Minding Ag's Business

Truth Serum for Crop Insurance Costs

By Marcia Zarley Taylor , DTN Executive Editor
With up to date expenses for 2012, Kansas State University economist Art Barnaby pegs the average taxpayer cost of the crop insurance program at about $5.1 billion to $5.3 billion/yeear since 2001. That counts about $4.043 billion in underwriting losses and premium subsidies, plus subsidies for administrative overhead.


Journalists are supposed to make the complex simple. What I am about to say involves crop insurance, so I apologize in advance.

Much has been debated recently about how much crop insurance costs in taxpayer subsidies. For the last year I've read more actuarial data, Risk Management Agency reports, Environmental Working Group exposes and insurance industry retorts than I care to remember. As Congress begins debate, it's worth a little fact checking. Don't err by saying a record $17.2 billion in claims paid to date on the 2012 crop are the true cost of the program. The real cost includes government'snet insurance subsidies on premiums, administrative costs and any underwriting gains or losses.

1. First, let's all remember that 2012 was the equivalent of Hurricane Sandy for drought losses, probably the most expensive crop loss ever. In the last 21 years, Kansas State University Economist Art Barnaby says we've only experienced two (1993 and 2012) where there were big yield losses in the Corn Belt and higher prices at harvest, the worst case scenario for government exposure. So 2012 is not the new trendline, it's an anomaly. A five-year or 10-year average is more indicative of real costs.

2. Second, farmers paid $4.1 billion of the total $11.08 billion in premiums (37% of the total cost) to insure their crops in 2012, so that inflow needs to be deducted from the outflow.

3. Third, insurance companies and the government split the underwriting losses based on the state and the year in question. Recently USDA negotiated a larger share of the profits but it also agreed to a larger share of the losses. (A quirk in government accounting only assesses crop insurance for outlays; profits are never credited back to RMA's account.) From 2006-2010, the government made $18 million to $1.51 billion/year on crop insurance. In 2012, the government will shoulder about $4.9 billion and the industry about $1.3 billion in underwriting losses. (See the red on the accompanying chart if you're getting lost).

4. Administrative subsidies now add about $1.3 billion/year to the government's cost, pared back in the last Standard Reinsurance Agreement. They are capped, one of the few certainties in insurance.

5. Bottom line is that the government will spend about $11.8 billion subsidizing crop insurance for the 2012 crop. It's a big deal but nothing like the $19 billion or $20 billion USDA spent on farmers in the height of the 1980s credit crisis, not taking even inflation into account.

Since 2001, the average taxpayer cost of crop insurance has been about $5.3 billion to $5.5 billion/year, according to Barnaby. While the Congressional Budget Office pegs future 10-year costs at $8.8 billion/year, they must make guesstimates of future crop sizes and prices so have a high margin of error.

Follow Marcia Zarley Taylor on Twitter@MarciaZTaylor

(SK)

