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Monday, June 11, 2012

Weaning Farmers Off Their Crop Insurance Habit


Not all that many years ago, crop insurance was only for the faint-hearted, or farmers whose farmland flooded or burned up without fail every year.  Few farmers signed up, in part, because it was expensive and there was rarely any return on their investment.  Then Crop Revenue Coverage came along, with an attractive price and the improved opportunity to recoup one’s investment.  Then USDA’s Risk Management Agency created new and improved crop insurance policies that ended up being guaranteed income and the majority of farmers were signing up.  But now, with crop insurance being part of the family, and a routine decision that is widely endorsed by lenders, the Congress is considering imposing restrictions on its use to limit the type of farmers which have access to it.  And there could be some unintended circumstances.

With the demise of direct payments as a part of the agricultural safety net, Congress is moving that responsibility to crop insurance.  That is the only safety net in the proposal the House Ag Committee will be presenting.  And in the Senate, crop insurance will be joined with a program call “ARC” that will ease the deductible by 6-8%.  But crop insurance will be the workhorse in the 2012 Farm Bill as far as commodity programs are concerned.

But Congress has overhauled the administration of the program over the past few years, reducing its partnership with insurance carriers, while increasing the subsidy of premiums paid by farmers, as a means of attracting more to the program.  With a majority of farmers using the program to help manage their risk, and the program becoming more sustainable because of the larger pool of farmers paying premiums, the Congress is considering some major restrictions to limit farmer access and use of the program.  Kansas State University ag economist Art Barnaby has outlined several of those restrictions.  One is a $40,000 maximum subsidy that farmers could receive on crop insurance.  As outlined in the May 28th edition of Farmgateblog, once a farmer received $40,000 in benefits from subsidized premiums, he would have to pay the full premium, which could be the other 50-60% of the cost of the premium.  That might be hit at the 50 acre mark for an operation with high value fruit or vegetable crops, or it might be the 1,700 acre mark for a dry land wheat farmer.  Barnaby says it is a significant restriction with many unintended consequences for Congress.

Barnaby uses the same comment for another amendment being proposed in Congress for the 2012 Farm Bill, which would prohibit the ability to purchase crop insurance if your adjusted gross income (AGI) exceeded $750,000.  In his analysis, Barnaby says the $750,000 threshold will affect only a few farmers, but there was an effort in the House during the 2008 Farm Bill debate that would reduce it to $250,000.  How close is your AGI to $250,000, and how would you manage risk without crop insurance if your AGI exceeded that threshold?  Farm lobbyists know that no idea ever dies in Congress, although it may just be tabled temporarily, and ready to see the light at anytime.  Means tests used to be kept out of the Farm Bill, but the flood gates have been opening a bit wider each time the Farm Bill is re-written.  This would be the first time restrictions were placed on crop insurance purchases or benefits.  Barnaby says the $250,000 AGI limit will impact about the same number of farmers as the $40,000 premium subsidy limit.  But the former will impact more corn farmers and the latter will impact more wheat farmers.

What is the acreage threshold if the limit is $750,000?
1. Michigan corn farmers would need about 4,564 acres or 6,968 acres of soybeans to hit the $750,000 AGI limit.
2. It would require about 13,437 acres of Kansas wheat and 16,499 acres of Oklahoma wheat to hit the $750,000 AGI limit.
3. It would require about 13,437 acres of Kansas wheat and 16,499 acres of Oklahoma wheat to hit the $750,000 AGI limit.
4. Nebraska corn, 3,994 acres; soybeans 5,683 acres; wheat 12,742 acres:
5. Minnesota corn, 4,129 acres; soybeans 7,324 acres; wheat 7,928 acres:
6. Iowa corn, 3,708 acres; soybeans 5,684 acres: would be required to hit a $750,000 AGI limit.

What is the acreage threshold if the limit is $250,000?
1. Michigan corn 1,521 acres, soybeans 2,323 acres:
2. Kansas wheat 4,479 acres:
3. Oklahoma wheat 5,500 acres:
4. Nebraska corn, 1,331 (combined irrigated and non-irrigated) acres; soybeans 1,894 acres; wheat 4,247 acres:
5. Minnesota corn, 1,331 acres; soybeans 1,894 acres; wheat 4,247 acres:
6. Iowa corn, 1,236 acres; soybeans 1,895 acres: would be required to hit a $250,000 AGI limit.

How do you get around this restriction, if it becomes law?
The most immediate concern is the $750,000 AGI limit
1. The Farm Service Agency applies the AGI to tax returns of individuals and corporations, so the corporation and individual stockholders must be under the threshold, or receive pro-rated benefits. 
2. FSA now allows a husband and wife to act as separate owners, which would allow a couple to have a $1.5 million threshold, if a tax advisor would certify both would qualify if filing separately.  If not, Barnaby says it might pay to divorce, but live together, so each has a $750,000 limit.
3. By shifting expenses and sales many farmers could keep under the limit
4. Chartering a C corporation that would receive farm payments, maintain crop insurance eligibility, and stay below the $750,000 threshold, but paying out rents and other payments to the farmer stockholders.
5. Increase the number of farms by adding family partners, but it may take legal help to achieve.

Barnaby says there are many unintended consequences of the Congressional proposals.  Among them is the potential for the crop insurance program to fail for lack of sufficient premiums paid into the program.  That would require a federal bail-out of a program it has been cutting.  Secondly, many farmers may be unable to participate although required to do so by lenders. 

Proposals are being made in the Farm Bill debate on ways to limit participation or limit benefits to certain farmers based on financial thresholds.  One would have farmers pay the full cost of the premium for crop insurance after a $40,000 subsidy on premiums.  Another would prohibit crop insurance eligibility to farmers with adjusted gross income over $750,000, and possibly as low as $250,000.

Posted by Stu Ellis on 06/11 at 01:24 AM | Permalink

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