Lukewarm welcome likely
for crop insurance scheme
The US government wants farmers to put more money into
crop insurance to protect them from the financial effects
of weather disasters and price-slumps. But why should they,
when they can get the same thing for free each time the
emergency aid cheque arrives, asks Alan Guebert?
WHEN the US Congress passed the untested Freedom to Farm legislation in early 1996, it noted that Freedom to Farm was only half the reform necessary to wean American farmers from government subsidies.The other half was re-inventing the Federal Crop Insurance Corporation, the governments poorly performing, money-losing agency that protects farmers from natural disasters like drought and flood. This reform effort was to be easy lifting compared to the political muscle required to pass Freedom to Farm.
It was a fools hope. Crop insurance became a Pandoras Box that, once opened, presented innumerable pitfalls. The biggest was what the "new" crop insurance had to do under Freedom to Farm: entice farmers to pay for risk management tools the government mostly had supplied for free.
Another hurdle was livestock. US meat and milk producers, facing the same market uncertainties as their grain-producing brothers, wanted government-sponsored price and production protection, too.
But Congress tried; since 1996 it has made several attempts at reform. All fell short. "We failed," explained Earl Pomeroy, North Dakotas lone congressman, "mostly because the effort has been backwards. We should have reformed crop insurance before we passed Freedom to Farm. Now its nearly impossible to do it."
Nearly, but not quite. On Mar 23, the US Senate passed the most sweeping crop insurance changes in 50 years. Boldly titled "The Risk Management for the 21st Century Act," the Senates plan closely resembles one passed by the US House of Representatives last August. If the two can be married, US farmers will have the most wide-ranging farm production insurance in the world in place by Oct 1.
Or so says Senator Pat Roberts, the co-author of the Senate insurance plan. Mr Roberts, you may recall, also was the principal author of Freedom to Farm. It made promises yet to be delivered on.
The central goal of Robertss idea is to encourage farmers to increase crop insurance coverage by subsidising costly premiums so they "buy up" protection. Congress has established an annual $1.5bn (£0.9bn) fund for four years to launch the programme. The subsidies – ranging from 45% to as high as 65% of the premiums – hope to entice more producers to buy crop insurance to make the entire programme more financially sound.
The idea has worked in the past. In 1999, a one-time programme of 30% subsidies drew 24% more farmer-paid money and 20% more insured cropland into the programme.
Similarly, the new programme will push farmers to buy not only production protection against natural disasters like drought, but it will also supply farmers with "revenue" coverage –
insurance for gross returns an acre of planted crop with or without disaster.
For example, under the Roberts plan a maize farmer will receive a 60% insurance premium subsidy to purchase 100% price protection on 50% of his potential crop. If the farmer chooses to buy 100% price protection on 85% of his crop, the subsidy slips to 55%.
The current insurance programme works just the opposite. This year, farmers can buy the 50% coverage with a 55% subsidy, but the 85% coverage offers only a 13% premium subsidy. The inverted structure – less subsidy for higher coverage -automatically limits farmer adoption of crop insurance, believes Roberts, and places more burden on Congress to bail-out farmers in periods of poor weather or weak prices.
And, of course, Congress has obliged, supplying $15bn (£9.4bn) in direct farmer bail-out money in 1998 and 1999 alone.
The Roberts plan has another enticement, a $100m (£62m) blank check to encourage livestock producers to try a "revenue" insurance programme of their own. This pilot programme will test the size of the livestock revenue insurance market as well as its costs.
Despite all the happy talk about the new insurance ideas, big problems loom. The biggest is what exactly will be the farmers out-of-pocket costs (after the subsidies) to adopt it. Crop insurance in the US is supplied by private companies who re-insure their risks through the US government. The programme has always been a money-loser for taxpayers and a money-maker for the private companies. Recent audits show the companies often make more money on the insurance than farmers collect in claims.
But Congress needs the new programme to work. The seven-year (from 1996 to 2002) Freedom to Farm idea was to cost about $42bn (£26bn). However, the programme will cost nearly $65bn (£41bn) in its first five years mostly because of huge "emergency" bailouts. Any new idea – especially one that limits costs like crop insurance subsidies to just $1.5bn (£0.9bn) – is a very welcome idea indeed.
Yet if history is any guide, the new insurance plan will find limited acceptance among farmers. Theyve lived through several insurance reform packages since 1980 and most have fallen short of widespread adoption.
Why? Because of the oldest reason in the world: Congress has always come through with cash during tough times. In fact, Congress is the best insurance policy American farmers could – and will – ever have.
If the two can be
farmers will have the most wide-ranging farm production insurance
in the world in
place by Oct 1
Yet if history is
any guide, the
new insurance plan will find limited
acceptance among farmers. Theyve lived through several
packages since 1980 and most have fallen short of wide-