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Lies, Damn Lies and Crop Insurance

Lies, Damn Lies and Crop Insurance

We all know when subsidies are limitless, people’s decisions about what they need are more generous.

The fact that outlandish misinformation flies around Capitol Hill as various groups fight to keep their subsidies is nothing new. But sometimes, the misinformation is so misleading and shocking that it’s important to stop and take note.

The prize for deception today goes to House Agriculture Committee Chairman Frank Lucas, R-Okla., who Thursday found himself desperately fighting to keep the massive subsidy scheme known as federal crop insurance in place in the doomed Farm Bill, despite a rising tide of opposition among members of his own party.

A bipartisan amendment offered by Reps. Ron Kind, D-Wis., and Tom Petri, R-Wis., took strong steps toward placing a reasonable scope on the program, which has consistently come in above cost projections by encouraging farmers to over-insure. Provisions in the amendment include a means-test of $250,000, a payment limit of $50,000, a reduction in subsidies to the insurance industry and transparency of premium support recipients.

Each of these provisions is essential to make the program sustainable over the long term, but to hear Chairman Lucas tell it, the amendment would single-handedly destroy agriculture in America. In a letter sent out to congressmen today, the chairman alleges the following:

The amendment is backed by groups whose goal is to cut $100 billion out of the Farm Bill’s safety net and crop insurance which would zero out the safety net and gut crop insurance. Some of the same groups say it is their goal to eliminate all federal support for crop insurance. Don’t let this crowd fool you: this amendment will mean no insurance for farmers, period.  For a lot of farmers and ranchers, this amendment will also mean no loans from their banker. This amendment means we will go back to the days of a failed, government-run crop insurance program or costly, unbudgeted ad hoc disaster bills.  Washington will always respond to a disaster.

First, as one of the groups trying to place reasonable restrictions on this ballooning government program, I can assure you no one we’re working with is advocating the total elimination of federal support for crop insurance in this year’s bill. Everyone understands that crop insurance is a tricky industry, far harder to navigate than other insurance for the simple reason that when failure occurs, it’s likely to be on a massive scale. Droughts don’t just affect one farm or one state, or often even one region. If Congress wants to avoid supplemental payments after each disaster (which is the sense most members express) subsidizing crop insurance purchases to encourage industry participation would be one way to do it.

The problem is that there’s never enough subsidy for Agriculture Committee members. Let’s walk through why this amendment, in the end, won’t “mean no insurance for farmers, period.”

Rep. Frank Lucas (R-OK) (AP Photo)

We’ll start with the means-test at $250,000. Lucas’s letter alleges:

The AGI test is not credible. It is 66 percent lower than the AGI test proposed by Sen. Coburn, R-Okla., and included in the Senate bill.  This will throw many farmers out of crop insurance and raise premiums on the rest.  Even the Senate bothered to include a safeguard.  A $250,000 AGI in one year may look really good until you realize it has to cover the next three years due to drought.

Leaving aside the fact that this Republican House member is defending something that was intentionally set high to pass a Democratic Senate, the argument is wrong on its merits. The change affects less than 4% of farmers nationwide, and these farmers have an average adjusted gross income of over $944,000. Now that crop insurance is a thriving industry with hundreds of thousands of participants, does it still make sense to provide 62% of the premium payments for farms making close to a $1 million in adjusted gross income? Removing premium support from these farmers in no way bars them from purchasing insurance, and after the 2012 drought, everyone understands how important crop insurance is.

This 4% of farms is about 46,000 across America. To imagine these farmers banding together and refusing to buy insurance in hopes that Congress will pass a disaster supplemental payment for them after a bad year is ludicrous. If there’s one thing we all know from Econ 101, it’s that prisoner’s dilemmas are bad for collusion, and laughable with 46,000 participants. Agriculture economist Bruce Babcock from Iowa State University examined what effect insurance premium restrictions would have on large farms, and found that the effects on program participation would be minimal.

But if some of these large farms did drop out, what would happen? This is a good time to discuss the payment limit. Around 80% of farms nationwide receive only $5,000 in benefits annually. However, the top 1% of farms receive $220,000 annually, and without a limit, there are even 26 farms in 2011 that received over $1 million. Setting a payment limit at $50,000 wouldn’t affect anywhere near the majority of farms, but would make the subsidy scheme more equitable and provide a much-needed scope for the program.

Farmers receiving more than $50,000 are the farms that can and should shoulder more of their own insurance burden. Lucas’s letter alleges that farmers can only insure a portion of their crops with this money, but one has to ask, what is the purpose of a safety net? Should the taxpayer be in the business of providing all the farmer’s insurance needs? Lucas goes on to allege that this will knock farmers out of the program, but once again, the farmers affected are farmers who can and should pay more of their own way. Certainly someone drawing in over $1 million in premium support can afford to insure a larger portion of their crops without taxpayer support.

The real effect of a payment limit would be that farmers would think more carefully about the types of policies they choose to buy. Currently, the unlimited nature of crop insurance support encourages farmers to buy more generous insurance policies than they would buy otherwise. In the end this is a problem, as these “Cadillac” insurance policies are incredibly costly for taxpayers, who share the burden of crop failure with the insurance companies. Encouraging a small portion of farmers to think more carefully about the type of insurance they actually need is what government programs should be doing. It’s the same logic used for block-granting Medicaid or limiting any other program. We all know when subsidies are limitless, people’s decisions about what they need are more generous.

Finally, there’s the reduction in industry payments. Lucas points out that in 2012, “every one of these companies reported losses,” and cutting their payments would harm them further. What he doesn’t mention is that these companies are guaranteed a 14 percent profit through the Standard Reinsurance Agreement. This amendment would wind that down to 12 percent. Heaven forbid these global insurance companies only receive a 12% profit guarantee. Yes, companies lost money last year – 2012 was one of the worst droughts in history. But almost every other year, they’ve made money while the taxpayers have lost more than expected.

The other industry cut is a reduction from $1.3 billion in administrative and operations subsidies to $900 million. Yes, this would affect insurance agents. But again the effect is positive. Currently, the more and better policies agents sell, the more money they can get back from the government, up to $1.3 billion. The effect has been to encourage agents to sell too much insurance that is too generous in it’s terms. Winding down that subsidy to $900 million would make agents a bit more judicious, once again protecting taxpayer dollars when losses occur.

None of this is to demean the chairman’s good intentions. Protecting your constituents is what Congress is traditionally about. But it’s short-sighted. The generous benefits of crop insurance are unsustainable, just like the benefits of the National Flood Insurance Program, which underwent reform last year. The sooner the program is reformed, the less drastic the changes will need to be. And with direct payments winding down and thousands of farmers being moved into crop insurance, providing them with a stable program now is incredibly important. Otherwise in five or ten years, when the need for reform is no longer ignorable, we’ll be pulling the rug out from underneath even more participants.

But perhaps the chairman won’t be in office then, and so it might not be his concern. Then again, he’s relatively young with many years left to potentially serve. It’s unfortunate that the short-term is Washington’s long game.


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