FIRE Podcast- Bruce Babcock: Growing waste with federal crop insurance

by R.J. Lehmann on April 27, 2012 · View Comments

Over the objections of senators largely from Southern states who complained that it didn’t offer enough subsidies to peanut and rice farmers, the Senate Agriculture Committee has approved a five-year, $480 billion Farm Bill that creates a new entitlement for federal insurance that cover farmers’ “shallow” losses of revenue.

It isn’t that the bill doesn’t get anything right. It saves $44.6 billion over the next decade by repealing direct payments to farmers, another $4.6 billion by repealing ACRE (average crop revenue election) payments and an additional $1 billion by repealing countercyclical payments. Overall, the Congressional Budget Office estimates the measure, as passed by the committee, will save $24.7 billion over the next ten years.

But that figure is well below the $33 billion in cuts that had been called for in the White House budget. And the bill doesn’t cut at all into the $9 billion federal crop insurance program, under which taxpayers pick up the tab for more than 60% of farmers’ premiums. Actually, the program itself is set to grow by $2.7 billion over the next decade, due largely to $3.2 billion in additional subsidies for “stacked income protection” for cotton farmers.

The bill even ties the hands of the U.S. Department of Agriculture’s Risk Management Agency from attempting to use its leverage to drive a harder bargain with the private crop insurance industry. In response to the 2011 Standard Reinsurance Agreement, in which $6 billion was cut from federal crop insurance subsidies through USDA negotiations, the Senate bill includes language requiring the next SRA must be “budget neutral.”

Even worse, the bill takes the bulk of the savings from canceling direct payments and funnels them back into a new program, known as “agricultural risk coverage.” The program would pay up participating farmers who see revenues from a crop fall 11% to 21% below the five-year average. This new “shallow loss” coverage is projected to cost taxpayers $29.2 billion over the next decade.

For a sense of just how badly the federal government has managed the crop insurance program, check out this study conducted by Iowa State University economist Bruce Babcock on behalf of the Environmental Working Group. Babcock’s findings: It would be cheaper to give free crop insurance that covered 70% of every farmer’s yields than it is to run the program as currently structured.

The report notes that, in addition to being wasteful corporate welfare for both big financial services and agribusiness firms, the program offers incentives for environmentally ruinous farming that runs counter to the goals of conservation and sound land management.

Babcock, who joins us for this week’s edition for the FIRE Podcast, clarifies that his recommendation is somewhat tongue-in-cheek. He doesn’t actually believe free crop insurance would be a good idea. However, it does demonstrate just how wasteful the current program is, and how badly it needs to be reformed.

Listen to the episode here, or subscribe to the FIRE Podcast in iTunes.

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