Responsible Approach Needed for Subsidized Crop Insurance

Federally subsidized crop insurance has become the primary farm program. It needs some changes to be good for family farms and conservation. It must also be fiscally responsible to leave room in the federal budget for other farm and small-town priorities.

Federal crop insurance’s magnitude was underscored by a Farm Credit Services study. It showed that $4.5 billion in 2012 crop insurance indemnities to farmers in Iowa, Nebraska, South Dakota, and Wyoming saved about 21,000 jobs. Those payments kept farm income at the second highest level ever in spite of record drought.

Crop insurance receives multiple federal subsidies: 1) In good years, as well as bad, the government pays 62 percent of farmers’ crop insurance premiums, 2) The feds pay over a billion dollars of insurance companies’ administrative costs, and 3) In years of big crop failures, the government reimburses insurance companies for their losses. The total cost last year was about $16 billion.

With its emergence as the primary farm program, some key crop insurance issues need attention.

The primary farm subsidy is now uncapped. If one corporation farmed every acre in America, the government would pay 62 percent of its crop insurance premiums on every acre. According to the Government Accountability Office, a $40,000 cap on those subsidies would have saved $1 billion in 2011. Uncapped premium subsidies help mega farms bid land away from smaller and beginning farmers. They contribute to deficits. And, like the big bank bailout, they enable the rich and powerful to socialize risk while privatizing profit.

There are no conservation requirements. Recipients of insurance premium subsidies, unlike other farm payments, are not required to practice soil conservation. High prices are now signaling farmers to maximize production. With no conservation requirement, that production will in some cases come at the expense of the soil. Furthermore, federal crop insurance has placed taxpayers in the position of bearing the risk for irresponsible individuals out to make a quick buck by tearing out fragile grasslands.

Subsidies increase as farm prices rise, driving up federal spending. It costs the government more to insure $7 corn than $4 corn. Direct farm payments were criticized for paying farmers as much in good years as bad. But federal crop insurance goes further. Premium subsidies are bigger in years when prices are higher – generally years of lesser need. Even before the drought, the cost of premium subsidies had quadrupled over 10 years to $7 billion, more than any other farm policy.

Record subsidies at a time of high prices are adding fuel to land price inflation. They are also squeezing other priorities out of the budget. The farm bill extension continued unlimited mega farm premium subsidies – even to those selling record crops at record prices. But to meet budget targets, new conservation enrollments were blocked. Beginning farmer and rural small business development programs were defunded.

Farmers who count on traditional farm programs to protect against long periods of low prices should also be concerned about focusing most spending on crop insurance. It protects only against price declines within a crop year, not against extended periods of low prices. Prices will inevitably fall. And when they do, farmers will be able to insure their crops only at the lower price.

It’s time to develop a responsible approach to subsidized crop insurance. Premium subsidies should be capped at reasonable levels. Recipients should be required to practice conservation and should not be subsidized to tear up grasslands. It’s also fair to ask whether premium subsidies should always increase in response to rising crop prices – particularly in years of normal yields.

Only with a fiscally responsible crop insurance program can we afford programs that protect farmers in the inevitable low price years. And only then can we afford to invest in protecting the land and establishing a new generation of farms and businesses to keep our small towns and countryside strong.