Crop-insurance tab for U.S. drought could top $15 billion

Reuters / U.S. taxpayers could pay a record $15 billion to subsidize the privately run crop insurance program in the wake of this year’s devastating drought.

The program’s runaway costs are in focus as Congress looks for ways to cut government spending, making crop insurance a bigger target for reforms.

Precise estimates won’t be available until late fall, when harvest is over, but the cost to taxpayers will be huge. Although crop insurance is sold by 15 private companies — the best known is Wells Fargo — Washington contributes in several ways. It not only pays roughly 62 cents of every $1 in crop insurance premiums, but also covers part of industry overhead and defrays the impact of severe losses on insurers.

Agricultural economist Vince Smith of Montana State University has done the math and come up with an estimate that taxpayers will shell out $15 billion — $7 billion in premium subsidies, $1.3 billion in overhead costs for insurers plus about $7 billion from underwriting losses.

That number will grab the attention of lawmakers when they return to Washington next month to tackle both the Farm Bill, which includes crop insurance, and broad spending cuts required to rein in the U.S. deficit.

“I think the rising cost of crop insurance will bring even more attention to crop insurance than has been paid so far,” said Craig Cox of the Environmental Working Group, which says crop insurance favours big farmers unduly and needs reform.

Highest cost

Crop insurance has become the biggest U.S. farm support as soaring prices for corn, soybeans and other commodities made the traditional price-support subsidies irrelevant. So-called revenue policies that shield growers from the effects of low prices and poor yields are the most popular version. Crop insurance blossomed into the biggest farm support because Congress seeded its growth.

Lawmakers wanted to end unpredictable and costly aid bills every time there was a farm disaster, aid that cost $45 billion between 1989 and 2001.

So a decade ago, lawmakers agreed to boost substantially the premium subsidy so farmers would buy higher levels of coverage. Policy value has tripled since then.

Weighing the popularity of crop insurance and the withering attacks on crop subsidies, the agricultural community made the cold-eyed calculation that insurance is the only sure survivor of budget austerity. The still-unfinished 2012 Farm Bill would kill an unpopular $5-billion-a-year farm subsidy and use some of the savings to expand the crop insurance program.

The easy way to reduce costs would be to cut subsidy for premiums, perhaps to 52 per cent, and also impose even larger cuts on big farmers.

Cuts are not guaranteed, however, as both major U.S. farmer and banker groups have joined the insurance industry in opposing them.

National Crop Insurance Services, an industry trade group, argues the program reduces taxpayers’ costs even in a disaster like this year by preventing calls for bailouts. The program is a financial safeguard against ruinous weather, it says.

“It’s necessary this year, especially with the drought,” said Pam Johnson of Iowa, a farmer and president of the National Corn Growers Association. “We feel like we can’t afford to be without it.”

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