Agribusiness Plants Seeds for Even Bigger Crop Insurance Boondoggle

Published November 7, 2011

Major agricultural interests are pushing for a new form of subsidized crop insurance to be implemented on top of the existing Federal Crop Insurance Corporation. Subsidies to the FCIC already cost taxpayers $8 billion annually.

Politico reported Nov. 3 on the lobbying efforts and budget wrangling that could result in some of the $5 billion currently spent annually by the U.S. Department of Agriculture on direct cash payments to agricultural producers being replaced by a new “shallow loss” insurance program. The program would supplement the 75 percent coverage farmers already buy from FCIC-backed insurers with free coverage that would cover up to 90 percent of area-wide average losses.

Cuts to the long-discredited direct payment system are believed to account for the bulk of the reported $23 billion in 10-year budget cuts the House and Senate agriculture committees have targeted for the next long-term Farm Bill.

No Support from Either Side

That new crop insurance subsidies could be contemplated are evidence of the White House’s political failure to earn support on either side of the aisle for its proposal to cut the FCIC further.

As part of its budget proposal, the Office of Management and Budget has proposed shrinking the FCIC’s overhead costs (which include insurance agent commissions) by 25 percent and reducing returns for insurers down to 12 percent, approximately 10 percentage points lower than the industry’s returns from the program over the past decade. (Insurers participate in the crop program through reinsurance agreements with the USDA’s Risk Management Agency.)

“Where is the Tea Party when you need them?” grumbled an administration official to Politico.

Growing Crop Insurance Portfolios

Those healthy returns, amid a prolonged soft pricing market in both insurance and reinsurance in recent years, have prompted some international insurers to double down on their crop insurance portfolio. Australian insurer QBE Insurance Group announced in April 2010 it would acquire crop insurer NAU Country Insurance Co. in a $565 million deal (later raised $605 million) and announced in November 2010 it was acquiring the U.S. operations of RenaissanceRe, including its primary crop insurance business, in a $275 million deal.

ACE Ltd., which already was one of the largest crop insurers, grew more when it announced in September 2010 it would buy out the 80 percent of Rain and Hail Insurance Service Inc. that it did not already own for $1.1 billion. ACE also is set to buy the parent of agribusiness insurer Penn Millers Insurance Co. in a $107 million deal announced in September 2011.

Big Government Subsidies

That these deals came after earlier rounds of cuts from the FCIC shows that the crop insurance business remains attractive to big players, which also includes banking conglomerate Wells Fargo.

And why not? Despite a 2010 agreement between the RMA and crop insurers that cut $6 billion over 10 years, or a roughly 7.5 percent cut from a program now projected to cost $74 billion, the federal government still subsidizes 60 percent of crop insurance premiums, in addition to paying $1.3 billion annually to the industry to compensate for overhead. Politico notes:

The cost per acre—in constant dollars—has almost tripled in the past 10 years, and an internal analysis by the Obama administration suggests that even after recent reforms, companies are well positioned to earn returns in excess of 20 percent.

Yields Rather Than Revenues

A new paper from economist Bruce Babcock of Iowa State University, completed on behalf of the Environmental Working Group, proposes $80 billion in savings over the next decade, partly by scrapping the existing crop program and moving to one that guarantees a farmer’s yields instead of his revenues. Under the current revenue insurance model, more than 80 percent of crop insurance policies cover business income even if there is no yield loss due to weather, the paper notes.

The bulk of the cuts the EWG proposes, some $57 billion, would come from eliminating “direct payments, counter-cyclical payments, loan deficiency payments, ACRE (Average Crop Revenue Election) and SURE (Supplemental Revenue Assistance Payments.)”

The paper also argues the government would save $26 billion in premium subsidies by replacing revenue insurance with policies (available for free to producers, but only if they meet basic conservation standards) that cover yield losses of more than 30 percent. Insurers could bid to serve these yield insurance policies and would otherwise be encouraged to develop truly private market solutions to fill in the gaps in coverage without any government subsidies.

Politico pulled no punches in its assessment of what the agriculture industry is doing:

“The effort to reshape the nation’s food and farm policies is at a critical point. If Big Agriculture and its lobbyists succeed in exploiting the Super Committee process for their own selfish interests, it will stymie the prospects for true reform for years to come. Americans who believe in healthy food, in protecting public health and the environment, in ensuring proper nutrition for children and the less fortunate, must speak up now. We must call on our representatives in Congress to stand firm against this cynical attempt to turn deficit reduction into a guarantee of prosperity for large-scale agricultural interests.”