Minding Ag's Business

Wrong Fight Over Insurance Subsidies

By  Marcia Zarley Taylor

Crop insurance critics at the Environmental Working Group are trying to pick a fight over the cost of the federally subsidized program. They're claiming that the harvest price adjustment in revenue insurance is too generous to farmers and is responsible for a doubling of the cost of the federal subsidy since 2000. In their view, there's no excuse to adjust price guarantees in those rare years when prices soar at harvest. Afterall, the $5.68/bu. guarantee for corn last spring was pretty good, so who needed the bump to $7.50 this fall? Was it a good use of taxpayer dollars?

Since they're quoting some of my blog posts as evidence, I feel compelled to respond.

First, let's not blame the victims. With limited equity and high land rental costs, young farmers are the first casualties of crop disasters. The 26-year-old operator I cited in earlier posts is no fat cat, he's a beginner with just a few hundred acres of his own and a second baby on the way. He wasn't expecting to get rich after losing about half of his corn crop this year, but he did get about what he expected when he planted his crop last spring--AFTER paying for two insurance policies--one from the federal government and one from a private insurance company. That's no free lunch. The people who will get rich this year are ones who could price a normal crop at $7.50, not disaster victims.

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If a 26-year old had experienced the same crop loss in 1988 (pre-revenue insurance), he would be out of business this Christmas. The US lost a whole generation of young farmers in the 1980s and the lack of decent insurance—on top of punishing commodity prices and high interest rates—was one reason. One stumble in the 1980s and there was no chance to recover. Without crop revenue insurance today, most 20-somethings won’t qualify for loans.

Second, the young operator in question needed a higher fall price for the exact reason it was invented. He had forward priced so much of his 2012 crop on the advice of his marketing consultant, he had to buy back his hedged positions at a loss. In other cases, livestock farmers need the extra price because they are buying grain on the open market, presumably paying the new market price not the spring price.

In short, the critics are missing crop insurance's greater good. EWG should be encouraging federal crop insurance coverage as it requires people pay for up front to be eligible for aid. In the old world, Congress simply passed free disaster aid after the fact, no strings attached. Now THAT was poor policy.

The only legitimate argument here is what level of subsidy is fair. But even then, it's worth keeping things in perspective. The New York Times reported last month that the federal government subsidizes more than half the cost of flood insurance for one million homeowners. If the government is pressed for cash, doesn't it make more sense to shore up farmers and the nation's food supply rather than subsidizing beach houses built on sand bars? Just sayin'.

