As the worst drought in three decades unfolded last year, opponents of farm programs almost gleefully predicted that taxpayers would be on the hook for $40 billion in crop insurance claims this past fiscal year.
Those “experts” grossly overestimated crop insurance costs by about $26 billion. And while crop insurance indemnities in fiscal year 2013 were understandably higher due to the epic drought, overall farm safety net spending was not higher.
Data recently presented by National Crop Insurance Services President Tom Zacharias and former USDA Chief Economist Keith Collins shows that, corrected for inflation in crop prices, total farm safety net expenditures were higher in fiscal years ’82, ’83, ’85, ’86, ’87, ’93, ’99, ’00, ’01, ’02, ’03, ’05, ’06, and ’09 than in ’13.
The reason that overall costs last year were kept down in the face of unparalleled weather disaster, according to Collins, is the combination of strong commodity prices and a policy evolution.
“The insurance system currently in place was specifically designed by Congress to displace costly ad hoc disaster payments,” he said. The rationale for the system is to provide farmers with more effective and predictable aid while shifting risk exposure away from taxpayers.
Unlike the old system of disaster payments, which are 100 percent taxpayer funded and drove up past farm policy costs, farmers now must buy crop insurance protection by paying premiums out of their own pockets. Farmers currently spend about $4 billion a year on premiums, and the accumulation of those premium dollars over the years is used to help offset claims in disastrous years.
In addition, farmers must absorb losses through an insurance deductible before receiving any assistance. These unreimbursed losses totaled $12.4 billion nationwide after the drought.
Beyond the farmers’ contributions in premiums and deductibles, the other factor that lightens the burden for taxpayers is that private crop insurers cover part of the claims in disaster years – this amounted to more than $1 billion in losses for crop insurers last year.
Collins also noted that farm policy outside of crop insurance operates largely on a“counter-cyclical basis” – that is, assistance is designed to kick in when crop prices are low. Because prices have remained relatively strong for the year, counter-cyclical and marketing loan payments were not triggered, helping bring down policy costs even more.
Farm safety net spending is predicted to decline even further through fiscal year 2023, according to the Congressional Budget Office (CBO). And, if Congress approves the pending five-year Farm Bill, total farm policy related expenses would fall billions more, according to CBO, because of new spending cuts in versions of the bill passed by the House and Senate.
Despite its fiscal success, farm policy is once again coming under attack by the same critics who were so far off on their drought expense predictions. The pending Farm Bill doesn’t cut deeply enough, they contend, and they are encouraging Farm Bill conferees to limit participation in crop insurance based on arbitrary income means tests.
This could be a recipe for disaster, Zacharias notes.
“Weakening a program that performed so well in the face of disaster makes little sense,” he said. “What’s more, by making crop insurance less attractive to farmers, you could inadvertently shift risk and expense back to taxpayers.”
Editor’s note: A detailed analysis by Zacharias and Collins can be read in the latest edition of Choices Magazine.