Crop Insurance; Farm Bill Issues; and Regulations
As the Farm Bill debate continues to unfold, increased attention has focused on crop insurance.
Crop insurance is a key variable in the farm safety net and the industry has provided an illuminating perspective on recent news associated with the program.? This additional outlook and assessment from the crop insurance industry is available here:
The Environmental Working Group (EWG) on Thursday released a paper criticizing crop insurance as excessive in the payments made under the program to both farmers and insurance companies. Unfortunately, the paper is based on misleading data, presents a biased, one-sided view of the nation?s crop insurance program, ignores program improvements underway and recommends a variety of changes that would sharply reduce the protection of U.S. agriculture from market risks and natural disasters.
The EWG paper uses data from 2007 to 2010 to claim crop insurance company returns are excessive.? Company returns reflect two primary variables:? (1) the indemnities paid to producers to cover insurance losses and (2) the premiums paid for insurance protection. During 2007 to 2010, the losses in agriculture were unusually low relative to history. Since the modern crop insurance program began 30 years ago, three of the four lowest loss years occurred in 2007, 2009 and 2010. It is simply unsound analytics to base expectations on future performance of an insurance program on such a very small sample of highly favorable experiences. Sound actuarial analysis of expected losses takes into account decades of data when establishing premium rates that are expected to cover future losses.
The EWG paper also fails to recognize that the government is under a mandate to operate the crop insurance program in a financially sound manner and is continually exercising flexibility to correct excesses that occur. Setting appropriate premium rates is an important factor in determining producer demand for insurance and company revenues. In 2010 and 2011, the government initiated a process to review and alter its rating methods, which will likely affect future premium rates and company revenues. Also in 2010, the government renegotiated its contract with the companies to deliver the program, and payments to companies are being reduced by an estimated $6 billion over 10 years.? The effect of these cuts on future profitability is unknown and cannot be judged by cherry picking recent past experience to claim these cuts are insignificant.
EWG argues against government support of revenue insurance by, once again, using a select sample?one year, 2008. While the use of futures prices may be improved, basing conclusions on one year ignores the fact that changes in farm level and futures prices have been correlated historically, and that it is efficient to combine yield and price protection into one insurance product. When U.S. prices decline, it is usually because yields increase, and when yields drop, that usually raises prices.? These offsetting effects can reduce farm revenue losses, an impact not captured by focusing on yields alone.
A variety of recommendations are made in the EWG paper including Federal insurance for yield losses only; 100-percent subsidized, low level insurance; partially subsidized insurance using vouchers; and elimination of Federal oversight of private crop insurance companies.? They reject any Federal protection for farmers from successive years modest losses that can be cumulatively injurious.
Policy leaders should reject the EWG recommendations. The Federal Crop Insurance Program is now the centerpiece of risk management for U.S. agriculture because it has proven its role in stabilizing U.S. agriculture. Farmers value the program, buying increasingly more protection and putting their own dollars to work. The program has grown from 84 million acres in 1993 to 262 million this year. This growth, and the protection it affords U.S. producers and consumers, is importantly attributable to the private delivery system that allows agents to work with producers to provide tailored coverage to their needs. Crop insurance is essential to making farmers credit worthy and enabling them to secure and repay loans to run their farms, modernize their businesses and remain in operation.
Separate industry analysis recently indicated that: EWG cherry picks the data to attempt to make their point.? For example, the paper uses data from 2007 to 2010 to claim crop insurance company returns are expected to be excessive.? During that time period, from 2007 to 2010, the losses in agriculture were unusually low relative to history. Since the modern crop insurance program began 30 years ago,three of the four lowest loss years occurred in 2007, 2009 and 2010.Curiously, they make no mention of 2011, a year with unusually high payments to farmers.
EWG fails to recognize that the government must operate crop insurance in a fiscally sound manner.? To accomplish this, the government is continually exercising flexibility to correct excesses that occur.? Setting appropriate premium rates is an important factor in determining producer demand for insurance and company revenues.? Recently, a review process was initiated to review and alter rating methods, which will likely affect future premium rates and company revenues.
Meanwhile, the Independent Community Bankers of America (ICBA) recently sent a letter to the leaders of the House and Senate Agriculture Committees, which stated in part that, ?The [ICBA] wishes to express our views on important issues related to writing the 2012 farm bill. Recently, ICBA?s Agriculture-Rural America Committee, consisting of approximately twenty-five bankers from across the nation and representing a large variety of agricultural commodities, met to discuss farm bill related issues and determined that the following policies should be pursued in the next farm bill.
?Crop Insurance ? ICBA appreciates that crop insurance will be the basis of the next farm bill as it enables producers to withstand weather related and price and revenue losses and repay their operating loans. In that regard, ICBA strongly supports continuation of the crop insurance program without any budget reductions. In addition, we would support a program to cover shallow losses but believe such a program should not compete with crop insurance coverage levels that producers are currently purchasing.?
