Crop insurance not a sure bet
November 7th, 2011
By Kathleen Masterson
IOWA – Farming is an expensive venture and a risky one. So crop insurance has become an essential part of the business. While the U.S. government has subsidized that insurance through the farm bill over the last few decades, rising costs and the way the program works have raised questions about the degree to which taxpayers should be subsidizing it. That uncertainty has farmers and insurers worried.
“In most of these field hearings Congress has had, time after time, producers are saying (crop insurance) is the most important safety net program,” said Joe Glauber, the chief economist for the U.S. Department of Agriculture.
With that kind of support, the crop insurance program may remain intact or even expand in the 2012 Farm Bill.
Or not. President Obama recently proposed a plan that would trim about $8.3 billion from the crop insurance program over 10 years.
Insurance advocates can’t deny that the crop insurance program has ballooned in recent years. Ten-year projections show the government paying $8 billion a year to both producers and crop insurance companies, making it the biggest farm program expenditure. That has some economists asking if we’re subsidizing crop insurance too much.
A big part of why crop insurance has grown so expensive and so central to so many farmers is because of a new crop insurance program recently introduced by Congress.
Traditional crop insurance, known as yield insurance, protects farmers when crops are wiped out by a hailstorm, a flood, pests or some other disaster. That type of insurance has been around for years and government programs still subsidize it.
Nowadays, though, farmers face just as big risks from volatile markets as they do from drought.
“Farming itself is, well, it’s Las Vegas on dirt,” said Steve Rutledge, chairman of Farmers Mutual Hail Insurance Co. His company sells a newer form of crop insurance designed to protect farmers from market losses.
This “revenue insurance” actually guarantees farmers a certain income. If market prices drop, a farmer with revenue insurance can get a payment based on market prices for grain and the farmer’s average yields in the past.
“It’s probably the most significant innovation in the federal crop insurance program since it began,” Rutledge said. “Over time it’s become so important that probably 80 percent of insurance sold now is revenue coverage, or includes the revenue component.”
The government started subsidizing this kind of insurance in 1996, but purchases soared over the last decade when the government threw more money at it.
In 2000, the government started paying about 60 percent of the premium instead of just 42 percent, said Bruce Babcock, an economist at Iowa State University who wrote a policy brief on crop insurance.
“So what a farmer’s choice is, is ‘Should I buy full coverage and the taxpayer pay 60 percent of the cost?’ Well of course I’m going to buy full coverage,” Babcock said. “But then if you took subsidy away, would a farmer make the decisions to buy full coverage? Some would, some wouldn’t just like rest of us make decisions about our medical insurance (and) property insurance.”
Take farmer Frank Seidel of Council Bluffs, Iowa. He insured his corn and soybean crops at 80 percent coverage, both yield and revenue insurance. A hailstorm hit one of his 70-acre fields and killed about 20 percent of that crop. The damage wasn’t enough for him to get a yield insurance payment, but because soybean prices have come down some since last spring, Seidel will get a revenue insurance payment, which could be about $1,745 for that field.
“Basically what the revenue plan does, it lets the insured know he can plant this many acres and have so many dollars guaranteed, so he can adjust his input costs to that figure,” said Tom Borrall, Seidel’s claims adjuster.
Now, the insurance isn’t cheap. Seidel’s paying $18 an acre for soybeans and $30 an acre for corn for his 1,400-acre farm. But the government is paying even more.
“Even going back to the early ’90s, the liability average from 1991 to 1995 was somewhere around $14 billion,” said Glauber, of the USDA. “If you look at the last five years, we’ve been more in the $70 billion to $80 billion range.”
That dramatic growth has some worried. Kathy Ozer, of the National Family Farm Coalition, said putting more taxpayer dollars into crop insurance programs is basically sending money to private insurance companies.
“The biggest concern around crop insurance is that it’s, in effect, privatizing what should be, in our view, a role of government in helping to enable farmers to receive a fair price for what they produce,” Ozer said.
Since 2002, the government has paid out $20 billion to private insurance companies, according to the government’s Risk Management Agency.
For insurers, that’s a business that’s hard to ignore.
For over 100 years, Farmers Mutual sold private crop insurance without any involvement with the federal government, Rutledge said. But in 1999, “it finally got to the point where we couldn’t compete any longer unless we made that leap into the federal crop insurance program.”
Now, their bread and butter is selling federally subsidized crop insurance. Along with other insurance companies, and many farmers, they’re lobbying hard to keep it that way.
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