Ag Policy Blog

CBO Breaks Down Possible Cuts to Crop Insurance Spending

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The Congressional Budget Office dropped a report on the federal crop insurance program just before Christmas. Forgive me for missing it at that moment, but the CBO's report offers several recommendations to chew on as Congress ramps up for a farm bill in 2018.

It's unlikely leaders of the House and Senate Agriculture Committee are going to take the CBO's considerations for changes to the insurance program, but it's also possible congressional leadership and other lawmakers may push for budgetary changes given that Congress is moving into a budget-cutting mode for 2018.

As CBO states, a key question in figuring out the federal government's role in crop insurance is determining whether farmers and ranchers can manage their risk exposure without federal assistance.

Overall, farmers as a group received about $65 billion more in indemnity payments from 2000-2016 than they paid in premiums, equating to about $4 billion annually. CBO notes consumers benefit from the crop insurance program because higher participation has boosted cultivated acreage slightly, which then translated into lowering those prices slightly as well.

Corn accounts for an average of 38% of claims while wheat takes up 16% and soybeans take 15%. Cotton involves another 10% of claims. All other crops account for 20% of claims.

Premium subsidies range from 38% of a policy to 100% for CAT coverage, but average 62% of the premium.

CBO notes crop insurance has cost the federal government an average of $9 billion annually over the last five years, though it was lower, at $5 billion, for 2016. While defenders of the program often repeat that crop insurance avoids the need for disaster assistance, CBO notes "it is unclear whether current subsidies for the crop insurance program represent a more effective or economical means of protecting producers from agricultural losses than supplemental assistance."

CBO projected in June that crop insurance would cost taxpayers an estimated $77.72 billion over the next decade.

The CBO report looks at four options for reducing costs in the program over the next decade. Those including restrictions on how losses are quantified; reducing premium subsidies; reducing reimbursements to companies for administrative and operating costs; and changing the terms of risk balance between crop-insurance companies and the federal government.

Looking at restrictions on insurance, CBO looks at ending the harvest price option for revenue policies, a proposal that has been offered repeatedly in Congress and is advocated by groups such as Heritage Action and Environmental Working Group. Dropping HPO would score out at saving $19.2 billion over the next ten years. CBO estimates that out of 300 million acres insured, only about 2.5 million acres would drop out and about 20 million acres would have lower overall coverage.

Another option of reducing the ability of farmers to adjust their APH would save another $2 billion in federal spending over a decade.

Reducing premium subsidies by 15 percentage points, going from an average of 62% to 47%, would save $8.1 billion over ten years as well. CBO again doesn't see a major change in acreage coverage if this were implemented, dropping 1.5 million acres out of the program, and lowering coverage on another 5 million acres. If that 15 percentage points were applied only to farmers making $500,000 in adjusted gross income, the saving diminish greatly, affecting only about $400 million in savings over a decade.

If the premium subsidy were capped at $50,000 a year, that would saving about $3.4 billion over 10 years and have much more limited impact on acreage, CBO stated.

Another option for saving would be to limit the administrative and operating overhead for insurance companies, known as A&O expenses. If A&O were capped at 9.25% of premiums, that would save about $2.8 billion over 10 years. CBO states this would essentially put reimbursements in line with actual A&O costs, though you can be assured there is an industry study disputing that claim.

If A&O payments were dropped altogether, that would generate about $10.2 billion in savings over 10 years, CBO states. The reality, though, is that it likely leads to fewer actual insurance companies in the business if the A&O were eliminated.

The full CBO report can be viewed at: https://www.cbo.gov/…

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

Follow him on Twitter @ChrisClaytonDTN

Comments

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SD Farmer
1/2/2018 | 7:07 PM CST
One of the "Right things to do", would be to have a premium subsidy cap. If that should be a $50,000 a year cap or a $250,000 adjusted gross income cap. Actually it would make since to include both. Otherwise all of these subsidies are going to people that simply don't need them. The harvest price support needs to be protected; it is the only way to protect forward contract pricing for producers especially if the producer loses his crop and has it contracted. Preventive plant options need to be protected in the prairie pothole region if producers there are to adhere to the crazy wetland compliance rules that a majority of the country is exempt from.
Unknown
1/2/2018 | 3:56 PM CST
I feel the best answer would be to look at getting rid of the 80 and 85% coverage levels.