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Crop insurance numbers stir competing arguments

Sept. 20, 2012 | 0 comments

While uncertainty reigns on the timing and content of new farm policy legislation, various interest groups are sparring over some of the particulars of proposed legislation.

One item drawing a lot of attention this year is crop insurance, which is being administered under existing policy for claims on 2012 crop losses.

A weekly update published online on behalf of the crop insurance companies points out that farmers have invested some $4 billion this year while purchasing crop insurance through more than 1.2 million policies. Those policies include a potential $115 billion in liability protection.

Due mainly to crop losses caused by drought and some early season freezes, the crop insurance industry has already paid out more than $1.4 billion in claims for this year. The industry operates with about 15,000 private crop insurance agents and 5,000 loss adjusters.

During 2011, a record of nearly $11 billion was paid on crop insurance claims. Insurance was obtained on approximately 266 million acres with a total liability of $114 billion on 128 different crops in all 50 states.

Estimates, counterclaims, and fears abound as harvest of the drought-ravaged 2012 proceeds and losses are tallied. Losses might increase in northern states where immature crops were hit by an early killing freeze this week.

In its Sept. 18 update, the crop insurance industry noted that 54 percent of the country was still in moderate drought or worse. "Crop insurance is helping farmers pick up the pieces," it noted.

While the crop insurance has indicated that it has the resources to cover claims lodged for 2012, the American Enterprise Institute (AEI) fears that too much of the financial load will be thrust onto taxpayers either this year or certainly in subsequent years if proposed farm policy legislation is approved.

The AEI is a conservative think tank, which calls attention to public spending it believes is excessive or unnecessary.

In a working paper released earlier this month by three of its agricultural economists, the AEI stated that the price level coverage (PLC) and supplementary coverage option (SCO), which are innovations and new terminology in the House of Representatives' version of the farm bill, approved only by its agriculture committee so far, have the potential of costing taxpayers more than $20 billion per year.

That would happen, AEI agricultural economists Vincent Smith, Bruce Babcock, and Barry Goodwin calculated, if crop prices would drop to their recent historical averages.

They indicated that the program costs of PLC alone could top $18 billion per year - nearly four times what has been paid out under the direct payments program that PLC would replace. They added, however, that if crop prices remained at their recent record or near record highs the annual payments would be close to $1.1 billion.

Regarding SCO and crop insurance, the AEI predicts annual payments of $2.6 billion if current high crop prices persist and of $1.5 billion if the prices return to recent historic levels.

The AEI also points out that SCO would provide the crop insurance industry with an additional $500 million in subsidies beyond the $3 billion it receives annually in conjunction with the existing crop insurance program.

On a related point, the AEI anticipates what it considers an unacceptably high $20 billion in annual spending on all farm programs if crop prices moderate to recent historic levels. The $20 billion would include direct and disaster payments, crop insurance subsidies, and crop storage loans.

In response to the numbers stated by the AEI, the crop insurance industry cites estimates by the Congressional Budget Office that PLC spending would average $1.6 billion over 10 years while the annual costs of SCO would average $300 million under the version of the farm bill already approved by the U.S. Senate and $400 million in the proposal being advanced by the House agriculture committee.

That would put the annual spending for those programs at close to $2 billion rather than a potential $20 billion, the crop insurance industry argues.

It also questioned the AEI claim of $3 billion per year in subsidies to the industry, indicating that those payments are designed to cover costs pertaining to program delivery and predicting that the industry would bear significant losses as this year's claims on crop losses are verified and paid.

The AEI also bases its claim of $3 billion per year in federal payments to the crop insurance industry on data selected from only a few years, the industry statement suggests.

It also observed that the payments made to farmers through various agricultural policy programs account for less than one percent of the federal budget.

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