“Buy federal crop insurance.” For years, that's been the mantra of the ag committees in Congress. If farmers could be persuaded to buy enough coverage, the argument went, Congress would no longer have to pass ad hoc disaster assistance bills.
As a result, Congress has provided premium subsidies, A&O (administrative and operating) reimbursements and underwriting gains, all of which the crop insurance lobby said were needed to make the program more attractive to producers.
Those arguments may be beginning to lose some of their sting, judging from recent actions in the House and Senate ag committees, which have cut funding for crop insurance programs in their versions of the 2007 farm bill. But they could do more, says Bruce Babcock, an agricultural economist at Iowa State University.
In an article, “How to Save Billions in Farm Spending,” in the Center for Agricultural and Rural Development's fall review, Babcock says Congress has two places to cut to increase funding in other areas: direct payments and crop insurance.
Despite the emphasis Congress has placed, most farmers don't think they're getting what they pay for with crop insurance, he notes. In the Corn Belt, where the program has its greatest acceptance, studies indicate farmers would not participate if it were not heavily subsidized.
“Given that corn and soybeans represent 60 percent of the crop insurance program, it is only a bit of an overstatement to say the crop insurance industry is selling a product with so little demand at its current price that without government price subsidies, there would be no viable market.”
That means Congress could achieve substantial savings by reducing premium subsidies. Depending on how it implemented the cuts, farmers would buy less insurance. “This decision would reduce premiums, reducing the per-acre premium subsidy and automatically triggering reductions in A&O reimbursements and underwriting gains.”
Congress could also base A&O reimbursements on policy count rather than a percentage of premiums. “This would create an equal incentive for companies and agents to sell crop insurance to large and small farmers.”
Congress could also cut crop insurance costs by reducing underwriting gains. The House bill cuts program costs by increasing the “net book quota share” to 12.5 percent. The latter is the percentage of net underwriting gains companies must pay USDA for positive gains, and the loss percentage companies do not have to cover when they're negative.
Sen. Tom Harkin's chairman's mark would have reduced federal crop insurance premiums for participants in the new Average Crop Revenue Program, but his ag committee adopted an amendment offered by Kansas Sen. Pat Roberts that would keep rates where they are.
Shortly before the vote, Ohio Sen. Sherrod Brown wondered if anyone was willing to “take on” the crop insurance industry. “We need to remember the federal government will spend $5.4 billion on crop insurance subsidies in 2007, the largest single expenditure in the commodity title of the farm bill,” he said.