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Published June 29, 2010, 10:51 AM

Vilsack proposes crop insurance cuts

WASHINGTON — Will a $4 billion cut in the cost of crop insurance in 10 years be enough for Agriculture Secretary Tom Vilsack to fight off pressures within the Obama administration to make other cuts in USDA programs?

By: Jerry Hagstrom, Special to Agweek

WASHINGTON — Will a $4 billion cut in the cost of crop insurance in 10 years be enough for Agriculture Secretary Tom Vilsack to fight off pressures within the Obama administration to make other cuts in USDA programs?

That seems to be the question after Vilsack’s release of a crop insurance reform proposal that seems intended to satisfy internal Obama administration pressures to reduce the deficit and allay concerns on Capitol Hill that any cuts in crop insurance will reduce the baseline for the 2012 farm bill.

Under an offer Vilsack made to crop insurance companies, the Agriculture Department would cut payments to the companies $6 billion in 10 years, but would give $4 billion to the Treasury for deficit reduction and use $2 billion of that money on other USDA programs. The payments are for administrative and operating expenses and for underwriting gains or profits. USDA officials emphasized that the negotiations would not affect farmers’ crop insurance premiums, which are set separately.

‘Stepping up’

At a briefing for reporters, Vilsack noted that farm programs always are subject to criticism and hinted that he would vigorously use the $4 billion savings in upcoming battles within the Obama administration about how much USDA should be expected to cut in order to reduce the deficit.

“We are stepping up here. We have given at the office. We will be watching everyone else on deficit reduction,” Vilsack said.

Addressing congressional concerns, Vilsack pointed out that the Congressional Budget Office already has projected a $3.9 billion decrease in crop insurance costs in 10 years. USDA Risk Management Agency Administrator Bill Murphy, who has been conducting the negotiations and who briefed Congress June 10, said he thinks members will find the offer acceptable because the $2 billion will be put into programs that are popular on Capitol Hill. Murphy said the money will be spent on expanding the pasture, rangeland and forage crop insurance program and enhancing the Conservation Reserve Program, which idles land for rehabilitation and wildlife habitat purposes by allowing the acreage to rise to the full authorized level and making other changes to it.

The companies’ initial reaction was not so positive, however. David Graves, a lobbyist for the companies, said that crop insurance executives were “shocked” at the level of cuts and at the new concepts presented in the final offer. Graves acknowledged the companies are under pressure to sign the agreement.

“Your company is not worth much if you don’t sign,” Graves said.

Murphy said the crop insurance companies will have 30 days to sign the agreement and that he expects them to sign it. He noted that the companies cannot sell crop insurance in the 2011 crop year if they do not sign it. Murphy maintained that RMA has made concessions to the companies.

Key elements

A key element in the new agreement is to limit the commissions companies pay to crop insurance agents on the grounds that companies have been paying such high commissions they may be endangering their own stability. Under a new system, the average commission would be $1,140 per policy. Companies also could make profitsharing payments to agents but the total amount that a company could pay agents, within a state would be limited to the total government payment to the company for administrative and operating expenses. Within that amount, individual agents could be compensated more highly than others, Murphy noted.

The Crop Insurance Professionals Association, which represents the agents, said in a statement, “Upon our initial reading of the document, the USDA made a few strides in the right direction, but crop insurance agents remain disappointed by the proposal as a whole because it would cut $6 billion out of crop insurance.” The agents also said, “The $6 billion proposed cut is nearly three times as large as one overwhelmingly rejected by Congress in the 2008 farm bill debate for being too crippling to the safety net.”

The new offer also divides the country into three sections and contains provisions to encourage companies to develop more attractive crop insurance policies in states outside the Midwest where fewer farmers buy the policies.

USDA has been conducting the negotiations under authority Congress gave it in the 2008 farm bill. As crop prices have risen in recent years, payments to the companies tied to the prices rose from $1.8 billion in 2006 to an estimated $3.8 billion in 2009.

An analysis performed for USDA showed that crop insurance companies have had a 17 percent return in the past 21 years, although the companies have disputed that figure. Murphy said the rate of return for the new agreement should be 14.5 percent.

President Obama’s proposed fiscal year 2011 budget called for $8 billion in savings from crop insurance.