The big news out of Washington, D.C., this past week was President Donald Trump's budget. The proposed cuts to agriculture are broad and deep, and congressional delegations and lobbyists from both sides of the aisle are unified in their assessment of the damage to agriculture in the Midwest.
Former North Dakota governor and present U.S. Sen. John Hoeven issued a statement saying "Cuts to programs like crop insurance, conservation reserve programs and agriculture research are unacceptable, especially when our farmers and ranchers face challenges due to low commodity prices."
Hoeven, recently re-elected in a landslide, is the chair of the Senate Ag Appropriations Committee. That role, and his credibility as a popular and effective leader for North Dakota, will be key in determining the eventual landing place of the Trump budget numbers as they make their way through Congress.
Speaking of crop insurance, the Trump budget proposes a 36 percent cut over a decade in the federally subsidized crop insurance program. In terms of U.S. Department of Agriculture farm support programs, crop insurance is the largest at a cost of nearly $8 billion annually.
Over the past 20 years, there has been a strong movement away from "direct support payments" to more "safety net" oriented programs. Part of the underlying logic behind this movement was to encourage farmers to have some "skin in the game" by purchasing crop insurance to protect their investment, with the government subsidizing some of the crop insurance premiums.
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This is a fair way of providing a safety net, in lieu of direct payments to farmers on an annual basis. By and large, this newer approach to a safety net has been successful and has cost far less than direct payments, which don't require the farmer to participate in the cost of insurance.
Like any federal program, there are multiple agencies and sub-agencies involved in the USDA's federal farm program. The Federal Crop Insurance Act is the governing federal legislation in this case, and that act authorized the creation of the Federal Crop Insurance Corporation.
The purpose of the FCIC is to carry out the purposes of the FCIA. The FCIA authorizes the FCIC to "insure or provide reinsurance" to private crop insurance providers, who in turn sell insurance to farmers.
Farmers are subject to certain risks - some say "externalities" - that are peculiar and specific to farming. Some of these risks are variable weather patterns, extreme market volatility and natural disasters. So as a matter of policy, it has been generally accepted over time that some form of safety net should be made available to those who feed the world.
Daniel Looker, in a recent article in Successful Farming at Agriculture.com, delved into this topic. He points out that two years ago when President Barack Obama unveiled his plans to cut certain crop insurance subsidies, the projected savings were $18 billion over 10 years.
At that time, Senate Ag Committee Chair Pat Roberts declared the cuts "dead on arrival." In the Looker article, a Kansas State University economist and insurance expert states that the proposed Trump budget would "kill crop insurance."
Our congressional delegation will not permit crop insurance to be killed. However, the proposed budget cuts are significant. What's interesting to me is that farmers - who currently pay roughly 40 percent of the cost of crop insurance premiums - are being asked to bear more of the burden of providing the safety net. As a matter of policy, this is consistent with the movement of the past 20 years away from direct payments.
However, as a matter of practicality, farmers are already bearing a tremendous share of the burden of providing their own safety net. Additionally, wheat is $4.95 at the local elevator, soybeans are $8.30, and corn is $2.89. At those prices, profit margins are slim to none. And if interest rates rise even just a little bit, it could get outright scary for 2018 and beyond. Stay tuned.
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