Footing the Farm Bill

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For American farmers, the 1930s were particularly trying. Not only was there the Great Depression that followed the stock market crash of 1929, but also severe drought and wide-scale erosion due to poor farming practices, known as the Dust Bowl. In 1933, the US government passed the very first Farm Bill—the Agricultural Adjustment Act (AAA)—through which farmers were paid to grow less and thereby raise the value of their crops. The AAA also enabled farmers to sell their excess crops to the government to establish a mass food and nutrition program that was the precursor to today’s food stamp system. Five years later, in 1938, Congress established the Federal Crop Insurance Corporation (FCIC), which legislators hoped would help safeguard farmers from disaster, and also help ensure all Americans would have steady access to a sufficient food supply.

That same year, Congress decreed that a farm bill would be passed every five years. And for the most part, in the subsequent decades, the legislation consisted of nutrition assistance, more commonly referred to as food stamps, and farmer support. That latter, broader category of “farmer support” looked surprisingly consistent in the decades following the 1930s. The federal government propped up prices of core commodities for the country’s farmers, and those farmers in turn were confident in their ability to receive steady payouts from the government, regardless of what production looked like or if a natural disaster occured. Those guaranteed disaster payouts could be steep in certain years, a reality which fed into the government’s growing enthusiasm for crop insurance programs. At its early stages, federal crop insurance was limited in its scope, covering only priority crops in key producing regions. Participation rates were low, with costs being prohibitively high for many.

Eventually, legislators sought to formalize and expand the federal crop insurance program to cover more farmers and crops, and reduce the pressure on the free disaster relief programs offered by the government. And so in 1980, Congress passed the Federal Crop Insurance Act, further subsidizing insurance premiums for farmers and setting the stage for increased participation by private insurers.

Farmer participation in the insurance program grew slowly in the 1980s. Congress was still spending a considerable amount on disaster relief programs for uninsured farmers—close to $10.7 billion, for example, between 1988 and 1993. In 1994, the national farm insurance program underwent yet another makeover, with that year’s Federal Crop Insurance Reform Act, under which the government made participation more affordable by paying a higher share of premium costs.

Crucially, the 1994 legislation also meant that farmers would only receive disaster coverage—previously free and universal—if they were insured. That legislative change worked wonders and participation rates soared. Lawmakers grew confident in the ability of the proactive legislation to save the government money compared to ad-hoc disaster assistance programs.

By 1996, the requirement to be insured in order to receive disaster assistance was withdrawn, but participation rates continued to rise thanks to low, subsidized costs and the attractiveness of insurance policies to farmers. That same year, the Risk Management Agency (RMA) was created to manage the country’s agricultural risk management programs, most prominently the federal insurance scheme. The RMA acts as a reinsurer, supervisor, and final clearing stop for the private insurers who draft and underwrite the insurance policies that are sold to farmers. The RMA also provides reimbursements for crop insurers’ administrative expenses to keep the premiums affordable for farmers.

Today, federal crop insurance enjoys great popularity. In 2014, 295 million acres were enrolled in the program, or about 90 percent of planted cropland in the US, with $110 billion in insured liability.

Insurance and Commodity Support in the 2014 Farm Bill

When most people think about the farm bill, the first things that come to mind are probably farmer subsidies and support. But in actuality, food stamps make up the single largest spending category of the contemporary legislation. Nearly 80 percent of the 2014 farm bill spending goes towards the program, amounting to nearly $756 billion for the period 2014–2023. As of January 2014, when the law was passed, roughly 46.5 million Americans (or 14.6 percent of the total population) were on food stamps, making the reason behind that steep price tag more clear.

The next-largest component of the Farm Bill in terms of spending is crop insurance, coming in at 9.4 percent of the total, or $89.8 billion, between 2014 and 2023. Crop insurance was one of the few components of the bill to actually be expanded in 2014, increasing by about $6 billion, and driven in part by the reasoning that this sort of proactive, preventative spending is cost-saving in the long term. Next on the list is conservation, at $56 billion, followed by “commodity programs” at $44.4 billion.

And while several of these farm bill components have repeatedly faced threats of budget cuts—the 2014 farm bill slashed food stamps by $8.7 billion over the next 10 years—crop insurance was the program most recently on the chopping block. The 2014 farm bill placed a renewed emphasis on insurance by offering a greater variety of risk management tools to farmers and ranchers, making crop insurance more affordable for new farmers, and offering better safety nets for farmers engaged in organic or specialty crop production.

Pre-2014, farmers already had several federal insurance options available to them. Federal insurance schemes are multiple peril—meaning they cover a range of natural disasters, including drought, floods, and disease—but they have to be purchased prior to the planting season. The federal options can vary considerably in their approach, but some of the most important include: Actual Production History (APH), which insures farmers against 50-75 percent of their average yield; Actual Revenue History (ARH) insures against a farmer’s historical revenues rather than their yields; Adjusted Gross Revenue (AGR) policies insure an entire farm rather than a specific crop; Group Risk Income Protection (GRIP) uses county revenues to determine individual payout; and the Rainfall and Vegetation Index policies use the weather station and satellite data for each to determine payouts. Federal subsidy rates for insurance premiums range from 38 to 67 percent, depending on a farmer’s plan and anticipated revenue, with an average rate across commodities in 2014 of 62 percent.

