It has become an article of faith amongst policy wonks that an administration’s budget proposal is considered “dead on arrival” before it hits the Halls of Congress. Every year the White House delivers a proposed budget to Capitol Hill and, every year, there is a hue and cry from affected stakeholders. The release of the Trump Administration’s fiscal year (FY) 2018 budget is no exception.
While it is true that an administration’s budget is the first step in an intricate dance with 535 members of Congress, it does provide insight as to the priorities of the Executive Branch.
The budget recently released by the White House would cut the federal crop insurance program by $28.5 billion—or roughly 36 percent—by capping the premium subsidy and eliminating the harvest price option.
As producers continue to face low commodity prices and weather-related challenges, 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.
The enhanced coverage provided by higher levels of revenue policy coverage means significantly greater protection for the producer’s revenue stream, as producers have shifted to protecting income rather than yield.
A review of recent history related to the crop insurance program are illustrative. During deliberations related to the 2008 Farm Bill included reductions to the crop insurance program of approximately $6 billion over a 10-year period.
The 2011 Standard Reinsurance Agreement (SRA) that went into effect July 1, 2010 included an additional $6 billion in estimated funding reductions the crop insurance program over 10 years.
Another part of the equation is the delivery mechanism for crop insurance – crop insurance companies. The two primary revenue sources for a crop insurance company are Administrative and Operating (A&O) reimbursement and underwriting of gains and/or losses.
During consideration of the 2014 Farm Bill, amendments in the U.S. House related to crop insurance would have reduced the cap of government funding for crop insurance companies from $1.3 billion to $900 million per year and another that would reduce the guaranteed rate of return for crop insurers from 14 percent to 12 percent.
A wide range of strong risk-management tools for producers, including a viable crop insurance program, is more important than at any time in recent memory. As such, proposed reductions in the crop insurance program would adversely impact producers and hinder their ability to manage risk.
The proposed reductions hold the potential to reduce the number of companies offering risk-management tools such as crop insurance. Without a viable program, it is likely that lending standards would need to be much more stringent in order to maintain sound credit quality.
It is unclear as to what the aggregate national impact of reductions to producer premium subsidies and A & O reimbursements 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.
It is important to remember that most producers cannot afford not to have some type of protection. Therefore, their profit margins would be further reduced if premiums are raised. In addition, many young and beginning producers (who traditionally have less collateral and equity) would face additional challenges in obtaining financing.
Crop insurance is not immune to the vagaries of the budget process and the issues deserve renewed scrutiny. Over the course of the past few years the program has emerged as a continuing policy issue for policy and philosophical reasons. In the end, Congress passes the budget and agriculture has generally been successful in making the case for crop insurance and mitigating proposed reductions. Each battle, however, expends political capital and emboldens critics – including members of Congress.
Dave Ladd, President of RDL & Associates, is a frequent guest commentator regarding the public policy and the political environment. He assists clients in achieving their legislative and policy objectives via government relations, strategic communications, and message development.