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Subsidy cuts could mean coverage cutbacks, crop insurers told

By JERRY HAGSTROM

INDIAN WELLS, Calif. — USDA Risk Management Agency Administrator Bill Murphy said today that the cost of the producer premium subsidy for crop insurance could reach $5.5 billion in 2011, but that if Congress cuts the subsidy, farmers are likely to cut back on their coverage for potential losses.

“If you lower [the percentage of the subsidy] farmers would reduce coverage," Murphy said during a speech here to the Crop Insurance Research Bureau. Farmers are unlikely to reduce the number of acres covered because lenders would not loan them money if they do not have insurance, Murphy added.

Murphy, who runs the crop insurance program, was responding to a comment by an insurance executive attending the meeting here that “there are rumors this will become a $10 billion industry in 2011,” meaning that the total amount insurance companies are paid in premiums would rise from $7.6 billion to $10 billion. The government subsidizes 52 percent of the premium, or $4.7 billion of the current $7.6 billion.

Murphy told The Hagstrom Report later that if the total cost of the premiums rises to $10 billion, the government portion of that would rise to between $5 billion and $5.5 billion.

In his speech, Murphy noted that as the government has increased the subsidy to farmers who buy higher levels of coverage, farmers have bought more insurance. But there seems to be a limit to what farmers will spend on insurance, he said. In reaction to a question about what farmers would do if the subsidy were reduced to 45 percent, Murphy said he believed farmers would lower the percentage of the value of the crop covered.

American Farm Bureau Federation lobbyist Mary Kay Thatcher told the crop insurance group Thursday that if Congress gets serious about controlling the deficit or needs money for other farm bill programs, the producer premium subsidy is a likely target for cuts because it is a large pot of money and makes up 69 percent of government spending on crop insurance. The rest goes for underwriting gains for the companies and the administrative and operating expenses for delivering the policies.

Murphy said he agreed with Thatcher about the potential cuts. “Everything will be on the table,” he said.

Murphy declined to talk more about the proposed good performance refund program that USDA has announced because the agency is still receiving comments on the proposal and reviewing them. CIRB has criticized the current proposal.

Murphy said he hopes the review will be completed in two to three weeks and that the rule will then be sent for approval to the Office of Management and Budget, which would then take another 30 days before making it final.

In the current budget environment, however, Murphy said he is not sure how long the good performance refund program “is going to be around.” When Congress gets to the 2012 farm bill, “they are going to be looking for money wherever they can find it,” he said.

Crop insurance agents not satisfied with last year’s standard reinsurance agreement that restricted how much money companies can pay them for administrative and operating expenses have requested a meeting with RMA, but Murphy had a warning.

“Do you want to be someone complaining you are not making enough money from crop insurance?,” he asked. Murphy said he had not heard of any situation where agents are not available, noting that as crop prices and premiums rise agents seem to be looking at how much money they would have made if the old payment schedule had been in place.

The standard reinsurance agreement said companies could pay agents only 80 percent of what the government pays to them for delivery of the policies. The government put in that provision because officials wanted the companies to keep more money on hand in case they have to pay losses. The new agreement permits companies to allow agents to participate in profit sharing. But Murphy said agents “don’t want skin in the game, they want a guarantee.”

The entire government payment for administrative and operating expenses is capped at $1.3 billion, and Murphy defended it in his speech. “The whole idea of a capped A and O is that it is going to have an impact. This was not a smoke-and-mirrors exercise. It is real money being saved.”

Murphy said that the total number of insured acres is 256 million, with 40 percent in corn, 23 percent in soybeans, 8.2 percent in wheat, 3.7 percent in cotton and 3.6 percent in nursery products.

Since RMA has made some changes to the gross margin insurance for livestock, it has become so popular with dairy producers that RMA may spend the entire $20 million Congress has allowed for that program. The National Milk Producers Federation has proposed a much larger gross margin insurance program that would use some current dairy subsidy money as the basis for its funding. National Milk has proposed that the program be managed by the Farm Service Agency rather than private companies, Thatcher noted Thursday.

Murphy also noted that RMA is going to change its prevented planting rules in the 2012 crop year so that farmers can get payments for not being able to plant a crop for only three years in a row. Then a farmer would have to plant and harvest a crop for a year before getting more prevented planting payments. Murphy said RMA changed the rules because one farmer had gotten prevented planting payments for 17 years in a row, and that farmers had begun to deal in land on the expectation of prevented planting payments. Prevented planting is an issue in Iowa, Minnesota and some other upper Midwestern states.