Crop Insurance Targeted for $14 Billion in Savings in FY 2015 Admin. Budget

March 4, 2014 10:01 PM

via a special arrangement with Informa Economics, Inc.

Proposals were not part of the newly passed farm bill

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Reductions in the federal crop insurance program totaling $14 billion over 10 years are included in the Obama administration’s FY 2015 budget proposal unveiled Tuesday. While Congress will not likely go along with most of the White House requests, it's just a matter of time before lawmakers tap the crop insurance subsidy bank for reductions to help reduce the still-growing national debt.

Notably, the savings proposed by the administration are provisions that lawmakers opted to reject in the consideration of the Agricultural Act of 2014, including a reduction in the premium subsidy level for farmers. The administration’s plan would extract $10.1 billion via those reductions with another $4.1 billion sought from changes to reimbursements to crop insurance companies.

Restructures Crop Insurance Subsidies. With the recent passage of the newly enacted 2014 Farm Bill, reforms did not include any of the administration’s proposals for improvements and efficiencies for the crop insurance program, which continues to be highly subsidized and costs taxpayers on average $9 billion a year to run: $3 billion per year for the private insurance companies to administer and underwrite the program, and $6 billion per year in premium subsidies to the farmers.

The budget includes proposals to reduce subsidies to farmers, as well as crop insurance companies, to more "reasonable: levels. These proposals will modify the structure of the crop insurance program so that it is less costly to the taxpayer yet still provides a quality safety net for farmers. Collectively these proposals are expected to save $14 billion over 10 years.

Specifically, here is how the budget proposes to achieve the savings:

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' return should be around 12 percent, but it is currently expected to be 14 percent. The Administration is proposing to lower the crop insurance companies' return on retained premium to meet the 12 percent target. This proposal is expected to save about $1.2 billion over 10 years.

Reduce the reimbursement 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 four 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 $2.9 billion over 10 years.

Lower the subsidy paid for producer premium by 3 percentage points for policies where the Government subsidizes more than 50 percent of the premium. Producers with policies whose premium subsidies are 50 percent or less would not be affected by this change. Currently the government subsidizes buy-up coverage at 60 percent on average. That level of a subsidy is no longer needed to boost or sustain participation. Participation has increased substantially in recent years and farmers have,  by now, incorporated crop insurance into their business model. With that level of participation, the reduced premium levels will still provide a level of subsidy sufficient to incentivize participation, and the safety net will remain intact. This proposal is expected to save about $3.8 billion over 10 years.

Reduce premium subsidy by 4 percentage points for revenue coverage that provides protection for upward price movements at harvest time. Producers will be able to continue to purchase affordable revenue coverage for potential upward price changes that may occur at time of harvest. This type of revenue coverage is the most expensive and provides producers with coverage that can fluctuate depending on price movement at time of harvest. The ability to have increased harvest price coverage seamlessly integrated into a crop insurance policy presents a convenience that approximates certain revenue protection available through private sector markets, and this proposal would shift more of the cost of this enhanced coverage from the taxpayer to the insured party, while still maintaining the availability and integrity of the policy. This proposal is expected to save about $6.3 billion over 10 years.

Rescind the authority for the funding of a pilot program for Wild Salmon (Section 523(a) of the Federal Crop Insurance Act) saving $10 million over 10 years.

Vilsack defended the administration's decision to repeat its proposal to slash spending crop insurance spending just after the idea was rejected by Congress in writing the 2014 Farm Bill. He said the administration was staying consistent with past budget proposals while identifying ways to pay for other initiatives. "Budgets are statements of priorities, and as you know we're dealing with a budget in which Congress has set a defined amount of money in which we are to fund all of the activities of the federal government," he said.

Comments: The budget savings proposed for the crop insurance program were not part of the farm bill and thus will not have support in Congress. In addition, it’s important to note that via the budget process, the savings of $14 billion in crop insurance are used to pay for expanded spending in other areas. This unrealistic savings, for now, is why so many observers have taken to calling this budget "pie in the sky." But longer-term, with a monstrous US debt getting ever larger, and a likely coming disaster plan for the creeping drought in the West and Southwest, lawmakers may just look, again, at "reforming" crop insurance by whittling down the around 62 percent subsidies farmers get from taxpayers to buy up their coverage. The clock is ticking.

Also, in my many speeches throughout the country, water-related issues (lack of it and regulations) are increasingly becoming a major item in some rural areas. This is a strategic issue which will have to be dealt with at both the state and federal level. Some states have done a great job in trying to deal with the lack of water, but their funds, alas, are limited.

And speaking of insurance, the vicious virus racing through the U.S. hog industry, Porcine Epidemic Diarrhea (PEDvirus, is a black cloud hanging over the hog producer. So much so that some hog producers do not want to leave their operations -- even to go to church or to attend industry meetings. The impact is also negatively affecting the amount of money state pork groups get from the checkoff program, and that in turn is negatively impacting many worthwhile state pork producer group programs. If the high anxiety I am hearing in hog country grows, some sort of "insurance" or aid should be and is needed. If so, some of those hefty crop insurance subsidies may have to be tempered to bring equity to the taxpayers' help to the ag sector. 

As for Vilsack's comments in defending the cuts, he's a very loyal Cabinet member and follows the gameplan. He is also a lawyer and knows that there could come another day in which to "retry" this case.

Regarding the $14 billion in savings, that amount is close to the entire amount the 2014 Farm Bill is projected to "save" based on what may be unrealistic Congressional Budget Office crop price projections. Point: Crop insurance cuts proposed are real, while farm bill savings may well vanish.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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