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."

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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.

Follow me on Twitter@MarciaZTaylor


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