

In areas often affected by drought, freezing or flooding, the government is paying well more for crop insurance than the program is getting back from premiums, the accountability office found. That practice is neither “sustainable” nor “actuarially sound” in today’s economic climate, it reported.

The accountability office defined high-risk areas as counties that pay in the top 20 percent of premium rates. The bulk of these counties are in Texas, North Dakota and South Dakota.

“Actuarial adjustments are made on a regular basis to make sure rates reflect specific areas’ risk conditions,’ said Lucas Lentsch, South Dakota Department of Agriculture secretary. “As the [accountability office] report pointed out, the highest risk areas already pay the highest premiums.”

But from 1994 to 2013, farmers in high-risk areas averaged $1.97 in net gains per every dollar of premiums paid, according to the report. During that time, farmers in less risky areas averaged 87 cents in net gains for every dollar of premiums paid.

“Premium rate fairness is always a subject for debate,” said Scott VanderWal, a South Dakota soybean and corn farmer, and president of the state’s farm bureau. “Rates in South Dakota are generally at a level where farmers cannot ‘lock in’ a profit by increasing the coverage level high enough to avoid financial losses.”

To decrease taxpayer cost, the accountability office suggested that the Risk Management Agency directly monitor and report on crop insurance premiums in high-risk areas.

The agency currently does not.

It also recommended increasing rates where necessary, but industry officials argue doing so could push farmers away from buying policies. If that happens, they say, farmers will once again become dependent on even more expensive disaster assistance programs.

In a letter, the Risk Management Agency stated it will continue to revise premium rates in an appropriate, prudent and sound manner.

“If rates get much higher, a significant number of farmers may choose to not participate in the program,” VanderWal said. “That could lead to instability in food supplies and prices.”

Slicing the wealthiest farmers’ subsidies could lead to big savings

In addition to adjusting premium rates in high-risk areas, the accountability office found that decreasing premium subsidies for the wealthiest farmers could lead to further taxpayer savings.

Unlike other USDA programs, crop insurance subsidies do not vary depending on income level. For instance, to receive certain conservation program benefits, farmers cannot have a three-year average gross income of more than $900,000.

With crop insurance, though, a farmer who makes $1 million per year gets the same subsidy rate as a farmer who makes $50,000 a year.

If subsidies to wealthy farmers had been cut by 15 percent from 2009 through 2013, the government could have saved at least $70 million, the accountability office found. Furthermore, only 1 percent of crop insurance participants would have been affected by such a cut.

The Senate-passed version of the 2014 Farm Bill originally included a provision that decreased subsidies for farmers who averaged a gross income of more than $750,000 in a three-year period.

One crop insurance participant highlighted in the report insured more than 150,000 acres in multiple states each year from 2009 through 2013. The government provided that participant with $6.1 million in premium subsidies during that time, and the participant collected $4 million in claims.

Overall, most major crops are covered by crop insurance.

More than four out of every five acres of corn, soybean, wheat and cotton are insured under the federal program, USDA statistics show.

“[Crop insurance] is one of the only tools available to mitigate risk from flooding, drought, disease and pest infestations that affect quality and production,” said Goehring. “Feeding, employing and fueling our nation is done by our farm and ranch families in America.”

Cuts could drastically affect central Illinois farmers

While Texas, South Dakota and North Dakota are far from central Illinois, any cuts to the crop insurance program would likely affect Champaign, Vermillion, Piatt, Ford and Douglas County farmers, as well.

Farmers growing in those areas insured more than 2.7 million acres of crops in 2014. In fact, Champaign and Douglas were in the top 100 counties in the nation in terms of acres insured.

In total, farmers with crop insurance in the five counties received a combined $47 million of subsidies last year.