Expanded crop insurance is bad policy
Over the past months, there's been a lot said about what kind of a new farm bill we should have.
Some people and some organizations would like to drop direct payments and replace them with a more extensive crop insurance program. But from my point of view, this is very bad policy--especially the proposals like crop insurance to cover shallow losses.
While we debate the new farm program, one thing we need to keep in the back of our minds is that our country really does have a financial problem in that we are spending money faster than it's coming in. To solve the problem, everybody is going to have to do their part. And that includes us farmers.
While we are all farmers, we are also part of something else. That is, we are all Americans. And instead of developing new self-serving programs, why don't we do the right thing--let's come up with ways for cutting our costs to the government. Instead of crowding to the front of the line, let's think beyond ourselves.
So rather than expand crop insurance as some would have us do, this program and other ag subsidies should be cut or made more efficient.
The shallow loss concept is nothing more than shallow thinking. Under this concept, you could expect to get crop loss checks almost every year. Traditional crop insurance generally covers maybe 70 percent of crop losses--major losses that don't occur all that frequently like those suffered during last year's drought. But the shallow loss program would push coverage to as much as 95 percent of revenue losses.
No-risk farming. That's a novel idea. I wouldn't want to be the one to explain this concept to Wall Street investors, futures market speculators, Las Vegas gamblers and small business owners. All of these groups also face much uncertainty but with few exceptions receive no government subsidy.
Of course, costs go up with the shallow concept, but outside of this problem, what else is wrong with the idea? Fortunately, organizations like American Farm Bureau see the shallow loss concept as having serious problems with market distortion. Since it's now almost impossible to lose money in farming, Farm Bureau says farmers will take on more risk rather than responding to market signals.
Farm Bureau President Bob Stallman says with an overly attractive crop insurance program, farmers are more inclined to react to government programs than to market signals. The low-risk crop insurance encourages them to buy more land and to bid up cash rents. In addition to raising costs of production, it obviously makes it more difficult for young and beginning farmers.
Noted ag economist Luther Tweeten from Ohio State University agrees. "Insurance subsidies to farmers encourage production, often on environmentally fragile lands. Indeed, crop insurance subsidies have been found to be the single most costly distortion of farm markets.
"Additional output distorts food and fiber markets, often to the detriment of poor farmers in developing countries. An end to insurance subsidies would sharply curtail all-risk insurance, but American farmers would continue extensive use of other risk management tools," Tweeten says.
While we ought to be concerned about how our farm policies affect farmers worldwide, we also need to remember World Trade Organization rules about trade distortion. Several years back our competitors in the cotton industry sued the United States over our STEP II program. They couldn't understand why the U.S. cotton acreage kept increasing while world prices kept dropping. Of course, it was because of our cotton subsidies, and, of course, we lost the WTO suit and, of course, every farmer in the United States got to help chip in to cover the penalties.
And that is the beauty of decoupled payments or today's direct payment. It is as clean as you can get with regard to market or trade distortion. But with the expanded insurance proposals, there are powerful incentives to do the wrong thing.
Crop insurance can be a valuable risk management tool. But again, to make it less market distorting, it has to cover all crops.
Tweeten also reminds us that with the highest net farm income in history, farmers are in a very strong financial position and can certainly afford the cost of these other risk management tools. In other words, the U.S. taxpayer doesn't have to subsidize these programs. He continues by saying, "neither does the taxpayer need to subsidize farmers for equity reasons because farm households including small farmers on average have considerably higher income and wealth than nonfarm households."
Bruce Babcock, ag economist from Iowa State University, also agrees. He says taxpayer subsidies actually encourage farmers to buy higher coverage than they may need. He argues that crop insurance doesn't need to subsidize the revenue protection component because farmers are already using forward contracts at their local elevator or the Chicago Board of Trade to lock in prices.
Babcock suggests offering farmers a decoupled risk management payment to buy crop insurance. Good idea. Provide us nothing more than a basic policy and if we want to buy up and get tinted glass, electric roll-up windows and leather seats, we can pay for the extras on our own. But guess what? If we have to pay for the extras, Babcock says we'll buy just the basic level. What does that tell us?
Vincent Smith, Montana State University ag economist, says the crop insurance industry is truly broken. "About 58 percent of crop insurance subsidies ultimately flow to crop insurance companies and their agents. Crop insurance subsidies are now the single largest farm subsidy program. The $5.6 billion crop insurance program is nearly one-third of all expenditures directly targeted to farmers.
"Further, even doing away with crop insurance would do little harm to farmers. Farmers have repeatedly shown they will not buy crop insurance without massive government subsidies--that is, they do not think the benefits are worth the costs. Farmers could protect themselves against financial losses by making greater use of modern financial techniques such as forward selling, puts, options and derivatives." Smith says.
Beyond that, we farmers can do a lot of other things to take care of ourselves--like paying off debt. Another idea I like is the concept of user fees. If you want to use programs like crop insurance, pay for it yourself.
And don't get the idea that I'm against subsidies. I'm just against self-serving and ineffective programs like the shallow loss idea. A subsidy I dearly love is to put huge amounts of money into research. Serving on the agronomy department advisory committee at Kansas State University, I was dismayed to see how many faculty positions were frozen and how much budgets had to be cut. For every dollar going into crop insurance subsidies, we ought to be spending that much on university research. Think how much less farmer subsidy is needed when we have new wheat varieties that yield 5 bushels per acre more than the next best variety out there. And, believe you me, the U.S. taxpayer can easily see the benefits of this to him through lower food costs.
In summary, I want to make one final thought. Once again as we debate the next farm bill, we are being given an opportunity to show what leadership is all about. But to do so we are going to have to think beyond ourselves and our own special interests.
--Vance Ehmke, Healy, Kan.