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DAVID KRUSE

Drunk on insurance? Nah

June 13, 2013
Farm News

What is most important to farmers in the farm bill is crop insurance. The crop insurance system was tested by the 2012 drought and worked well to buffer the devastating losses as it was intended. There are many who just can't stand to see success so are out to undermine the crop insurance program going

We just had the worst drought in decades and no disaster aid bill was needed or asked for because of the crop insurance coverage. Farmers received indemnity payments of $17.2 billion.

Insurance underwriters took $6 billion of the hit and the other $11 billion was covered by premiums. Farmers are giving up $5 billion in direct payments that have outlived their credibility. Had there been no crop insurance in 2012, the ag sector and rural communities would have been roiled in severe financial problems that were avoided.

The subsidy that went into crop insurance was no larger than would have gone into a disaster aid program that would have been far less effective in stabilizing the ag economy. The money from disaster aid programs typically comes way too late to avoid the damage that is done. Crop insurance keeps the house from collapsing which is a lot better than re-building it after it falls. The U.S. consumer benefits greatly from farm subsidies that go into crop insurance as they stabilize food production, which reduces food costs.

Nowhere else in the world do they have such a system that provides such food security at such a low net percentage of disposable income as U.S. consumers enjoy today.

Government does a lot of things that are criticized, but its food policy has worked and crop insurance is part of the success.

USDA spending was up. When you have a drought, crop indemnities will be higher. When you have a Great Recession, food stamp outlays increase. That is what happens when safety nets are employed.

Some seem shocked by the cost, but that is just how safety nets work.

"One way or the other, taxpayers are going to pay for disasters in agriculture," Sen. Chuck Grassley said. "If they don't pay for it in crop insurance, then they are going to pay through disaster payments."

Crop insurance is a much more effective use of tax dollars than disaster programs.

Iowa State University has had some controversy over academic freedom, but I think that ISU Ag Economics Professor Bruce Babcock who has been bashing the crop insurance system working with the Environmental Working Group is all the evidence needed that ISU offers plenty of academic freedom.

The EWG is not farmer-friendly and a long time vocal critic of farm subsidies.

In the course of the debate over crop insurance subsidies, Babcock has reportedly alluded to farmers being "cheap drunks at an open bar" and "bribe takers," yet complains that we cannot have a rational balanced discussion of crop insurance subsidies.

With comments like those, Babcock is relying heavily on his ISU academic freedom.

Rather than being drunks or bribe takers, farmers paying $30/acre for crop insurance are often surprised to find out how much the government is contributing to premiums.

The Farm Bureau Spokesman printed an editorial by Thomas Zacharias, president of the National Crop Insurance Services and a former ISU associate professor, saying Babcock's characterization and, "use of such language and misleading information is simply unprofessional and must be challenged."

Thomas argued, "Farmers had insurance deductibles so they shouldered at least $12.7 billion in losses before they collected a single check from their insurance companies. Not exactly 'laughing all the way to the bank' when combined with the $4.1 billion farmers paid out of their own pockets to purchase crop insurance last year.

"It is also important to note that when crop insurance premiums exceed losses, the government sees underwriting gains that help offset payments in bad years. In fact, the government experienced nearly $4 billion in gains from 2001 to 2010.

"The farming community should not be subjected to a litany of ill-conceived metaphors and tasteless punch lines wrapped in the veil of academia and protected by an outdated system of University tenure."

Specifically, Babcock challenged the "harvest price option" saying that had revenue policies been based on the lower spring price, payments would have been halved. First of all, farmers paid more premium for the harvest price option and without it they would have endured the worst crop results in the history of many farms and gotten little coverage.

The harvest price option allows the coverage to reflect the market period when most farmers get paid. That this is somehow excessive compensation for losses is absurd.

Kansas State University economist Art Barnaby told DTN, "What's more, farmers paid about 50 percent higher premiums to include the harvest coverage in their policies.

"What is the point of having crop insurance if it's not going to pay in a loss year?"

Babcock said of the response to his views, "I'm almost a pariah."

No. Not almost. He is totally there.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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