"crop insurance"

Re-evaluating the Agriculture Department's Federal Crop Insurance Program

By: Erin Murphy, Staff Member

President Obama has vowed to reduce the nation's deficit. However, one federal program had a record cost last year.[1] The 2012 bill for the Agriculture Department's federal crop insurance program could reach $16 billion, up from $9.4 billion in 2011.[2] The crop insurance program was established in the 1930s to aid farmers who experienced crop losses.[3] A discussion of the expansion of the program can be found here.[4] In addition to the cost of administering the program, a record $11.4 billion has been paid out in indemnities to farmers for crop losses in 2012.[5] Some officials believe this number could reach $20 billion.[6] In addition to these costs, the Agriculture Department also spends millions of dollars annually in grants to industry trade groups and universities to promote enrollment in the crop insurance program.[7]

Critics of the program claim the program only benefits insurance companies and large farmers.[8] The insurance companies that sell the policies receive approximately $1.3 billion annually for their services.[9] The government could also pay an additional $7 billion to cover losses and other costs by the insurance companies.[10] Thus, insurance companies greatly benefit because the government pays the companies a large amount to administer the program and the company incurs very little risk as the government covers their losses. Large farmers also benefit. The 2012 net income for farmers may reach $114 billion, the second highest in 30 years.[11] Thus, as farmers experience losses, the program insures the farmers against revenue losses, thereby protecting their net incomes.

As this program reaches a record cost, Congress must reevaluate the program's implementation approach in light of the nation's deficit. Congress must heed the words of critics and address the inequitable benefit the program grants to insurance companies and farmers. Agreements with the insurance companies administering the program should be renegotiated. The fees the government pays the insurance companies must be lowered. Further, the government must discontinue backing the companies against all losses. Rather, the insurance companies themselves must experience some risk. If the government continues to allow the insurance companies a windfall for merely administering the program, the program will no longer serve the purpose intended: to aid farmers who have experienced crop losses. In addition, the government must place some responsibility on the farmers themselves for the crop insurance they receive. If the government continues to pay 62 percent of the farmers' insurance premiums, the farmers themselves have little incentive to farm responsibly and prudently.[12] The farmers themselves must experience some personal financial incentive to farm in a manner that minimizes losses. Congress must address the record cost of the program by realigning the administration of the program with the goal of the program.
[1] Ron Nixon, Record Taxpayer Cost is Seen for Crop InsuranceThe New York Times (January 15, 2013), http://www.nytimes.com/2013/01/16/us/politics/record-taxpayer-cost-is-seen-for-crop-insurance.html?_r=0.
[2] Id.
[3] Id.
[4] Jocelyn Arlinghaus, Crop insurance: The agricultural equivalent of the mortgage crisis?Kentucky Journal of Equine, Agriculture, and Natural Resources (August 23, 2012), http://www.kjeanrl.com/search/label/crop%20insurance.
[5] Nixon, supra note 1.
[6] Id.
[7] John Soloman, USDA agency's largesse grows crop insuranceThe Washington Times (December 30, 2012), http://www.washingtontimes/com/news/2012/dec/30/usda-agencys-largesse-grows-crop-insurance/.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Nixon, supra note 1.

Crop insurance: The agricultural equivalent of the mortgage crisis?

By: Jocelyn Arlinghaus, Staff Member

Every five years, Congress promises to improve the agriculture industry in the United States through a new farm bill. The bill addresses competing challenges facing the agriculture industry, including devastating losses to American farmers as a result of crop failures and increasing government subsidies in order to keep these farmers in business, costing taxpayers millions of dollars in the process.[1] The Senate is currently considering the Agriculture Reform, Food, and Jobs Act of 2012, which proposes a series of resolutions to these ongoing problems.[2] Through the act, Congress seeks to expand the crop insurance system by creating a $3 billion per year subsidy that would cover any farm losses before crop insurance policies kick in, effectively “bailing out” both farmers and insurance companies. This will replace the existing direct payment system which paid out over $5 billion a year as part of a direct subsidy to farmers regardless of whether they actually planted crops.[3] While the possibility of cutting $23 billion in spending over the next ten years is enticing, critics argue that this system only creates new problems for the agricultural economy and will have a negative impact on the environment.[4]

