Here’s a deal few businesses would refuse: Buy an insurance policy to protect against losses – even falling prices — and the government will foot most of the bill.
That’s how crop insurance works.
The program doesn’t just help out farmers, however. The federal government also subsidizes the insurance companies that write the policies. If their losses grow too big, taxpayers will help cover those costs.
In the farm bill now making its way through the Senate, crop insurance will cost taxpayers an estimated $9 billion a year.
Lawmakers, farm groups and insurance companies say the program is a vital safety net, designed to keep farmers in business when bad weather strikes or markets go haywire. But critics say it’s a wasteful and fast-growing subsidy that could have perverse consequences, not just for taxpayers, but for rural lands.
In Washington, where farmers have long been the recipients of government support, the heightened role of crop insurance in the five-year farm bill is being described as reform.
“This is not your father’s farm bill,” says Sen. Debbie Stabenow, a Michigan Democrat who chairs the Senate Agriculture Committee. “This farm bill represents the greatest reform of agriculture policy in decades.”
To be sure, the Senate version of the bill — which awaits action by the House — does cut spending by about $24 billion over the next decade to a total of $969 billion. It does so largely by eliminating direct payments to farmland owners, which are paid whether they grow crops or not.
Now that direct payments are on the way out, farm-state legislators and industry groups say an expanded crop insurance program is needed to protect farmers from risk in an inherently volatile industry. Without it, they might not produce commodity crops such as corn, soybeans, wheat, and cotton at the levels, and prices, the nation has enjoyed.
Crop insurance helps farmers and ranchers manage risk and ensure an “ample and stable U.S. food, fiber, feed and fuel supply,” said Tim Weber, president of the crop insurance division at Cincinnati-based Great American Insurance Co. in congressional testimony in May.
But critics say the fast-growing crop insurance program will cost as much as or more than the direct payments that it would replace. That’s because the government covers nearly 60 percent of farmers’ premiums and subsidizes the costs of private insurance companies, including those based overseas, to write the coverage for farmers. If insurers suffer a loss, the government will backstop the losses, much as a big reinsurance company assumes the risks of individual insurers. It also assumes most of the risk for policies placed in a special assigned risk fund.
Crop insurance is “a very wasteful approach to risk management,” says Vincent Smith, an agricultural economist at Montana State University. “The agriculture and insurance industries are stunningly overcompensated.”
Because the insurance reduces risk so dramatically, it encourages farmers to expand into marginal lands and ecologically sensitive areas like prairie grasslands. While farmers who accepted direct payments had to follow conservation measures, there are no such conditions attached to crop insurance, to the dismay of environmentalists and former government officials who say such measures were a success.
Crop insurance took root in the late 1930s after the devastating impact of the Dust Bowl. For decades, the government supported a modest program that covered farmers’ losses from bad weather or pests. New crops and insurance products were added over the years but, as recently as 2000, crop insurance cost the government just $951 million, according to a Government Accountability Office report.
Since then, the program has grown dramatically. Last year, the price tag hit $7.3 billion. The annual subsidy for premiums for existing crop-insurance programs will grow to about $9 billion a year, or about $90 billion over the next decade, the Congressional Budget Office estimates.
Furthermore, a provision in the Senate bill would add a so-called “shallow loss” provision that would cover losses as small as 10 percent, effectively subsidizing farmers’ insurance deductibles.
Critics say the shallow loss program could cost $8 billion to $14 billion a year, which is more than the direct payments it replaces. Farm-bill supporters say it will cost less. If commodity prices were to fall dramatically from their current levels, the government’s exposure would be bigger.
None of this has received much scrutiny outside the agricultural policy world because crop insurance is but one element of the complex, 1,010-page, five-year, $480-billion farm bill. The law cobbles together food stamps and nutrition programs for the poor, which account for about 80 percent of the spending, rural community development, agricultural research, forestry and conservation programs. But in places like Iowa, which gets more farm subsidies than any other state but Texas, people are paying attention.
Farm politics makes odd bedfellows.
The American Enterprise Institute is a free-market think tank that wants the government to leave business alone. The Environmental Working Group favors regulation of products ranging from cell phones to sunscreen.
Both oppose the expansion of crop insurance.
To marshal support for their cause, the two groups turned to America’s leading critic of crop insurance, a wiry, matter-of-fact agricultural economist from Iowa named Bruce Babcock. Ironically, he helped create an early form of crop insurance for the Department of Agriculture.
