Farm-policy reformers in Congress want to rein in the costs of the most popular, and most expensive, part of the federally subsidized crop insurance program: revenue policies with the so-called Harvest Price Option (HPO). Roughly two-thirds of land covered by crop insurance is under HPO, which generated more than 80 percent of payments to growers in 2012, 2013 and 2014, according to USDA data. The HPO allows farmers to base their indemnities on harvest-time prices if they are higher than the price that was guaranteed when they bought coverage at planting time.
The reform package would eliminate premium subsidies for HPO policies to save an estimated $19 billion over 10 years, or one-fifth of the projected cost of crop insurance to taxpayers. Insurers still could offer HPO policies but farmers would pay all of the premium instead of the government paying 62 percent of it. The higher cost would discourage farmers from buying the policies and reduce the size of payments. The change in premium subsidies would provide the bulk of the $24 billion in savings proposed by Reps. Jim Sensenbrenner and Ron Kind, of Wisconsin. “These important reforms not only strike a better deal for taxpayers but will have no out of pocket expense to farmers,” said Kind.
Republican congressional leaders quickly abandoned a proposal a week ago to pare $3 billion from crop insurance by reducing the return on investment allowed to insurers. The Sensenbrenner-Kind bill was expected to face heavy opposition; its elements have been broached without success in recent years. Sensenbrenner said the package would preserve the farm safety net, “especially for those who need it the most,” while satisfying the need to reduce the federal deficit. Environmental groups and budget hawks hope the populist tone of the presidential campaign will bring more allies to their side.
“The Harvest Price Option creates all sorts of perverse incentives,” said economist Vince Smith of Montana State University, a crop-insurance critic. A common complaint among critics is that the heavily subsidized program encourages farmers to plant on marginal and environmentally sensitive land because of the assurance of coverage in case of crop failure or heavy losses.
HPO gives farmers protection similar to a homeowner’s policy that is set at replacement value, says the crop-insurance industry. “It enables the producer to acquire the lost production at its replacement cost,” says a National Crop Insurance Services website – important for growers who sold part of the expected harvest in advance or livestock farmers who lost a crop and need to buy feed.
Farm groups and insurers defend crop insurance as a true safety net because farmers pay 38 percent of the premium and see a payment only if losses exceed a specified amount. Insurance is a familiar concept to city dwellers, so the program is easier to defend than crop subsidies. The 2014 farm law eliminated the $5-billion-a-year “direct payment” subsidy that was paid regardless of need. A large part of the money went to deficit reduction and the rest funded an expansion of crop insurance.
In the past three years, 75-percent of crop insurance policies included HPO, says the Environmental Working Group, which has called HPO “Cadillac” coverage that goes beyond the safety net needed to keep farmers in business. “The policy question is what’s the public role,” said EWG’s Craig Cox. “It’s not whether farmers should have options to manage risk.” Less expensive insurance policies are available as well as contracts and options associated with the futures markets.
Policies with HPO appeared in USDA data in 1996 with succeeding iterations consolidated in 2011 into the Revenue Protection policy that dominates sales, said EWG economist Anne Weir. Some 83 percent of U.S. corn land was enrolled in the policies during the 2012 drought, calculated a U-Illinois economist.
Crop insurance surged in popularity after a 2000 law doubled the size of the federal premium subsidy. HPO policies are more expensive than alternatives that respond solely to yield losses or low prices, but the incremental cost to the farmer is lessened by the premium subsidy.