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Published February 23, 2010, 08:37 AM

Ag budget cuts could be reduced

SAN DIEGO — The Obama administration, which had proposed a $8.4 billion cut in the federal crop insurance program in the next 10 years, is offering to reduce that cut by $1.5 billion to $6.9 billion, a key Agriculture Department official said Feb. 17 in San Diego.

By: Jerry Hagstrom, Special to Agweek

SAN DIEGO — The Obama administration, which had proposed a $8.4 billion cut in the federal crop insurance program in the next 10 years, is offering to reduce that cut by $1.5 billion to $6.9 billion, a key Agriculture Department official said Feb. 17 in San Diego.

Agriculture Department Risk Management Agency Administrator William Murphy, who is negotiating a five-year agreement with the insurance companies that deliver the policies, said at an industry convention in San Diego that he had taken “to heart” the industry’s criticisms of the government’s initial offer late last year and was making a new offer.

President Obama included the $8.4 billion in savings in his fiscal year 2011 budget.

House Agriculture Committee Chairman Collin Peterson, D-Minn., has criticized the negotiation because he says it will reduce the farm bill baseline when the next farm bill is written. Agriculture Deputy Undersecretary for Farm and Foreign Agriculgture Services Michael Scuse said that the administration recognizes Peterson’s concerns about the baseline “and will look at ways to overcome this obstacle.”

In the negotiations, the administration is attempting to address the cost of subsidies to crop insurance companies and agents for delivering crop insur

ance, which have arisen from $1.8 billion in 2006 to a little less than $4 billion in 2009. Obama administration officials contend that the companies and agents are making more money than is appropriate and that the subsidies can be cut while the industry has contended that the government’s first offer would cut so deep it would reduce service to farmers.

New issues

In the new offer, Murphy addressed a series of issues that the industry had raised, but said he is determined to stop companies from attempting to increase their market share by paying agent commissions so high that they may destabilize their own companies. The government’s new offer would provide a “safety valve” by setting a “soft cap” on agent commissions at 80 percent of the government subsidy for administrative and operating expenses, but would allow the companies to offer the agents profit sharing, Murphy said.

Murphy said the agency abandoned proposals for the government to absorb more downside and upside risk because he said they want to take those risks and increased what the agency considers a reasonable rate of return from 12 percent to 14 percent.

The agency also changed its proposal to divide the states into four groups based on risk and instead will propose dividing the country into two groups — one group including Minnesota, Illinois, Iowa, Indiana and Nebraska, where weather risk is considered relatively low, and a second group including all other states.

Murphy said the proposal still will include measures to encourage crop insurance companies and agents to sell more coverage in the higher risk states, for certain crops and for underserved types of farmers. Murphy also noted that this negotiation does not affect farmers’ premiums, which are based on risk, or premium subsidies, which are set by statute.

Bob Parkerson of National Crop Insurance Services said USDA officials “have listened to us to some extent,” but that he wants to study the details of the USDA proposal. On the level of amount of money USDA wants to cut from current expenditures, Parkerson said, “We aren’t there yet.”

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