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Cutting Crop Insurance Subsidies Won't Scare Away Farmers

Thursday, September 11, 2014

You’ve just bought your dream home.

Wood floors? Check. Big back yard? Check. Marble counters in the kitchen? Check.

Then in a moment of panic, you realize you haven’t bought insurance. You’ve heard horror stories of falling trees and floods, so you quickly look up policies and call an insurance company to get a price. The agent says the opposite of what you expect. 

“At the expense of the taxpayers, we can offer you several hundred dollars a month to buy our policy. You’ll only have to cover a small portion,” she says.

What’s not to like? You quickly agree.

Homeowner’s insurance? Check. Time to move in.

Believe it or not, that’s how federal crop insurance works. Just like homeowners, farmers can buy a policy to protect their crops. If bad weather – an early freeze, a flood, a drought – comes along and ruins them, the program pays out based on the damage.

To encourage farmers to sign up, the federal government not only handsomely subsidizes companies that offer the policies, it also pays roughly two-thirds of the premium. Not surprisingly, farmers love this. They get great coverage on the cheap.  

Taxpayers? Not so much.

From 2003 through 2012, these premium subsidies cost taxpayers $42.1 billion – 72 percent of the federal crop insurance program’s total costs.

In the endless debate leading passage of the 2014 farm bill – the legislation that controls the federal crop insurance program – members of Congress who represent farm country did everything they could to protect these lavish benefits.

A proposal to lower premium subsidies would “discourage participation in the crop insurance program and as a result endanger its integrity,” claimed House Agriculture Committee Chairman Frank Lucas (R-Okla.) in 2012. Sen. Pat Roberts (R-Kan.), a member of the Senate Agriculture Committee, said a similar proposal to cut premium subsidies would cause larger farms to drop out of the program and ultimately create “higher premium” costs for other farmers.

Enter the Government Accountability Office (GAO). According to the government’s own authoritative watchdog agency, reducing the subsidies could actually save millions of dollars. And contrary to the claims of Lucas and Roberts, it would have little influence on farmers’ participation. The GAO found that farmers’ response to such cuts could be “small due to factors such as attractiveness of revenue policies and increasing importance of crop insurance as other farm programs are reduced or eliminated.”

Moreover, lowering the subsidies would have a limited affect on the cost of farming, “usually less than 2 percent, and often less than 1 percent.”

This table from the GAO report demonstrates that reducing subsidies would have a minimal effect on farmers’ costs.

 

Crop

Share of total premium subsidies in 2012

Average cost of prod-uction per acre

Farmer’s average premium increase per acre with 5 point subsidy cut

Average increase in farmer’s premium as % of cost of production with 5 point cut

Farmer’s average premium increase per acre with 10 point subsidy cut

Average increase in farmer’s premium as % of cost of production with 10 point cut

Corn

44.7%

$655.79

$2.81

0.4%

$5.62

0.9%

Cotton

8.6%

$808.38

$4.23

0.5%

$8.47

1.0%

Soybeans

24.3%

$417.38

$1.92

0.5%

$3.84

0.9%

Wheat

18.0%

$303.78

$2.09

0.7%

$4.18

1.4%

 

Here at EWG, we’ve long known the benefits of cutting premium subsidies. We strongly support common-sense reforms to the crop insurance program, such as means testing to lower premium subsidies for higher income farmers, in order to save money, improve the program’s functioning and increase transparency.

Many members of Congress agree with us.

Sens. Dick Durbin (D-Ill.) and Tom Coburn (R-Okla.) proposed reducing premium subsidies for farmers with adjusted gross income above $750,000 a year. According to the Congressional Budget Office, that would have saved taxpayers $982 million over 10 years. 

This reasonable proposal passed twice in the Senate, and the House passed a resolution supporting it as well, but in the end it died. Unfortunately, when members of Congress who support lavish programs control the outcome, reform usually loses.

With the costs of the 2014 farm bill continuing to grow, common-sense reforms endorsed by the Government Accountability Office and cost-conscious members of Congress shouldn’t be brushed aside for the benefit of big agriculture.

If Congress had paid attention when it had the chance, it would have trimmed premium subsidies – instead of ballooning the deficit.

Real reform plan? Check. Evidence? Check. Action? …