farmgate: Crop Insurance and CRP. Distant Cousins That Have An Intriguing Relationship.
Although land retirement programs have long been an instrument of US farm policy, most involved supply management to ensure sufficient grain existed, but not too much to drown the market. The 1985 Farm Bill brought the advent of the Conservation Reserve Program (CRP) which allowed up to 35 million acres to be converted to grass or trees, in return for USDA rental payments. The CRP contracts soon included an Environmental Benefits Index (EBI) to prioritize land that had the most vulnerability to wind or water erosion, for owners wanting to park land in the CRP. But while the environmental benefits were all ranked for importance, one factor was left out of the formula, and that is how much savings to the taxpayer there would be if that land no longer required subsidized crop insurance. Now, there’s a twist!
Just think for a moment. The land that is most environmentally vulnerable and which should qualify for inclusion in the CRP, is probably the land that is most likely to have crop failures and require heavy subsidization of crop insurance. That is the contention of Iowa State University ag economist David Hennessy. He wants you to consider how land retirement programs integrate with crop insurance, since the CRP will pay out $5 billion per year through 2017 and crop insurance subsidies have cost $11 billion from 2000 to 2007. He says the EBI includes many factors which push up the amount of CRP rent a producer could collect. But he says omitted from the formula is a reduction in crop insurance subsidies “that would occur were the land to be removed from production.”
Hennessy points to the concentration of CRP acres in the southern Cornbelt, eastern Dakotas, Montana, the Great Plains, and parts of the Palouse, and he says CRP enrollment costs are low while environmental benefits may be high. Those erosion prone regions are more vulnerable to nutrient losses and water pollution, and Hennessy says the factors that make them more likely for CRP enrollment also make them more likely for owners to regularly collect indemnity payments from crop insurance due to crop failures. The Iowa State economist says farmers in most of those geographical areas receive twice as much in crop insurance indemnity payments as they pay into the system in premiums, while in states such as Iowa, Illinois, and Indiana the reverse is true.
There are two concerns Hennessy has about omitting crop insurance subsidies from the financial formula for tallying CRP rental rates. He says federal tax dollars spent or saved have equal weight in the budget deficit calculation, and if the CRP rent formula included savings on crop insurance subsidies there would be better choices made for enrolling highly erodible land into the CRP. Hennessy seems to suggest—using economic terminology—that a change in USDA practice would be unpopular and could create some political issues. He says USDA has long histories of crop performance down to the farm and field level, used for rate setting for crop insurance, and is even planning to include carbon sequestration in the EBI, although that data is more foggy.
Hennessy raises the issue of restricting application of nitrogen and pesticides on such land, which may make yields more variable, and therefore more prone to receiving crop insurance subsidies. He observes, “On balance, we conclude that restrictions on the use of inputs that are protective in function would likely increase the cost of an insurance subsidy policy. It may be that, rather than restrict input use when producing on land that is marginal as cropland, is environmentally sensitive, and has high yield variability given output level, it would be better to remove the land from production entirely.” He adds that the reason CRP contract formulas do not intersect with crop insurance is political in nature, and being administered in different parts of USDA, they would have priorities that do not correlate well with each other over time.
Summary:
Highly erodible land scores high on environmental scales when it comes to enrollment in the Conservation Reserve, but such land is also highly variable in its productivity and subsequently becomes more costly for crop insurance subsidization. However, the formulas used by USDA to determine CRP rental agreements do not consider such savings, possibly for political reasons.
Posted by Stu Ellis on August 6, 2009 12:48 AM to farmgate