Proposed crop insurance supplement would yield windfall profits: Report

Extreme weather making government-supported crop insurance more important, expert says

March 28, 2014 | 9:39 pm

The proposed Supplemental Coverage Option, a key part of both House and Senate versions of the stalled farm bill, would yield substantial windfall profits to farmers, according to an analysis by Iowa State University economist Bruce Babcock.

“The proposal will increase taxpayer costs and potentially deliver windfall payments to growers who are already well protected – in many cases over-protected – by crop insurance,” Babcock said in an Environmental Working Group-commissioned study released Thursday.

Had it been available during last year’s drought, the supplemental insurance option would have added another $6.8 billion – on top of the $17 billion in crop insurance payouts actually made in 2012, most of which taxpayers funded, he said.

Babcock said the supplemental insurance -- intended to replace the widely discredited direct payment subsidy – would provide “shallow loss” coverage on a portion of the deductible losses on the farmer’s underlying policy.

It would be analogous, he said, to the supplemental health insurance purchased by most Medicare recipients – except for the 65 percent premium subsidy that Medicare recipients don’t receive.

Dave Miller, research director for the Iowa Farm Bureau Federation, said he objects to the use of the word “windfall.”

“Over time, crop insurance is working exactly as it is supposed to – as a broad-based risk management program,” said Miller, who spoke Thursday from his combine in Lucas County.

Last year, when Miller’s corn yielded 72 bushels per acre, was an exceptional year, he said.

Most years the premium payments cover the indemnity payments, he said.

With extreme weather becoming more prevalent and crop input costs going up, farming is as risky as it’s ever been, making government-supported crop insurance more important than ever, he said.

Babcock’s financial analysis focused on the drought year of 2012, when payouts to farmers totaled a record $17 billion.

Babcock cited as an example a typical corn farmer in Champaign County, Ill., where the average corn yield last year of 107 bushels per acre was 70 bushels below expectations.

Babcock found that the combination of revenue protection (the most popular and heavily subsidized insurance coverage) and the proposed supplemental coverage would have generated payouts ranging from $172,000 to $322,000 to farm businesses that suffered little if any revenue loss because of the drought.

“In a reasonably rational world,” he said, “one would expect that the major yield losses caused by the 2012 drought, even with large insurance payouts, would have resulted in farm revenue falling below what growers anticipated when they planted their crop.”

The crop insurance flaw that yields windfalls – its failure to account for the increased crop prices that typically accompany yield declines in weather-related catastrophes -- would also be incorporated in the supplemental option.

Babcock said the proposals before Congress could be fixed by substituting “pure revenue insurance” for the “Cadillac protection with the harvest price kicker that, in a disaster year, pays farmers more than they anticipated at planting.”

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