Top Priority for the 2018 Farm Bill: Protect Federal Crop Insurance

Of all the issues surrounding a new Farm Bill in 2018, perhaps none unifies American agricultural producers more than Federal Crop Insurance, provided by USDA’s Federal Crop Insurance Corporation (FCIC).  Be it North or South, big or small, row crops or specialty, organic or conventional, the FCIC crop insurance program is today viewed almost universally as the central pillar of USDA’s safety net for farmers, and the one most vital to defend.

FCIC crop insurance is so ubiquitous today that where producers complain about it, it’s usually  because they believe they need more of it, better access or better coverage, either because they represent an underserved region, crop, or practice, or because policies don’t adequately cover their particular risks, yields, or quality.  FCIC crop insurance today covers more than 100 different individual crops plus whole- farm policies, policies covering yield, revenue, margin, livestock, and other specialized coverages.  Over 90 percent of major crops are now covered by FCIC policies representing over 350 million acres and almost $110 billion in guarantees (even with today’s depressed commodity prices).   Rather than see it cut, farmers mostly want it expanded or improved so they can participate fully.

But if protecting Federal crop insurance is the top priority of farm producers in the upcoming 2018 Farm Bill, there is reason for concern.  Because it has grown so large in recent years, FCIC crop insurance is now also the most targeted and vulnerable of all agriculture support programs.  Simply put, it’s where the money is.

Numbers tell the story.  FCIC crop insurance has cost taxpayers on average about $7.2 billion in annual spending over the past ten years, and is expected to cost an average of $7.7 billion over the next ten years (even after collecting the annual average $3.8 billion in farmer-paid premiums).  According to the Congressional Budget Office (CBO) baseline report, that’s a total of $77 billion over the coming decade, enough to attract more than its share of hungry wolves.

Already, the wolves are circling.  Critical reports from the American Enterprise Institute, the Heritage Foundation, the Environmental Working Group, CBO, various academics, even the Office of Management and Budget, have all suggested cuts, and it’s still just the first half of January 2018.   Proposals to cut crop insurance (and usually redirect the money to somebody else’s pet projects) often cloak themselves as “reforms” claiming to benefit taxpayers or smaller farmers against larger ones.  These include such perennials as eliminating the Harvest Price Option, means testing premium subsidies, or cutting delivery costs to participating companies or agents.  These, however, go to the heart of the program, as detailed below. 

But crop insurance also has defenders, and they have plenty of ammunition.  The program has a good story to tell.  And the fact is, those so-called “reforms” are no reforms at all. 

The appeal of FCIC crop insurance runs deeper than simply dollars and cents, the average annual $8.1 billion it has paid farmers in indemnities for lost crops over the past decade.  Today’s FCIC program is the product of a sustained effort spanning three decades and four administrations, two Democratic, two Republican, plus multiple Congresses and multiple Farm Bills, all aimed at shifting farm programs to a sustainable, businesslike basis with incentives for good farm management and fiscal soundness. 

Crop insurance critics have a blind spot, seen in the recent CBO report Options to Reduce the Budgetary Costs if the Federal Crop Insurance Program, issued December 2017.  At several points, CBO asks whether the cost to taxpayers for the current FCIC program is justified compared with the alternative, that is, simply protecting farmers against unusual disasters by providing what it calls “supplemental assistance,” or what used to be less-delicately labelled “ad hoc disaster bailouts.”  CBO ultimately ducks the question.  “It is not possible to know,” the report says, “nor are data available,” it argues, and “it is not possible to compare” the two.   Here, they are wrong.  Data does exist to compare the two approaches.  All that’s required to access it is a memory.

Young farmers today probably don’t remember what it was like to be dependent for survival after a natural disaster almost entirely on politicians in Congress working feverishly to produce emergency one-time-only ad hoc rescue packages.  These ad hoc bills have largely gone extinct since around 2011 as FCIC crop insurance has replaced them.  This accomplishment is no small thing. Even the recent House-passed special emergency bill for 2017’s devastating Hurricanes Harvey, Irma, and Maria, which does provide aid for certain crop losses, links that aid directly to crop insurance participation.

But before 1994, FCIC crop insurance was a tiny program, with participation barely a fourth of modern levels and total guarantees barely a tenth.  As a result, every farm disaster required an emergency ad hoc disaster bill.  During the decade before 1994, these ad hoc disaster bills averaged about a billion dollars per year, peaking at $4 billion each following the monumental 1988 drought and 1993 flood.   These disaster bills, in turn, discouraged farmers from buying coverage.

This was the system that modern crop insurance was designed to replace.  The disasters bills at the time were necessary lifelines in the absence of other support, but they were also a nightmare: for farmers, for taxpayers, and for USDA staff trying to administer it.  Beyond the sheer uncertainty, a parade of reports from GAO, the Washington Post and other newspapers, and Congressional oversight  committees disclosed legions of mis-payments and program abuses, not the fault of farmers or agency staff but simply the fact that USDA was required to implement these bulky, multibillion-dollar programs with little notice and inadequate infrastructure, the result of being, in fact, ad hoc.  

FCIC crop insurance, unlike disaster aid, is a business model that rewards farmers for being good managers and good businessmen.  Claims are paid reliably in 30 days after being filed, based on stable, pre-set contracts.  Farmers purchase their coverage, paying good money from their own pockets, yes at subsidized rates, but still large enough to force them to make serious choices about risk.  Producers who keep good production records enjoy better guarantees, and those who incorporate crop insurance into business plans linked with credit, banking, precision agriculture, and related risk-management tools like forward contracting and futures and options, do even better.  For farmers who pre-contract their crops to processors, FCIC policies are often designed to incorporate those contacts seamlessly with their coverages.  No wonder that private lenders today routinely require crop insurance as a condition of extending credit, as do other rural businesses.

The “reforms” that claim to “fix” crop insurance, be it through means testing, eliminating coverages like the Harvest Price Option, or similar steps, all work against the program’s basic strength, its business basis reflected in established systems for underwriting and rating.

FCIC crop insurance certainly is not perfect, and Farm Bill draftsmen will find plenty of areas for improvement.  In recent years, Congress and the agency have taken major steps to reduce FCIC costs, particularly with respect to participating insurance companies and agents.  The program has incorporated conservation compliance standards into its policies and succeeded in reducing its “improper payment” level (a government-wide measure of program integrity) to historic lows.    Certainly, there are more internal program elements needing fixes, such as, for instance, the 508(h) reimbursement system and coverage for quality adjustments.   

But once the Agriculture Committees complete this work, it will be vital for the farm community to link arms.  FCIC crop insurance will doubtless be a target during the 2018 Farm Bill process, but too much effort has gone into building this program into its modern form to allow it to be knocked down for someone else’s short-term political gain.

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