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Monday, May 28, 2012

How Would You Be Affected By A Payment Limit On Crop Insurance Premium Subsidy?


With the apparent demise of Direct Payments in the 2012 Farm Bill, many farmers might assume that would also spell the demise of payment limitations.  After all what could be limited if there are no USDA payments?  Oh, but there are, and there are elements on Capitol Hill which have their sights on the government share of crop insurance premium subsidies.  But how would a payment limitation work on crop insurance?  Here’s how….

While farmers will pay a premium for crop insurance, it is only a part of the total premium, with the rest subsidized by USDA’s Risk Management Agency.  The premium will be different for different forms of insurance and also will vary depending on the coverage level selected.  Kansas State University ag economist Art Barnaby suggests that the intent of Congress may be to limit their subsidy of agriculture by first restricting payments to large farms, and secondly, achieving that savings with a cutback of premium subsidies. The limit being frequently discussed is $40,000, but how does that translate to crop insurance subsidies?  Barnaby says the average farmer is paying $18.28 per acre for insurance with the government paying $29.06.  That would mean an average of 1,377 acres nationally, but another crop insurance authority said it might be as low as 600 acres.  The wide variation exists because the USDA subsidizes more of the premium for enterprise units than other coverages, and typically will subsidize higher levels of coverage.  Consequently, one farmer will hit the maximum well before or after the neighbor who farms down the road.

Among the issues that farmers should consider, thinks Barnaby are:
1) Cash rent farmers will have all of the subsidy count in their own payment limit.  And that would hurt younger farmers who have more cash rent obligations than owned land.
2) Lenders have encouraged producers to protect their collateral, so such payment limits will affect available credit.
3) Specialty crop farmers may hit the limit with very few acres because of high premiums for high value products.
4) Since the amount of premium and subsidy change from year to year, the payment limit may be reached one year at a specific number of acres, but at a totally different number in a preceding or following year.
5) While Direct Payments were received annually needed or not, Barnaby says “while a risk management policy will pay nothing in most years but limits payments in the catastrophic years when farmers really need the cash because of an arbitrary payment limit.”

Barnaby says Congress in the past has raised its subsidy of crop insurance as an enticement to use the program, and that has successfully moved 74.6 million acres into the program with higher levels of coverage.  When Crop Revenue Coverage (CRC) was first offered, the premium came with a 30% subsidy, but that has risen to more than 62% today.  And he says if the premium was cut back, many of those farmers and acres would no longer be covered.
The ag economist says Washington policymakers have to decide what they want.  “Changing public ag policy affects ag lenders, rural commodity brokers, contracts offered by processors, crop insurance agents, crop insurance companies, and USDA employees. Libertarians would argue Congress could even close down USDA and eliminate all commodity programs and crop insurance subsidies, and Iowa will still be planted to corn. So what do policy makers want; more insured farmers or less subsidy dollars?

Barnaby also predicts that if subsidies are reduced in crop insurance, farmers will create new entities to avoid the limits, such as dryland farmers have done to separate their dryland and irrigated land into different insurance crops.

As an alternative, Barnaby suggests reducing the 100% subsidy for the catastrophic coverage or CAT insurance policies, which is nearly $400 per acre.  He says the average farmer with CAT coverage has an expected crop value of $1,304 per acre, compared to farmers with buy-up coverage who are expecting a crop value of $575 to $625 per acre.  But he says another unintended consequence of limiting the subsidy by $40,000 is it is likely to move many farmers to lower coverage levels, including CAT. So if the subsidy remains at 100% on CAT that will limit the savings from a subsidy limit. And he says payment and subsidy limits may good politics but poor economics.

Congress has been considering a $40,000 limit on the subsidy of crop insurance for individual operations.  There are wide variations on the number of acres needed for one farm to reach the limit, depending on crop, level of crop insurance coverage, and type of insurance.  The limit could reduce the amount of acres covered nationally, as well as impact cash rent farmers, and have other unintended consequences.

Posted by Stu Ellis on 05/28 at 08:28 AM | Permalink


Please click on: To see the facts and Taxpayer Risk with present and future farm policy at

Posted by: Alan Roebke at May 30, 2012 3:03PM

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