Washington Insider-Wednesday

Crop Insurance Criticism

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

WTO Members Meet Today to Consider Next Steps in Doha Round

A World Trade Organization panel is meeting today in Geneva to put the finishing touches on a proposed Trade Facilitation Agreement (TFA) that was negotiated in Bali, Indonesia last year. The purpose of the TFA is to expedite the transportation, release and clearance of international goods among member countries by harmonizing customs forms and other red tape. Once in place, TFA is estimated to save the global economy hundreds of billions of dollars annually through increased trade efficiencies.

India's previous refusal to sign off on the TFA has held up adoption of the document since last July. However, the United States and India recently negotiated an agreement under which India would approve the TFA in return for an indefinite guarantee that India's domestic food security programs would not be subject to WTO disputes, formally known as a "peace clause." The U.S.- India agreement further urges members to hold WTO meetings that focus on the public food stockholding issue and place a priority on such negotiations leading up to a December ministerial meeting in Turkey.

Taken together, these steps appear to give new life to the WTO's Doha Round of trade talks, a process that has been proclaimed dead on more than one occasion.

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China Outlines Plans to Wean Itself From Dependency on Coal

China's energy officials have updated their energy targets through 2020, providing a clear indication that they intend to reduce the country's reliance on coal while gradually increasing its use of natural gas, shale gas, coal bed methane and renewable energy. Still, the rate of change will not be sudden. The target for coal consumption as part of the primary energy mix will be set at 62% by the end of 2020 compared with a current level of around 65%.

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China is by far the world's largest customer for coal, importing nearly a quarter of all coal moving in international trade, according to the U.S. Energy Information Administration. It also is the world's largest coal consumer, accounting for nearly half the coal burned throughout the world each year. As a result, even a small percentage change in the country's coal consumption translates into a large number of tons. For example, a 3% cut in China's coal use would equal nearly 125 million tons.

So at a time when U.S. energy and environmental policies are driving a move away from domestic coal use, China is beginning a similar shift.


Washington Insider: Crop Insurance Criticism

The 2014 Farm Act established crop and revenue insurance as the principal safety net for the sector, and there has been a spate of articles from ag groups emphasizing how important those programs are. At the same time, there are more than a few active critics who, while not denying that the insurance programs are essential, believe they are simply too highly subsidized and unnecessarily costly. And, they are willing to cite chapter and verse about why they think this is true. For example, on Monday, the Land-Stewardship Project released the first of three white papers that define the group's concerns.

The paper, "Crop Insurance: The Corporate Connection," examines the $90 billion projected overall ten-year cost of the program and focuses on the amount to be spent for administrative costs of crop insurance companies, which is now capped at $1.3 billion a year.

The authors are counting on generating sticker-shock over the programs, especially for lawmakers. They claim that the study, which was based mainly on USDA online reports that were accessed this month, shows that the second-biggest portion of federal costs for crop insurance, administrative reimbursements to insurers, accounted for 21% of all costs in recent years. Premium subsidies for farmers accounted for 72%.

After reviewing these figures, LSP concludes that the "significant subsidies crop insurance corporations receive" consistently contribute to profits "considered far above the reasonable rate of return as calculated by economic experts.

Between 1989 and 2009, crop insurance companies averaged a 17% return on equity at a time when the "reasonable" rate was under 13%, according to an analysis done for USDA. In 2009 alone, crop insurers enjoyed an astounding 26% rate of return, more than double what was considered reasonable by the industry standard for that year, the study found.

The crop insurance industry, of course, disagrees sharply with the study and its findings. It responded that the key data used were old and carefully selected, and did not include cuts already made before and after 2009. And, it argued that rather than the very high 17% return on equity claimed by the study, recent returns have averaged "under 5%" and many be "dangerously low, for maintaining the many contributions of private capital" and that two large firms are moving to exit the crop insurance business.

Crop insurance spokesmen then note that the 2014 Act made crop insurance the premier risk management for our nation's farmers, ranchers and growers — and, that those programs deserve the most up-to-date analyses possible, especially given their important role and the fact that a major government expense is involved.

The Land-Stewardship Project group is not the first to question the rates of return on equity allowed for cooperating crop insurers under the under the programs, or the very large share of producer operating risk these programs shift to the public. The question of the level of returns allowed to cooperating private insurers compared to reasonable industry standards has long been important to ag observers, many of whom are, at best, suspicious of their role and the effects of that relationship on the program as a whole.

This suggests that the issue continues to be one that deserves close oversight by congressional committees, and by USDA as well as by universities and private groups. It has long been highly controversial and likely will remain so, at least until it is more fully addressed, Washington Insider believes.


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(GH/CZ)

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