Why crop insurance subsidies are winning out

Jun 19, 2013

Kansas wheat farmer John Thaemert surveys his parched crop in this file photo from 2006.
Credit Frank Morris / Harvest Public Media

There is little doubt that crop insurance will emerge from the current farm bill process with hefty subsidies in place. If anything, the program will become a larger part of the farming safety net.

The real unknowns are the details of those subsidies and who winds up getting them. The Senate recently passed a bill that would expand crop insurance but impose some limits.  In the House, where the farm bill is expected to soon hit the floor, several pending amendments would curb how much the government subsidizes the premiums farmers pay.

But premiums aren’t the only part of the system supported by taxpayers. Crop insurance companies also enjoy lots of government largess. That’s by design.

"Congress wanted this to happen and it is now happening,” said Keith Collins, who had the job of chief economist at the U.S. Department of Agriculture longer than anyone ever has. He served 16 years under four presidents and watched as most farm support programs were rolled into crop insurance.

"You had one member of Congress after another saying that we have to find a better way to manage disasters,” Collins said. “And the sort of the after-the-fact approach that had been taken was having to pass emergency supplemental on budgeted bills."

That’s why last year — when the worst drought in generations struck the Corn Belt — there was no need for an emergency disaster program.  Because unlike in previous droughts or floods, most farmers now carry plenty of crop insurance.

Popular … and expensive

This year’s farm bill compromise — if it passes — will likely kill the direct payments program, which had been cutting checks for billions to farm landowners, whether they farmed or not. Some of that money will be plowed into expanding crop insurance, mostly for farmers outside the Corn Belt, who can’t use the program effectively now.

The problem is that as crop insurance has become more popular with farmers, it also has grown much more expensive. Plus, there's the matter of unpredictable weather in the Corn Belt.

The 2012 drought pushed the total bill for taxpayers to more than $13.5 billion at a time when grain farmers are enjoying near record incomes and the federal government is skimping on everything from national parks to nutritional programs for the poor.

The backlash was inevitable.

"The crop insurance program, you really just got to say, that is under attack in Washington D.C.," said Tom Sell, a lobbyist working to protect crop insurance.

Sell said senators weighed lots of ways to curb the cost of the program. In the end, they trimmed premiums and subsidies for farmers making more than $750,000 and tied crop insurance eligibility to environmental regulations that have long been requirements for participating in other types of farm programs.

Sell argues that crop insurance works great the way it is, and that it provides farmers with enough security to invest in equipment to manage their business aggressively, without betting the farm to do it.

But Bruce Babcock, a professor of economics at Iowa State University, says the system is out of whack: "Where is it written that the taxpayers need to take all the risk out of farming to allow farmers to take more risks?"

What’s covered

Taxpayers support crop insurance in three basic ways:

* The government picks up more than 60 percent of the premiums that the farmers pay to crop insurance companies to the tune of about $7 billion a year

* Taxpayers pony up for virtually all the insurance company's operating expenses. That bill was $1.3 billion last year.

* The federal government also steps in to bail out crop insurance companies when widespread disaster strikes and insurance indemnities total more than premiums.

Supporters say all of this is a benefit to farmers, because if the companies weren't getting the subsidies they would charge much more, and farmers couldn’t afford insurance. But Babcock says it amounts to a pretty sweet deal for crop insurance companies, too.

"Even in disastrous years… how much loss they have to absorb is dramatically limited by the taxpayers,” he said. “In good years they get a bunch of money.”

For last year’s drought, the government stepped in to cover about $4.7 billion worth of crop insurance company losses. The drought cost crop insurance companies too. They’re out about $1.3 billion. But it is only the second year this century that insurers actually lost money.

The industry's long run of subsidized profitability has drawn scrutiny. The Obama administration has capped the money it pays for operating expenses and the commission that agents can charge, stripping billions of dollars out of the industry. Those cuts haven’t caused a single company to walk away from the business.

Still, Keith Collins, the former USDA chief economist, said the limits have been enough to move the policy debate to premium subsidies for farmers.

He said pending amendments in the U.S. House would cut premium subsidies across the board, cap subsidies to individual farmers or impose income limits on them, as was done in the Senate.

Art Barnaby, at Kansas State University, said a small cut to crop insurance premiums would be fine, but he insists that crop insurance has to be subsidized to some degree in order to work as the principle farm safety net.

Drop the subsidy and the price might triple, many famers might drop coverage, some would pay to keep it.

"That would all work unless, the first time there is a disaster the government comes along with an ad hoc disaster program, and then you just killed the incentive to pay those substantially higher premiums for insurance coverage," Barnaby said.

Since the disastrous 1930s, federal government has maintained the farm safety net, and it’s that expectation that necessitates crop insurance subsidies now.

“You can't sell unsubsidized insurance into a market that expects a government bailout if something bad happens,” Barnaby said.

This story originally aired as part of Business Beat, a weekly program about business and economics in mid-Missouri.