Agri-business backs making crop insurance boondoggle even bigger

by R.J. Lehmann on November 4, 2011

Even as the Joint Select Committee on Deficit Reduction – the so-called “Super Committee” – moves toward its Nov. 23 deadline to come up with at least $1.5 trillion in cuts from the projected 10-year federal budget, major agricultural interests are already pushing for a new form of subsidized crop insurance that would come on top of the existing Federal Crop Insurance Corp. Subsidies to the FCIC already cost taxpayers $8 billion annually.

Politico reported Nov. 3 on the lobbying efforts and budget wrangling that could see some of the $5 billion currently spent annually by the U.S. Department of Agriculture on direct cash payments to agricultural producers replaced with a new “shallow loss” insurance program. The program would supplement the 75% coverage farmers already buy from FCIC-backed insurers with free coverage that would cover up to 90% of area-wide average losses. Cuts to the (long-discredited) direct payment system are believed to account for the bulk of the reported $23 billion in 10-year budget cuts the House and Senate agriculture committees have targeted for the next long-term Farm Bill.

That new crop insurance subsidies could even be contemplated are, unfortunately, evidence of the White House’s political failure to earn support on either side of the aisle for its proposal to further slash the FCIC. As part of its budget proposal, the Office of Management and Budget has proposed slashing the FCIC’s overhead costs (which include insurance agent commissions) by 25% and reducing returns for insurers — who participate in the crop program through reinsurance agreements with the USDA’s Risk Management Agency — down to 12%, or roughly 10 percentage points lower than the industry’s returns from the program over the past decade.

“Where is the tea party when you need them?” grumbled an administration official to POLITICO.

Those healthy returns, amid a prolonged soft pricing market in both insurance and reinsurance in recent years, has prompted some international insurers to double-down on their crop insurance portfolio. Australian insurer QBE Insurance Group announced in April 2010 it would acquire crop insurer NAU Country Insurance Co. in a $565 million deal (later raised $605 million) and went on to announce in November 2010 it was acquiring the U.S. operations of RenaissanceRe, including its primary crop insurance business, in a $275 million deal. ACE Ltd., which already was one of the largest crop insurers, got even bigger when it announced in September 2010 it would buy out the 80% of Rain and Hail Insurance Service Inc. that it did not already own for $1.1 billion. ACE also is set to buy the parent of agribusiness insurer Penn Millers Insurance Co. in a $107 million deal announced in September.

That these deals came after earlier rounds of cuts from the FCIC shows that the crop insurance business remains attractive to big players, who also include banking conglomerate Wells Fargo. And why not? Despite a 2010 agreement between the RMA and crop insurers that cut $6 billion over 10 years, or a roughly 7.5% cut from a program now projected to cost $74 billion, the federal government still subsidizes 60% of crop insurance premiums, in addition to paying $1.3 billion annually to the industry to compensate for overhead. Politico notes:

The cost per acre — in constant dollars — has almost tripled in the past 10 years, and an internal analysis by the Obama administration suggests that even after recent reforms, companies are well positioned to earn returns in excess of 20 percent.

But a new paper from economist Bruce Babcock of Iowa State University, completed on behalf of the Environmental Working Group, proposes $80 billion in savings over the next decade, partly by scrapping the existing crop program and moving to a program that guarantees a farmer’s yields, rather than his revenues. The paper notes that under the current revenue insurance model, more than 80% of crop insurance policies now cover business income even if there is no lost yield due to weather.

The bulk of the cuts the EWG proposes, some $57 billion, would come from eliminating “direct payments, counter-cyclical payments, loan deficiency payments, ACRE (Average Crop Revenue Election) and SURE (Supplemental Revenue Assistance Payments.)” But the paper also argues the government would save $26 billion in premium subsidies by replacing revenue insurance with policies (available for free to producers, but only if they met basic conservation standards) that covered yield losses of more than 30%. Insurers could bid to service these yield insurance policies, and would otherwise be encouraged to develop truly private market solutions to fill in the gaps in coverage without any government subsidies.

The effort to reshape the nation’s food and farm policies is at a critical point. If Big Agriculture and its lobbyists succeed in exploiting the Super Committee process for their own selfish interests, it will stymie the prospects for true reform for years to come. Americans who believe in healthy food, in protecting public health and the environment, in ensuring proper nutrition for children and the less fortunate, must speak up now. We must call on our representatives in Congress to stand firm against this cynical attempt to turn deficit reduction into a guarantee of prosperity for large-scale agricultural interests.

Babcock’s proposal would represent a major improvement over the current state of affairs, although any proposal for “free” insurance must give one pause. Insurance premiums are economically useful not only as a funding source for claims, but for the market signals and incentives for mitigation that risk-based prices provide.

The EWG proposal also would be strengthened with provisions that limited any subsidies only to lower-income or small farmers.  And if yield insurance is to be offered by a public agency like the RMA, it should made to manage its risks appropriately through the purchase of private reinsurance or through the use of alternative risk transfer products like catastrophe bonds. The lessons of the National Flood Insurance Program should have taught us that no risk-bearing agency should be granted a blank check from the U.S. Treasury.

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  • splined

    Incredible that the greedy farm groups and the corrupt politicians that support them are again attempting to continue the multibillion dollar larger farmer larger guaranteed income insurance scheme. It is hard to know how a more discriminatory program could be designed. The huge disparity in incomes guaranteed by this program have effectively kneecapped the smaller farmers ability to compete for agricultural land. It really should not be that hard to understand, those that have a greater income guaranteed have a government granted competitive advantage over those who have smaller government guaranteed income or no guaranteed income. It is not to surprising that those involved in such a despicable act of legislation have to resort to such covert and underhanded means to pursue these massive transfers of monetary wealth to the largest farmers. It is obvious to me that the Senate ag committee can not be trusted to dispurse ag government benefits in an equitable manner.Farm safety nets that guarantee million dollar investments and profits as well are an example of unequal distribution of government business benefits. Smaller farmers are denied by government an equal opportunity to compete in agriculture due to the overwhelming competitive financial edge these guarantees give to those with the greatest probability of the greatest profits. Safety nets that cover land costs are in fact profit guarantees as many farmers have their land paid for and with the doubling of many commodity prices these guarantees provide for a whole lot more than real estate taxes. n

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