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The Case for Crop Insurance Reform

Monday, June 11, 2012

By Environmental Working Group Vice President for Government Affairs Scott Faber and EWG Senior Vice President Craig Cox

The Senate is expected to start debate this week on adoption of common sense reforms to the federal crop insurance program.

This issue could not be more important. Crop insurance has quietly become the primary source of federal subsidies for farmers. The cost to taxpayers of heavily subsidized crop insurance has steadily increased – from $2 billion in 2001 to $9 billion in 2011.

A program once intended to reduce the need for ad hoc disaster payments has become far more costly than policymakers ever imagined.

A decade ago, the U.S. Department of Agriculture paid, on average, 30 percent of the cost of insurance premiums. But in the year 2000, to encourage more farmers to buy insurance, Congress dramatically expanded subsidies to both farmers and insurance companies.

Today, USDA pays an average of 62 percent of farmers’ premium subsidies and spends $1.3 billion a year on payments to insurance companies and agents that sell policies to farmers.  Crop insurance has morphed from a program designed to compensate producers for weather-caused crop losses to a guarantee of farm income.  The program’s costs have exploded.

Over the next decade, taxpayers are expected pay out another $90 billion for the program, nearly twice traditional farm subsidies.

While direct payments and counter-cyclical payments have been subject to means tests and payment limits of $40,000 and $65,000 per farmer respectively, crop insurance premium subsidies have no limits, setting up an unfair playing field that benefits the largest, most profitable farm business. Last year, 26 policyholders each received more than $1 million in premium subsidies.  More than 10,000 of those  each received $100,000 or more in premium subsidies, according to EWG analysis.

The top fifth of subsidy recipients collected almost 80 percent of all insurance funding. By contrast, the bottom 80 percent of premium subsidy recipients collected, on average, about $5,000.

Unlike other subsidies, Congress does not know who receives these subsidies – even though many crop insurance companies are major donors to members of the House and Senate agriculture committees. Many of these recipients are among the most profitable companies in America.

Bloated insurance subsidies produce powerful incentives to plow up wetlands, grasslands, and marginal lands.

As one farmer told the New York Times last week, “When you can remove nearly all the risk involved and guarantee yourself a profit, it’s not a bad business decision” to plow up marginal lands. “I can farm on low-quality land that I know is not going to produce and still turn a profit,” he said. The Times quotes a 2007 study by the Government Accountability Office that found that crop insurance provided a major incentive to plow up grasslands.

More recent EWG analysis found that the combination of unlimited subsidies and high prices have contributed to the loss of millions of acres of wetlands and grasslands in parts of the Great Plains, harming wildlife and increasing water pollution from farms.  EWG research shows that polluted runoff from farms in driving up the cost of drinking water and that soil erosion is growing worse.

Nevertheless, farmers who receive crop insurance subsidies are not required to protect wetlands, grasslands and soil health.

Fortunately, the Senate may have an opportunity to adopt common sense reforms to crop insurance.

One amendment offered by Sens. Jeanne Shaheen (D-NH) and Patrick Toomey (R-PA) will cap crop insurance premium subsidies at $40,000 per farmer and generate $5.2 billion in savings. Fewer than 4,000 farmers would be affected by the cap, which is similar to caps on other traditional farm subsidy programs. A separate amendment by Sens. Tom Coburn (R-OK) and Richard Durbin (D-IL) would reduce premium subsidies for very profitable farms by 15%.

A third amendment by Sen. Ben Cardin (D-MD) would require farmers who receive these insurance subsidies to protect wetlands and grasslands – a quid quo pro that has been in place since 1985 for farmers getting traditional farm subsidies.

Finally, Sen. Kirsten Gillibrand (D-NY) will offer an amendment to cut subsidy program payments to insurance companies – many of which are based in insurance tax havens like Bermuda and Switzerland and are reporting record profits –  and would restore cuts to feeding assistance programs and to invest more funding in healthy diets.  Crop insurance companies are so grossly over-subsidized (PDF) that one dollar goes to an insurance company for every dollar that goes to a farmer.

Despite what you may hear from some “farm leaders,” reforming crop insurance will have no impact on crop prices, production, or the price of food.

High prices provide farmers powerful incentives to grow basic commodities and, as was recently reported in the journal Food Policy, farm subsidies “have negligible impact on the prices paid by consumers for food.” According to one study, complete elimination of existing farm programs “would have a very modest effect on farm prices and production” of subsidized commodities like corn and wheat. Even FAPRI, when comparing different subsidy proposals, found that changes to farm subsidies changed the price of food expenditures by, at most, one half of one percent.

That won’t stop some “farm leaders” from dissembling. It’s worth remembering that these are the same “farm leaders” who have fought the hardest for ethanol mandates and for dairy and sugar supply controls – all of which actually increase the price of food.

Adopting these common sense reforms – reasonable limits on insurance subsidies to farmers, basic environment protections, and a reasonable rate of return for crop insurance vendors – would  constitute a generous safety net for farmers at far less cost to the taxpayer. Adopting payment limits and providing insurance companies a 12 percent rate of return (down from 14 percent today) would generate enough savings to avoid any cuts to feeding assistance and conservation program.

Why didn’t the Senate Agriculture Committee bring that bill to the Senate floor?

Instead, it expanded crop insurance by creating a new cotton insurance program that bills taxpayers for 80 percent of farmer insurance premiums (at a cost of more than $3 billion) and created a costly new entitlement program to guarantee 89 percent of a farmer’s revenue (at a cost of $30 billion).  To help pay for this, the committee cut funding for conservation programs by $6.5 billion and feeding assistance programs by $4.5 billion.

This is reform?

In its rush to defend the largest farmers and insurance companies, the Senate panel failed to put the public’s interest ahead of the special interests that fund their campaigns. So, now it falls to the full Senate to ensure that our farm safety net helps those farmers who need help when they really need help – and meets the needs of all Americans and the environment.

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