The “extended” 2008 Farm Bill expires in less than eight months, and little has been accomplished in Congress other than for the House and Senate Agriculture Committees to announce their new members. The House Agriculture Committee at one time had a meeting scheduled at the end of this month, but has since cancelled. One of the reasons is the fact that March 1 is when across-the-board 8.2% budget cuts will occur, termed in Washington as the “sequester.” It is part of a $1.2 trillion budget cut over 10 years, and the USDA share of that is nearly $5 billion/year, with half of that to come out of USDA spending before of the end of the federal fiscal year. So far there is no word from USDA or the White House Office of Management and Budget where the cuts would come, but the most expensive single farm program is crop insurance, which undoubtedly would be pared.
As Congress prepares a farm bill over the next eight months, and addresses the mandatory budget cuts, what parts of crop insurance could be cut? While cuts may not be popular with farmers, there are ways to reduce the expense of the program, say three ag economists who have studied the methods. Art Barnaby of Kansas State, Carl Zulauf of Ohio State and Gary Schnitkey of Illinois are widely recognized for their work on risk management and farm programs. Their analysis (pdf) is not designed to be suggestions to Congress about where cuts could be made, but an alert to farmers of where cuts are possible in the federal government’s effort to reduce spending.
The economists warn that the crop insurance program could suffer serious harm, depending on the cuts, “Each alternative may impact the actuarial soundness of crop insurance, the possibility that ad hoc disaster assistance is provided and different crops and areas of the country differentially. It is important to assess these impacts so that a better informed decision is made.”
Only subsidize crop insurance policies that insure against yield loss. Since farmers have the potential for price protection from the futures and options market, as well as cash contracts, should the government also be in the business of providing revenue protection? They cited a study that indicates half the cost of crop insurance could be saved with only yield policies.
Reduce the amount of government subsidy of the premium, making farmers pay a larger share of the premium costs. The farmer share of premiums was in the low 70% range until 1995, when it dropped under 45%. Farmers pay about 40% of the cost of the premium and have since 2001. Related to that is whether Catastrophic (CAT) insurance should be free, since farmers only pay an administrative fee and not a premium.
Instead of yield insurance, offer only revenue insurance, which would base payments on whether the revenue at harvest is less than expected revenue, minus the deductible. The economists say it would be similar to Revenue Protection, but there would be no harvest price option and would save the government 25-40% of the cost of the program. One downside for farmers is the reduced ability to forward contract.
The cost of the harvest price option could be reduced by cutting the rate at which HPO is subsidized. That could be done with a limit on the expected yield for livestock producers or at an unsubsidized premium for other producers.
The cost of the program could also be reduced if the subsidy rate varied with the size of the farm, which parallels the philosophical debate over payment limits. A reduced subsidy for large farms may cause them to self-insure, taking them out of the insurance risk pool, and causing an imbalance in the crop insurance program, and raise the premiums for all farms.
Costs could be reduced with certain program changes that might include reduced payments for prevented planting acres or changing provisions regarding T-yield. While that will not affect farmers in general, it will have an impact on farms that frequently have planting issues.
Crop insurance costs could also be reduced with the elimination of optional units, transferring more risk to the entire farm, and not just a field. Production variability is much higher in a given field than across the entire farm, and optional units create higher risk and generate more indemnity payment potential.
Improvement in the underwriting and adjusting rates has made significant changes in the past two years for the crop insurance program, and a continued effort to improve its efficiency would reduce the cost of the program. It would cause some farms to pay higher premiums because they would be in a risk pool that had more frequent claims.
If conservation compliance were linked to crop insurance, the economists say some farmers would not qualify for insurance and would not be eligible for the subsidized premium rate.
Summary
Fiscal conditions in Washington and the effort to cut spending may be forcing reductions in farm programs, particularly crop insurance. Such cuts could either come as the Congress considers renewal of the farm bill by Sept. 30 or they could come automatically March 1 as a budget-cutting deadline looms. There are a number of places that the crop insurance program could be cut, but some could imbalance the financial stability of the insurance risk pool.
