Posted on 02 May 2013 by Neilson
The worst drought in 50 years led to record payouts from a taxpayer-subsidized insurance program created to protect farms from weather-related disasters. But the high costs were mostly a result of policies that guarantee farmers a portion of their projected revenue, rather than coverage that pays them for their damaged crops, according to a study released Wednesday.
The study comes as lawmakers are preparing to work on a new farm bill, a spending bill passed every five years that sets the nation's food and farm policy. The last farm bill was passed in 2008.
The study was financed by the Environmental Working Group, a Washington research group, and conducted by Bruce A. Babcock, an agriculture economist at Iowa State University.
Under the federal crop insurance program, farmers can buy insurance that covers poor yields, declines in revenue or both. Dr. Babcock said most farmers bought a combination of the two policies.
The result, he said, is that crop insurance has become more of a farm income support program than a system that protects farmers in times of disasters like the 2012 drought.
Taxpayers pay about 62 percent of the insurance premiums. The policies are sold by 15 private insurance companies, which receive about $1.3 billion annually in total from the government. The government also backs the companies against losses.
These subsidies drive up the cost of the program, Dr. Babcock said, with farmers buying higher levels of coverage than they otherwise would. He estimated that without the subsidies, crop insurance payouts during last year's drought for the two largest crops, corn and soybeans, would have been just over $6 billion, about half of the $12 billion that the government actually paid.
As a result, the study found, many farmers made more money from insurance payouts during the drought than they would have from healthy crops.
"It's good insurance and a good safety net," Dr. Babcock said. "The question is, is there any justification for taxpayers to subsidize the costs?"
Crop insurance will be a major part of the new farm bill. Last year, lawmakers on the House and Senate Agriculture Committees passed legislation that would expand the crop insurance program by eliminating $5 billion a year in direct payments to farmers and farmland owners who receive government checks regardless of whether they grow crops, and diverting some of that money to crop insurance. The Senate passed its version of the farm bill, but the House bill was never brought to the floor for a vote.
Agriculture groups and farmers say the crop insurance program is crucial.
"The significant, widespread crop losses of 2011 and 2012 have clearly demonstrated the need for crop insurance protection and the public-private partnership of program delivery," a coalition of farm groups wrote to members of the House and Senate Agriculture Committees in March.
The crop insurance program has drawn a wide range of criticism from those who say that the costs need to be reduced and that it benefits mainly insurance companies and large farmers.
Farmers' net income for 2012 is expected to be $114 billion, down 3 percent from 2011 but still the second highest in 30 years. Crop insurance subsidies are set to cost more than $94 billion over the next 10 years, according to the Congressional Budget Office.
President Obama has proposed cutting crop insurance subsidies and reducing the amount paid to insurance companies, saving about $4 billion over 10 years.