Letter from Langdon: The Insurance Question — How Much Pain Can You Stand?
The crop insurance program spreads the risk of catastrophic loss among farmers, taxpayers, and the insurance industry. The result is a sturdier agriculture economy and more reliable food supply. Insurance subsidies are a perennial favorite target for budget hawks. But the savings would be small and the potential down side substantial.
Farmers learned long ago that draining the swamp could only happen after a lengthy environmental impact study combined with a comment period and review.
Somebody’s always gotta make a federal case out of something.
Now, with a new farm bill coming up fast, swamp-draining means something else, something that could dry up farm income faster than climate change in July. Farmers find themselves on the wrong side, as usual, because draining this swamp only makes the quicksand deeper.
Maybe we need an EPA review process for farm bills.
The current mood of deregulation and budget-cutting is threatening a venerable favorite of the farm bill – all risk crop insurance. Over the years, Senator Jeff Flake of Arizona has made regular trips to the well of crop insurance downsizing. He has hoped to reduce the scope of the program, but his proposals would hurt the effectiveness of one of the most popular and successful risk management programs for farms USDA has ever administered. So far he’s come up dry. This time might be different. The Washington apple cart is looking mighty tippy where the federal budget is concerned.
He’s at it again.
It’s true that payment limitations (capping the amount that could go to any individual participant) could have taken care of this years ago, except Congress decided that bigger farms are better and entitled to more money. Farmers still had to do stuff to get the money, but Congress could have concluded that farmers who want to get bigger should bear more responsibility, and risk, than average family farmers who stayed with the same farm and relished their work almost as much as they loved their families. All they had to do was enact a disappearing subsidy rate on farms that grow beyond the average size.
Big money won. There’s no cap on payments. And that gives Senator Flake leverage in today’s Washington.
It’s death by a thousand cuts, because the usual approach for farm bill opposition is to attack USDA food aid for the poor (the Supplemental Nutrition Assistance Program, or SNAP). That’s where the lion’s share of USDA funding goes – about 80%. The rest is split up into things like the Forest Service and conservation, animal and plant health inspection, Ag payments, and yes, a tiny fraction of a percent for crop insurance subsidies.
Everyone knows that if you take away bureaucratic money, in this case by reducing budget items at USDA, you take away political power from whatever’s left. So budget-hawkish Senator Flake sees the light at the end of USDA’s tunnel. No. It’s not a choo-choo, but for grain and oil-seed farmers it’s arguably the single most valuable part of the farm program. It’s what keeps us chugging on down the line.
Crop insurance is expensive. Farmers know that because they pay close to half the cost themselves. The government pays the other half. In return, we gain modest protection from crop failures and price plunges, and the government – aka you the people – gets to avoid funding costly disaster programs when weather or markets go terribly wrong. Plus you get a vibrant competitive farm sector producing animal feed, people food, and renewable energy non-stop forever.
The reason that’s important to you is that food prices rely on farmers to keep them affordable, because we grow many of the raw materials food is created from. Industry jobs that supply farms with inputs, machinery, and support, are important, too.
We don’t want to see tweets about agriculture outsourced to foreign countries now, do we?
To explain crop insurance to novices, it’s best to think of farm income as a paycheck like the one consumers get from their employers. So, let’s say consumers were told tomorrow that their annual income was going to drop to half what it was last year, what would they do?
In other words $50,000 income would shrink to $25,000 for the same 40-hour work weeks.
That’d be tough. Farmers know that because that’s the kind of thing that’s happened to us before. But when it happens to us, it’s not net income like a paycheck, but gross income before expenses. That means we aren’t short of grocery money because we won’t have grocery money. Zero. Zilch. Nada.
Plus we owe the bank loan for last year’s crop inputs (the things we have to buy to produce a crop) even before we pay this year’s expenses.
Then we have to borrow more money — for groceries.
It’s like finding out that not only your paycheck was cut, but you’re going to have to give up what’s left of it and dip into your savings to help pay your employer’s debts. Suddenly your job, your home, and your life on the land are all at risk.
Let’s just say more is less because weather and markets have become more unpredictable than ever.
Crop insurance allows us to choose the level of financial pain we can tolerate by insuring our crops at levels we choose from 50% up to 85% of average production. We have to pay an insurance premium to get that, and the premium costs an amount equal to about twenty percent of the guarantee. Choosing 50% nets 40% coverage. 85% guarantee only gets me a little more than 60% if I grow nothing at all. Even in disaster years when I only grow 20%, that poor 20% still reduces my payout by the same amount. No freebies.
And always, without exception, the premium is due.
It’s true, government helps pay part of the total cost, but farmers pay all they can realistically afford. We always have to pay the premium no matter what size crop we raise. Good or bad, it’s a cost all farmers who use crop insurance must bear. When crops are good and prices are stable, farmers pay the premium without collecting anything. That’s exactly what happens most of the time.
And the insurance company makes money.
It’s no gravy train, but it helps keep honest farmers farming by covering severe losses and making bankers feel more comfortable about loaning money to farms for inputs to grow crops.
It seems odd that so many conservative farmers (here in Missouri rural people voted in favor of Donald Trump for president by a margin of 3 to 1), cuss the Affordable Care Act but buy federally subsidized crop insurance for their farms. And just like the ACA, without a broad market and substantial commitment to insurance by the government, it’s all going to go away. That’s because, like health insurance, the number of crop insurers is limited. If just one pulls out, the rest feel the strain. When that happens, they all exit the business because no matter what kind of insurance you’re talking about, its all a business of numbers.
If the numbers don’t work, insurance companies don’t either.
Sick people have that in common with ailing farms.
That’s because without government insurance subsidies, insurers will pull the plug.
Richard Oswald is a fifth-generation farmer and president of the Missouri Farmers Union.