Babcock, 54, has a unique perspective on the farm economy. He’s a faculty member at Iowa State University in Ames, who also farms. He also understands the labyrinthine world of obscure agencies, acronyms and special interests that make up U.S. agricultural policy.
Crop insurance as currently designed has “zero benefit” to the public, Babcock said in a recent interview in his university office. It’s become unjustifiably expensive because of the extraordinary costs to deliver to program.
He believes farmers would do just as well with a scaled-back version of the program that offers a base level of coverage at no cost, and then lets growers buy additional insurance out of their own pocket.
Still, as a farmer who grows corn and soybeans on 200 acres of gently rolling farmland not far from campus, he is a recipient of the very crop insurance subsidies he criticizes. Refusing the assistance would be like leaving money on the table, he says. As long as it’s offered, farmers will take it.
His farming partner, Travis Wearda, 35, farms 2,700 acres of corn and soy. He, too, recognizes that the crop insurance subsidies that he receives would be hard to justify to someone in another line of work. “I honestly don’t think I would be able to,” he says.
Because Wearda has to sink so much money into his fields before harvest — in rent, seeds, herbicides, fertilizer, labor and production costs — crop insurance gives him the comfort that he will at least break even if his land is hit by drought or grain prices go haywire. Without the subsidies, he says, he would buy less insurance and maybe take a more conservative approach to farming, say, by planting later in spring when the weather tends to be more predictable.
Skewing farming to more risky practices is a reason for concern, the critics say. If the bets pay off, then the farmer wins. But if they do not, then the government program makes up the losses so the farmer can bet again the following year. It’s a system of “socialized losses and privatized gains,” says Montana State’s Smith.
Despite repeated requests, neither the crop insurance industry association, National Crop Insurance Services, nor Sen. Stabenow were available for comment.
Speaking for insurers at a House subcommittee hearing in May, Weber of Great American Insurance Co., said: “We firmly believe that crop insurance should remain (farmers’) core risk management tool, and we are committed to the public-private partnership of program delivery, which directly supports more than 20,000 private sector jobs across the country.”
A bonanza for crop insurers
The biggest crop insurance program, known as “federal crop,” is administered by the USDA’s Risk Management Agency in a partnership with 15 private insurance companies. This is the $7.3 billion-a-year program under which taxpayers pick up about 60 percent of farmers’ premiums and cover about 18 percent of insurance companies’ operating costs.
The program has been a bonanza for crop insurance companies and the independent agents who sell the policies, according to Babcock, who has authored two reports critical of crop insurance for EWG.
He found that for every $2 the government spends on crop insurance, $1 goes to the insurance industry. Montana State’s Smith — who worked with Babcock and another economist on a report for the American Enterprise Institute — differs a bit: He estimates the industry gets $1.44 for every $1 in premium subsidies that flow to farmers.
Even in bad years, the insurers do fine, partly because premiums have risen in lockstep with crop prices. Last year, for example, was a tough one for farmers, with droughts in the southern Plains, hard freezes in Florida and flooding along the Mississippi and Missouri rivers. But the crop insurance companies posted nearly $2 billion in profits in 2011, according to Babcock and his colleagues.
Between 2001 and 2011, the industry generated $11.8 billion in profits, their studies found. Participating companies include Wells Fargo, John Deere Insurance Co., Switzerland’s Ace Ltd. and Australia’s QBE Insurance Group.
Among the 486,867 farming operations that got federal crop insurance last year, more than 10,000 received federal subsidies of $100,000 to $1 million, according to USDA data released this month under a Freedom of Information Act request filed by the Environmental Working Group. Twenty-six got more than $1 million. The farmers’ names were not disclosed.
“Can you tell me another industry that enjoys this level of protection?” asks Craig Cox, senior vice president for agriculture and natural resources for Environmental Working Group.
Following the disclosure, Sens. Jeanne Shaheen, D-N.H., and Pat Toomey, R-Pa., introduced an amendment to cap insurance subsidies that an individual farmer can receive at $40,000 per year. It would save $5.2 billion over 10 years.
While that measure will be debated, even critics realize the underlying program has a tremendous amount of support. “Crop insurance is the holy grail of the farm bill,” said Ferd Hoefner, policy director of the National Sustainable Agriculture Coalition, an advocate for policy reform.