Posted on 16 May 12
It's a deal that most businesses would relish: Buy an insurance policy to cover losses or falling prices, and the government will foot most of the bill. Such an arrangement has been enjoyed for more than a decade by the farmers who grow crops such as corn and soybeans, and the companies that insure them. And it’s about to get even better.
The farm bill now before Congress includes a provision — estimated to cost about $3 billion a year — that would help cover the losses farmers suffer before their crop insurance policies kick in. Those losses, termed deductibles, can run in the tens of thousands of dollars for a typical mid-size farm.
Supporters say it's a money saver because it would replace an existing subsidy costing $5 billion a year.
That subsidy, known as direct payments, pays farmland owners a set amount regardless of whether they've planted crops on the land. Pressure has been mounting for years to end direct payments, long viewed as a symbol of the largess that flows from Washington to the nation's farmers.
Critics of the proposal concede it may be less costly than the direct-payment subsidies but say it would still take away U.S. Agriculture Department funds from more important programs such as food stamps, which fed 1 in 7 U.S. residents in an average month last year.
"It's obvious why a farmer would like this, but it's not at all obvious why the taxpayer should pay for this," said Craig Cox, senior vice president for agriculture and natural resources at the nonprofit research organization Environmental Working Group.
The proposed $3-billion subsidy for deductibles would come in addition to an existing federal program to subsidize the premiums themselves. It was included in the farm bill that passed the Senate Agriculture
Committee last month by a bipartisan 16-5 vote. The existing premium subsidy program, which would be retained by that bill, costs about $10 billion a year, according to the White House budget office.
Some say farmers don't need the help. American farms turned an estimated $98 billion in profits last year, up from $55 billion in 2001, according to the Agriculture Department. Those profits were outpaced slightly by sales of crops and livestock, which went from $200 billion to an estimated $363 billion over the same period.
Times may be good right now, but farmers say bad weather or steep price declines could still put them in the red. Protecting farmers' ability to stay in business also ensures a steady and stable food supply for consumers.
"I'd say agriculture is doing our share of deficit reduction and reducing spending," said Steve Wellman, president of the American Soybean Assn. "But we also think it's important that we have programs that help agriculture make it through the rough times. It just makes sense to protect an industry that provides jobs
and creates billions of dollars of exports."
The proposed program would supplement farmers' already subsidized crop insurance policies. The government would pay farmers if revenue dips below historical averages. Farmers say the program would protect them from suffering years of smaller losses that don't trigger an insurance payout.
"This just provides some small cushion for the shocks," said Jon Doggett, vice president for public policy at the National Corn Growers Assn. "This is an idea that was developed in the hopes that it would never need to be used."
But critics say the proposed program is simply a subsidy swap with the potential to leave taxpayers on the hook for even more.
If prices for corn and wheat drop significantly in the coming years, there is "no doubt" taxpayers will end up shelling out more in deductible payments than will be saved by eliminating direct payments, said Bruce Babcock, an economics professor at Iowa State University.
The idea that the government should pay to insure crops dates from the 1980s, when Congress, trying to get away from the practice of sending money each year to farmers whose crops had been destroyed by disasters, teamed up with the private insurance industry to offer crop insurance.
Few were enticed because the premium subsidies were small and Congress was still sending disaster payments if bad weather struck.
So Congress sweetened the deal. By 2000, taxpayers were heavily subsidizing plans that cover as much as 85% of a farm's yield or expected revenue, or both.
The new plan to subsidize deductibles has been billed as a reform, but not all farmers are enamored with the proposal.Small farmers say most of the benefits wouldgo to their larger rivals.
"There's no rationale to say the largest and wealthiest landowners need taxpayer assistance at that level," said John Crabtree, media director at the Center for Rural Affairs, a group that represents small and medium-size family farms.
And House Agriculture Committee Chairman Frank D. Lucas (R-Okla.), whose committee has yet to draft its farm bill, criticized the Senate bill for "lock[ing] in profit for a couple of commodities."
Last year, about one-third of all premium subsidies went to just 4% of farmers, most of them large farms.
One farm, for example, received $1.3 million in premium subsidies, and the insurer was paid $499,000 in overhead expenses for the policy, which covered canola, corn, dry beans, potatoes, soybeans, sugar beets and wheat across eight counties in two states, according to the U.S. Government Accountability Office.
If subsidies to farms such as these were capped at $40,000, the government could save $1 billion a year, the GAO found.
Babcock, the Iowa State economist, has led the effort to reform the subsidized insurance program. The program would cost about half as much if it weren't administered through private agents and multinational companies, he said.
"It would be far more efficient for this program only to cost taxpayers if bad weather hits," Babcock said.
"But it's set up to make the companies money every year."
Insurers defend their role, saying agents provide hidden savings by helping farmers make sound risk-management decisions.
"Crop insurance agents play an integral role in servicing the program," said Jen McPhillips, senior director of public affairs for the Independent Insurance Agents and Brokers of America. "They are able to tailor programs for farmers specific to what they're doing."
And the program employs 12,500 agents, plus support staff.
"In rural areas, they are huge drivers of employment," McPhillips said. "Sometimes it's just a three- or four-person shop, but some people can employ upwards of 40 or 50 employees."