Minding Ag's Business

Crop Insurance Rebuttals

Critics like Iowa State University economist Bruce Babcock argue crop insurance overhead and premiums subsidies are bloated (see DTN's "Raising Cain Over Crop Insurance," http://goo.gl/… in top news.) In a recent study for the Environmental Working Group, he contends that the harvest-price adjustment used in popular revenue insurance products more than doubled the cost of 2012's claims.

That's the provision that compensated insured corn growers at $7.50/bu. last fall, instead of the original $5.68 spring price. Without the harvest feature, claims would have run only $6 billion in 2012, Babcock says, not the record $17.2 billion just reported by the Risk Management Agency.

Growers really didn't experience a financial loss in 2012, he argues, since a 32% increase in corn prices offset most yield losses. If Congress is serious about cutting bloat, he advocates eliminating subsidies for harvest-price coverage altogether.

"Many farmers did not forward contract last year so they made record income with some crop to sell at these higher prices. The idea that they suffered losses is an illusion, he says. "Land markets have never been stronger." Two months ago, Babcock and his wife just sold the small Iowa farm they bought in 2006 for three times its original purchase price.

The problem, counters Kansas State University economist Art Barnaby, is that terminating the harvest-price feature would rarely save the government money. He considers years like 2012 a true anomaly. "Bruce Babcock is arguing that the harvest price should be eliminated because it over pays losses and provides 'Cadillac' insurance coverage when it is 'clear' farmers don't 'need' that level of protection," Barnaby said. "But two conditions must be met before the harvest price will significantly increase indemnity payments. One is insurable yield losses and two is a significant price increase."

For most Iowa farmers that's a yield loss of at least 20% before they are eligible to collect from higher harvest prices. With no indemnity payment, they'd still owe a premium payment on top of a yield loss. "What is the point of buying crop insurance if it's not going to pay the insured farmer in a loss year?" Barnaby says.

Only twice in the past 21 years have corn growers suffered a significant yield loss in conjunction with high prices (1993 and 2012), he adds. "I'm not advocating this, but if taxpayer cost is the issue, then simply increase the farmer's share of the premium across all contracts, including catastrophic coverage. However, by eliminating the harvest price or pricing HP out of the market reduces cost by reducing coverage. If the goal is to reduce coverage for farmers, then it makes just as much sense to eliminate the 80% and 85% coverage as it does to eliminate the harvest price. "

Farmers who forward contract ahead of harvest need replacement cost coverage to buy out contracts due to a yield shortfall, Barnaby argues. "If an insured hedger-farmer has a crop failure, what is the difference between this farmer and a Chicago short speculator trader? The answer is nothing, unless the farmer has Revenue Protection to replace those bushels and maintain the hedge."

The irony in all this debate is that neither the Senate nor House Agriculture Committees seem worried about crop insurance costs. As DTN's Chris Clayton reported last week, the Senate Committee's bill (now being debated on the Senate floor) not only ensures crop insurance is protected from cuts, but proposes several new policies to broaden crop insurance with a variety of new programs for different agriculture sectors. The bill encourages USDA to study and create whole-farm coverage for farmers that would have a $1.5 million liability cap. Another provision would ensure organic producers are paid the market price for organic crops in policies. Catfish producers could become eligible for margin coverage to protect against losses. Another policy would be for poultry producers in cases of catastrophic diseases.

Yet another pilot program would create a federally subsidized "index-based weather insurance" program. Farmers and ranchers would receive 60% premium assistance for buying such coverage.

The bill also includes studies, including one for catastrophic coverage for swine producers. Another study would consider the feasibility of offering food-safety insurance in case a particular crop becomes subject to a contamination recall.

For cotton producers, the bill keeps the Stacked Income Protection for Cotton, or STAX. Under STAX, USDA would pay 80% of the premiums. The bill also would include a new crop-insurance coverage for peanut producers. The House Committee bill contains many similar provisions.

