Friday, March 21, 2014

Crop Insurance- Reassurance!


There’s been a lot of buzz recently about Obama’s 2015 Budget announced earlier this March, and the effect it will have on federal crop insurance for American farmers. Whereas the White House plans on reducing wasteful spending, apparently this means that the administration wants to cut $14.2 billion in excess crop insurance subsidies over the next ten years. And while this unavoidably sounds like bad news, let me take a few minutes to explain these reductions and why they may not be as bad as they sound.

The key here is that the effects of the 2015 Budget need to be taken into account in conjunction with the new farm bill that passed through Congress last month. According to a March 2014 Wall Street Journal Article, “2015 Budget: Obama Proposal Would Trim Crop Insurance Assistance,” the farm bill cut direct payment and countercyclical farm subsidies, alternately boosting government subsidized crop-insurance offerings (The link to the article can be found here: http://on.wsj.com/1nGS8Sv). CBO estimates that the savings reinvested into new subsidy programs is projected to increase crop insurance funding and disaster assistance programs by approximately $5.7 billion over the next few years. If anything, this push towards safety-net programs heightens the risk the government assumes in the agricultural industry because weather and growing seasons as well as market conditions will dictate the outflow of money from government to farmers. As a result, the biggest “losers” of the budget plan will be crop insurance company sellers, such as Wells Fargo & Co. and Ace Ltd. because they rely on discretionary spending. Here is the essential breakdown of the savings: $6.3 billion in savings by cutting 4% from policies that drive up crop insurance program costs, $4.2 billion by cutting crop insurance company profits from a 14% rate of return to 12%, and $3.8 billion over the next 10 years by cutting 3% from premium subsidies. The Environmental Working Group claims that this is $14.2 billion in actual savings, compared to the supposed savings designated in the farm bill (http://bit.ly/NxMCkf).

Only time will tell whether this reallocation of funding will work in giving farmers greater control over risk management of crops, rather than solely relying on direct payment handouts. Common themes the 2015 budget seem to be productivity and efficiency, which are noble goals. The question then becomes whether or not the implemented changes will actually achieve these goals. While I may not have convinced anyone that these net “trimmings” to crop insurance are positive (good luck to anyone who can argue that), for what my $.02 is worth, I don’t think that this is cause to panic nor is the situation is as dramatic as the numbers seem.  

 -Allison Paisner 
National Grange Intern 

2 comments:

  1. Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. get more info

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  2. Thanks for the information! It seems important to know how the new budget will affect crop insurance. I've also been worrying about how the 2015 Budget will affect crop insurance subsidies. I suppose we'll see the effects in the next ten years.
    http://www.fritchins.com/crop/

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