Farm Bill- Supercommittee Developments
In other news, Andy Eubank indicated in an update posted last week at Hoosier Ag Today that, ?This week Ag Committee leaders were not able to deliver farm policy recommendations to the deficit reduction super committee as they had planned, but they continue their efforts. House Ag Ranking Member Collin Peterson says a lot of the bill is done with four or five of the titles already completed. That includes dairy.
?Issues that remain in the areas of rural development, conservation and nutrition are solvable, according to Peterson, but he says the commodity title is where there is a hang-up.?
An update posted on Friday at the National Sustainable Agriculture Coalition (NSAC) Blog pointed out that, ?There was much speculation this week that the leaders of the House and Senate Agriculture Committees were close to finalizing a farm bill to send to the Super Committee today; however, no agreement has yet emerged.?
The NSAC update added that, ?It remains to be seen what the agriculture committees will release this weekend, or next week.? And beyond that, the Super Committee may or may not decide to accept the agriculture committees? recommendations.? It could accept them or reject them, modify them or write new policy altogether.? Time will tell what the outcome will be, though it must tell before November 23, and, if CBO wishes are to be heeded, by sometime next week.?
Daniel Looker reported on Friday at Agriculture.com that, ?Jon Scholl, president of American Farmland Trust [AFT], told reporters Friday that his group favors streamlining the conservation title of the next farm bill, reducing the alphabet soup of programs from more than 20 to five.
?Speaking on a day when congressional ag committees were rumored to be on the verge of releasing a new farm bill for the deficit-trimming Super Committee, Scholl said that could not only save the federal government money but might also make the process of using conservation programs less confusing for producers.?
(A related AFT news update from Friday is available here).
Recall last week that Rep. Tim Huelskamp (R-Kansas) had indicated that he will introduce legislation to add a Regulatory Title to the Farm Bill called ?The Freeing Agriculture to Reap More (FARM) Act.?
Rep. Huelskamp was interviewed recently on KRVN 880 Rural Radio and discussed this proposal in more detail; to listen to the KRVN interview, just click here.
Philip Brasher reported yesterday at the Des Moines Register Online that, ?Boom times in farming come and go, something growers know from either personal experience or their parents? experience, so they fear today?s roaring agricultural economy is bound to falter.
?That concern, coupled with farmers? usual worries about the weather, is helping drive the farm lobby?s effort to get Congress to create a new subsidy program that would guarantee a minimum return on grain, soybeans and other crops should prices fall significantly.?
The Register article stated that, ?Bob Bowman, a producer near De Witt in eastern Iowa, started farming in 1974 in the middle of another farm economy boom. It ended with a thud in the 1980s when collapsing crop prices and soaring interest rates forced many highly leveraged farmers out of business.?
?The farm economy crashed again in the late 1990s. The average price farmers made on corn plunged from $3.24 per bushel in 1995 to $1.82 by 1999,? the article said.
The article pointed out that, ??Do we expect $2.50 corn again? No, I don?t,? [Chad Hart, an economist at Iowa State University] said. ?Can we touch it on rare occasions? Sure, I would say on increasingly rare occasions.? He thinks corn prices are more likely to settle closer to $4 a bushel.
?Still, it?s not $2.50 corn that farmers worry about. At $3 or more they would also take a hit. Production costs have risen sharply along with prices of commodities. Seed and fertilizer prices are up significantly, and the cost of buying or renting land has doubled or more.
?Average land values in Iowa jumped from less than $1,900 an acre in 2000 to more than $5,000 in 2010, according to Iowa State University. Land values in Alverson?s [South Dakota farmer Keith Alverson] area have jumped from $1,000 an acre a decade ago to as much as $5,000 or $6,000 recently, he said.?
The article added that, ?The seed, fertilizer and chemicals needed to grow corn now cost about $300 an acre, according to University of Missouri economists. The cost of renting land adds $300 to $400 or more per acre. A bumper crop of 200 bushels an acre would gross a farmer $800 per acre, should corn drop to $4 a bushel.?
In opinion regarding the next Farm Bill, Adam Monroe, the President of Novozymes North America, indicated in update posted last week at The Hill?s Congress Blog that, ?Right now, biofuels are being made from crops grown by our farmers. They are being made in American cities and rural communities, reinvigorating our local economies, and by American workers, offering them good-paying, stable jobs in a growing industry.?
The Op-Ed stated that, ?We are thankful the REFRESH Act?s energy title includes baseline funding. The problem is that the current farm bill does not, putting in jeopardy programs that our farmers and economy depend on, including the Rural Energy for America Program, Biomass Crop Assistance Program, Biorefinery Assistance Program and Biobased Markets Program. That?s why it?s critical the next farm bill include mandatory funding for energy programs.
?These programs are economic engines, creating jobs and increasing efficiency at farms, ranches and businesses.?
In executive branch perspective on the Farm Bill, Steve Tarter reported late last week at the Peoria Journal Star Online (Illinois) that, ?In an interview Thursday with the Journal Star editorial board, [Sec. of Agriculture Tom Vilsack] said that congressional ag committees had informed the Committee of 12, the group of legislators faced with the responsibility of reducing the federal budget, of a willingness to reduce expenditures to farmers by $23 billion.
