Environmental Working Group highlights costly policies

May 3, 2013

The federal government could save money by stopping farmers from buying “Cadillac” crop insurance policies but taxpayers might end up paying more on the back end through ad-hoc disaster programs.

As the House and Senate Agriculture committees prepare to take yet one more swing at drafting new versions of a farm bill, the Environmental Working Group (EWG) is taking another Don Quixotesque charge at crop insurance.

EWG released a report last Wednesday from Iowa State University Agricultural Economics Professor Bruce Babcock analyzing the high costs of crop insurance. The report largely focused on the farmer shift to buying Revenue Protection policies that protect against losses due to both low prices and low yields.

The committees want to draft farm bills that reduce the growth of spending at USDA by anywhere from $23 billion to $38 billion over the next decade. But leaders of the Senate and House Agriculture committees have drawn a line on crop insurance, saying there will be no cuts to insurance. Instead, the committees will expand crop insurance by shifting some savings from elimination of direct payments.

Babcock’s report states “Cadillac insurance” policies drive up the cost of the program. Rather than policies that protect just against yield or price collapses, Revenue Protection insurance, also called “combo” insurance, is more highly subsidized and it pays out more often. Revenue policies also lower the risk to forward sell the grain.

The 2012 crop year has led to nearly $17.2 billion in indemnity payouts after collecting more than $11 billion in premiums. The insurance industry will absorb more than $6 billion in underwriting losses.

Out of more than $10.66 billion in payouts on the 2012 crop for corn, more than $10 billion were for revenue policies, or roughly 93 percent. Babcock asserts that, had the vast majority of those claims been in yield protection, the indemnities would have been about $2.4 billion less.

“The point is not to argue that the drought did not seriously affect crop yields,” Babcock’s report stated. “Clearly it did. But given the high cost of the crop insurance program, it is reasonable to ask whether it makes any sense to entice farmers to buy Cadillac coverage with taxpayer dollars when a basic coverage guarantee is possible at a much lower price.”

Babcock and other critics may be chasing windmills or poking the bear. Almost every commodity and farm group has championed crop insurance, with farmers from most major commodity groups willing to forgo the guaranteed $4.9 billion-a-year direct payments to defend insurance. Shifts from direct subsidies to crop insurance will cut about $16 billion from commodity programs over the next decade.

“If we’re moving to a risk management system with an overall much stronger farm economy, I think that’s a better way of protecting farmers and ranchers against risks,” said former Clinton administration USDA Agriculture Secretary Dan Glickman last week at a forum hosted by rural Senate Democrats.

Bing Von Bergen, a Montana farmer now serving as president and acting CEO of the National Association of Wheat Growers, wrote an op-ed last week reiterating an opinion heard again and again from commodity producers: Do no harm to crop insurance. “One thing that farmers today can agree on, despite which commodity they grow, is that in the next farm bill, crop insurance is a top priority. It’s our principle and most reliable safety net,” he wrote.

Von Bergen was critical of suggested reforms, such as means testing, which he said could lead to higher premiums for all farmers who buy crop insurance because some larger farmers could opt out if the premiums become too high.

Von Bergen also noted that despite the 2011 floods and droughts, then the 2012 drought, there have been muted calls for disaster aid. “That’s because most farmers were already protected by crop insurance policies they had purchased for themselves.”

Last year on the Senate floor, Sens. Tom Coburn, R-OK, and Dick Durbin, D-IL, co-sponsored an amendment to the farm bill that would reduce the taxpayer share of the crop-insurance premium by 15 percent for farm businesses with adjusted gross incomes above $750,000. At the time, it was estimated to affect about 1,500 farms nationally. The amendment passed 66-33, reflecting broad support for curbing costs in the program.

Sen. Chuck Grassley, R- IA, acknowledged there would be attempts to reduce crop insurance subsidies in the farm bill debate, but he doesn’t think those efforts will succeed. He agreed any attempts to limit crop insurance would reduce participation and lead to fewer farmers buying insurance and more payments for disaster programs. “Those things are apt to happen proportional to the subsidy. There will be a proportionate reduction in the program.”

Grassley said it would be wiser to encourage risk management before a disaster occurs and use the premium subsidies to protect against a disaster, rather than paying up after a disaster.

“One way or the other, taxpayers are going to pay for disasters in agriculture,” Grassley said. “If they don’t pay for it in crop insurance, then they are going to pay through disaster payments. And sometimes, they pay for it through both programs, because sometimes even though you have crop insurance there is sometimes still the rationale for disaster payments.” — Chris Clayton, DTN