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KC S 5/30/2013 | 11:51 AM CDT
I have no problems with a general safety net for US farmers at all. It is a volatile business subject to the whims of the seasons. That said, the program we have in place now is bloated and far too complex as many government programs tend to be. Rules, options, endorsements, and exceptions for production history are out of hand, revenue coverage is extremely unfair to other industries (and some foreign governments would say to other countries, but that's another debate) plus, when prices rise, it results in higher commissions to companies and agents while farmers have to deal with the higher costs associated with rising prices. There are some great agents out there in the field that genuinely care about their growers and do a great job of educating their clients and managing risk, but there are a lot of people out selling the insurance that either don't know what they are doing or they are in it because they get paid regardless of what happens.
ryn bohr 5/28/2013 | 11:29 AM CDT
I wish i had my company's insurance premiums reimburessed over 50%,,in SD,ND, they were 65$ last 3 yrs!!,, Last year our neighbor netted over 1.2 million dollars!!!! in crops alone!!(i remind you thats after all expenses are paid,ALL!) and he STILL recieved direct payments over 126k AND had his 52k insurance premium reimburesed to 62.3%,,that is over 32k back to him! that is over 150k he was givin from the tax payers,,you and I. And here is the kicker, he complained about the people on welfare, milking the system. whats worse a person getting 24k a yr that has no job and feeds a family of 3,,OR a farm making over 1.2 million and still getting a welfare/bailout check for over 150k ??? And a side not to that farmers story, he tore out trees and drain tiled to the public ditch and help cause flooding of that road which tax payers have to fix. And in the middle of summer the field blew 7k a acre in the air, but we pay them to distroy the land... I simply laugh when i see that commercial "trueenvorimentlist"..most farmers now are the worse for the land and water.,, The program should be set up to only give a payment if its a drought or MAJOR FLOODING, not minor. and only get a payment for the imput cost. I tired of hearing "we feed the world though" well my grandparents did too, and they never got a baillout every year,even on good years, they managed their money, not waste it. P.S.. we have a TRUE family farm too, so we KNOW how the farm welfare program works.
John Olson 5/24/2013 | 9:37 PM CDT
US ag is a highly competitive business between farmers. Billions in insurance subsidies and billions in gov't investment/profit guarantees have been capitalized into higher land prices with US cropland selling in many areas between$5000 and $20,000 per crop acre. When gov't targets annually lottery sized awards to the largest farmers (multimillion dollar insurance subsidies as well as multimillion dollar investment/profit guarantees) this annihlilates the ability of the smallest farmers to compete. Gov't has no business throwing around multimillion dollar investment/profit guarantees nor billion dollar subsidies for these guarantees.
Pedro Sanchez 5/23/2013 | 8:34 AM CDT
I get that crop insurance "only" cost tax payers $7 billion last year in premium subsidy compared to the billions fed to Hurricane Sandy disaster relief/rebuilding and other disasters, but it still doesn't excuse the bloated program. Crop insurance works, but it is getting to be too big of an animal in modern agriculture. Crop insurance is supposed to limit calamity, it isn't supposed to gurauntee shallow losses or "profits". If you don't have any risk in the game, you make riskier decisions, like paying $10k for land or bidding $500/A for cash rent. As someone who works in banking, insurance and farms as well, I get first hand experience on the bloated government crop insurance program and how farmers use it to make decisions.
Bonnie Dukowitz 5/23/2013 | 5:33 AM CDT
Or the home owners in Duluth. One recieved over $3500.00 for roof damage and the cost of repair was only $300.00, with no premium paid. We should be in a different profession if we wanted to milk the government. Whether the issue is food safety, subsidies, dishonesty, chemicals, water pollution, Its The Farmers Fault.
Curt Zingula 5/22/2013 | 8:09 PM CDT
Did you hear that in Cedar Rapids, Ia, home owners who lived in the 100 year flood plain, but carried no flood insurance, were awarded on the average $65,000 in taxpayer money for the flood of 2008? Why does this farmer, who spends something like $14,000/year for crop insurance, feel like I have a "kick me" sign pasted to my backside?! Including 2012, I've paid in more than I've received. Shame on me for calling myself a farmer!
Bill Billson 5/22/2013 | 2:12 PM CDT
Of course Marcia failed to mention that 2012 was a record year for crop farmer net farm income. The program is so bloated that taxpayers are subsidizing farmers at record levels during extremely profitable times!?!?! How can anyone defend this program???? IT MAKES ME SICK TO CALL MYSELF A FARMER
Eric Sorensen 5/22/2013 | 12:14 PM CDT
Great article Marcia! Thanks for laying these numbers out about as clearly as can be done. EWG, Babcock and those special interest parties are always so one-sided on the numbers that it would be confusing for anyone not "in the know" to understand. Amazing that 41 million acres were planted in one week. Amazing! Thank God for farmers.
David Taffe 5/22/2013 | 10:28 AM CDT
Thank you Marcia!! These numbers are insignificant compared to how much the government pumps into Hurricane disasters. What was it $60 billion for H. Sandy? What do the pin heads say about these hand outs. Dave
Freeport IL 5/22/2013 | 7:34 AM CDT
Farming is a feast or famine industry. In the bad times farmers spend to get by. In the good he spends most of what he has. The current spending spree has served the US consumer well this year. Only with the upgrades the US farmer has made to his equipment and technology could 41 million acres of corn been planted in a week's time; as occurred last week. Arguably that feat alone, in one crop, has saved consumers a buck a bushel or around 14 billion dollars. I am not big on government spending. But if crop insurance is part of the puzzle that keeps farmers spending than that $43 per household ($5 billion by 114 US households) may have been well spent. Freeport, IL
Unknown 5/21/2013 | 10:01 PM CDT
Unbelievable! Why are taxpayers subsidizing the unprecedented run up in land prices?
Hogs at the trough.