Milestones in Farm Policy History: 1989 GAO Report

September 4, 2013
“Those who don’t know history are destined to repeat it.”
-Edmund Burke                     
 
On the heels of weather disasters in ’83, ’84, and ’88, rural America was struggling, and lawmakers were losing patience.  Compounding the problem was an unparalleled farm debt crisis.  America’s food and fiber producers needed assistance, but aid was expensive and slow to arrive, causing hardship not just in the countryside but for taxpayers as well.
 
On April 20, 1989, House Agriculture Committee Chairman E. “Kika” de la Garza had enough and asked the General Accounting Office (GAO) for help.  Concerned that the federal government’s responses to natural disasters had been “generally reactive and ad hoc,” De la Garza raised questions about the lack of an overall strategy for dealing with recurring disasters.
 
Interestingly enough, the resulting GAO examination and report would help pave the way for a new approach to agricultural policy – one that would ultimately protect 86 percent of planted cropland and help farmers weather the 2012 drought, the worst on record since 1988.
 
Specifically, the GAO studied USDA’s three main disaster programs – ad hoc direct disaster payments, disaster emergency loans and crop insurance – and compared their effectiveness using eight different criteria, including:
  • The amount of assistance provided is determined by the amount of loss;
  • Programs offer similar amounts to farmers for similar damage;
  • Assistance to farmers should not exceed the value of their losses;
  • Disaster assistance programs should not incentivize risk taking;
  • Disaster programs should be available over the long-term to assist with planning;
  • Programs help farmers withstand and recover from natural disasters;
  • Programs should have predictable costs; and
  • Programs should meet their objectives at the lowest possible cost.
The GAO found that while none of the programs satisfied all the criteria laid out, “crop insurance is a more equitable and efficient way to provide disaster assistance” than both direct disaster payments and emergency loans.  
 
“Crop insurance treats disaster victims more equitably” and also “provides farmers disaster assistance more efficiently because farmers generally have more incentive to reduce risk under the program than they dounder loan and direct payment programs.”
 
That doesn’t mean crop insurance didn’t have its flaws in the 1980s.  
 
“[W]e recognize that FCIC (Federal Crop Insurance Corporation) has had a history of management problems that, in the short term, makes it difficult to justify the current crop insurance program as the sole source of disaster assistance to farmers,” GAO wrote.  “Consequently, if the Congress chooses to rely on the crop insurance program exclusively to provide crop disaster assistance, a transition period for strengthening the program would probably be necessary.”
 
And so, crop insurance began its journey of improving and evolving as the centerpiece for U.S. farm policy.  That included more private-sector involvement, making the program actuarially sound, and encouraging participation.
 
Even as late as the early 1990s, crop insurance participation rates hovered in the 30 percent range and Congress was often spending considerably more each year in disaster relief expenditures than it was on crop insurance.  
 
The Federal Crop Insurance Reform Act of 1994 restructured things to boost farmer participation, increase the private sector’s role, and create the USDA’s Risk Management Agency (RMA).    Other important reforms to crop insurance can also be found in the “Blueprint for Financial Soundness,” published in the Federal Register in 1994.  Many of these recommendations have been implemented since its publication.
 
They include:
  • Determination of more accurate yields;
  • Better tracking of ineligible producers;
  • Premium rate adjustments;
  • Improved underwriting;
  • Better program compliance;
  • Introduction of new products to improve participation;
  • Increased risk bearing by AIPs, and
  • Management actions to correct if changes not working.
By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988.  But coverage levels on a per acre basis were still low, such that Congress had not been able to break the habit of yearly ad hoc disaster bills.
 
Then, in May of 2000, Congress approved the breakthrough piece of legislation: the Agricultural Risk Protection Act (ARPA).  The provisions of ARPA made it easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields.
 
By summer of 2012, more than 280 million acres were enrolled in crop insurance – just in time for historic drought that would have otherwise crippled rural America.  
 
As a result of these continuous improvements to modern-day insurance program, there have been no calls for ad hoc disaster bailouts – even after the widespread floods of 2011 and Dustbowl-like conditions of 2012.  
 
Farmers quickly received indemnities for their insured losses and could repay operating loans.  And best of all, taxpayers weren’t left funding it all because private insurers shouldered more than $1 billion in underwriting losses, growers paid $4 billion for premiums out of their own pockets, and farmers absorbed nearly $13 billion in deductible losses before receiving a single dollar.
 
Sounds like it worked just like it was envisioned all those years ago. Makes you wonder why today’s farm policy critics want to weaken the successful policy and revert back to the inefficient days of the ’80s.