Crop Insurance and Compliance

USDA Study Points to Value of Linking Premium Subsidies to Conservation Compliance

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Conservation compliance is aided by the tie to crop insurance premium subsidies in the 2014 farm bill. (DTN/The Progressive Farmer file photo by Jim Patrico)

OMAHA (DTN) -- The linkage between conservation compliance and crop insurance premium subsidies continues to draw complaints, but a new study by USDA's Economic Research Service shows the link helps reduce the farming risks on highly erodible lands and wetland conversions.

Coupling insurance and conservation compliance in the 2014 farm bill has helped reduce erosion on highly erodible land. The study found that if Congress were to take away the link to the crop insurance subsidy, then conservation compliance on highly erodible land would fall from 25 million acres to closer to 14 million. The incentives for reducing erosion on those highly erodible fields would be gone.

"There are a lot of farmers that just move into lower incentive categories by removing that link," said Roger Claassen, an ERS economist and one of the study's lead authors.

Compliance for crop insurance continues to have its critics, including Senate Agriculture Committee Chairman Pat Roberts, R-Kan. At a recent hearing, Roberts asked insurance professionals about problems with conservation compliance linkage to crop insurance. Roberts added that he felt in 2014 that the link to insurance was "unneeded, costly, burdensome."

William Cole, chairman of the Crop Insurance Professionals Association, told senators the intention of the 2014 language was to bring more farmers into compliance, but the paperwork became a hassle for some. "If this stays in, we have got to simplify it without the penalties where they lose coverage," Cole said.

Cole later noted that the insurance professionals are not saying conservation compliance is a bad thing. "We're not saying conservation compliance is not a good thing. Our producers need to be in compliance, but I think it's more the regulatory timing aspect of it as far as when they get their paperwork filed with the Farm Service Agency," Cole said.

Ron Rutledge, president and chief operating officer of Farmers Mutual Hail Insurance Co., told senators there was a lot of work to get farmers to file the proper paperwork with the Farm Service Agency in that first year USDA tied compliance to insurance. Rutledge recalled one situation where a beginning farmer missed the filing date and it had to be straightened out.

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Farmers are at risk of losing their crop insurance premium subsidies and access to other commodity and conservation funds, as well as USDA farm loans, if they are found to be out of compliance with basic conservation measures on highly erodible lands and wetlands.

The incentives to remain in compliance with conservation provisions shifted in the 2014 farm bill not just because of the compliance link, but also because of ending Direct Payments, the ERS report notes. The commodity title of the farm bill was reduced, and that shifted the major safety net protection to crop insurance and the premium subsidy that farmers receive. At the time, it was also noted only about 36% of farmers received commodity or conservation payments, but as much as 93% of cropland was on farms that either received commodity payments or crop insurance premium subsidies.

Compliance incentives would be quite a bit lower on many farms if the link to crop insurance were severed, Claassen said. In the Northern Plains, for instance, Direct Payments weren't very high, but the crop insurance premiums are expensive. So the premium subsidy has a higher value for those farmers. The ERS analysis calculated a little more than 3 million acres remain tied to conservation compliance provisions purely because of the benefits from the premium subsidy.

"Taking away Direct Payments and changes in the commodity programs that we saw, plus relinking the premium subsidies, the change is about a wash," Claassen said. "So if you take the premium subsidies back out of the system, you're going to have a significant reduction in incentives. That's just simple math. The premium subsidies are a pretty big chunk of farm-program benefits as the programs are now configured."

The ERS economists looked at the relationship between conservation compliance and three different price scenarios for corn. The analysis looked at the value of compliance with a low price such as the 2004 corn price of $2.83 a bushel, a high price such as 2013’s $5.65 a bushel and a medium-range price of $3.99 in 2010 that would not be far from Friday’s December contract price on the CME, which settled at $3.88.

The incentive for staying in compliance swings both ways. When prices are low, the commodity title kicks in more and programs such as Price Loss Coverage and Agricultural Risk Coverage step in as the safety net. When prices are higher, the crop insurance premium is higher and thus so is the premium subsidy.

"The mix of incentives seems to cover a pretty wide range of price circumstances," Claassen said.

Looking at the Prairie Pothole region, the report highlights that on about 2.6 million affected acres, the combined value of compliance incentives -- insurance, farm program and conservation payments -- outweighs the potential value of wetland conversion into crop production without factoring in the added costs of drainage. About 75% of wetlands are on farms that have USDA farm program benefits that are greater than the potential rental value of those wetlands after conversion. About 10% of wetlands are on farms that do not receive any farm-program benefits, which means they are not subject to compliance requirements.

Related to those compliance rules, South Dakota farmer Kevin Scott, a board member for the American Soybean Association, told senators at the hearing that the process for determining the existence of a wetland has become a slow and burdensome process for producers in the Prairie Pothole states. There is a growing backlog of applications at local Natural Resources Conservation Service offices as farmers wait for the agency to determine whether there is a wetland. The regulations in the Dakotas also seem to differ from other states, Scott said.

"We have incredible wetland determination problems in our area because of the backlog that has been created there," Scott said. "Farmers would like to drain and farm areas that may be wet in the spring and dry in the summer and not become a wetland anymore ... We would like to be able to drain those things."

The ERS compliance study can be found at http://dld.bz/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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Chris Clayton