Read the NY Times article at http://www.nytimes.com/…

Marcia Zarley Taylor can be reached at marcia.taylor@telventdtn.com

Follow her on Twitter@MarciaZTaylor

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Comments

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william jameson
12/11/2012 | 3:46 PM CST
Marcia, would you, or anyone, care to document the billions spent in the last 10 years by the taxpayers in indemnities, premium subsidies, and adminstrative costs, and the billions paid in premiums by the policy holders?
Lon Truly
12/10/2012 | 12:44 PM CST
Any studies indicating revenue positive results to taxpayers with federal crop insurance do not reflect the billions spent annually by taxpayers for this program. Any discussion of federal crop insurance should reveal the vast differences in taxpayer subsidies paid per policy holders as well as differences between investment/profit guarantee amounts per policy holders. In other words the huge differences in benefits per policy holder need to be revealed. Also when government assumes production risks and guarantees profits to policy holders the extent of profitability margin manipulations should also be explored as well as just what is the extent of land valuation manipulations due to these profitability guarantees.
william jameson
12/10/2012 | 9:45 AM CST
Initial discussion of crop insurance costs should be based upon the basics. Namely the net cost of the premium subsidy and administrative costs to the taxpayer over a period of years. A couple of recent articles have indicated that the crop insurance program has been revenue positve to the taxpayer over a ten year period. Would you address and document this information? Thanks, Bill
Lon Truly
12/6/2012 | 10:44 AM CST
The bottom line is that government beginning farmer insurance or other schemes do not work very well as for all practical purposes the only beginning farmers are the poor sons of the multimillion dollar net worth farmer fathers. And we all know that for all practical purposes, that the poor sons of the poor farmers are never able to out bid the poor sons of the wealthy farmers. So what is the point of the government spending billions subsidizing the poor sons of wealthy farmers expand that families holdings via some stupid government beginning farmer scheme.
Curt Zingula
12/6/2012 | 7:27 AM CST
Marcia, I used your same logic about young farmers on a Cedar Rapids Gazette online blog about crop insurance - it didn't work. Too many urban interests don't give a tinker's hoot about young farmers succeeding. They're more worried about the federal budget they say. I would also like to point out the billions of dollars that FEMA will spend on flood recovery for Cedar Rapids. Of the 15.2 square miles of CR development in the 100 year flood plain, anyone not carring a mortgage, didn't carry flood insurance either. "Too expensive" they said. Now look at how much it will cost the taxpayers! Finally, lets not forget that the EWG wanted to marry conservation compliance to crop insurance subsidies and live happily ever after. When Congress left them standing alone at the alter, the turned against those subsidies as "a burden to the taxpayer". Evidently it wasn't a burden when they wanted to use those subsidies!
Lon Truly
12/6/2012 | 7:25 AM CST
Congress's mindless obsession with targeting the wealthiest farmers with nearly limitless multimillion dollar investment/profit guarantees is one of the most disruptive financial forces to ever hit rural America. Smaller farmers given miniscle government benefits are stamped irrelevant by insane government insurance programs that destroy their ability to compete in any way with the umbrella of overwhelming superior investment/profit guarantees larded on the largest operations and are being rapidly driven from rural America. If smaller farmers are to have any chance of competing in America, government must be stopped from this mindless obsession of awarding the richest with the largest income/investment guaranteeing programs
Bonnie Dukowitz
12/6/2012 | 6:23 AM CST
Some of your points, Lon, are well taken. However anyone, especially a small operator(however that term is never defined) will not get an operating input loan without crop insurance. Without a crop insurance policy of some type available, if any debt is being carried by the farmer, production will cease. Yes there guarantees of profit, but that goes to the insurance companies.
Lon Truly
12/5/2012 | 8:54 PM CST
The clueless and or corrupt congress ever fixated on re-election has chosen to be oblivious to the economic carnage it is creating with the unfair and inequitable crop insurance schemes. It should be obvious to everyone that targeting the largest and most profitable farm businesses with the largest investment and income guarantees grants these operations with an overwhelmingly competitive edge in a highly competitive business. It should be noted that many of these operations have little or no land costs and that government has no business guaranteeing ever increasing land values with insurance schemes that cover land costs. It should also be obvious that smaller farm operations targeted with no or minimal government benefits have little or no chance of competing in such an economic environment. Considering the stratospheric levels to which land values have escalated it should be obvious to all that extreme government income and investment guarantees are capitalized into land values and that government has no business targeting the wealthiest with multimillion dollar business benefits and billions in insurance subsidies.
Raymond Simpkins
12/5/2012 | 6:24 PM CST
Marcia, I believe the young farmers in our area are the ones running land prices higher and higher! They know more than us older guys you know?I was 28 and my very first year of farming in 1988. We came though it just fine with no crop insurance.I have only bought insurance the last two years.Crop insurance is needed more today because of such high input cost,but it should only be there to cover cost not to get rich on.I think that is what non farming people see.There is way to much fruad and miss use of insurance money.If it paid you for lost cost of inputs we could all farm next year. I like your blog site Thanks
