While the next farm bill is still in flux, it's thought that crop insurance, which already runs billions of dollars every year, will be greatly expanded
Federal farm subsidies have long been the scourge of food policy critics who decry taxpayer support for agriculture that has resulted in billions of dollars in handouts primarily benefiting large producers.
Enemy no. 1 was the direct payment subsidy program. From 1995 to 2010, the program paid out $167.3 billion to grain and commodity farmers to produce, regardless of their actual production. The underlying idea was that the government needed to provide a safety net to ensure farmers remained solvent.
But now, with crop prices at sustained high levels for the past few years and increased scrutiny of the program's flaws, direct payment subsidies are on their way out with the 2012 farm bill renewal, saving taxpayers more than $4 billion a year.
Instead of offering up those savings to help chip away at America's deficit, though, policy makers are using those funds as a justification to expand revenue-guarantee programs and crop insurance -- a program that has drawn criticisms and already costs taxpayers billions of dollars a year.
Crop insurance used to be delivered through the government, but was shifted to the private sector in 1980 to boost participation.
Critics say farmers (primarily corn, soybean, cotton, and wheat producers) are able to buy publicly subsidized crop insurance policies that can guarantee them a level of revenue that's out of reach for many struggling Americans. Proponents of crop insurance point to the importance of maintaining a robust agriculture system as vital to American independence and security. Agriculture also faces unique challenges like unpredictable weather patterns.
"Because we are a nation that hasn't really experienced food shortages in recent memory, folks forget the role that [farmers] play on a lot of different levels," said Mike Torrey, executive vice president of Crop Insurance and Reinsurance Bureau, a lobbying group for the crop insurance industry.
But administration of the program has come under fire from agriculture economists as well as the independent agency, the U.S. Government Accountability Office.
"It's an inefficient delivery system," said Tom Cook, deputy director of GAO's Natural Resources and Environment team. "It's a system that a large percentage of the federal expenditures for this program end up going to just the delivery of the program, to the middle men: insurance companies and insurance agents"
Crop insurance used to be delivered through the government, but was shifted to the private sector in 1980 to boost participation -- which it has. Now, it is administered through 15 private companies, but is heavily subsidized by public funds. The government pays the insurance companies up to $1.3 billion a year, or more than 75 percent of their operating costs, to offer the program. In addition, taxpayers cover about 60 percent of farmers' premium costs.
In total, from 2000 to 2010 taxpayers contributed more than $42 billion to the industry, according to a 2010 Congressional Research Service report.
"I think that there is a service benefit to producers through the private sector delivery," said Keith Collins, former chief economist for the U.S. Department of Agriculture. "But it does come at a cost. When private companies deliver the product, they have to get paid to deliver the product."
While the next farm bill is still in flux, it is generally believed by those involved in negotiations that crop insurance will be expanded. Collins points out that the overall safety net for farmers is diminishing.
Here's a look at some of the debated areas for crop insurance in its current form.
GUARANTEEING REVENUE, NOT PRODUCTION
"Crop insurance started out as insurance against crop loss or yield loss. It was yield insurance until the late 1990s," said Bruce Babcock, an agriculture economist at Iowa State University. "Then people realized that farmers pay their bills with revenue so a couple of revenue insurance products were developed to allow farmers to buy insurance against revenue losses."
In non-insurance speak, this means farmers can guarantee up to 85 percent of their revenue. So, for example, if yields were high, but prices dropped at harvest compared to earlier in the year when the policy was purchased, farmers could still receive compensation for loss of income.
While there are two general forms of crop coverage, yield-based and revenue-based, most farmers opt for the more expensive revenue-based insurance because they know the majority of the cost will be covered.
The crop insurance industry is "selling a product that farmers have to be subsidized to buy," said Babcock. "It does provide value to farmers but they wouldn't find the value high enough to buy it if they had to pay for it with their own money rather than taxpayers' money."