WASHINGTON (DTN) -- The denouncements came swiftly Tuesday as details emerged that an agreement on the federal budget included a provision that would reopen the 2014 farm bill and allow USDA to renegotiate an average of $375 million a year in taxpayer savings in the contract between the federal government and crop insurance companies.
The provision is projected to cut slightly more than $3 billion from crop insurance over eight years stretching from 2018-2025 by essentially requiring USDA to renegotiate the Standard Reinsurance Agreement with crop insurance companies in 2016. The bill also sets a hard cap of 8.9% as the overall rate of return crop insurance companies can receive. Under current law, the overall rate of return is 14.5%.
The plan does not call for increasing premium costs for farmers or demand any means testing that would reduce the current premium subsidy for producers.
With the budget plan up for possibly swift passage before a vote on a new House speaker, insurers, farm groups and backers in Congress quickly called on Congress Tuesday to defeat the budget agreement struck between President Barack Obama and congressional leaders.
Crop insurance is just a small piece of the puzzle in the budget agreement rolled out late Monday that would increasing defense and domestic spending $80 billion over the next two years and increase the debt limit into March 2017, effectively eliminating the likelihood of another budget or debt-limit standoff between the president and Congress throughout the rest of his presidency.
Farm groups and lobbyists for the crop insurance industry cited that the industry has seen $12 billion in cuts to projected spending since the enactment of the 2008 farm bill. Much of those cuts came when USDA renegotiated the Standard Reinsurance Agreement with insurers in 2011.
Renegotiating the payment structure between USDA and insurers strips out language in last year's farm bill that effectively blocked USDA from conducting such negotiations. The farm bill stated any new Standard Reinsurance Agreement must be "budget neutral," which blocked USDA from squeezing savings from crop insurers.
All cuts that would result from the deal would come directly from the profit margin and expenses charged by insurers. Nonetheless, people and farm groups who criticized the cuts declared they would be felt by farmers who rely on crop insurance.
"Farmers and ranchers have done more than their fair share to reduce government spending," said Sen. Pat Roberts, R-Kan., chairman of the Senate Agriculture Committee. Roberts effectively led the charge in the farm bill negotiations to prevent USDA from demanding further cuts from the crop-insurance industry. "To target the number-one priority for producers with additional cuts will undermine the delivery of this important protection for agriculture," Roberts added. "While Congressional leaders may sell this package as providing budget stability, it is anything but stable for farmers and ranchers."
Rep. Michael Conaway, R-Texas, chairman of the House Agriculture Committee, said his committee was not consulted about any policy change that would be under his jurisdiction. He also noted that similar language allowing for such cuts to insurer reimbursements was debated and defeated by the committee in 2014. Conaway added, "Make no mistake, this is not about saving money. It is about eliminating federal crop insurance."
Sen. Debbie Stabenow, D-Mich., ranking member of the Senate Ag Committee, also said she opposed efforts to reopen the farm bill and increase the cuts in that legislation. Rep. Collin Peterson, D-Minn., ranking member of the House Ag Committee, made a similar statement.
The budget deal and its push to cut crop insurance comes as the industry has been under pressure to consolidate. Industry groups such as the National Crop Insurance Services have been arguing that returns for crop insurance companies have become "anemic" under the current Standard Reinsurance Agreement that was signed in 2011. Rates of return in recent years have fallen to only 5% to 6% of cumulative retained premiums, NCIS wrote in a year-in-review piece on the crop insurance industry for 2014.
Wells Fargo announced over the summer that it was considering options for selling part of its crop insurance business. Rural Community Insurance Services (RCIS), a subsidy of Wells Fargo, is the second-largest crop insurer in the country based on volume of sales and market share last year. Wells Fargo stated in August the bank was looking at "strategic options" that could include selling RCIS. Wells Fargo's decision came just after the insurance underwriter OneBeacon and its partner, Monsanto Co., collectively sold off their stakes in Climate Corporation's crop insurance business. John Deere also got out of the insurance industry earlier this year.
Farm groups on Tuesday weighed in with sharp criticism of the deal as they protested cuts to crop insurance at a time of low prices and following passage of a farm bill last year that requires farmers to lean more heavily on crop insurance as a safety net.
The National Association of Wheat Growers called the cuts "devastating to the crop insurance companies and ultimately for growers as well." As Brett Blankenship, president of the wheat growers, added, "In this difficult economic climate, at a time when commodity prices are low, agriculture has already taken a hit. We took unprecedented cuts in negotiating the farm bill. Just one year into the new farm bill and Congress let sequester cuts happen. Now they want to cut more. We cannot stand by and allow more cuts to be made."
National Farmers Union also called on Congress to reject the budget deal, citing that crop insurance is a better safety tool than ad-hoc disaster programs that could take a year or more to provide payments to farmers.
"More and more, crop insurance providers are exiting the sector because these cuts have made it no longer profitable to be engaged in this business," said Roger Johnson, president of the National Farmers Union. "Since 2013 we have witnessed the exit of five large crop insurance providers with additional providers teetering on the edge. NFU remains concerned about concentration in the marketplace and its impact on farmers and ranchers. These budget cuts would accelerate the consolidation of the crop insurance sector."
The crop insurance industry was naturally unhappy to see it would be bearing the brunt of further cuts to agriculture. The various groups involved in crop insurance -- the Crop Insurance and Reinsurance Bureau (CIRB), National Crop Insurance Service (NCIS), and American Association of Crop Insurers (AACI) -- released a joint statement. "Make no mistake -- the budget deal's proposed cuts to crop insurance would be devastating. Today, crop insurance is a successful public-private partnership that has already sustained $12 billion in cuts since 2008. This proposal would cripple that partnership and with it, the rural economy."
The insurance lobbies stated that the budget deal "would essentially destroy the delivery system and the timely service that farmers have come to rely on to get back on their feet after times of disaster."
Seeking to demonstrate that the crop-insurance plan was not just a proposal from the administration, a USDA official noted to DTN on Tuesday that Congressional Republican budget proposals going back several years have proposed similar cuts. House Speaker-in-waiting, Rep. Paul Ryan, R-Wis., has proposed as chairman of the House Budget Committee $23 billion in cuts to agricultural programs over 10 years. In Ryan's fiscal year 2014 budget, he proposed $31 billion in cuts.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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