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Farm Bill should reform crop insurance system

Revenue protection insurance isn’t merely crop insurance: It’s income insurance, and the government subsidy for the premiums is so high that farmers simply can’t turn it down.

A generation ago, crop farming was a very risky way to make a living.
REUTERS/Jessica Rinaldi

The following is an editorial from the Rochester Post-Bulletin.

As you drive the highways and gravel roads of southeastern Minnesota, gazing upon waterlogged fields that haven’t been planted, you might be tempted to say something along the lines of, “Oh, what a terrible year to be a farmer.”

That sympathy might be well-deserved — depending on whose farm you’re driving past. The cold, wet spring could have a serious effect on the bottom line of farmers who grow corn and soybeans to feed cattle, hogs and poultry. And some dairy farmers in our region are in an especially tight spot right now because the long winter took a heavy toll on their alfalfa.

But what about the farmers who make a living growing corn, soybeans and other cash crops? How will they fare if they don’t plant a crop this spring — or if they do, but their yields are low?

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Questions like that harken back to a generation ago, when crop farming was a very risky way to make a living. Corn and soybean varieties 30 years ago were far more susceptible to drought and insects. When the planets aligned and yields were huge, commodity prices generally plummeted.

For small farmers who had mortgages on their land, it was difficult to keep the wolves at bay after a bad year — hence the famous “Farm Aid” movement that kicked off with a concert in Champaign, Ill., in 1985, featuring Willie Nelson and John Mellencamp of “Rain on the Scarecrow” fame.

But in the past 30 years, seed hybrid technology has improved dramatically. More importantly, a variety of government-subsidized safety nets have transformed the economic landscape for farmers, especially those who raise cash crops.

So, although 2013 won’t be the banner year that many Minnesota farmers enjoyed last year, when the median income for crop farmers topped $250,000, the financial effect of the wet spring will be far from devastating. The vast majority of crop farmers protected their revenue stream for this year back in March when they signed up for crop insurance.

They’ll pay, on average, about 45 percent of the premiums for that insurance. Taxpayers will pay the rest.

Guaranteed income

Much of the talk about the Farm Bill debate has focused on proposed cuts to the Supplemental Nutrition Assistance Program, formerly known as food stamps. But there’s a growing drumbeat of support for reform in the Federal Crop Insurance Program.

It’s an incredibly complicated program involving both the government and private insurers, but it’s essentially a system in which crop farmers are given every incentive to purchase “Revenue Protection” insurance. It’s the most costly crop insurance available because it protects both ways: If a farmer’s crop is huge and prices plummet, resulting in lower profits, the policy pays off. Ditto if a farm’s yields are low but prices are high.

Revenue protection insurance isn’t merely crop insurance: It’s income insurance, and the government subsidy for the premiums is so high that farmers simply can’t turn it down. In 2012, more than 85 percent of eligible crop acres in the U.S. were covered by federally subsidized crop insurance, and more than 90 percent of those acres were covered by revenue protection, as opposed to coverage that merely protected against reduced per-acre yields.

What does this mean to taxpayers? Well, in drought-stricken 2012, farmers paid $4.1 billion in crop insurance premiums, and the government paid $6.9 billion. Farmers collected $16 billion in payouts, and although insurers absorbed some of those losses, the total cost to taxpayers last year hit a record high of $12 billion — yet nationwide, farmers’ net income last year was $114 billion, the second-highest in the past 30 years.

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Dr. Bruce Babcock, an economics professor at Iowa State University who studied the effects of the 2012 drought on crop insurance claims, found that many producers’ insurance policies helped them “to make more money from insurance payouts than they would from a healthy harvest.”

That needs to change.

Make no mistake: We don’t want to go back to the days when an ill-timed hailstorm could lead to a sheriff’s sale, with neighbors bidding on their unfortunate friend’s combine and tractors. Farmers — especially small operations — do need a safety net, and crop insurance won’t do them any good if they can’t afford the premiums. Some level of federal support is necessary to protect smaller operations and to ensure our nation’s supply of food and ethanol.

But the next Farm Bill shouldn’t use taxpayer dollars to guarantee the profits of 20,000-acre operations that sprawl across multiple counties, or even multiple states. Furthermore, we’d argue that the scales have been tilted too heavily in favor of crop farmers, leaving livestock farmers and dairy operations at far greater risk of economic disaster.

Finally, we’d be remiss if we didn’t point out that if our government is going to reduce food aid to needy families, then our leaders need to make certain that taxpayers aren’t lining the pockets of farm operations that are truly too big to fail.

Reprinted with permission.


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