?Whether that amount is upheld or increased remains to be seen, said Vilsack, who was keynote speaker Thursday at a symposium on agriculture at Bradley University.?
The article added that, ??There will be a redesign of the safety net for farmers. You can expect changes in the direct payment system (to producers),? Vilsack said.
?It?s important that a strong safety net remain in place to protect the people who raise our food and fiber while maintaining conservation programs that have proved so effective in recent years, he said.
?The secretary said another round of budget cuts at the Department of Agriculture could see that department?s workforce of 120,000 reduced by as many as 10,000 people next year.?
In more specific developments on supercommittee activity, Manu Raju and Jake Sherman reported on Friday at Politico that, ?Top negotiators on the congressional supercommittee on Friday tried to defuse growing skepticism that the panel can reach a deficit-reduction deal, as secretive talks continued in a bid to break a partisan impasse over taxes.
?With a Thanksgiving deadline rapidly approaching and no deal in sight, Rep. Jeb Hensarling (R-Texas) and Sen. Patty Murray (D-Wash.) met Friday morning ? and tried to show that they were still trying to make a deal in order to avoid $1.2 trillion in automatic cuts.
??We continue to negotiate,? Hensarling said, standing alongside Speaker John Boehner (R-Ohio).?
The article noted that, ?The leadership on both sides has significantly stepped up its involvement. Senate Minority Leader Mitch McConnell (R-Ky.) and Boehner met Friday morning with the three Senate Republicans on the committee ? Rob Portman of Ohio, Pat Toomey of Pennsylvania and Jon Kyl of Arizona ? along with Hensarling, Rep. Dave Camp (R-Mich.) and Fred Upton (R-Mich.), who also serve on the committee. They were with top policy advisers to Boehner.?
Alexander Bolton reported on Friday at The Hill Online that, ?Senate Minority Leader Mitch McConnell (R-Ky.) has made an about-face in recent days and now favors a huge deficit-reduction deal, according to Senate GOP sources.
?McConnell?s shift is significant because it could push the supercommittee to pursue an agreement that would slash trillions of dollars from the nation?s record debt levels. Such a deal could derail President Obama?s reelection strategy of criticizing what some have called a do-nothing Congress.?
James Politi reported on Friday at The Financial Times Online that, ?US lawmakers and budget analysts are starting to contemplate the possible failure of a special congressional committee to reach a deal to cut America?s budget deficits?Republican aides say Democrats are not proposing sufficiently audacious cuts to popular government programmes, and Democratic staffers say Republicans are still holding out against any net tax increases. No compromise is in sight.?
The FT article pointed out that, ?This week, John McCain and Lindsey Graham, the two Republican senators, said that if the panel failed to meet its mandate, they would seek to roll back the Pentagon cuts.?
Meanwhile, Mike Lillis reported yesterday at The Hill Online (video clip included) that, ?Rep. Mike Simpson said Sunday that new revenues are central to Congress?s efforts to reduce the deficit, but the Idaho Republican drew a line in the sand in his opposition to tax hikes.
??The reality is you can?t get to $4 trillion without including additional revenues,? Simpson told Fox News Sunday. ?We might have different ideas what those revenues would look like. I think you could get additional revenues by actually lowering the tax rates and eliminating all of the exemptions underneath. ? More revenue is key to this.??
The Hill update stated that, ?From across the aisle, Rep. Heath Shuler (D-N.C.) on Sunday was more willing to go after his party?s sacred cows, saying benefit cuts to entitlement programs like Medicare and Social Security are vital if the country hopes to rein in deficit spending.?
Yesterday?s article explained that, ?Simpson and Shuler spearheaded a letter last week calling on the supercommittee to keep everything on the table, including ?revenue.?
??To succeed all options for mandatory and discretionary spending and revenue must be on the table,? reads the letter, which has been endorsed by 103 House members.?
And Abby Livingston reported yesterday at Roll Call Online that, ?Speaker John Boehner doubled down today on the need for the Joint Committee on Deficit Reduction to come to a deal, saying he?ll do everything he can to help its members ?reach a successful outcome.?
??It has to work, and I am committed to ensuring that it works,? the Ohio Republican said on ABC?s ?This Week.??
Friday?s Commodity News for Tomorrow Email update (CME Group, Dow Jones) stated that, ?The U.S. Agriculture Department, bowing to opposition by the meat industry, is dropping some of the most controversial changes it had proposed more than a year ago to its livestock antitrust regulations.
?According to people familiar with the matter, the wording of the final rule that the department sent Thursday to the Office of Management and Budget for review doesn?t include provisions that meatpacking officials complained would have made it too easy for farmers to sue meatpackers, and a provision that they claimed would have made it harder for meatpackers to give incentives to certain high-performing farmers.
?While these provisions are still being considered by the USDA, and might resurface at a later date, they won?t be in the final rule that the department hopes to have published in the Federal Register this year.?
Chris Clayton, in an update posted yesterday at the DTN Ag Policy Blog, documented a variety of reactions to this news development.
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