New Obama Budget Includes Cuts for Federal Crop Insurance

By Kenneth D. Ackerman

Few Washington government programs escape un-cut in the new 2014 budget unveiled today by President Obama’s administration, and Federal crop insurance is no exception.

2012 saw Federal crop insurance emerge as the premier Federal backstop for American farm producers against natural disaster, paying over $16 billion in indemnities as farmers virtually nationwide faced historic drought conditions.  This is why almost every discussion of a proposed new 2013 Farm Bill starts with crop insurance.   Nevertheless, the new Obama budget contains five separate proposals to cut crop insurance spending, totaling $11.7 billion over ten years.  Three of these (numbers 3, 4, and 5 below) aim directly at farmers, sharply raising out-of-pocket costs for buying protection.

Congress will have to agree before any of these crop insurance cuts can go forward, and the issue likely will become enmeshed in the larger Farm Bill debate.   Congress has shown little taste so far for reducing crop insurance outlays.  In fact, most Farm Bill proposals have tended to favor crop insurance as a more efficient, management-oriented, and farmer friendly alternative to traditional subsidies and price supports.

Below are the five cuts, as described by USDA in its 2014 Budget Summary released today:

  1. Establish a reasonable rate of return to participating crop insurance  companies:

A USDA commissioned study found that when compared to other private companies, crop insurance companies rate of return (ROR) should be around 12 percent, but that it is currently expected to be 14 percent. The Administration is proposing to lower the crop insurance companies’ ROR to meet the 12 percent target. This proposal is expected to save about $1.2 billion over 10 years.

  1. Reduce the reimbursable rate of administrative and operating expenses:

The current cap on administrative expenses to be paid to participating crop insurance companies is based on the 2010 premiums, which were among the highest ever. A more appropriate level for the cap would be based on 2006 premiums, neutralizing the spike in commodity prices over the last few years, but not harming the delivery system. The Administration, therefore, proposes setting the cap at $0.9 billion adjusted annually for inflation. This proposal is expected to save about $2.8 billion over 10 years.

  1. Decrease the premium subsidy paid on behalf of producers by 3 percentage points:

The proposal would reduce the premium subsidy levels by 3 percentage points for those policies that are currently subsidized by more than 50 percent. This proposal is expected to save about $4.2 billion over 10 years.

  1. Decrease the premium subsidy paid on behalf of producers by 2 percentage points on policies where the producer elects policies that provide protection against price increase:

This reduction is in addition to the 3 percentage point reduction on policies currently subsidized by more than 50 percent. These policies provide upward price protection which provides a higher indemnity if the commodity prices are higher at harvest time than when the policy was purchased. This proposal is expected to save about $3.2 billion over 10 years.

  1. Reduce the premium rate on catastrophic coverage to better reflect historical performance:

This proposal would require that USDA reset premium rates to more accurately reflect the performance of the catastrophic portfolio. The proposal is expected to save about $292 million over 10 years.