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Means Testing Would Hurt Crop Insurance Program

November 21, 2013
By: Boyce Thompson, AgWeb.com Editorial Director
 
 

Head of association for crop insurance companies raises danger that some farmers may not participate

 

Farmers might leave the federal crop insurance program if Congress changes it to require high-income farm operations to pay higher premiums, said Tom Zacharias, president of National Crop Insurance Services, at a Federal Reserve Board of Chicago agriculture conference this week.
 
The Senate-passed version of the farm bill includes so-called "means-testing." It reduces crop insurance premium subsidies (which averaged 62% in 2012, according to the Government Accounting Office) by 15% for producers with average adjusted gross income greater than $750,000.
 
"That would hurt the program," said Zacharias, holding out the possibility that some farmers might opt out of federal crop insurance. "The question is would there then be a call for a supplement disaster because people exit the program?"
 
The federal crop insurance program enjoys record participation, according to statistics presented by Zacharias. "We have about 70% of acres covered at 70% or higher," he said, adding that because of strong coverage, "there’s no outcry for supplemental disaster legislation."
 
It’s not clear how much leverage high-income farmers would have to leave the farm insurance program. Several other speakers at the conference made it clear that banks often require farmers to take out crop insurance as a condition of loan approval.
 
"I can’t understate how important crop insurance is to us as a risk management tool," said Gary J. Ash, president and CEO of 1st Farm Credit Service, based in Normal, Ill. "Without it, we’d have to set much higher lending requirements."
 
Purdue University professor Michael Boehlje, speaking at the same conference, recommended that lenders tell their farmers to take out more insurance in 2014 due to coverage changes. "We don’t have enough protection at 75%. [We] need to move up to 85%."
 
The Congressional Research Service, in a report issued earlier this year, concluded that average producer subsidies in 2009 varied widely by income levels. The average producer subsidy for a farm with less than $100,000 in sales was $1,300, compared to $37,000 for farms with more than $1 million in sales.
 
In virtually every crop year between 1989 and 2009, Congress provided ad hoc disaster assistance to farmers and ranchers with significant weather-related losses. The assistance, which primarily came through emergency supplemental appropriations to a wide variety of USDA programs, equaled $68.7 billion, according to a 2010 Congressional Research Service report.
 
By comparison, the crop insurance program cost USDA about $14 billion in 2012 alone. Zacharias said costs in 2013 are expected to return to 2011 levels of $9 billion.
 
Zacharias disputed the notion that crop insurance completely insulates farmers from risk. A Bloomberg article earlier this year quoted critics of the program who said it "eliminates almost all risk" from agriculture.
 
"There was some talk about how farmers didn’t lose anything during 2012 due to insurance," Zacharias said. "Well, farmers lost about $13 billion on the deductible side and they paid $4 billion in premiums."
 
Federal crop insurance policies covered 283 million acres in 2012, according to the Congressional Research Service. Four crops—corn, cotton, soybeans and wheat—accounted for nearly three-quarters of enrolled acres.
 
Most farmers—70.2%—bought revenue protection policies in 2012, according to Zacharias’ statistics. Yield protection insurance represented only 18.2% of total insurance liability. Very few farmers bought insurance based on area yield and revenue, a type of insurance promoted by the pending farm bill.
 
Crop insurers made money--banked underwriting gains--in all but two years since 1993, according to data shared by Zacharias. In the last decade, gains by crop insurance companies have topped $10 billion, according to USDA's Risk Management Agency (RMA).
 
RMA changed the rules for the program beginning in 2011 in a way that reduced revenue gains and administrative and operating payments by $6 billion over 10 years, according to the insurance industry.
 
The alterations were made after a report done for the RMA by Seattle-based Milliman Inc., that found that in the 21 years from 1989 to 2009, crop insurers averaged a 17% return, compared to a "reasonable" return of 12.7% for insurance companies during that period.
 
Congress also made changes to the program in the 2008 farm bill that reduced revenues over a 10-year period by another $6 billion.

 

 

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COMMENTS (7 Comments)

splined
Not surprising that farm credit services is again pandering for government bailouts for its' borrowers via federal crop insurance. I guess that their managers never learn that setting lending standards based on government bailouts of borrowers is another train wreck waiting to happen. In the past many lenders determined that they could not make a bad loan as FmHa would bail out any bad loans they made. Now these lenders ever eager for more loan volume have been more than willing to lower lending standards based on government guaranteeing borrowers' investments and profits. Allowing government to be involved in business lending and insurance is a great way of flushing out smaller farmers from the industry as these government benefits quickly end up flowing in volume to the largest players in the industry.