While the number of policies for which crop insurance premium subsidies were paid has remained fairly constant between 1995 and 2014, a period during which the area under insurance increased by 33.6 percent, the amount the government spent increased by almost seven-fold—from $889 million in 1995 to $6.3 billion in 2014. There are several reasons for this substantial increase, including higher crop prices, a shift to crops with higher per-acre value, and the increased ability of farmers to purchase higher coverage insurance. The 2011 floods and 2012 drought made those years particularly heavy on insurance indemnities, with loss claims reaching $13.4 billion and $18.4 billion, respectively. Disaster payouts, meanwhile, averaged $1.24 billion annually between 1995 and 2014.

The 2014 Farm Bill continues to make the aforementioned coverage plans available, but it also offers several important changes to federal crop insurance. First, it introduced the Supplemental Coverage Option (SCO), which provides additional coverage for some of a farmer’s underlying insurance deductible. There is also the new Noninsured Crop Assistance Program (NAP), which offers weather-related loss coverage when insurance is unavailable. Overall, the increase in insurance coverage will translate into a $7 billion higher price tag compared to 2008 levels, and an additional $7 billion is being provisioned to cover expenses before the insurance kicks in.

The insurance expansion was lauded by farmers and insurers alike, but it also won strong support from conservationists. Under the 2014 update, in order for farmers to receive subsidized insurance, they would have to implement basic protections against soil erosion and to preserve wetlands.

“Commodity programs,” which in 2014 were allocated $44.4 billion, are closely linked with insurance provisions in any farm bill. These programs typically include a number of safety nets for farmers beyond traditional insurance. Historically, direct payments were the most controversial of such safety nets. Farmers of certain crops received payment according to historical farm acreage, regardless of market prices—and, amazingly, sometimes regardless of whether their farms were still producing crops. Also important was the system of countercyclical payments, through which farmers were paid when market prices fell below a target level. The system has parallels to the Average Crop Revenue Election (ACRE) program, which made payments to farmers when their farm revenues were below-target. The 2014 farm bill eliminated all three of these systems going forward—direct payments, countercyclical payments, and ACRE payments—and replaced them with more dynamic safety nets.

The first of the replacements for the eliminated safety nets is the Price Loss Coverage (PLC) mechanism, which makes payments to producers when market prices for covered crops are below fixed reference prices. The other major program is the Agriculture Risk Coverage (ARC) system, which makes a payment when either farms’ revenues from all crops or counties’ revenues for a crop fall below 86 percent of benchmark levels. US farmers have a choice between the two programs but cannot enroll in both. Since their enactment, almost all long and medium-grain rice and peanut farmers elected to participate in the PLC, while almost all soybean and corn farmers, and more than half of wheat farmers elected the ARC-County option. The 2014 bill also stipulated that in order to be eligible for the PLC and ARC payments, a person had to be “actively engaged” in farming, closing a troubling and costly loophole, and also capped commodity payments at $125,000 per person. In accordance with World Trade Organization (WTO) rulings, US cotton farmers are eligible for neither the PLC nor the ARC, and instead can only have access to a new cotton-specific insurance scheme, the Stacked Income Protection Plan (STAX).

Between 2010–2014, the federal government spent an average total of $6.3 billion each year on the now-eliminated fixed direct payments, ACRE payments, countercyclical payments, and supplemental and ad-hoc disaster assistance. According to the Congressional Budget Office, in 2015, the replacement ARC and PLC programs as well as disaster payments will cost only $4.9 billion. For the period 2014-2023, they will cost $4.4 billion annually.

The 2014 Farm Bill expanded crop insurance and attempted to make qualification for the various supportive “commodity programs” for farmers tighter and more market-based. The updated legislation does help save some money. But critics of the legislation point out that the 2014 bill is not saving as much money as many had hoped it would. Total savings from the 2014 farm bill between 2014–2023 are projected to be $16.6 billion—nearly half of which comes from trims to the national food stamp program. This fell far short of the reductions the White House was seeking—$38 billion in 10 years. In describing the need to trim the farm bill, the White House specifically highlighted the call for reductions in payments to farmers, stating that “income support payments based on historical levels of production can no longer be justified.”

Whether these payments are justifiable in the first place—regardless of whether or not they are market-based—remains a central question. Critics and budget hawks point out the fact that the income of the average farmer is actually substantially higher than that of the average taxpayer. Why should the latter have to subsidize the former? Proponents of strong financial support emphasize the critical nature of agriculture to the American economy, while maintaining that the payouts and profitability claimed by critics are overstated.

What is clear, however, is that the 2014 Farm Bill, while slightly more efficient than its predecessor, does not really represent a significant departure from the norm. Farmer support mechanisms remain extremely strong, and the overall cost of the bill is still.

The November 2015 Budget Cuts and December Backtrack

Few were surprised by the underwhelming spending cuts in the 2014 Farm Bill. Many more were surprised, however, to find that the November 2nd 2015 bill stipulated a $3 billion cut over a decade to the bill’s crop insurance program. Since the formation of public-private partnerships for crop insurance, insurance companies have had a guaranteed rate of return in order to encourage participation. The November 2015 budget changed the target rate of return from 14.5 percent to 8.9 percent —a move which legislators insisted would not affect farmers. Insurers, however, argued that critics were overstating their profitability, pointing to the fact that the number of insurance companies participating in the federal program has consistently dwindled in recent years.

Those cuts were ultimately very short-lived. On December 1st 2015, just one month after they were passed, the reductions to crop insurance were reversed via text placed into the otherwise transportation-focused Highway Bill. Insurers and some farmer groups celebrated the move, with headlines even claiming that the reversal “rescued” insurers. And while the core components of farmer support programs remain safe for now, it is likely that they will face renewed, close criticism come the next farm bill in 2019.

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