Harvest Public Media
12:02 pm
Thu May 2, 2013

Report Questions Crop Insurance Structure

Parched ground in western Kansas
Credit Eric Durban / Harvest Public Media

Taxpayers are contributing billions more than necessary for farmers’ crop insurance, according to a new report from the Environmental Working Group (EWG).

The study, which examined the 2012 crop year, argues that big subsidies channel farmers into lavish policies that in some cases paid drought-afflicted farmers last year more than they would have earned with a good harvest.

“Congress has a role in helping make farmers whole after a drought. Congress does not a responsibility to make farmers rich,” said Scott Faber, vice president of government affairs for EWG, an advocacy organization broadly hostile to farm subsidies.

Supporters of the current crop insurance program said the study is misleading, but EWG’s data analysis raises questions as Congress debates safety net policy in the farm bill.

The drought that baked the Midwest last year withered billions of dollars worth of corn and soybeans, and yet, farmers nationwide enjoyed near record farm incomes. That’s partly because crop insurance paid out nearly $17 billion.

The drought drove commodity prices way up, which was great for farmers with grain to sell, but also for those who hold the most popular type of crop insurance, known as “revenue protection,” the EWG report said.

These policies pay the value of the crop at harvest time, which for the 2012 crop was much higher than it was in the spring when farmers bought the policies. That means that some farmers made more money on insurance than they had anticipated earning with a healthy crop, the EWG report said.

The problem, according to Bruce Babcock, the study’s author, is that the prices farmers pay for crop insurance are artificially low, held down by government subsidies. What’s more, the policies that produce biggest pay outs, in the broadest range of circumstances, carry the biggest government subsidies. So, roughly speaking better the crop insurance farmers carry, the more of the cost of that insurance is covered by the government.

On average the feds pick up about 60 percent of the cost, said Babcock, a professor of economics at Iowa State University. He figures that farmers carry more than double the value of insurance they would if they were paying the full cost themselves.

“That would be fine if farmers were paying the premiums. That is, if farmers were paying the extra cost of that coverage,” he said during a press conference about the study.

“And furthermore, it’s taxpayers who are on the hook for paying out that extra indemnity."

The insurance payout, that is. It’s another way crop insurance is subsidized: the federal government steps in to pay big losses. The higher the losses, the higher percentage that is paid — not by the crop insurance companies, but by taxpayers. And last year, the losses were huge.

“Turns out that about 75 percent of the underwriting losses, the gross underwriting losses in 2012, were born by taxpayers,” Babcock said.

That’s roughly $12 billion — an amount that doesn’t count money the government paid crop insurance companies to cover overhead, which is the third way taxpayers fund the crop insurance system.

“It just seems to me that there is a lot of money to be saved by reducing subsidies in the crop insurance program,” Babcock said.

And as EWG points out, there’s an opportunity to strip money out of the crop insurance system this year as Congress tries again to come up with a comprehensive farm bill. But people who defend the crop insurance system, and there are plenty of them, say that Babcock is ignoring the enormous savings that the current system of crop insurance provides over past farm programs.

Last year, amid the worst drought in generations, there was no need for a big, emergency relief bill.

“I think you have to ask yourself, would Congress have stood by and not provided an ad hoc disaster program, in the middle of a presidential election year, that was hotly contested, particularly in Iowa and Ohio, if those farmers in those states had not been getting indemnity checks,” said Art Barnaby, an agricultural economics professor at Kansas State University.

Barnaby said if farmers hadn’t been carrying such super insurance, the losses would have been much more painful, and there would have been an outcry. And, he said, 2012 is far from a typical year to use to judge crop insurance.

“The thing with crop insurance is you have years in which the premium, in some cases the farmer-paid premium, exceed the indemnity payments,” Barnaby said.

Overall, he said, the program is efficient. It also gives farmers some stability, lets them take chances and make investments, and some years it even comes close to paying for itself.

One thing crop insurance detractors and supporters agree on, everyone planting corn and beans this month would rather make a good crop, than take an insurance payment for a ruined one. And everyone involved wants to keep the U.S. farm economy humming. How much taxpayers should have to chip in, that’s the question.