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Published March 14, 2011, 04:35 AM

Crop insurance costs expected to double, but agreement renegotiations may yield savings

WASHINGTON — The government’s cost of insuring increasingly valuable crops could double this year to about $9 billion, but the amount of savings from the Obama administration’s renegotiation of the agreement with crop insurance companies also may be more than twice than what was expected, key industry leaders said March 8.

By: Jerry Hagstrom, Special to Agweek

WASHINGTON — The government’s cost of insuring increasingly valuable crops could double this year to about $9 billion, but the amount of savings from the Obama administration’s renegotiation of the agreement with crop insurance companies also may be more than twice than what was expected, key industry leaders said March 8.

Record-high commodity prices, volatility and a 10 million-acre increase in planted acres all are causing the cost of insuring crops to rise, according to the National Crop Insurance Services, an industry-sponsored research group that announced the figures in a telephone news conference.

“It is important that policy officials understand the relationship between a higher value of U.S. agricultural production and increased cost exposure of the crop insurance program,” said Tom Zacharias, NCIS president. “Insurance protects the value of the underlying asset, and when higher prices increase the value of the asset, the risk of having to pay higher indemnities goes up. Thus, policy officials should be prepared —and not think something is wrong with the program — if program costs turn out higher this year.”

But the costs could cause Congress to think twice during the 2012 farm bill debate as lawmakers try to figure out what farm programs are the most important to keep and protect while they look to cut the deficit.

The increased cost of crop insurance — designed to go up when crop prices go up — is in dramatic contrast to the cost of price-related direct farm subsidies, which go down when prices go up, noted Keith Collins, a former USDA chief economist and crop insurance board chairman who is a NCIS consultant.

“The asset you are insuring goes up, the risk exposure goes up,” Collins said.

Payment cap

The costs would be even higher if the Obama administration had not put a cap on the administrative and operating expense payments to insurance companies when it negotiated a new standard reinsurance agreement with them last year.

If the old agreement had been in place, the cost of those payments would have followed the rise in insurance premiums and totaled $2 billion, industry officials said. The agreement caps the payments at $1.3 billion, which means a savings of $700 million. When USDA’s Risk Management Agency negotiated the new agreement, it estimated that the savings would be $6 billion in 10 years and $335 million in 2011.

A spokeswoman for RMA Administrator Bill Murphy said the agency was unwilling to confirm the industry figures. The closing date for insurance sales for 80 percent of U.S. crops is March 15.

“It is too early to judge exactly how farmers will respond to how today’s commodity prices and volatility factors have affected premium rates for 2011 spring crops,” said Shirley Pugh, the spokeswoman. “None of the savings would have been possible if the Obama administration and the companies had not negotiated (the new agreement) in good faith.”

In their news conference, crop insurance officials acknowledged that premium prices would be much higher this year because many commodity prices are at record levels and more volatile. But they emphasized that farmers’ potential earnings also are much higher, and that at these levels, crop insurance payments would pay back the cost of production if there were a crop failure.

Higher value, higher premium

The higher premiums mean increased income for the companies, but the officials emphasized higher premiums and higher-valued crops also mean increased liabilities if a crop should fail partly or completely. Premiums may rise from $7.6 billion in 2010 to $11 billion, of which $6.6 billion or 60 percent would come from the government, Collins said. Liabilities for the companies could total $112 billion, up from $80 billion in 2011, Collins added. Zacharias said that the companies are working with reinsurance companies to assume part of the obligation in case of crop losses.

Collins said that if government expenditures reach more than $9 billion, that figure would be composed of $1.3 billion in administrative and operating expenses to deliver the policies, $6.6 billion in producer premium subsidies and $1.3 billion in underwriting gains, the insurance company term for profits, which are calculated as 14.5 percent of retained premiums.

Collins noted that the program has fulfilled Congress’ goal because it has reduced the need for ad hoc disaster programs.

“We have gotten this far because we have encouraged participation,” he said.

Congress did, however, include a permanent disaster program called SURE in the 2008 farm bill. In 2010, when SURE proved inadequate to cover crop losses in the South, and when Sen. Blanche Lincoln, D-Ark., who was seeking re-election, had a hard time getting an ad hoc disaster program through Congress, the Agriculture Department stepped in with a special disaster program that critics found questionable.

Regional differences

Crop insurance is more popular in the Midwest than in the South, where farmers say the policies do not work as well for cotton and rice. Southerners vigorously have defended the $5 billion in direct payments that crop farmers get whether prices are high or low, while Northern farmers have suggested that the direct payment money could be better used to improve crop insurance.

Collins said that the producer premium subsidy has never been targeted for a cut in farm bill negotiations, but American Farm Bureau Federation lobbyist Mary Kay Thatcher has noted that the producer premium subsidy is now one of the biggest pots of money in the farm bill, and could well be targeted.

Critics such as the Environmental Working Group already have said that Congress should cut the direct payments to farmers, contending that in times of high crop prices, they cannot be justified.

Asked whether Congress would be likely to cut the producer premium subsidy in the farm bill, the direct payments, or both, Collins said, “We could answer that one and be taken to a psychiatrist, or figure out how not to answer it.”

In reality, he concluded, the answer “depends on the balance of interests” in the farm bill debate.