Minding Ag's Business

More Haircuts for Crop Insurance

President Obama's proposed 2014 budget released this week outlines five potential cuts in crop insurance subsidies. Altogether they'd trim an estimated $11.7 billion from crop insurance's federal budget over 10 years, with some targeted at raising the cost of producer premiums and others raising administrative costs of private insurers.

Former Risk Management Agency Administrator Ken Ackerman believes the moves "aim directly at farmers, sharply raising out-of-pocket costs for buying protection." In particular, revenue-based products with harvest price options could become much more expensive, if the changes are enacted.

"Congress will have to agree before any of these crop insurance cuts can go forward, and the issue likely will become enmeshed in the larger Farm Bill debate," Akerman added.

So far, Congress has shown little appetite for trimming a program that kept farmers and farm communities on even keel after the Great Drought of 2012.

On Tuesday, Rep. Mike Conaway (R-Texas) , a House Agriculture subcommittee chair, told the North American Agricultural Journalists that Congress will recognize previous haircuts crop insurance companies have taken since 2008--and that companies are still working through. "Food security is a national security issue," he argued, and the move away from direct payments and toward an insurance-based safety net is far superior to previous farm programs. Senate Ag Committee Chair Debbie Stabenow (D-Mich.) agreed."With crop insurance, a farmer has skin in the game. It's not like direct payments which pay whether the price is high or low," she added. Making sure that premiums are affordable is one of her priorities.

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Below are the five cuts, as described by USDA in its 2014 Budget Summary::

1. Establish a reasonable rate of return to participating crop insurance companies.

A USDA commissioned study found that when compared to other private companies, crop insurance companies rate of return (ROR) should be around 12%, but that it is currently expected to be 14%. The Administration is proposing to lower the crop insurance companies' ROR to meet the 12% target. This proposal is expected to save about $1.2 billion over 10 years.

2. Reduce the reimbursable rate of administrative and operating expenses.

The current cap on administrative expenses to be paid to participating crop insurance companies is based on the 2010 premiums, which were among the highest ever. A more appropriate level for the cap would be based on 2006 premiums, neutralizing the spike in commodity prices over the last few years, but not harming the delivery system. The Administration, therefore, proposes setting the cap at $0.9 billion adjusted annually for inflation. This proposal is expected to save about $2.8 billion over 10 years.

3. Decrease the premium subsidy paid on behalf of producers by 3 percentage points.

The proposal would reduce the premium subsidy levels by 3 percentage points for those policies that are currently subsidized by more than 50%. This proposal is expected to save about $4.2 billion over 10 years.

4. Decrease the premium subsidy paid on behalf of producers by 2 percentage points on policies where the producer elects policies that provide protection against price increase.

This reduction is in addition to the 3 percentage point reduction on policies currently subsidized by more than 50 percent. These policies provide upward price protection which provides a higher indemnity if the commodity prices are higher at harvest time than when the policy was purchased. This proposal is expected to save about $3.2 billion over 10 years.

5. Reduce the premium rate on catastrophic coverage to better reflect historical performance. This proposal would require that USDA reset premium rates to more accurately reflect the performance of the catastrophic portfolio. The proposal is expected to save about $292 million over 10 years.

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