Record Crop Insurance Payout Stirs Subsidy Debate
Farmers will be paid a record $16 billion in crop insurance claims for 2012 because of the widespread drought, a staggering amount that has critics calling for changes to what they say is an inefficient taxpayer subsidy the government cannot afford.
While farmers buy crop insurance from private companies, the federal government subsidizes their premiums and picks up the tab for losses over a certain amount. One analyst estimates the federal tab for 2012 will come to about $11 billion.
It is the second year in a row that U.S. farmers have received record crop insurance payments as flooding and drought in 2011 was followed by an even worse drought last year. The $16 billion in payments also comes as lawmakers working on a new farm bill have been considering a shift from disaster relief to crop insurance as a more predicable way of protecting farmers from natural disasters.
Farmers say they must have some kind of protection or a year like the past two could put them out of business.
Ben Steffen, who has crops and livestock near Humboldt, Neb., said he had insurance to cover three-fourths of his losses last year when drought took about a third of his corn and soybeans and two-fifths of his hay. Farmers can buy insurance that covers from 50 percent to 85 percent of the revenue they would have earned and pay premiums based on their coverage.
"It's not a money-making proposition," Steffen said. "It's a way to keep you from getting buried by a disaster."
The most recent report from the Federal Crop Insurance Corp., released Monday, put the total payout so far at $15.91 billion, but some claims for 2012 are still pending. Even so, last year's loss represents at least a 47 percent increase from the $10.8 billion record loss in 2011.
Taxpayers will pick up most of the cost. The program run by the Risk Management Agency in the U.S. Department of Agriculture is a three-way venture in which insurance companies sell farmers policies to cover crop losses. The government subsidizes the program by paying about 62 percent of the cost of insurance premiums and farmers pay about 38 percent.
When losses exceed premiums, the government ends up picking up most of that cost too, said Bruce Babcock, an agricultural economist at Iowa State University. He estimated that between premium subsidies, crop loss payments and administrative costs, U.S. taxpayers will end up paying about $11 billion for 2012. That's too much, he said.
"I believe farmers need the opportunities to have all the tools they could possibly use to manage their risks," Babcock said. "I just don't think they need to be bribed to do so with such high degree of subsidies."
Some agriculture economists think the federal government should set up an emergency fund that sets aside a certain amount of money, perhaps $3 billion a year, to cover unusual disasters.
But crop insurers still say their program is a better bet because approval of emergency aid isn't always certain and crop insurance pays faster. That "stabilizes the supply chain quite a bit" because banks and other companies know farmers will be able to make loan payments and pay their bills even in bad years, said Tom Zacharias, president of National Crop Insurance Services, the nonprofit trade group for insurers that sell policies to farmers.
A similar debate is being heard in Congress, where Republican Sens. Jeff Flake, of Arizona, and John Duncan, of Tennessee, introduced bills early this month bills to reduce the premium subsidy to pre-2000 levels. Flake said the proposals will save about $40.1 billion over 10 years by cutting the government's portion of insurance premiums to 37 percent from the current 62 percent.
Congress had increased the subsidy to boost participation in the program — a move that was successful in raising the number of insured acres from 215 million acres in 2002 to 282 million acres last year.
"The current U.S. fiscal crisis makes a strong argument for a common sense roll back of crop insurance subsidies," Flake said in a statement.
But Iowa Sen. Charles Grassley, another Republican, said it's better for farmers to buy crop insurance than to go to the federal government for disaster aid every time there's a significant drought or flood.
"It's either going to be disaster assistance or its going to be crop insurance," he said. "Isn't it better for the government to promote risk management and have the farmer plan ahead and probably pay out a lot less taxpayer dollars than you have with disaster assistance?"
In central Illinois near Auburn, Mark Reichert was grateful for crop insurance after his 520 acres of corn produced only one-half to two-thirds of their normal yield during the drought. Reichert, 52, had enough insurance to cover 90 percent of his losses.
He paid $46 to $50 an acre in premiums last year and expects to buy the same amount of protection at about the same cost this year. He said it essentially allows farmers to go on to farm another year and assures banks holding farm loans that there's consistent revenue to make payments.
"It's not meant to be a cash cow," he said of the insurance. "It has performed exactly the way it was meant to perform."