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The new face of farm policy: crop insurance

August 2013

By Andrew Bowman

Aug. 2, 2013-From walking on soil baked into near-concrete during the worst drought in over 50 years in 2012, to dredging across flooded fields this soggy spring, farmers continue to face uncertainty. And that’s just weather. As a 27-year-old farmer, I’m starting to wonder what “normal” even means.

Andrew Bowman photoIn my short career, corn prices have been under $2 and over $8 per bushel, land prices have nearly tripled since I purchased my first field, more regulations point to greater expense without offsetting revenue, and farm policy has evolved from focusing on price supports and direct payments toward a more market-oriented risk management tool called crop insurance, a public-private partnership whereby farmers purchase policies and only receive a payment if there is a documented loss. Given our new “normal” characterized by volatility everywhere-in weather, markets and regulation-farmers would struggle without access to crop insurance, a vital tool for rural America and the new face of farm policy.

The farm bill, which will guide American agriculture for the next five years, is currently being debated in Congress. Current farm bill proposals eliminate direct payments, which are cash subsidies based on historical price figures. Price support mechanisms still exist, but are much reduced-corn and soybean price supports as proposed in the House are 72 percent and 75 percent of the 2008-2012 Olympic Average Price, respectively, and the Senate version is even lower at 55 percent for both crops. These programs are less necessary because crop insurance has assumed the role as the primary risk management tool for farmers.

Crop insurance saves taxpayers’ money. When disasters struck in the past, recovery was paid for completely by taxpayers. And that doesn’t include the other trade-distorting supply controls and price support policies enacted in response to farm crises. Last year, in contrast, when farmers here in Illinois were decimated by drought, we had crop insurance and didn’t need a disaster bill to help us plant this year.

It is a vast improvement over the price support system and direct payments of the past. Farmers must put “skin in the game.” Many even complain about the money lost over the years purchasing crop insurance. Moreover, we lose a hefty deductible-15 percent minimum-before any claims are paid out. Last year, this deductible was $12.7 billion. Coupled with $4.1 billion in premiums paid last year, farmers lost or paid nearly $17 billion before crop insurance kicked in. It’s a major expense for us, but one we’re happy to pay for because it gives us something this new “normal” rarely allows: peace of mind. From the federal government’s perspective, it may be a liability, but the public-private partnership means taxpayers and farmers also shoulder the rewards in the form of underwriting gains during good years. In fact, from 2001-2010, the government saw $3.99 billion in gains.

And the benefits extend to rural communities. The average American farmer is 58, the oldest at any time in our history. Assuming most retire at 65, we are seven years from real problems if we don’t start transitioning to the next generation. Crop insurance helps young farmers because it serves as “stop-loss” collateral to back credit-a crucial transition tool given the high capital costs of farming. In this sense, it is a bridge to the future for America’s farmers.

Crop insurance also supports farmers’ working capital, allowing cash to flow back into the economy. Farmers in other countries need to stockpile a large share of their profits into cash reserves planning for a bad year so they have sufficient liquidity when disaster strikes. Because American farmers have crop insurance, they don’t need enormous cash reserves and can instead reinvest profits. I have paid down debt and invested in newer, more sustainable technologies faster because crop insurance covered the risk…

Farm Bureau News

August 2013

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