By Charles Abbott
(Reuters) - With Congress on the brink of
passing the most sweeping farm spending cuts in a generation, critics are riled
the budget axe will spare billions of dollars in federal subsidies for private
companies that reap double-digit returns for insuring crops.
Two years of wrangling over the next farm
bill has cut $23 billion over the coming decades from crop subsidies,
conservation programs, food stamps and a range of rural economic development
programs.
There would be no cuts, however, in federally
subsidized crop insurance, forecast to cost the government $90 billion over the
next decade. An aggressive lobbying campaign has helped protect and expand a
profitable niche for about 15 private companies that deliver the insurance,
including Wells Fargo and Archer Daniels Midland.
For farmers and farm belt politicians, the
government-backed insurance program that protects growers from poor yields or
low prices is a reliable alternative to traditional crop subsidies, which are
being almost wholly eliminated in the farm bill nearing Senate passage.
"This is real reform," says Sen
Debbie Stabenow of Michigan, chairwoman of the Senate Agriculture Committee, in
virtually every speech about the bill. It would create an insurance-like farm
program that compensates growers for small declines in revenue. Crop insurance
would cover larger losses and expand its position as the premiere risk
management tool in agriculture.
But an increasingly vocal contingent of
critics decry the scheme for richly rewarding large financial firms, and
offering a costly, highly subsidized insurance system that enriches big farmers.
While slow to materialize, opponents are beginning to have an impact, forcing
Republicans and Democrats to ask pointed questions.
"Crop insurance has quietly morphed from
what most people would consider a safety net -- insurance against crippling losses
-- to a federally guaranteed business income for some of the most profitable
and financially secure enterprises in the nation," the Environmental
Working Group, a critic of the program, said in a report. It says insurance
companies got $7.1 billion in subsidies from 2007-11 as the program grew.
NO CUTS FOR CROP INSURANCE
The farm bill under debate in the Senate
would boost the cost of the program by 5 percent, estimates the Congressional
Budget Office, mostly by creating two new insurance plans with higher subsidy
rates than usual; 80 percent for cotton and 70 percent for grains and soybeans.
Importantly, the bill also directs the
Agriculture Department not to try to save money by revising terms of business
with the industry in the next few years. USDA used that route in 2010, under
orders from Congress, to pare $6 billion over 10 years, a move that still
rankles the industry.
Under the crop insurance program, growers
select the type of policy and level of protection they want, with premiums
rising with the amount of coverage. Revenue policies, which take yield and
price into account, are the most popular type, accounting for three-quarters of
coverage. Popularity of revenue policies drove the dramatic rise in the
government cost of crop insurance in recent years.
Revenue policies usually are written to cover
from 50-75 percent of the target for returns on a crop. Yield-only policies are
available as are bare-bones "catastrophic" policies for crop losses
that exceed 50 percent.
Under a master agreement with the industry,
USDA pays an average 60 cents of each $1 of the premium. The government sets
the rates that are charged, decides which crops will be insured in each region,
and requires insurers to sell a policy to any eligible farmer who requests it
and to retain a portion of the risk on each policy, says the American
Association of Crop Insurers, a trade group.
MONEY FOR SOMETHING
Crop insurance, little known outside farm
country, allows insurance companies to reap a long-term return of 14.5 percent
while the government pays up to $1.3 billion a year in overhead costs and
shares the burden of any catastrophic losses.
Despite a record payout in 2011 for drought,
floods and other crop damage, crop insurance companies were expected to divide
underwriting gains of $1.5 billion-$1.6 billion. The industry says underwriting
gains are part of gross income, before expenses are counted.
Critic Vince Smith, an agricultural economist
at Montana State University, says crop insurance is a poor deal for the
government. When the various payments to the industry are counted, the program
costs $1.44 for every $1 in indemnities to the grower, according to his
calculations.
"It gives tons of money to the farmer
and tons of money to the industry," said Smith.
Precisely for those reasons its popularity
has soared, especially for coverage that guarantees crop revenues, which
affords greater premium subsidies and has encouraged farmers to "buy
up" coverage. Federal spending on crop insurance has climbed nearly
five-fold in the past decade.
Last year, U.S. farmers bought up more than a
million policies covering three-quarters of U.S. cropland, for a whopping $114
billion in coverage.
"A TOOL TO SURVIVE"
The industry defends its earnings.
"That is part of the risk-sharing and
incentive part of this business," said Tom Zacharias, head of the trade
group National Crop Insurance Services, when asked about underwriting gains.
"Companies need to make a profit to stay in business."
They describe it as a partnership between
government and agriculture, one that helps farmers like Jim Koeller, who grows
corn and soybeans with his father and step-brother near New Canton, in western
Illinois.
"We look at it as more of a tool to
survive," he says. Rising labor, land and fertilizer costs coupled with
volatile grain prices has only increased the need for insurance.
"You don't make a profit because you had
insurance. You're able to survive," said Koeller.
Crop insurance leaders say their system is
efficient. Last fall, the industry paid $1 billion in a month to drought-hit
Texas cotton growers. By comparison, it can take 18 months or longer for a USDA
disaster program to issue a check.
The industry's favored place in the farm bill
grew from several roots. Insurance is a familiar concept and the industry has
an army of supporters in the form of trade groups, 18,000 agents who sell the
insurance and hundreds of thousands of farmers who buy policies. It got
additional support among farm groups this year because it would be almost the
only survivor amid the upheaval of creating a new safety net for farmers.
As well, crop insurance groups spent $730,000
on lobbying in 2011, more than any commodity group such as those representing
corn, soybean and wheat growers, according to the EWG.
PROGRAM FACES CHALLENGERS
For all its support in the early going on the
farm bill, the crop insurance industry is now facing mounting challengers.
The Obama administration proposed earlier
this year to cut $4 billion over 10 years by lowering the rate of return to
insurers and reducing the federal payment for overhead costs.
The Senate debate on the farm bill offers a
new round of opportunity for reformers, which includes proposals to cut the
premium subsidy given to wealthier large-scale operators to save $1 billion a
year. Reformers also have suggested a limit on how much money anyone can
collect on a subsidized policy and that farmers should be required to practice
land, water and wildlife stewardship in exchange for the subsidized insurance.
Senator Kirsten Gillibrand pushed for a cut
in crop insurance rather than in food stamps, a program that has many
proponents. She called for holding crop insurers to a 12 percent rate of return
and cutting the overhead costs by one-third.
"My amendment lowers the subsidies to
companies from billions of dollars a year to hundreds of millions of dollars
per year," said Gillibrand, a New York state Democrat, in the run-up to
Senate debate. She lost on a 2-to-1 vote.
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