Congress introduced federal crop insurance in the 1930s in an attempt to recover the agriculture industry after the Dust Bowl devastated Midwestern prairielands.[5] The government provided small subsidies that covered farmers’ losses due to circumstances beyond their control such as bad weather or pests.[6] Through this program, farmers can purchase insurance coverage against poor yields and the decline in crop prices.[7] The government now spends roughly $7 billion a year to cover two-thirds of farmers’ insurance premiums.[8] Congress now proposes an increase in the program to $9 billion a year in coverage and suggests a “shallow loss” provision that will cover losses to a minimum of 10%, effectively subsidizing farmers’ insurance deductibles.[9]

While government subsidies appear to be a necessity for farmers whose profits hinge upon the weather and a volatile market,[10] this proposal has sparked recent controversy among industry experts. Critics argue that the new crop insurance program will be just as costly to taxpayers as the direct payment program because the government will be effectively subsidizing the private insurance companies that provide coverage to farmers.[11] Further, critics suggest that the program will create serious environmental risks. Because the guarantee of a large insurance subsidy reduces the risk of profit-loss, farmers are encouraged to plant “fence to fence” and expand onto land that is unsuitable for farming in order to make more money.[12] Enticing farmers to plant on unsuitable land where failure is almost certain will cost the government and taxpayers millions when these crops fail to produce.[13] Millions of acres in the Midwest that were once used for hunting purposes and home to many species of wildlife will be turned into corn, soybean, and wheat fields.[14] The bill does not include the conservation measures that were in place under the direct payment program, so farmers are free to take extreme risks knowing that if they are not successful the government will compensate them for their losses.[15] It is a win-win situation for farmers at the expense of taxpayers and the environment. Indeed, it is difficult to conceptualize why a big business American farmer is granted a “subsidy” during hard times while similar aid would be labeled as a “bailout” in a different industry. Additionally, some farmers have complained that while this program will help corn producers who are more affected by natural disasters, it will do little to help rice and peanut farmers that do not encounter “shallow losses.”[16]

Because the negative impact of increasing crop insurance subsidies cannot be ignored, Congress should consider a less extreme version of the program in which a base level of coverage will be offered to farmers free of cost, with the option to purchase additional coverage out of their own pocket.[17] This places more responsibility on farmers and less of a burden on the government to provide a bailout for poor business decisions. Without such large subsidies, farmers are still have other remedies. They can choose to purchase less insurance or farm more conservatively by planting later in the spring when the weather is less volatile.[18] Allowing an increase to crop insurance subsidies would be a tragedy for government spending, taxpayers, and American prairielands.

[1] See Ron Nixon, Crop Insurance Proposal Could Cost U.S. Billion, The New York Times (June 6, 2012) http://www.nytimes.com/2012/06/07/us/politics/bill-to-expand-crop-insurance-poses-risks.html?ref=farmbillus
[2] Agriculture Reform, Food, and Jobs Act of 2012, S. 3240, 112th Cong. (2012).
[3] Nixon, supra note 1.
[4] Id.
[5] Stett Holbrook, Crop insurance a boon to farmers--and insurers, too, The Bottom Line on MSNBC http://bottomline.msnbc.msn.com/_news/2012/06/18/12240997-crop-insurance-a-boon-to-farmers-and-insurers-too?lite (last visited June 19, 2012).
[6] Id.
[7] Nixon, supra note 1.
[8] Id.
[9] Holbrook, supra note 5.
[10] Nixon, supra note 1.
[11] Holbrook, supra note 5.
[12] Nixon, supra note 1.
[13] Id.
[14] Id.
[15] See Holbrook, supra note 5.
[16] Melissa Miller, Proposed farm bill would end direct payments, Southeast Missourian, (June 15, 2012) http://www.semissourian.com/story/1860520.html
[17] Holbrook, supra note 5.
[18] Id