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RSS By: Chip Flory, Pro Farmer

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Gasoline tossed on crop insurance debate

Sep 13, 2013

Pro Farmer Extra

- From the Editors of Pro Farmer newsletter -

September 6, 2013

The following is the feature item from this week's Pro Farmer newsletter. With the farmbill debate ready to ramp up again, it's important to be up to speed with the opposition to some of the key farm bill issues... and crop insurance is certaintly critical to the safety net portion of the farm bill.

Gasoline tossed on the crop insurance debate

The crop insurance system — from farmers who buy it to the companies that sell it — was cast in a very negative light in a series of reports by Bloomberg News last week. The series comes as lawmakers prepare to step up consideration of a new farm bill. It addressed many issues crop insurance opponents will use in an effort to reduce funding for the program. That’s the reason we’re bringing the series to your attention.

The real facts — go figure

The series focuses on payouts for 2012 crop revenue losses and sets the tone early by saying, “Taxpayers are helping farmers pay their bills even as farm income this year is expected to top $120 billion, its highest inflation-adjusted mark since 1973, according to the USDA’s Economic Research Service.”
We alerted months ago as the 2012 crop loss claims neared record levels that program opponents would use 2012 as their “reason” to cut funding. Payouts under the program in 2012 reached $17.4 billion with a loss ratio of 1.57 — $1.57 paid in indemnities for every $1 paid in premiums. But 2012 was the first year since 2002 the program saw a loss ratio of 1.0 or greater.

Breaking down the series —
Bloomberg News pulled no punches in the series, starting with these agenda-setting headlines:

Sept. 9: “Taxpayers Turn U.S. Farmers Into Fat Cats With Subsidies”

Sept. 10: “Crop Insurers’ $14 Billion Some See as Money Laundering”

Sept. 11: “Fraud Stealing $100 Million Shows Flaws in U.S. Crop Insurance”

Fat cats —

In the first installment, Bloomberg delivered these assessments of crop insurance:

  • “Federal crop insurance encourages farmers to gamble on risky plantings in a program that has been marred by fraud and that illustrates why government spending is so difficult to control.”
  • “The [crop insurance] arrangement is a good deal for everyone but taxpayers.”

 

In a few cases, less-productive ground was brought into production with the security of crop insurance “backing” the decision. However, unless a farmer is committing fraud, this problem is self-correcting. Declining APH yields eventually reduce coverage.

Saying the program is “a good deal for everyone but taxpayers” is a stretch. One of the reasons U.S. consumers spend less of their annual incomes on food than any other country in the world is because of food security, and crop insurance plays an important role in food security.

Food expenditures as a percent of disposable personal income in the U.S. fell under 10% for the first time in 2000 and bottomed in 2008 at just 9.5%, according to USDA’s ERS. In 2011, consumers spent just 9.8% of personal income on food (at home and away from home).

We’re not saying farm policy (past and present) is the only reason U.S. consumers enjoy “cheap” (and safe) food. Ultimately, the U.S. enjoys a relatively cheap, abundant and safe food supply because of the production capacity of the country and professional drive of farmers.

We’ve always said consumers will either pay for food individually (higher cost) or collectively (lower cost through supporting agriculture with tax dollars). Remove supports for crop insurance now and consumers may end up paying more later in the form of higher-priced foods as risk escalates for farmers.

Money Laundering —

This installment details how high-profit companies and investors (like Hank Greenberg who headed up AIG) have been attracted to the crop insurance industry “that in most years all but guarantees profits for insurers.”
The series’ only quote from crop insurance guru Bruce Babcock, ag economist at Iowa State University, was used to support the “profit-guarantee.” Babcock was quoted saying, “Even in a pretty bad year, the companies make money.”

At a rally on Capitol Hill Sept. 12, Representatives Tom Petri (R-Wis.) and Ron Kind (D-Wis.) asked lawmakers to re-examine farm spending for the next five years and to revamp crop insurance.

“We’re asking these crop insurance companies to put a little bit of their skin in the game too, so it’s not all on the taxpayer back,” Kind said. At the rally, Kind said the existing crop insurance program guarantees companies a 14% profit, forces the adoption of little risk and covers administrative and operating expenses. “There’s not a business in the world that wouldn’t sign up for that offer, so why are we doing that in [the] crop insurance program of the farm bill,” asks Kind.

Fraud —

Sure there’s fraud in crop insurance — there is in all types of insurance. The series details the well documented events (in 2005) of admitted fraud in North Carolina. Fortunately, it also provides details of steps taken by the Risk Management Agency to identify fraudulent and questionable claims the past two years.

Supporters of crop insurance are pushing back

Tom Zacharias, president of National Crop Insurance Services, the main lobby for crop insurers, says the Bloomberg series showed “obvious bias” against the program. He says crop insurance “forces farmers to manage risk before, not after it happens, which saves taxpayers money.”

USDA Secretary Tom Vilsack said the crop insurance program was a vital part of U.S. farm policy and has come in for “unfair criticism” as the farm bill is debated. Vilsack says, “Those who report on it don’t understand it and its importance to the food supply.”



 



 

Follow Pro Farmer Editor Chip Flory on Twitter: @ChipFlory


To see more of what Pro Farmer has to offer, be sure to visit www.profarmer.com.

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