6:14 AM Nov 25th
 
splined
Crop Insurance Subsidies Could Provide Bumper Crop of Budget Savings By: Scott Faber, Vice President of Government Affairs Wednesday, November 20, 2013 Looking for a way to save more than $60 billion? Reducing subsidies to large farm businesses, crop insurance companies and their agents, and trimming their windfall profits could generate enormous savings, EWG has found. EWGâ?™s analysis, based on Congressional Budget Office estimates developed during House and Senate consideration of the farm bill, demonstrates that taxpayers could harvest significant savings if Congress voted to: Reduce Crop Insurance Premium Subsidies to pre-2000 Levels. Legislation introduced by Sen. Jeff Flake (R-Ariz.) and Rep. John Duncan (R-Tenn.) would save taxpayers $40 billion over 10 years by gradually reducing average premium subsidies from 62 percent to 37 percent over five years. A recent CBO study found that immediately reducing the premium subsidies to an average of 40 percent would save $22.1 billion over the next 10 years, including $5 billion in the first two years. End the Harvest Price Option. Farmers are allowed to purchase revenue insurance policies linked to the price of the crop at harvest â?“ rather than the price the farmer expected to earn when he planted his crop in the spring. Eliminating this option would save taxpayers $8 billion over 10 years. Reps. Duncan and Henry Waxman (D-Calif.) filed an amendment to eliminate the option, but House leaders blocked a vote. Subject Crop Insurance to Means Testing. Means testing is not applied to crop insurance subsidies, unlike traditional farm subsidies. As a result, some farmers receive more than $1 million a year in premium support and more than 10,000 each collect more than $100,000 a year. Means testing to require the largest 1 percent of farm businesses to pay more of their risk management costs, which has twice been approved by the Senate, would save nearly $1 billion over the next 10 years. End Subsidies for Insurance Agents. Ending these subsidies would save taxpayers more than $11 billion over 10 years. A recent Congressional Budget Office study found that simply lowering the cap on agentsâ?™ subsidies from $1.3 billion to $915 million (9.25 percent of expected premiums) would save $5.2 billion. Share Risk with Insurance Companies. Renegotiating the risk-sharing agreements between the crop insurance companies and USDA to lower their guaranteed rate of return could save taxpayers billions more. Currently, USDA guarantees the insurance companies â?“ many of which are based in tax havens such as Bermuda and Switzerland â?“ a 14 percent rate of return. Since 2001, the companies have enjoyed $10.3 billion in underwriting gains â?“ while taxpayers have suffered a net loss of $276 million. Reducing subsidies to farmers, insurance agents and companies would still provide farmers with a robust safety net. Studies show that reducing crop insurance subsidies would not shrink the number of farm businesses that buy insurance but would instead encourage farmers to adjust their coverage levels. Moreover, cutting the subsidies would not increase the need for disaster payments. In fact, an EWG analysis found that crop insurance is more costly than the ad hoc disaster programs crop insurance was designed to replace. For more information, visit: http://www.ewg.org/farmbill2013/the-case-for-crop-insurance-reform
12:17 AM Nov 23rd
 
