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Group questions unintended consequences

of federally subsidized crop insurance

Sept. 12, 2013 | 0 comments

This is the second in our series on the impacts and effects of crop insurance as it increasingly becomes the means the federal government has chosen to use to support agriculture.

It's anyone's guess how farm legislation will turn out now that members of Congress have returned from their August recess.

Experts who have followed the farm bill closely are saying that there's a chance a comprehensive farm measure could get through Congress, either this year or next year; or lawmakers could decide to tack farm policy onto a budget-cutting proposal.

Another option - one that is opposed by just about every ag advocacy and commodity group -- is to just extend current policy for another year.

That would mean continuing the automatic direct payments that are also opposed by nearly every ag policy group.

No matter what happens, many analysts and economists, including Paul Mitchell of the University of Wisconsin-Madison, have noted that crop insurance is taking the place of earlier farm support programs - both those that are part of an overall plan and so-called ad hoc disaster programs that have sprung up over the years as lawmakers saw farmers had a problem and tried to do something.

Those kinds of programs have been disappearing as Congress has placed a greater emphasis on crop insurance programs.

Evidence of the decline in disaster programs is the fact that last year, with the worst drought in 50 years plaguing most of the country there were no calls for Congress to pass any kind of measure to "help out the farmer."

But the federally subsidized crop insurance payments have been rising - catching the attention of many in the continuing farm bill debate.

In 2011, the Federal Crop Insurance Program (FCIP) paid out a record $10.8 billion in crop insurance claims to farmers, many of whom suffered losses from flooding in the Mississippi River basin.

That record lasted only a year as the claims rose to an all-time high of $17.3 billion in 2012, mostly due to severe drought.

Over $8 billion of those total crop loss payouts were funded directly by taxpayers because of the way the government subsidizes crop insurance companies and indemnities.

From 2001-10, crop losses averaged just $4.1 billion a year for the entire country.

A lobbying group that has been active in farm bill debates over the last few years, the Natural Resources Defense Council (NRDC) just released a report called "Soil Matters: How the Federal Crop Insurance Program Should be Reformed."

Farmers may remember that during the last farm bill debate, the NRDC was the group that produced a searchable website showing how much revenue individual farming operations got from the government.

Now, as government support for commodity agriculture appears to be shifting away from direct subsidies and payments, to subsidies for crop insurance programs, the NRDC is weighing in again.

The report makes the argument that the Federal Crop Insurance Program could be a "promising strategy for reducing both material and financial losses" on U.S. farms. Practices like cover cropping, no-till and efficient irrigation could help mitigate losses as well as building the resilience of farmland, especially in the face of a changing climate, they say.

But the crop insurance program effectively penalizes farmers that use practices like cover crops, the report argues.

Corn growers in states that were most impacted by the 2012 drought, including those in Iowa, Illinois, Nebraska and Kansas, received billions in indemnities.

In one way or another most of that money came from taxpayers through the Federal Crop Insurance Corporation and through reinsurance.

The government also pays for some of the operations costs of the private companies with which it operates the program.


The NRDC report argues that the average "cover cropping corn farmer" had yields that did not go below the average yield that would have triggered an insurance claim in those states.

During the historic drought of 2012, fields that had been managed with cover crops yielded an average of 122 bushels of corn per acre in those four major corn growing states, while on average the fields where corn was grown without the benefit of cover crops, corn yields were 106 bushels per acre.

Claire O'Connor, a water policy analyst with the NRDC, who wrote the report, argues that the 15 percent bump in yield that cover crop farmers got from using that practice meant those growers didn't meet the "deductible" and therefore most of the money paid out for subsidized crop insurance went to those who didn't use cover crops - a practice the NRDC clearly thinks is worthwhile and beneficial.

"Effectively this means we are penalizing farmers who are working to build their resilience, to reduce their losses," O'Connor noted in the position paper.

The group believes that crop insurance could and should be reformed to encourage farmers to use practices like cover crops, by giving them what amounts to a "good driver" credit on their insurance premium - like auto insurance companies do for drivers.

Currently, crop insurance premium rates are set by the U.S. Department of Agriculture's Risk Management Agency (RMA).

The NRDC says that while the agency is setting those rates it should use that as an opportunity to reward those who are practicing preventive measures - especially when those same measures are saving water and fertilizer and preventing erosion to boot.

The federal crop insurance system is failing farmers and taxpayers because as it is now designed it is a "subsidy for increasingly risky practices" and "less sustainable production methods," O'Connor argues.

Federal policy allows the USDA to institute pilot programs within the crop insurance program and she maintains that the agency should do so for the sake of rewarding farmers who are implementing practices like cover crops, more efficient irrigation and no-till.


Last year, when the severe widespread drought drove insurance claims to that all-time record, Wisconsin was in the top ten for indemnities at a level of $372 million with 94 percent of the losses due to "drought, heat and hot wind" according to the USDA.

Illinois had the highest level of insurance payouts at about $3 billion; Iowa had $1.9 billion in indemnities paid under the program.

Other states in the top ten based on farmers' losses and insurance payments due to the drought were Indiana, Kentucky, Missouri, South Dakota, Kansas, Nebraska and Texas.

More than 80 percent of farmland across the country experienced drought last year according to the USDA.

Congress created the FCIP in 1938 in response to the Dust Bowl devastation experienced by farmers. In the modern era, the program wasn't used much until subsidies were boosted in the 1990s.

The NRDC report explains that the Federal Crop Insurance Program is sort of a public/private partnership between the Risk Management Agency and 18 private insurance companies. Over 282 million acres of cropland are insured under the program.

According to the report there are two major problems with the current structure of the FCIP. The formula that the RMA uses to set premium rates attracts "high-risk" production methods.


The report also claims that the structure of the program "incentivizes production choices that damage natural resources and increase the risk of crop loss."

Unlike what car owners and homeowners experience when they buy insurance, the rates are "non-competitively set" by the RMA and there are "very few market signals that private insurance companies can send to farmers to make risk-reducing choices," the report finds.

Despite the well-documented benefits of growing cover crops for example, a survey done by the USDA in June 2013 found that only about 7 percent of U.S. row crop farmers planted them in 2012.

Crop insurance incentives could boost that number, the NRDC believes.

O'Connor believes that farmers should get those "good driver" reduced premiums for doing things like planting cover crops, no-till farming and for those with irrigation, using methods that adjust the amount of irrigation water applied to the needs of the crop rather than fairly arbitrary fixed times of applying water.

The way the system is now, she says, "encourages risky production methods and will become increasingly expensive to administer unless changes are made."

As other forms of government support evaporate under the heat of budget cuts, farmers are increasingly turning to the subsidized FCIP to manage the risks of farming.

But O'Connor argues that the view of risk management should be a more holistic one and it "would be good for farmers, good for taxpayers and good for the environment."

To read the report, from the NRDC, go to the website: http://www.nrdc.org/water/soil-matters/files/soil-matters-IP.pdf.

The group also unveiled its new interactive crop loss and weather map at: http://www.nrdc.org/water/your-soil- matters/default.asp.

The map details crop losses county-by-county in all 50 states for last year, because of the drought. Typing in the zip code produces information for that county.

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