While it seems like crop insurance will get a boost in this farm bill, Barnaby doesn't think insurance will escape scrutiny forever. "Liberals are ticked off about cuts for food stamps. The far-right conservatives want to cut everything," he says. What's more, the President's proposed budget earmarks more crop insurance savings as well. That's a separate discussion for another day.

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Jarrod Bennett
6/11/2013 | 7:42 AM CDT
Thank you Eric for the link. Kind of puts holes in Dr Babcock's assault on farmers and insurance companies being on the government dole... In case anyone didn't follow the link, it was a disclosure of Dr Babcock's Iowa State salary since 2006; each year salary was in excess of $200k, this most recent year $265k. (100% taxpayer subsidized being that Iowa State is a public institution)
5/23/2013 | 11:19 AM CDT
I am an unlucky individual who not only forward contracted but excluded the fall harvest price bonus. Yet somehow I manage to stay in business. When you have been through the 80's and remain intact as a 5th generation farm all this insurance debate seems rather silly. The megafarms and megafarm managers are the ones that are protected by the fall harvest price option. They can easily cheat the game, farming in many counties and leasing fleets of semis. I look forward to the great retraction where, as in the 80's, we will have a chance to expand.
Eric Sorensen
5/22/2013 | 12:21 PM CDT
Here's what the Des Moines Register's site posts as the salary for Bruce Babcock from Iowa State University. Of course this does not include what he receives from special interest groups such as Environmental Working Group (EWG) and others that are big-government minded. It also would not include any overrides that he might receive from the sale of GRIP or LGM or other products he had a hand in developing. If you want to talk "boondoggle", write an article on the math behind GRIP and its subsidy. It is better now than it was a few years ago, but still bad. These figures also do not include income he receives from his own farm. http://data.desmoinesregister.com/dmr/dmr-public-records/state_salaries.php?keyEMPLOYEE=babcock+b&keyFISCAL_YEAR=&keyDEPARTMENT=IOWA+STATE+UNIVERSITY
Bonnie Dukowitz
5/19/2013 | 8:35 PM CDT
Conducting a study for the environmental working group discredits any merit of the conclusion.
Marcia Taylor
5/17/2013 | 9:39 AM CDT
I read your article regarding Bruce Babcock in regards to farm subsidies. I am very disappointed with these economic professors from land grant universities that are supposed to be representing agriculture. We are a fourth generation ranch family in central Montana and we have a professor, Vincent Smith from Montana State University, Bozeman, Montana that has the same ideas. My question is this: I thought land grant universities are federally supported where they receive federal money. Who pays the salaries for these professors? Maybe they need a pay cut in their salaries, if it is federally supported. Thanks, Neil Glennie Judith Gap, MT
Mark Smeby
5/17/2013 | 6:11 AM CDT
How much does Iowa state and Bruce Babcok receive from the tax pay maybe he should expose this all so
Aaron Cross
5/16/2013 | 1:07 PM CDT
Did you know that the individuals that come up with the insurance policies get a portion of the sales of that type of policy sold? Could it be because of RP's success and the failure of GRIP and GRIP HO (developed by Babcock and others at ISU) that they are trying to revive or make RP less appealing so more farmers will switch to their products, thus they will be receiving more money? Just a thought. . .
Bill Billson
5/16/2013 | 8:15 AM CDT
Really sad the house and senate are caving to their lobbies and enhancing the wasteful crop insurance program. It appears they want nothing but mega farm and essentially spit on small/beginners. When crop insurance guarantees a profit every year there is no reason not to obtain an unlimited amount of acres. Crop farming will be like hog production before we know it. At a minimum the should cut the crazy high admin costs to the taxpayers by 75% or just have USDA administer the programs since we are paying those folks to pay our welfare/dcp anyway. I would rather have lesser service from USDA for my crop insurance if it saved the taxpayers billions as shown in the GAO reports.
Jarrod Bennett
5/16/2013 | 7:35 AM CDT
Babcock says, "Many farmers did not forward contract last year..." What?!! Not the one's I work with dude. Most of them did and always do. And fella, they were glad their corn policy paid them $7.50 last fall to buy out of the contracts they couldn't fill. Good read Marcia.