Sorry, you need to enable JavaScript to visit this website.

Means Testing Would Hurt Crop Insurance Program

06:00AM Nov 22, 2013
Dry Corn Heat Weather Pro Farmer Crop Tour 2013

Head of association for crop insurance companies raises danger that some farmers might 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.