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The politics and economics of crop insurance in 2018

Crop insurance critics have a blind spot.

That sentiment comes from former Risk Management Agency (RMA) Administrator Kenneth Ackerman, who is now an Of Counsel attorney at OFW Law, concentrating his practice on Federal crop insurance and agriculture programs.

“Crop insurance is a very important part of the farm bill and one of the very few issues that almost everyone in the farm community agrees on,” Ackerman said. “It’s grown substantially over the past few years and as a result it’s become something of a target.”

Crop insurance is the largest core agriculture support programs with an estimated price tag of $7.7 billion per year, which has the attention of budget cutters’ in Washington.

“Over the last several cycles of farm bills and appropriations bills, we have seen people looking to take money away from crop insurance to spend someplace else,” Ackerman said. “We’ve already seen for 2018 a number of reports coming out of different ‘think tanks’ suggesting cuts to crop insurance. It will almost inevitably be a subject of discussion.”

Prior to the 1990s, the crop insurance program was very small, with about a quarter of the participation and a tenth of the guarantees of today. As a result, when a large disaster would hit, farmers were dependent for their livelihoods on politicians in Washington scrambling to get an ad hoc bailout package through Congress.

“Beyond the uncertainty created by these ad hoc disaster bills, there were a lot of problems with administering them,” Ackerman said. “They had to be put in place with little notice and little infrastructure and that resulted in mistakes being made and program abuses which created controversy about these bailouts.”

Crop insurance was built on a business basis, which offers something more stable, predictable and dependable to farmers today.

“FCIC crop insurance, unlike disaster aid, is a business model that rewards farmers for being good managers and good businessmen,” Ackerman said. “Farmers purchase their coverage, paying good money from their own pockets, yes at subsidized rates, but still large enough to force them to make serious choices about risk. Producers who keep good production records enjoy better guarantees, and those who incorporate crop insurance into business plans linked with credit, banking, precision agriculture, and related risk-management tools like forward contracting and futures and options, do even better.”

As the 2018 Farm Bill begins to take shape, Ackerman says it’s important that farmers stay on top of the rhetoric in Washington and speak up if crop insurance is an important part of their operation.

“Once the agriculture committees finish their work on the core program, it is going to be very important for the farm community to be united,” Ackerman said. “There will be people who oppose the program for reasons that have nothing to do with agriculture, but have more to do with competing interests from other parts of the country.”

Like farmers, many agribusinesses are also keeping a close eye on the progress of the 2018 Farm Bill and the role crop insurance will play in it.

“Crop insurance is a public/private partnership that works really well,” said Jason Alexander, Senior Vice President of Insurance Services with Farm Credit Mid-America. “When the farmer pays that premium, they save taxpayers money in the long run. There could be tweaks but we are confident that there won’t be drastic changes to the program that could affect the risk pool and, in turn, affect the way producers buy crop insurance.”

There may be some changes in the way producers buy crop insurance in 2018, but it will have nothing to do with policy. Farm economics may have some growers looking for ways to save money with different coverage plans and options. Alexander says looking at crop insurance as a cost savings may not be the most prudent approach.

“I encourage producers to look at crop insurance from a ‘how much risk can I bear’ and start at the other end of that spectrum,” Alexander said. “Producers have made less money, most have burned through a lot of working capital and so their risk-bearing capacity has become less. So, I think you start at the opposite end of that and say ‘If another 2012 happens, what does that mean for me and what type of policy should I have in place to keep farming?’”

Alexander recommends not being short-sighted and trying to save a dollar or two on the premium here or there and lower your level of coverage.

“That might make a little sense to save a little money, but if you play out those worst case scenarios the outcome is much different than it was just seven years ago,” Alexander said. “We’re seeing a lot of farmers looking to increase their coverage levels to be able to withstand that additional risk that many farmers are currently facing.”

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