How much of the risk in farming should fall on the shoulders of the farm operator as opposed to the government. Since the first farm programs, policymakers have decided that some portion of the weather related losses should be USDA responsibility or there may not be enough farmers who plant the crops that are needed. But taxpayer questions about crop insurance subsidies and frequent disaster payments have created a new atmosphere of contentiousness in the 2007 Farm Bill debate.

Part of the permanent farm program authorized in 1938 and 1949 requires federally subsidized crop insurance to be offered to producers by USDA’s Risk Management Agency. Additionally, the Farm Service Agency offers the Non-insurance Assistance Program as well as ad hoc disaster payments when there are widespread problems. To assist Members of Congress understand the players, a scorecard was created by the Congressional Research Service http://www.nationalaglawcenter.org/assets/crs/RL34207.pdf to help clarify the rules of the game.

Crop insurance programs are developed and marketed by private insurance companies, but since the USDA underwrites the risk for farmers and ensures the company can cover its expenses, there is a substantial taxpayer cost. Subsequently, all crop insurance agents have to sell all of the authorized programs and in 2006 that represented over 100 crops covering more than 75% of the US planted acres. Not surprisingly, corn, beans, wheat, and cotton make up 80% of the crop insurance business. Since 2000, crop insurance has cost taxpayers more than $2 billion, and has been as high as $3.5 billion. That includes both the indemnity payments to farmers for production or revenue losses, as well as subsidies to insurance companies for their operating expense and agent commissions.

The program has expanded over the past 25 years with the thought farmers would assume more of their own risk of production, but that has not happened. Nearly every year Congress not only underwrites the cost of the insurance but also appropriates millions of dollars for ad hoc disaster aid, whether farmers had crop insurance or not. In the past year, crop insurance was a requirement for any disaster receipts that might be issued. For those who had enrolled in such a program $1.5 billion in disaster aid was distributed. For the past 18 years over $20 billion in disaster payments have been made, but in the past 6 years disaster aid and crop insurance subsidies have averaged $4.5 billion annually. Congressional supporters of disaster assistance have called for permanent programs, instead of ad hoc programs, but opponents say that would diminish the interest in voluntary crop insurance purchases.

The advent of revenue insurance programs, which have been attractive to farmers, have greatly increased the business being done by insurance companies and the cost to the government has doubled over the past 7 years. Some traction in the current Farm Bill debate has been generated by a revenue insurance on steroids that takes part of the place of a commodity support program. With crop insurance subsidies being a target of complaints by trading partners, the new concept is being promoted as one that will escape such criticism if established within World Trade Organization parameters.

Within the current Farm Bill debate, the House has attempted to renovate the crop insurance program and save some expenses by reducing payments to companies and shifting farmer indemnity payments into the next Farm Bill. But the companies and farmers would shoulder $1 billion more in program costs, with farmers paying more for CAT insurance. The House does not include any provision for a permanent disaster aid program, one of the keystone elements in the Senate’s proposed Farm Bill currently being debated. The Senate also claims a savings of $3.5 billion in the crop insurance program, but only because of timing payments and collection of premiums. Other parts of the savings are reductions in fees paid to insurance companies and an increase in the fee charged to farmers for the CAT program.

The Senate also offers farmers a choice in participation in the average crop revenue program, which includes reduced premiums for crop insurance. Additionally, the Senate has included a permanent fund for disaster assistance. Part of any benefits would be direct payments, and a second part would cover the increased cost of crop insurance which is mandated by the program. The Congressional Research Service says, “Under the proposed program, an eligible farmer in a disaster-declared county would receive 52% of the difference between an established guaranteed level of revenue and actual total farm revenue. The target level of revenue would be based on the level of crop insurance coverage selected by the farmer, thus increasing if a farmer opts for higher levels of coverage.”

Summary:
Risk management is a significant part of agriculture, particularly with high production costs and potentially high amounts of revenue that can be at risk. The new Farm Bill will have some changes to crop insurance programs, and farmers may be asked to pick up more costs, even with the higher rates from higher commodity prices. The major debate will be whether a permanent fund will be included to distribute disaster aid, and how it will be handled for producers with and without crop insurance.