Analysis: Budget ax may spare costly crop insurance

WASHINGTON (Reuters) - With Congress on the brink of passing the most sweeping farm spending cuts in a generation, critics are riled the budget axe will spare billions of dollars in federal subsidies for private companies that reap double-digit returns for insuring crops.

Two years of wrangling over the next farm bill has cut $23 billion over the coming decades from crop subsidies, conservation programs, food stamps and a range of rural economic development programs.

There would be no cuts, however, in federally subsidized crop insurance, forecast to cost the government $90 billion over the next decade. An aggressive lobbying campaign has helped protect and expand a profitable niche for about 15 private companies that deliver the insurance, including Wells Fargo and Archer Daniels Midland.

For farmers and farm belt politicians, the government-backed insurance program that protects growers from poor yields or low prices is a reliable alternative to traditional crop subsidies, which are being almost wholly eliminated in the farm bill nearing Senate passage.

"This is real reform," says Sen Debbie Stabenow of Michigan, chairwoman of the Senate Agriculture Committee, in virtually every speech about the bill. It would create an insurance-like farm program that compensates growers for small declines in revenue. Crop insurance would cover larger losses and expand its position as the premiere risk management tool in agriculture.

But an increasingly vocal contingent of critics decry the scheme for richly rewarding large financial firms, and offering a costly, highly subsidized insurance system that enriches big farmers. While slow to materialize, opponents are beginning to have an impact, forcing Republicans and Democrats to ask pointed questions.

"Crop insurance has quietly morphed from what most people would consider a safety net -- insurance against crippling losses -- to a federally guaranteed business income for some of the most profitable and financially secure enterprises in the nation," the Environmental Working Group, a critic of the program, said in a report. It says insurance companies got $7.1 billion in subsidies from 2007-11 as the program grew.

NO CUTS FOR CROP INSURANCE

The farm bill under debate in the Senate would boost the cost of the program by 5 percent, estimates the Congressional Budget Office, mostly by creating two new insurance plans with higher subsidy rates than usual; 80 percent for cotton and 70 percent for grains and soybeans.

Importantly, the bill also directs the Agriculture Department not to try to save money by revising terms of business with the industry in the next few years. USDA used that route in 2010, under orders from Congress, to pare $6 billion over 10 years, a move that still rankles the industry.

Under the crop insurance program, growers select the type of policy and level of protection they want, with premiums rising with the amount of coverage. Revenue policies, which take yield and price into account, are the most popular type, accounting for three-quarters of coverage. Popularity of revenue policies drove the dramatic rise in the government cost of crop insurance in recent years.

Revenue policies usually are written to cover from 50-75 percent of the target for returns on a crop. Yield-only policies are available as are bare-bones "catastrophic" policies for crop losses that exceed 50 percent.

Under a master agreement with the industry, USDA pays an average 60 cents of each $1 of the premium. The government sets the rates that are charged, decides which crops will be insured in each region, and requires insurers to sell a policy to any eligible farmer who requests it and to retain a portion of the risk on each policy, says the American Association of Crop Insurers, a trade group.

MONEY FOR SOMETHING

Crop insurance, little known outside farm country, allows insurance companies to reap a long-term return of 14.5 percent while the government pays up to $1.3 billion a year in overhead costs and shares the burden of any catastrophic losses.

Despite a record payout in 2011 for drought, floods and other crop damage, crop insurance companies were expected to divide underwriting gains of $1.5 billion-$1.6 billion. The industry says underwriting gains are part of gross income, before expenses are counted.

Critic Vince Smith, an agricultural economist at Montana State University, says crop insurance is a poor deal for the government. When the various payments to the industry are counted, the program costs $1.44 for every $1 in indemnities to the grower, according to his calculations.

"It gives tons of money to the farmer and tons of money to the industry," said Smith.

Precisely for those reasons its popularity has soared, especially for coverage that guarantees crop revenues, which affords greater premium subsidies and has encouraged farmers to "buy up" coverage. Federal spending on crop insurance has climbed nearly five-fold in the past decade.

Last year, U.S. farmers bought up more than a million policies covering three-quarters of U.S. cropland, for a whopping $114 billion in coverage.

"A TOOL TO SURVIVE"

The industry defends its earnings.

"That is part of the risk-sharing and incentive part of this business," said Tom Zacharias, head of the trade group National Crop Insurance Services, when asked about underwriting gains. "Companies need to make a profit to stay in business."

They describe it as a partnership between government and agriculture, one that helps farmers like Jim Koeller, who grows corn and soybeans with his father and step-brother near New Canton, in western Illinois.

"We look at it as more of a tool to survive," he says. Rising labor, land and fertilizer costs coupled with volatile grain prices has only increased the need for insurance.

"You don't make a profit because you had insurance. You're able to survive," said Koeller.

Crop insurance leaders say their system is efficient. Last fall, the industry paid $1 billion in a month to drought-hit Texas cotton growers. By comparison, it can take 18 months or longer for a USDA disaster program to issue a check.

The industry's favored place in the farm bill grew from several roots. Insurance is a familiar concept and the industry has an army of supporters in the form of trade groups, 18,000 agents who sell the insurance and hundreds of thousands of farmers who buy policies. It got additional support among farm groups this year because it would be almost the only survivor amid the upheaval of creating a new safety net for farmers.

As well, crop insurance groups spent $730,000 on lobbying in 2011, more than any commodity group such as those representing corn, soybean and wheat growers, according to the EWG.

PROGRAM FACES CHALLENGERS

For all its support in the early going on the farm bill, the crop insurance industry is now facing mounting challengers.

The Obama administration proposed earlier this year to cut $4 billion over 10 years by lowering the rate of return to insurers and reducing the federal payment for overhead costs.

The Senate debate on the farm bill offers a new round of opportunity for reformers, which includes proposals to cut the premium subsidy given to wealthier large-scale operators to save $1 billion a year. Reformers also have suggested a limit on how much money anyone can collect on a subsidized policy and that farmers should be required to practice land, water and wildlife stewardship in exchange for the subsidized insurance.

Senator Kirsten Gillibrand pushed for a cut in crop insurance rather than in food stamps, a program that has many proponents. She called for holding crop insurers to a 12 percent rate of return and cutting the overhead costs by one-third.

"My amendment lowers the subsidies to companies from billions of dollars a year to hundreds of millions of dollars per year," said Gillibrand, a New York state Democrat, in the run-up to Senate debate. She lost on a 2-to-1 vote.

(Editing by Russell Blinch, Bob Burgdorfer and David Gregorio)

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