Issue Update: Federal Crop Insurance

With the elimination of direct payments during the last farm bill, one of the largest “pots of money” on the table remains the federal crop insurance program.  As such, it continues to drawn attention from all quarters – in much the same way bees are drawn to honey.

The Obama Administration’s budget proposal for the United States Department of Agriculture includes $1.26 billion in crop insurance reductions for fiscal year (fy) 2017 and an estimated $18 billion over 10 years.

The Administration proposal would reduce premium subsidies for revenue policies that have a harvest price option (HPO). It would also eliminate buy-up coverage for prevented planting insurance.

The current producer premium subsidy, on average, is 62 percent. The Administration believes the average should be closer to 50 percent.

The president’s budget outline, of course, is simply that — an outline.  The Administration has laid out its priorities but this is just the first step of the dance.  Members of Congress will heavily scrutinize and revise the proposal and will adopt their own budget blueprint prior to beginning work on individual appropriations bills.

Although the Senate Agriculture Committee Chairman Pat Roberts (R – KS) and his counterpart, House Agriculture Committee Chairman Mike Conaway (R – TX) have pronounced the Administration’s crop insurance provisions “dead on arrival” the current crop insurance debate is an indicator of battles yet to come.

The proposal comes at a time when farm income for this year.  According to the United States Department of Agriculture (USDA), producer income will have gone down 56 percent since 2013.  As producers face lower farm income, risk management tools such as crop insurance continue to be a critical component of their marketing plan.

Crop insurance protects a producer’s yield and price, as well as providing collateral and a repayment source for operating loans, term loans for machinery, livestock, facilities and real estate loans.  As producers have shifted to protecting income rather than yield, the greater coverage provided by higher levels of revenue policy coverage means significantly greater protection for the producer’s revenue stream.

In a larger sense, it is unclear as to what the national impact of reductions to producer premium subsidies would be on producers and those entities that currently serve the crop insurance marketplace.  It is likely, however, that lower producer premium subsidies would stifle producer utilization of crop insurance as a risk-management tool. Likewise, lower reimbursement rates would most likely be passed along to producers in the form of higher premiums or diminished service.

Most producers cannot afford not to have some type of protection. Therefore, their profit margins would be further reduced if premiums are raised. Many young and beginning producers, who traditionally have less collateral and equity, would face additional challenges in obtaining financing.

A wide range of strong risk-management tools for producers and the proposed reductions in the crop insurance program could adversely impact producers and hinder their ability to manage risk.  Without a viable program, it is likely that lending standards would need to be much more stringent in order to maintain sound credit quality.

Dave Ladd, President of RDL & Associates, recently provided a brief update via the Linder Farm Network regarding the landscape for federal crop insurance.

Part 1 of the update can be accessed here: https://soundcloud.com/rdl-associates/linder-farm-network-crop-insurance-part-1mp3

Part 2 of the update can be accessed here: https://soundcloud.com/rdl-associates/linder-farm-network-crop-insurance-part-2mp3

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