Trump’s proposed budget would cut crop insurance options for farmers

Farmers giving Farm Bill testimony have stated their number one farm safety net is the crop insurance program.

Crop insurance targets payments only to farmers who have losses caused by drought, heat, wind, hail and other weather perils; provides a backstop to marketing; and provides loan collateral. Farmers pay a significant amount of the premium for the coverage that best fits their farm and type of marketing, according to Kansas State University agricultural economics professor, Art Barnaby.

As a result, he said, many farmers were alarmed by President Donald Trump’s proposed budget announced May 23 that would cut $58.7 billion from crop insurance, or about $6 billion a year over 10 years.

If enacted, the cut would nearly eliminate the government’s share of the cost of crop insurance premiums paid through the Agriculture Department’s Risk Management Agency, said Barnaby, an expert in farm insurance and a state program leader with K-State Research and Extension.

Over the last five years, total crop insurance premiums or government subsidies paid by the RMA, have been $6 billion to $7 billion per year.

Barnaby’s analysis showed the cuts would limit the government’s share of the crop insurance premium to $40,000 per farm with the balance paid by farmers; eliminate the popular Harvest Price Option (HPO) which provides replacement coverage on lost production when prices are higher at harvest than the price projected before planting; and require an adjusted gross income (AGI) of less than $500,000 to participate in crop insurance.

“It would take an average of about 1,500 acres to 2,000 crop acres in Kansas to hit the $40,000 cap,” the economist said. “About 20 percent of the farms currently in the Kansas Farm Management Association are over this limit on acres.”

Once a farmer hits the $40,000 limit, he or she pays 100 percent of the premium cost for any covered acres above that level.

The average number of crop acres by year to hit the $40,000 cap in other states is presented in an interactive map.

Barnaby said the budget proposal would save $38 billion by requiring the limit on a premium “subsidy” to $40,000 per farm, according to government calculations. Another $11.9 billion would be saved by eliminating the Harvest Price Option (HPO).

Nearly 100 percent of revenue-insured farmers include the HPO, he said. Over the past 25 years, Illinois corn farmers had only one major crop failure, in 2012. Illinois corn farmers would have had their 2012 crop insurance payments cut or even eliminated without the HPO.

“If crop insurance is not going pay in a catastrophic loss year like 2012, then why buy crop insurance?” Barnaby said.

Criteria to reach the $40,000 cap would vary by state and by year. In 2016, for example, California would have required 542 crop acres to hit the $40,000 limit. The average amount of coverage was $2,608 per acre.

By comparison, Kansas would have required 1,998 acres to hit the limit with an average amount of coverage at $222 per acre.

The higher California liability was not offset by the lower premium rate that averaged 1.8 percent farmer-paid rate with an average subsidy per acre of $73.78. Kansas farmers paid an average rate of 5.6 percent with an average subsidy per acre of $20.02.

“The Kansas subsidy per acre is lower because the dollars of coverage are lower than in California,” the economist said. “This is the reason it requires more acres for the average Kansas farmer to hit the subsidy limit.”

The number of acres required to hit the $40,000 limit also varies by year, he said: “This is going to create an administrative nightmare for farmers, agents, insurance companies and the RMA.”

Like any business adjusting to new parameters, Barnaby said he believes many farmers are likely to make adjustments to avoid the subsidy limit if the budget proposal is enacted. They may include dividing acres into two “farms” and getting a second policy under a spouse’s name or encouraging landlords to change from cash rent to crop share rent. Larger farms will likely hire accountants and lawyers to create more “farms” from their existing acreage.

Such efforts will magnify paperwork needed for the whole system, he added, including insurance agents and companies, the RMA, and the farmers themselves – all with no new premiums being paid into the system.

Barnaby’s full analysis is available at: http://www.agmanager.info/crop-insurance/risk-management-strategies/administrations-proposed-crop-insurance-cuts-would. An Agriculture Today radio interview with Art Barnaby will be available June 14 at http://www.ksre.k-state.edu/news/radio-network/ag-today.html.

Press-release writer/sender: Mary Lou Peter

Press-release source: Kansas State University - 'K-State' Research and Extension, June 13, 2017

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Published by Agrolinker: Jul 28, 2017

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