Big Change Got Little Attention Crop Insurance Provision Made Enterprising Changes
DTN Ag Policy Editor
Wed Nov 3, 2010 07:14 AM CDT
WASHINGTON (DTN) -- One of the biggest changes for farmers in the 2008 farm bill largely flies under the radar, but has allowed farmers to buy higher levels of crop insurance while spreading the risk of indemnity payouts for companies.
Though commodity programs such as Average Crop Revenue Election (ACRE) and the Supplemental Revenue Assistance Payments (SURE) drew a lot of attention, a small provision in the crop insurance title created a pilot program to increase the federal premium subsidy to 80 percent for farmers who buy their crop insurance as enterprise units. Under enterprise units all of a particular farmer's acreage of a single crop in a given county is covered under one policy. That was a boost from the basic or optional units subsidy, that ranges from 50 percent to 60 percent on a tract of land.
"The one big thing that came out of the farm bill that many people don't think about is the enterprise unit subsidy," said Gary Schnitkey, a farm management specialist at the University of Illinois. "It greatly reduced premium and we have seen a tremendous shift from basic and optional over to enterprise units. That has had a pretty dramatic impact on changes in crop insurance. What we have seen is people switch to enterprise units and then a lot of people bought up coverage."
Enterprise units are considered such an afterthought that when the House Agriculture Committee held several hearings earlier this year on the farm bill, almost no one mentioned the effect of the change. Gerald Simonsen, a Nebraska farmer and chairman of the National Sorghum Producers, testified in June that the increased subsidy for enterprise units has allowed more sorghum growers to increase coverage, while paying a lower premium.
The option to buy crop insurance for enterprise units is available on 11 commodities. Since introducing the option in 2009, the Risk Management Agency has seen enterprise units go from being a small part of the crop insurance business to now hitting about 37 percent of eligible acres. That included adding 12 million acres in 2010.
Sam Willett, senior director for public policy at the National Corn Growers Association, said a lot of people didn't appreciate how such a change would affect farmers, but the change allowed farmers to buy better coverage.
"It accomplished what we said it would all along in that producers wouldn't necessarily pocket those savings," Willett said. "Instead, they have taken the savings to buy a higher level of coverage. At a time of even greater need for risk management, this policy achievement was really timely."
Tom Zacharias, newly-named president of National Crop Insurance Services, said enterprise units have expanded the opportunity for farmers to manage their risk.
"I would say, in general, it has been very well-received," Zacharias said. "There is evidence enterprise units have moved producers from CAT (catastrophic) to buy-up coverage," Zacharias said.
Zacharias said he has heard insurance representatives say that about 40 percent of their business is enterprise units. In the Corn Belt, it looks as if there is more uptake for enterprise units on single-crop ground. There have even been increased sales in other regions of the country, such as the Mississippi Delta.
More acres and more diversification reduce the likelihood of a payout, so it reduces the premium substantially, while it increases the premium subsidy.
"It provides a pretty good discount," Zacharias said. "The benefit to the producer is reduced premium." The benefit to the insurer is reduced risk.
Before the increase in the subsidy, there were still enterprise units, but participation was relatively low. "So that is a very big increase going from negligible enrollment in enterprise units to up to one-third of the acreage. That's quite a change."
Zacharias said there is some buyer's remorse from producers who aggregate their land, but then don't trigger a payment. But to get a prevented planting payment, farmers have to have a minimum number of acres. A larger number of acres in an enterprise plan might help qualify for a payment in that regard.
Further, the Supplemental Revenue Program also raises the income guarantee level when the coverage gets higher. So, if producers can use premium savings to buy up to a higher level of coverage, they are also getting a higher level of SURE protection.
There will be more focus heading into the 2012-2013 farm-bill debate over whether farmers want more investment in crop insurance and less in traditional support payments, or vice versa.
Spending on crop insurance also will draw more scrutiny in coming years. Scoring over the next 10 years, estimates are that commodity programs will cost $64 billion, but crop insurance will cost taxpayers between $76 billion and $83 billion, depending on different economic analyses. Higher crop prices and bigger yields are going to lead to higher crop insurance indemnities, said Pat Westhoff, program director for the Food and Agricultural Policy Research Institute at the University of Missouri.
"We can actually have a situation where higher prices turn into more government spending," Westhoff said at a meeting earlier this fall in Washington, D.C.
The expense to implement crop insurance already has come into question. Bruce Babcock, a professor at Iowa State University, testified earlier this year before the House Agriculture Committee that the cost of implementing crop insurance over the past two years is proving to be much more expensive than traditional commodity programs.
"Of the $13 billion in support for crop insurance, more than $7 billion went to the companies. Farmers received $6 billion in net indemnities," Babcock testified. "Crop insurance failed the cost-effectiveness test, because it simply makes no sense for taxpayers to spend $13 billion to deliver $6 billion in net payments to farmers."
Chris Clayton can be reached at firstname.lastname@example.org