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USDA to Cut Subsidies as Insurers Post Big Profits

posted on April 30, 2010


MINNEAPOLIS (AP) -- The federal government wants to save taxpayers billions of dollars by reducing spending on crop insurance after years of big profits by insurers, but the industry claims the reductions could hurt rural areas.

The U.S. Department of Agriculture is negotiating a new deal with crop insurance companies, which posted profits of 26.4 percent last year.

Crop insurance covers part of farmers' losses when their crops fail and helps them get credit for spring planting because lenders know they will be able to repay their loans. While participating farmers pay premiums, the government subsidizes the program to keep it affordable. Last year, it paid crop insurers $3.8 billion.

"The federal crop insurance program is an important part of the farm safety net, but costs have escalated to an unsustainable level and we need to take steps protect taxpayers," U.S. Agriculture Secretary Tom Vilsack said.

Earlier this year, the U.S. Department of Agriculture proposed cutting $8.4 billion in spending on crop insurance over 10 years. Its first revision brought that down to $6.9 billion. The agency is now preparing its third draft, which Bill Murphy, administrator of the USDA's Risk Management Agency, expects to release in early May.

A study done for the Risk Management Agency found the crop insurance industry's profit in 2009 was the second-highest in 21 years and more than double the 10.7 percent the agency considered "reasonable" for last year. Over the past 21 years, the study said, the companies averaged a 17 percent return, compared with a "reasonable" rate of 12.7 percent.

The agency also said government payments to crop insurance providers have more than doubled in the past three years while the number of policies hasn't really grown.

"If you look back since the mid-1990s, the companies have only lost money in this program one year, 2002, and it wasn't that much of a loss," Murphy said, noting a 2002 loss of 0.5 percent. "They certainly have been making far more than they've been losing."

Brian Riedl, a budget analyst at the conservative Heritage Foundation, said he doesn't like the government telling people what a reasonable profit should be, but the crop insurance system needs reform.

"I have no sympathy for those who are making a killing off the crop insurance program on the backs of the taxpayers," he said.

Farmers say crop insurance gives them crucial protection against unpredictable weather.

Dale Shelley, who grows corn, soybeans, oats, alfalfa and grass seed on about 2,700 acres about 60 miles northwest of Minneapolis, said insurance helped him through a drought and hail damage in 2008. Without it, he would have had to borrow money to buy seed and fertilizer in 2009 instead of paying cash.

"The government wants cheap food," Shelley said. "To raise cheap food, we have to have a guarantee of something to keep us afloat."

Insurers said they're not simply trying to guarantee themselves fat profits, although they acknowledge they're doing well.

Bob Parkerson, president of National Crop Insurance Services, a trade group based in Overland Park, Kan., said the companies are legally required to maintain huge reserves. That's because they have to pay out large sums when there are widespread crop failures, he said.

The industry employs some 18,000 people, mostly in rural communities, and those jobs could be at risk if the federal government cuts too deep, Parkerson said. That could mean too few employees to serve farmers well, he said, adding that writing policies and handling claims for crop insurance is much more labor intensive than for auto or home insurance.

Policies must be rewritten every year, so if there are fewer agents, they might not have as much time to drive out to farms, sit down with clients, determine their needs and provide advice, Parkerson said.

His group points to a study that concluded crop insurance is less profitable than the broad segment of the industry that includes insurance on homes, cars, businesses and individuals. The USDA's proposal would likely cut profits by up to 30 percent, which could prompt some companies to end or scale back their participation, it said.

Senate Agriculture Committee Chairwoman Blanche Lincoln and 29 other senators wrote Murphy late last month about the magnitude of the proposed cuts.

"We remain concerned about proposals that may undermine the program, reduce the quality of service and availability of the program, and harm rural America through job loss," they wrote.

Farm groups also have objected to the potential loss of several billion dollars in federal spending on agriculture. They fear any cuts now would mean less money for agriculture in the 2012 Farm Bill.

Chandler Goule, vice president of government relations for the National Farmers Union, said any savings should be put back into other risk management tools for farmers.

Despite the apparent opposition, Murphy said one-on-one discussions with companies have gone very well.

"At the end of the day, it is going to be an offer that's fair to the companies, it's fair to the government, it'll maintain accessibility of farmers and it's also fair to the taxpayer," Murphy said.


Tags: agriculture government industry insurance money news rural USDA