splined
Crop Insurance Subsidies Could Provide Bumper Crop of Budget Savings By: Scott Faber, Vice President of Government Affairs Wednesday, November 20, 2013 Looking for a way to save more than $60 billion? Reducing subsidies to large farm businesses, crop insurance companies and their agents, and trimming their windfall profits could generate enormous savings, EWG has found. EWGâ?™s analysis, based on Congressional Budget Office estimates developed during House and Senate consideration of the farm bill, demonstrates that taxpayers could harvest significant savings if Congress voted to: Reduce Crop Insurance Premium Subsidies to pre-2000 Levels. Legislation introduced by Sen. Jeff Flake (R-Ariz.) and Rep. John Duncan (R-Tenn.) would save taxpayers $40 billion over 10 years by gradually reducing average premium subsidies from 62 percent to 37 percent over five years. A recent CBO study found that immediately reducing the premium subsidies to an average of 40 percent would save $22.1 billion over the next 10 years, including $5 billion in the first two years. End the Harvest Price Option. Farmers are allowed to purchase revenue insurance policies linked to the price of the crop at harvest â?“ rather than the price the farmer expected to earn when he planted his crop in the spring. Eliminating this option would save taxpayers $8 billion over 10 years. Reps. Duncan and Henry Waxman (D-Calif.) filed an amendment to eliminate the option, but House leaders blocked a vote. Subject Crop Insurance to Means Testing. Means testing is not applied to crop insurance subsidies, unlike traditional farm subsidies. As a result, some farmers receive more than $1 million a year in premium support and more than 10,000 each collect more than $100,000 a year. Means testing to require the largest 1 percent of farm businesses to pay more of their risk management costs, which has twice been approved by the Senate, would save nearly $1 billion over the next 10 years. End Subsidies for Insurance Agents. Ending these subsidies would save taxpayers more than $11 billion over 10 years. A recent Congressional Budget Office study found that simply lowering the cap on agentsâ?™ subsidies from $1.3 billion to $915 million (9.25 percent of expected premiums) would save $5.2 billion. Share Risk with Insurance Companies. Renegotiating the risk-sharing agreements between the crop insurance companies and USDA to lower their guaranteed rate of return could save taxpayers billions more. Currently, USDA guarantees the insurance companies â?“ many of which are based in tax havens such as Bermuda and Switzerland â?“ a 14 percent rate of return. Since 2001, the companies have enjoyed $10.3 billion in underwriting gains â?“ while taxpayers have suffered a net loss of $276 million. Reducing subsidies to farmers, insurance agents and companies would still provide farmers with a robust safety net. Studies show that reducing crop insurance subsidies would not shrink the number of farm businesses that buy insurance but would instead encourage farmers to adjust their coverage levels. Moreover, cutting the subsidies would not increase the need for disaster payments. In fact, an EWG analysis found that crop insurance is more costly than the ad hoc disaster programs crop insurance was designed to replace. For more information, visit: http://www.ewg.org/farmbill2013/the-case-for-crop-insurance-reform
12:17 AM Nov 23rd
 
splined
What makes no sense is for government to continually be awarding those with the greatest probability of the greatest incomes the largest income guarantees as well as giving the largest insurance subsidies to those with the greatest income probabilities. What this is doing is privatizing profits and socializing losses and turbocharging the growth of the largest farms. Anyone with any math capabilities can understand that this is no win economic climate for smaller farmers. It is kind of like awarding the wealthiest congressmen with the largest salary. For decades this government created "largest farmers always get the largest government income guarantees" has been eliminating smaller farmers from the industry. It should be obvious to everyone that farmers respond in a big way to government income guarantees by the recent explosion in farmland values driven in a large part by government guaranteeing that farmers can gross $1000- plus per acre growing corn.
12:14 AM Nov 23rd
 
splined
What makes no sense is for government to continually be awarding those with the greatest probability of the greatest incomes the largest income guarantees as well as giving the largest insurance subsidies to those with the greatest income probabilities. What this is doing is privatizing profits and socializing losses and turbocharging the growth of the largest farms. Anyone with any math capabilities can understand that this is no win economic climate for smaller farmers. It is kind of like awarding the wealthiest congressmen with the largest salary. For decades this government created "largest farmers always get the largest government income guarantees" has been eliminating smaller farmers from the industry. It should be obvious to everyone that farmers respond in a big way to government income guarantees by the recent explosion in farmland values driven in a large part by government guaranteeing that farmers can gross $1000- plus per acre growing corn.
12:14 AM Nov 23rd
 
swmnag - Marshall, MN
They will still take crop insurance. Don't kid yourself. They might not buy up to 85% if they have to stomach 15% more in cost, but if a farm is netting more than $700,000 in Sch F income, they can afford to give up their subsidy when our government is broke and we are taking away a food subsidy to SNAP receipients.
1:34 PM Nov 22nd
 
swmnag - Marshall, MN
They will still take crop insurance. Don't kid yourself. They might not buy up to 85% if they have to stomach 15% more in cost, but if a farm is netting more than $700,000 in Sch F income, they can afford to give up their subsidy when our government is broke and we are taking away a food subsidy to SNAP receipients.
1:34 PM Nov 22nd
 



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