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GAO report restarts calls for crop insurance

April 15, 2012

GAO Report Triggers Crop Insurance Debate
by Ferd Hoefner
National Sustainable Agriculture Coalition

On Thursday, April 12, the U.S. Government Accountability Office released a report detailing ways to better target federal crop insurance subsidies. The targeting would aim to get some control on rapidly escalating taxpayer costs while also reducing the program’s impact on subsidizing the destruction of family farming and reducing new farming opportunities.

The report, “Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining“, was put together in response to inquiries by Senator Tom Coburn (R-OK) about the effect on costs of placing per farm caps on insurance subsidies and the extent to which USDA is using the tools it has to prevent fraud, waste and abuse in the program.

The report notes that nearly all other federal farm programs have payment limits and conservation requirements, but not so for what is now the largest of all the programs. According to the Congressional Budget Office, crop insurance premium subsidies and administrative expense subsidies will total about $9 billion a year over the course of the next decade, far exceeding the taxpayer costs of commodity production subsidies and conservation incentive payments.

In 2011, on average, taxpayers paid for 62 percent of farmers’ insurance premiums, with farmers covering the other 38 percent. This is nearly an exact reversal of the average percent shares in 2000, the year Congress passed major crop insurance legislation that increased the subsidy rates.

For sake of analysis of a possible option for consideration, the GAO looked at what a $40,000 annual cap per farm on taxpayer subsidies would look like in terms of its impact. They chose this particular dollar number presumably because it is the current cap that Congress has placed on direct commodity production subsidies. If such a cap had been in place in 2011, the GAO estimates, based on USDA data, a taxpayer savings of $1 billion a year at current market prices. They estimate the cap, had it been in effect in 2011, would have affected 33,690 farmers, or 3.9 percent of all participating farmers, farmers who collectively account for nearly a third of all premium subsidies.

The report also indicates that in 2011, 53 farmers nationwide benefited from insurance premium subsidies of over a half million dollars. For instance, the report identified a farm with land that spans eight counties and grows corn, beans, canola, sugar beets, potatoes, and wheat received $1.2 million in premium subsidies in 2011 and taxpayer payments to crop insurance companies to deliver that insurance were another $499,000.

Administration Reaction

USDA Under Secretary for Farm and Foreign Agricultural Services Michael Scuse wrote the Administration’s response to the GAO findings. As might be expected, they came down very hard on the GAO, arguing the case that by not having caps on the amount of subsidies any one farm can receive “treats all producers equally” and allows “each producer to tailor their coverage to their individual operation.” As USDA often argues in response to proposals to place stronger caps on commodity production subsidies, Scuse argues that caps would affect different commodities and regions of the country differently, USDA’s ability to track and control subsidy limits “would be virtually impossible,” and that even if the Department could get figure out how to track and control a cap on subsidies, mega farms would simply create more “paper” entities so they can keep collecting the same subsidies, thus increasing program complexity and reducing USDA’s ability “to maintain program integrity.”

The GAO authors respond to each of these criticisms at the back of the report, for instance challenging USDA on the assertion that a cap would be impossible to administer and also noting that the bulk of producers who would be affected by a cap will have already reorganized their farms to take advantage of loopholes in the regulations on commodity subsidy caps, and thus are unlikely to reorganize further.

In addition to the subsidy cap issue, the GAO report also contains a set of recommendations to help reduce fraud, waste, and abuse within the program. On Friday, April 13, USDA announced that the Farm Service Agency and Risk Management Agency have begun implementing some of GAO’s recommendations with respect to spot checks and data mining to prevent abuse. USDA Secretary Tom Vilsack also blogged about crop insurance.

Industry Reaction

The National Crop Insurance Services issued a press release opposing the options presented by GAO, as would be expected. Incredibly, they argue that doing anything to put per farm caps on program subsidies would “shift risk back to taxpayers and consumers.” The logic of that statement, if there is any, is that caps of any kind would result in farmers dropping crop insurance altogether, thus making it more likely they would insist on emergency disaster funding from Congress if weather extremes led to crop shortfalls. Such a view presupposes that anything less than 60-plus percent subsidized insurance premiums on every last acre and every last bushel would drive mega farms out of the program and away from insurance-based risk management. It also presupposes that if in fact they did leave the insurance program Congress would nonetheless pass a bail out bill if they suffered major crop losses or price declines because they would be too big to fail. Both suppositions strike us as very weak.

The NCIS release also expresses concern that instituting a cap on subsidies to the very largest farms “could prove particularly punishing to beginning and young farmers…who are less likely to secure essential loans without adequate insurance coverage.” The likelihood of many young beginning farmers being in the segment of farms impacted by a subsidy cap is extremely low. Young and beginning farmers face many obstacles in securing reasonable and appropriate crop insurance, issues that hopefully the new farm bill will begin to tackle. But they do not face problems from a cap on subsidies. Quite the contrary, putting reasonable limits on subsidies would have a moderating effect on mega farm expansion and thus on land prices, which over time would be of great benefit to new farmers trying to access land on which to get started.

NSAC Proposals

NSAC has proposed a variety of crop insurance proposals in our farm bill platform. On the issue of caps, we have proposed a different option than the one analyzed by the GAO. We propose that the premium subsidy rate be ratcheted down once the total value of all insured crops on a farm reached a gross dollar amount. We have suggested the phase out begin with a 50 percent reduction in the subsidy percentage at $1 million in production and phase out to no subsidy at 2 and a half times that amount. At all levels, all farms would have access to insurance. The only thing that would change would be the share of the premium paid by the taxpayer.

Other NSAC proposals relate to whole farm revenue insurance for diversified crop and crop-livestock farms and dealing with the crop insurance problems faced by beginning farmers and by farmers using organic farming methods.

NSAC also endorses the commodity program cap proposal introduced by Senators Grassley, Johnson (SD), Harkin, Nelson (NE), Gillibrand, Brown (OH), and Enzi.

  
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