WASHINGTON — In late October, Congress announced a bipartisan budget deal with proposed cuts to federally subsidized crop insurance.
The deal proposed $3 billion in cuts to the crop insurance program over a 10-year period.
The proposed cuts included provisions for the Standard Reinsurance Agreement to be renegotiated by the end of 2016 to reduce the target rate of return for crop insurance companies from its current level of 14.5 percent to 8.9 percent, explained Joshua Woodard, assistant professor of agricultural business and finance at Cornell University.
After passing the U.S. House of Representatives in a 266-167 vote, agricultural leaders responded quickly to express their concerns.
Discussion
During a colloquy on the Senate floor following House passage, Senate Majority Leader Mitch McConnell, R-Ky., expressed concerns from his home state about the proposed cuts to the program.
“We’ve got a big agricultural community in Kentucky and I’ve certainly heard from them in great numbers over the past couple of days,” said McConnell.
“These folks rely heavily on the notion that a bad crop yield year will not stop their ability to continue farming because of the certainty provided through this crop insurance program,” he said.
The Republican chairman of the Senate Agricultural Committee, Sen. Pat Roberts, R-Kan., reiterated these concerns on the Senate floor. “Should it go into effect, it would greatly damage the crop insurance program as we know it, not to mention the farmers who purchase this crop insurance.”
Agreement made
In response to these concerns by agricultural leaders, Republican House Agricultural Committee Chairman, Rep. Mike Conaway, R-Texas, was able to reach an agreement with House leaders to reverse the cuts to crop insurance in the upcoming omnibus spending bill.
“The commitment we have reached is to reverse these damaging cuts and policy changes to the crop insurance program in order to protect our producers and their primary risk-management tool,” Roberts said on the Senate floor.
Within 48 hours, a joint understanding was reached to reverse the cuts to the program and find a bipartisan alternative in the omnibus bill later this year. The Senate went on to pass the bill with a 64-35 vote.
Continuing debate
“I think that the proposed cuts in the House bill are an indication of continuing debate over the cost of the U.S. crop insurance program,” said Carl Zulauf, agricultural economist, Ohio State University.
According to the USDA’s Risk Management Agency, following the completed crop year 2014, 294.7 million acres were insured with a total liability of $110 billion. Net insurance payments to farmers (total insurance indemnity payments to farmers minus premiums paid by farmers) was $5.2 billion. The total cost of the insurance program in 2014 was $7.7 billion. This year, 297.2 million acres have been insured with a total liability of $102 billion. It is too early to get a reading on net insurance payments to farmers as well as a total insurance program cost this year, Zulauf said.
“It will be interesting to see if this debate continues into the next farm bill,” Zulauf added.
Fragile market
“If not ultimately reversed in the omnibus, the proposed cuts to the target rate of return could further discourage providers from participating in federal crop insurance,” said Woodard.
The Federal Crop Insurance Program has faced many changes over the last few years that have made it less attractive for private insurers said Woodard, and company returns have been lower in the last few years. Many large agribusiness players, such as John Deere, Monsanto and Wells Fargo, have already started to exit the crop insurance market, even before this proposal came to light, Woodard said.
“If not ultimately reversed, the proposed cuts to the target rate of return could very well trigger more companies to exit the market,” he said.
