Drought brings record U.S. cost for crop insurance subsidy

WASHINGTON (Reuters) - U.S. taxpayers could pay a record $15 billion to subsidize the privately run crop insurance program this year, double the recent cost due to devastating drought in the Farm Belt, say an array of agricultural economists.

The program's runaway costs are in focus as Congress looks for ways to cut government spending, making crop insurance a bigger target for reforms.

The government and industry said they prefer to wait until late fall, when harvest is ending, to estimate costs. As of Monday, $2.6 billion has been paid in 2012 crop indemnities.

When lawmakers return to Washington next month, they must tackle both the farm bill, which includes crop insurance, and broad spending cuts required to rein in the U.S. deficit.

"I think the rising cost of crop insurance will bring even more attention to crop insurance than has been paid so far," said Craig Cox of the Environmental Working Group, which says crop insurance favors big farmers unduly and needs reform.

At present, the government pays roughly 62 cents of every $1 in crop insurance premiums and shoulders a large part of the losses in bad years like this one.

The Senate voted in June to reduce the subsidy to big farmers, potentially saving $1.1 billion over a decade. The House of Representatives however, postponed dealing with the thorny issue of cutting farm subsidies until after the November 6 elections.

CROP INSURANCE, THE NEW SAFETY NET

For the 15 companies selling crop insurance, such as Wells Fargo, QBE, ACE, American Financial Group and Endurance, 2012 is the first time in a decade that crop insurance is a money-loser.

Indemnities will be so large, the companies will pay out all the money they collected in premiums this year, $11 billion, plus $2 billion to $3 billion more, say agricultural economists at Montana and Illinois universities and the catastrophe modeling company AIR Worldwide.

In coming years, as insurers seek to recoup these unprecedented losses, farmers, who contributed $4 billion of their own money this year for policies, will face higher premium rates. "We don't expect it to be huge rate increases because it will be blended in with other years," said analyst Jason Porter of ratings agency Standard & Poor's in an interview.

Crop insurance has become the biggest U.S. farm support as soaring prices for corn, soybeans and other commodities made the traditional price-support subsidies irrelevant. So-called revenue policies that shield growers from the effects of low prices and poor yields are the most popular version.

Some 85 percent of eligible farm land, 281 million acres, was covered by $116 billion worth of crop insurance this year, setting a high for coverage.

THE MATH, AND PATH, TO A $15 BILLION TAB

As the program grows, so does its cost to taxpayers. Along with premium subsidies, the Agriculture Department pays part of industry overhead and defrays the impact of severe losses on insurers. Experts say USDA could pay three-fourth of this year's underwriting losses, which are indemnities that exceed premiums.

Taxpayers will face a tab of around $15 billion, including $7 billion in premium subsidies, $1.3 billion in overhead costs for insurers plus about $7 billion from underwriting losses, says agricultural economist Vince Smith of Montana State University.

Crop insurance blossomed into the biggest farm support because Congress seeded its growth. Lawmakers wanted to end unpredictable and costly aid bills every time there was a farm disaster, aid that cost $45 billion between 1989 and 2001.

So a decade ago, lawmakers agreed to boost substantially the premium subsidy so that farmers would buy higher levels of coverage. Policy value has tripled since then.

Weighing the popularity of crop insurance and the withering attacks on crop subsidies, the agricultural community made the cold-eyed calculation that insurance is the only sure survivor of budget austerity. The still-unfinished 2012 farm bill would kill an unpopular $5 billion-a-year farm subsidy and use some of the savings to expand the crop insurance program.

ONE ANSWER -- ACROSS THE BOARD CUTS

Leaders of the House and Senate Agriculture committees declined to comment on how record costs could affect crop insurance in the lame duck session.

Critics say there are plenty of ways to save money, such as cutting the premium subsidy across the board for all farmers by 5 or 10 percentage points and setting the subsidy rate as low as 52 percent. The idea is similar to the Senate vote to cut the subsidy for big farmers by 15 points.

Other potential reforms would require the industry to carry a larger share of losses or charge farmers for catastrophic coverage, now available for free.

"We could also change the delivery system and save at least $1 billion a year that way," said Smith, of Montana State University, a fierce critic of the program.

Congress could reduce the overhead payment to insurers or by capping the amount insurers collect in overhead and underwriting gains in good years, Smith said.

Cuts are not guaranteed, however. House Republicans are on record in favor of insurance cuts but they are not in the farm bill. The Obama administration was rebuffed on a package that included a two percentage points cut to the premium subsidy.

A Farm Belt senator, Chuck Grassley of Iowa, argued farmers should not be forced to shoulder more than their share of budget cuts in any government-wide retrenchment.

"It has to be in the context of the entire situation ... It's got to be proportional," Grassley told reporters last week.

CENTERPIECE OF U.S. FARM POLICY

Crop insurance has become the favorite risk-management tool of American agriculture, replacing crop subsidies and the major U.S. farmer and banker groups have joined the insurance industry in opposing cuts to the program.

National Crop Insurance Services, an industry trade group, argues the program reduces taxpayers' costs even in a disaster like this year by preventing calls for bailouts. The program is a financial safeguard against ruinous weather, it says.

"It's necessary this year, especially with the drought," said Pam Johnson of Iowa, a farmer and president of the National Corn Growers Association. "We feel like we can't afford to be without it."

Crop insurance is a small part of the portfolio for the larger insurance companies, so the drought's impact on them could be muted. Neither Moody's nor Standard & Poor's are expected to make ratings changes because of losses on crop policies.

The program will likely remain a central part of U.S. farm policy for years to come, said Alan Murray, a senior vice president at ratings agency Moody's Investors Service.

"What does seem to be the case is that the sector is becoming more and more the vehicle by which the government manages financial risk for the agricultural sector," he said.

(Reporting By Charles Abbott; Editing by Theodore d'Afflisio)

Source: http://news.yahoo.com/drought-brings-record-u-cost-crop-insurance-subsidy-164708280--business.html

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