Marcia Taylor
12/5/2012 | 10:00 AM CST
I believe that to protect the food supply the government needs to provide a basic bottom line coverage at a reasonable cost (subsidized but probably not with fall price option.). This would assure the farmer will be back next year. But with the governments own problems I donâ?™t think they owe farmers a guaranteed profit. Most farmers this year with crop insurance have made more money than if it was a normal year and are laughing about it. If the government would provide the rp policy with the fall price option and not subsidize it, then if the farmer wanted to pay the price to guarantee himself a profit he has that opportunity. The government then could use that money to lower the cost of the crop insurance program. The government needs to ensure their own survival which seems to be at risk. I actively farm my own ground but otherwise am retired and used to sell crop insurance. Thank you for listening. -- Larry Bettis
Marcia Taylor
12/4/2012 | 3:38 PM CST
I also asked Kansas State University economist Art Barnaby to explain why Revenue Protection policies and harvest price adjustments make sense. Afterall, he was one of the creators of that concept. Here's a shortened version of what he said: "The Revenue Protection contract is effectively two contracts. When prices increase the RP is a yield guarantee. Farmers must suffer a yield loss to trigger a payment, [15% for someone with an 85% policy]. But it is more common for the RP to require a 20% to 25% yield loss to trigger payments. Under RP the bushel is replaced at its market value, not some dollar amount set months ago. When crop insurance started in the 1930s it was possible to go to a license warehouse and be paid your crop insurance loss in bushels that a farmer would load on his truck. The government no longer has that amount of grain in storage so an indemnity price based on the harvest price is a close substitute. "If prices fall the real yield guarantee expires worthless and the grower is paid based on the revenue coverage. If prices increase and the farmer has RP with harvest price exclusion, then the "put" in RP takes on negative values. As a result 2012 Iowa corn farmers with half of a crop would have had much lower or even no payments, if the harvest price were eliminated. Would Congress have stood by and not provide ad hoc disaster payments during election year in Iowa, if those farmers were not paid by crop insurance? "About the dumbest cut policy makers could make is to eliminate the harvest price. You make the insurance contract a worthless contract and it will die on its own. Also cut premiums, change the Standard Reinsurance Agreement and the private companies at some point will leave on their own."
Bonnie Dukowitz
12/4/2012 | 3:38 PM CST
Marcia, John, Crop insurance is not 100% of production cost, plus. Crop insurance is designed to carry farmers through a disaster so as to allow food production again in another production year. Not to line the pockets of a few. Average this out, nation wide, adequate food ,hopefully will be available. Disaster payments do not do the food supply any good when this practice is often way too late to assist one to stay afloat as a producer into another production year. Because of failures in earlier programs, such as a government held grain reserve, reserves are now held by producers, much of what is on farm storage. So, there is a reserve, only not in direct government controll. Hundreds of thousands of bushels of grain disappeared over many years when under the direct possesion of the government. Bugs consumed much of it because the inspecters couldn't keep on top of it. I am not defending abuse of gov. programs, where ever they may be, only trying to paint the picture as it is. Don't throw out the baby with the bath water. Your article, Marcia, was "right on". Thanks
Marcia Taylor
12/4/2012 | 3:27 PM CST
John, before modern crop insurance was launched in 1980, the "experts" said it took many farmers seven or eight years to recover from disasters. At least, that's what I recall from witnessing testimony on the first crop insurance law as a Washington-DC reporter in the late 1970s and 1980s. Stability encourages lending to a industry that frankly, Wall Street and power brokers have always ignored. With access to credit from the Farm Credit System and country bankers, we have retooled the equipment industry, built high tech grain handling systems, encouraged the adoption of seed technologies and treatments that have more than doubled corn yields in 40 years. It's not in the nation's interest to wipe out multi-generation family businesses from fluke or extreme weather disasters. In fact, we've made the US the most reliable supplier of grain in the world. That's good for humanity.
Jarrod Bennett
12/4/2012 | 11:04 AM CST
Thank you for not letting EWG get the last word. Far too often, the people who get the microphone know the least about the subject. The last paragraph you wrote speaks volumes! Just sayin! haha
John West
12/4/2012 | 9:50 AM CST
The USdA reports that row crop producer's income is up 6% overall from last year. It also says last year was a record year. In terms of the US Food supply isn't there something wrong with a system that rewards failure over success. How does crop insurance protect the food supply? The US has oil in reserve, but not food. Crop insurance guarantees us will will have fewer farmers as crop insurance plays a part in rising land prices. How does having fewer farmers protect the food supply?
Unknown
12/4/2012 | 9:04 AM CST
Well said Marcia Zarley Taylor !
Bonnie Dukowitz
12/4/2012 | 6:54 AM CST
Thanks for putting the nations food supply and farmers in the same sentence. This is so often ignored. The so-called farm subsidies are a part of the program to supplement the food supply.