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USDA Finalizes Crop Insurance Cuts

At the beginning of June USDA released its latest set of proposed regulations that calls for a total of $6 billion in cuts of funding for crop insurance funding. Two thirds of this savings will go toward paying down the federal deficit, and the remaining third will support high priority risk management and conservation programs.

USDA announced that all 16 private insurance companies who participated in the federal crop insurance program during the 2010 crop year formally agreed to USDA's proposed changes to the system, totaling $6 billion in cuts over the next 10 years.

The signing of the mandated 2011 Standard Reinsurance Agreement (SRA) from all 16 private insurance companies ends negotiations which began in December 2009. USDA first proposed $9 billion in cuts, which were scaled back after three different draft SRAs were released.

Producers likely won't notice any changes except for shifts within the companies themselves on how insurance is delivered. Price or coverage won't change, explains Chad Hart, extension economist at Iowa State University.

What is causing quite a concern for some is the fact that this takes out money from the baseline of the 2008 Farm Bill prior to the rewriting of the next farm bill. It essentially creates a "hole in budget that can't be recovered," says Tom Sell, Crop Insurance Professional Association's policy advisor.

Secretary of Agriculture Tom Vilsack said that the average return to companies is figured at 14.5%, a "fair and reasonable rate of return" that helps maintain stability in the industry and is slightly less than in the past. An analysis shows that over the past 21 years, crop insurance companies averaged a 17% return when the average reasonable rate for that period was 12.7%.

The crop insurance industry said although the industry felt the negotiation process was generally handled reasonably well by USDA, there were terms and conditions added to the agreement very late in the process that gave companies very little time to react and negotiate a contract that was fair to all parties.

Bob Parkerson, president of National Crop Insurance Services, said the companies had no choice but to sign this SRA because, if they don't, they "cease operating and the safety net that America's farmers and ranchers rely on so heavily would be disrupted."

Senators wrote USDA expressing concern over USDA's plan to cap commissions paid to crop insurance agents, who are independent contractors. A USDA spokesman responded that the cap on commissions will ensure that insurance companies have sufficient funds to pay the other operating expenses in years in which there may be little or no underwriting gain.

In 2009, 265 million acres across the U.S. were insured under the federal crop insurance program. The major commodity crops widely use the program and it increasingly is becoming one of the most important risk management tools producers use today.