When Congress overhauled the federal crop insurance system 13 years ago, lawmakers hoped it would reduce the need for rescuing farmers through multibillion-dollar bailouts.
The overhaul, which offered steep subsidies to reduce premiums on high-value insurance policies, succeeded beyond lawmakers’ dreams. Despite last year’s devastating drought, one of the worst since the Dust Bowl, farmers were so heavily insured that Congress’ not passing a farm bill was met with a collective shrug in the countryside.
Crop insurance is now on the verge of becoming the primary means, and in some cases the exclusive means, of supporting farm income, supplanting traditional subsidies.
But farmers and their allies are worried congressional budget cutters will go after the program in their search for ways to cut the deficit. “There’s a big target on crop insurance now,” said former Texas Rep. Charles W. Stenholm, who was the ranking Democrat on the House Agriculture Committee in 2000.
President Barack Obama and House Budget Chairman Paul D. Ryan, R-Wis., both proposed last year to slash spending on crop insurance. The House Agriculture Committee, in a Feb. 26 letter to Ryan laying out the panel’s budget priorities this year, said the insurance system already had been cut enough in recent years and “must not be weakened.”
“Last year’s drought exemplified exactly how important crop insurance is to producers and the rural economy,” the letter said. “With almost half of the country experiencing severe to exceptional drought, there were no calls for ad hoc disaster assistance as there have been in the past, because of the protection crop insurance provides.”
The program’s cost rose to $14.1 billion in 2012, up from $2.2 billion in 2000, according to the Congressional Research Service.
Farmers bought policies worth nearly $117 billion last year on 282 million acres. The government now pays 55 percent of the premium for a popular type of policy that insures 75 percent of a crop’s value. Before 2000, taxpayers subsidized 24 percent of that policy’s cost. Total premium subsidies have risen from $1.3 billion in 2000 to $7.1 billion last year.
The program has a broad base of political support other than from farmers: the insurance agents, who are allowed to keep a share of the premiums; the 17 companies that sell the policies and keep the profits when premiums exceed losses; and rural bankers, who reduce their risk of farm loans by insisting that borrowers buy the policies.
“I would say 90 percent, maybe as much as 95 percent, of our borrowers have some type of crop insurance. You can’t go out there and borrow half a million, three-quarter million dollars and not cover yourself,” said Kreg D. Denton, senior vice president of First Community Bank in western Kentucky. He’s concerned that if farmers are required to pay more for insurance, some will control costs by buying less coverage, putting them at greater financial risk.
But critics say the 2000 insurance overhaul, the Agricultural Risk Protection Act (PL 106-224), was a flop when it comes to saving taxpayers money. They say it encourages farmers to plow up grasslands and plant crops on riskier acreage, knowing that most of the potential revenue is insured.
Bruce Babcock, an economist at Iowa State University, estimates taxpayers could save $4.2 billion a year if premium subsidies were rolled back to pre-2000 rates. It would be cheaper for the government to give farmers a no-premium, 65 percent policy, a coverage level similar to traditional disaster assistance, than to maintain the current system, he said.
Other critics, who worry that many farmers may drop out of traditional subsidy programs and rely only on crop insurance, are urging Congress to cap premium subsidies for wealthy farmers and to require farmers to control erosion on highly erodible land. Conventional subsidies already are subject to means testing and conservation requirements, but insurance is not.
The rival farm bills that the Senate passed and the House Agriculture Committee approved last year both would have expanded the crop insurance program, using savings from eliminating the $5 billion in annual direct payments that are now given to grain and cotton growers. Among other things, the bills would have provided for new subsidized policies to cover revenue losses not covered by conventional insurance.
Many farmers, like bankers, argue that it’s critical to maintain the premium subsidies.
Bing Von Bergen, a wheat and barley grower who has been farming in Montana for 33 years, said at a recent crop insurance conference that the subsidized policies are especially important to young farmers. “It’s still critical for me for my operation, but sometimes the biggest critics of federal crop insurance don’t realize that it will be more detrimental to the young farmers” if the program is cut.
Curt Friesen, a corn and soybean grower in Nebraska, is looking forward to his son-in-law’s return to farming, and he will have to have the insurance. “A banker, if they’re going to finance someone like that, he’s going to have to have crop insurance,” he said.
Hudson W. Williams, executive vice president for community banking at Regions, said it is more important to keep the subsidies for insurance premiums intact than to protect direct payments. Banks would raise interest rates on farm loans for borrowers who lacked adequate insurance, and that would cost them more than they stand to give up in direct payments, he said.
Losing “the direct payment is something that is not going to hurt them nearly as much to lose than, say, if the crop insurance program were drastically reworked,” Williams said.