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    April 12, 2012

    GAO Report Recommends More Crop Insurance Costs Be Shifted to Farmers

    AgFax.Com - Your Online Ag News Source

    By Chris Clayton, DTN Ag Policy Editor

    The Government Accountability Office says the federal government would save money by shifting more of the cost for crop-insurance premiums over to farmers.

    Farmers have steadfastly supported crop insurance this year as the core of the safety net, but the report released Thursday states there are savings to be had for taxpayers by cutting government support that approached $8.7 billion in 2011.

    The GAO, Congress’ investigative arm for examining government spending, stated a $40,000 cap on premium subsidies would have saved taxpayers $1 billion last year and as much as $358 million in 2010. By the same token, those taxpayer savings would have cost farmers comparable amounts, assuming they would have paid to keep the same level of insurance protection.

    The broad difference in the savings shows how commodity prices are reflected in premium costs. A $40,000 cap in premium payments would have affected 13,309 farmers in 2010, the GAO stated. But higher commodity prices pushed up premiums in 2011 to the point that 33,690 farmers would have faced a premium subsidy cap in 2011.

    The GAO report comes as the Senate Agriculture Committee pushes to draft a new farm bill with formal meetings expected to begin as early as the week of April 23. The Agriculture Committee has several proposals to reduce commodity spending by $15-$16 billion through the elimination of direct payments and likely creating a shallow-loss program that would supplement crop insurance.

    Such a shift in the safety net demands a strong crop insurance program, which has been the mantra of almost every farmer who has testified before the House and Senate Agriculture Committees over the past year. Farm groups have been willing to accept cuts to commodity programs for the sake of avoiding further cuts to crop insurance.

    Farmers who testified before senators last month, said crop insurance has been the difference between survival and financial ruin when disastrous weather strikes. Without crop insurance, “we would be having a farm sale this spring instead of preparing to plant the next crop,” Jarvis Garetson, a farmer from Haskell County, Kan., told the Senate Ag panel.

    More than one-half of farmers are buying at least 75% coverage and one-quarter of farmers are buying at 80-85% coverage levels. Liability coverage has grown from $28 billion in 1998 to $113 billion now.

    The Obama administration has been criticized for proposing $8 billion in cuts to crop insurance over the next 10 years. That plan called for a 50-50 premium split with producers and lowering the return on investment to insurers. In one of the few budget areas where they actually agree, House Budget Chairman Paul Ryan, R-Wis., also has proposed roughly the same level of cuts to crop insurance as the president.

    The GAO report also was requested by Sen. Tom Coburn, R-Okla., one of the Senate’s leading fiscal conservatives. Coburn said in a statement emailed to DTN that he expects the Senate Agriculture Committee to take the GAO recommendations seriously when drafting a farm bill in the coming weeks.

    “This report shows that Congress could cap premium subsidies at $40,000 and save taxpayers $1 billion,” Coburn said. “High premium subsidies have hurt small and beginning farmers because the subsidies themselves have distorted the market. For instance, high subsidies have artificially increased the value of land and have created other barriers to entry and expansion. I applaud GAO for providing Congress with yet another way to save taxpayer dollars and reform government.”

     

    In responding to the report, Michael Scuse, acting undersecretary for Farm and Foreign Agricultural Services, stated that in recommending a $40,000 cap, the GAO “does not fully account for all potentially negative impacts and costs resulting in such a change … The federal crop insurance program treats all producers equally, regardless of farm operation size. Small, medium and large operations pay the same premium rate for the same risks and receive the same subsidy percentage, but the total premium amount changes depending on the quantity of the commodity to be insured. This allows each producer to tailor coverage to their individual operation and within financial parameters imposed by lending institutions.”

    A $100,000 premium-subsidy cap would have affected 4,202 farmers in 2011 and saved about $232 million.

    The GAO cited a couple of instances in which a few farmers were receiving $1.6 million to $2.2 million in premium subsidies. Those farmers also generated hundreds of thousands of dollars in administrative and operating expenses.

    One consideration for limits on premium subsidies is the ripple effect. The GAO report said “Premium subsidy limits or reduced premium subsidy rates could lead to lower participation in the federal crop insurance program and higher disaster assistance payments for farmers.”

    The GAO also stated USDA’s Risk Management Agency is not taking full advantage of its data-mining capacity to root out waste, fraud and abuse. Further, poor communication and lack of follow-through with the Farm Service Agency translated into a wide disparity among states in FSA field inspections. In 2010, RMA requested 111 field inspections in Minnesota and 97 were done. In Colorado, RMA requested 47 inspections and none were completed.

    FSA officials in some states cited staff reductions as one reason some inspections were not completed.

    USDA spent $7.4 billion on subsidies for crop insurance premiums in 2011 and another $1.3 billion in administrative and operating expenses for insurance companies. The report cites the premium subsidies and expenses as financial benefits to farmers even though they are not paid directly to them.

    Overall premiums were $11.8 billion in 2011, a record level, topping $9.8 billion in premiums in 2008. The federal government pays an average of 62% of the total premium dollars.

    Administrative expenses actually peaked in 2008 at $2 billion but have come down since then because of efforts to ratchet down those costs. A&O expenses were projected to be $1.3 billion for 2011.

    In a statement, Tom Zacharias, president of National Crop Insurance Services, a lobby group for the industry, said any proposal to limit insurance protection or discourage farmer participation only shifts risk back to taxpayers and consumers and makes it more likely that farms would be unable to pick up the pieces in the aftermath of an unpredictable weather event or market collapse.

    Further, Zacharias said the plan outlined by the GAO would adversely affect many of America’s full-time farmers. “In addition, we fear it could prove particularly punishing to beginning and young farmers and other operators who are less likely to secure essential loans without adequate insurance coverage,” he said.

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