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Safety Net or Trampoline?

Monday, December 3, 2012

Marcia Zarley Taylor recently posted a blog aptly titled Extreme Insurance. As executive editor of DTN, which publishes The Progressive Farmer magazine and website, Taylor is one of the more cogent observers of crop insurance and this year’s drought.

Her post highlighted the happy experience of Seth Baute, a 26-year-old farmer in Bartholomew County, Indiana. As Taylor reported, the combination of a private sector insurance policy on top of a federally subsidized 85 percent Revenue Protection policy “will push [his farm’s] income to at least 110 percent what they had projected last spring when corn was supposed to tumble to $4 a bushel at harvest.”

I think it’s great that Baute is going to come out okay – actually ahead – despite the drought. It’s also a great thing that farmers like Baute are making good money, even getting rich, from today’s high crop prices and skyrocketing land values. It hasn’t always been that way, as anyone who witnessed the farm financial crisis of the 1980’s knows full well.

But two things in Taylor’s post should give taxpayers and policymakers pause.

The first is the cost of that federally subsidized Revenue Protection policy. Taxpayers are paying as much as $39 an acre to insure corn in Bartholomew County, according to the Illinois Farm Doc crop insurance tool. And taxpayers will ultimately shell out two to three times more per acre as corn prices soar in response to the drought. This is because these very popular and heavily subsidized Revenue Protection policies pay out at the drought-inflated corn price, not the much lower price at which the crop was insured last spring.

As Taylor notes in another post, the difference may be as much as $2 per bushel – 35 percent more than the spring price that farmers like Baute expected when they insured their crop in March. The total tab for taxpayers this year could exceed $20 billion because the government – not crop insurance companies – will pay for most of the drought-induced losses, and at drought-inflated prices.

It wasn’t always this way. Prior to the 2000 Agriculture Risk Protection Act, most farmers were protected by an insurance policy that paid out at the insured price if they suffered a serious loss in their crop yield. This year, that kind of policy would have cost taxpayers about $24 per acre and still paid Baute and his fellow farmers for their losses at an historically high price of $5.67 per bushel. If taxpayers had insured only 75 percent of the crop’s value, rather than the 85 percent coverage Mr. Baute enjoyed, their cost per acre would have dropped to $20 per acre. That’s half of what taxpayers are currently paying to boost Baute’s income to 110 percent of what he expected.

It’s a fine thing that Baute and hundreds of thousands of other farmers have this generous level of coverage. The urgent question is, how much of the cost of that coverage should be picked up by taxpayers?

I am all for a safety net, but these policies look far more like a trampoline.

The second thing that should give us pause is the Climate Corporation’s “novel TWI [Total Weather Insurance] policy,” which Taylor reports is “gaining attention – both from farmers and from policymakers who think it may be a model for a less expensive method to deliver crop insurance coverage.” Baute reported that the totally private-sector TWI insurance he bought will help boost his income this year by “filling in the deductibles in conventional [read, federally subsidized] insurance.” In other words, the TWI insurance will cover the so-called “shallow losses” that federally subsidized crop insurance doesn’t.

But these are the very same shallow losses that the farm bill proposals pending in Congress would cover with spanking new federal entitlements. Taxpayers will get the tab for most if not all of the cost of these new, unprecedented business income guarantees. Moreover, Climate Corporation will find itself in direct competition with the federal government with its novel TWI policy. What farmer is going to pay for a private sector insurance policy when he or she can get the same coverage for free from the government?

Let’s review the bidding. Taxpayers are already paying twice as much as they used to in order to subsidize crop insurance. The current farm bill is proposing to fatten already expensive federal crop insurance with new entitlements that will cover part or all of an underlying deductible. In the process, Congress will stifle innovation in the private insurance market and pit federal programs against private companies. All this at a cost of $140 billion over the next ten years, paid for by cuts to nutrition and conservation programs.

Does this make sense?