To deficit hawks and critics of American farm policy, they are a clear example of wasteful government spending, lavishly rewarding farmers beyond what is necessary or fiscally prudent.
To many farmers, they are crucial to American agriculture – a safety net that enabled them survive the worst drought in at least a quarter-century last year.
Crop-insurance subsidies were until recently a barely noticed part of US farm policy. But with their cost soaring and Congress under pressure to cut spending, they have become one of most contentious issues in the farm bill, a hugely complicated and expensive piece of legislation that the Senate is debating this week and that will set American farm policy for the next five years.
In the broader debate, last year’s drought has become a subject of differing interpretations. Did generous payouts to farmers show that the system was working? Or did it prove that farmers have become too cozy on the public dime?
For now, Congress appears to support the subsidies. Efforts in the Senate to restrict subsidies have so far mostly failed, and proposals in the House and Senate are increasing them by as much as $1 billion a year. The Senate is expected to pass its bill Monday afternoon.
Last year, farmers bought insurance for 282 million acres of American farmland. Most of the premiums – an average of 62 percent – were paid by taxpayers. Three-quarters of the insurance subsidies go to four crops: corn, cotton, soybeans, and wheat. And with crop prices rising, both premiums and subsidies have been increasing to keep pace. A program that cost the federal government between $2.1 billion and $3.9 billion from 2000 to 2007 last year rose to $14 billion.
Insurance companies and many farm groups have fought hard to preserve the subsidies. They argue that the subsidies help boost local economies, save farmers, and eliminate the need for federal disaster assistance in bad years.
“Last year proved that the mission was accomplished,” says Mary Kay Thatcher, senior director of congressional relations with the American Farm Bureau Federation in Washington. “It was a terrible year, and we had no calls for disaster assistance.” Without current subsidies, she says, crop insurance “would be so expensive it would be unaffordable.”
Subsidies are popular in farm country, too. “Right now the feeling is really good about crop insurance in 2012,” says Paul Taylor, a corn and soybean farmer in Esmond, Ill., and president of the Illinois Corn Growers Association.
The drought hit the Corn Belt hard last year, but farmers still did well because they were able to sell their reduced crop at higher prices. In addition, the insurance payments they received for their losses were often based on drought-inflated prices.
Richard Gates, who farms about 1,000 acres in Carmi, Ill., lost 80 percent of his corn crop. Still, he says he earned as much profit as he would have if the drought had never happened.
“It means you can keep farming,” he says. “If you didn’t have it, it would have been difficult to go out and borrow money to put in a crop this year.”
But critics like Bruce Babcock, an agricultural economist at Iowa State University in Ames and an architect of today’s crop insurance programs, argue that too-generous subsidies have warped the system he helped create, encouraging farmers to buy “Cadillac” plans that give them more coverage than they need.
“Almost all of them have Cadillac insurance,” he says. “If they had yield shortfalls, then they made a lot of money.”
For years, critics of the US farm policy focused on eliminating direct payments, some of which paid farmers in both good years and bad. These payments have become increasingly difficult to justify in the face of record farm income and worry over the federal budget deficit.
“Most people have a really hard time justifying to friends and relatives why they should get a federal payment when they have had record profits,” says Mr. Taylor of the direct payments.
This year, direct payments are likely to be cut from the farm bill. But versions of the legislation in both the House and Senate would pour most of the savings – more than $4 billion a year – back into other programs, including more generous insurance subsidies. Both versions of the farm bill would also cut funding for conservation and food stamps.
Limits on subsidies, or no subsidies at all, are favored by conservative organizations, such as the Heritage Foundation and Taxpayers for Common Sense, which are looking for ways to reduce the federal budget. Liberal farm groups say unlimited subsidies favor larger operations at the expense of family farms. And environmental groups argue that some of the billions spent on insurance subsidies could be better spent on conservation and other programs.
“The expensive cost of these programs is really cutting into our ability to fund other parts of the farm program, such as research, conservation, and rural development,” says Craig Cox, senior vice president of the Environmental Working Group, a Washington-based environmental organization that has been a vigorous critic of farm subsidies. “A lot of the farm program that has substantial public benefit is being cut because of poor priorities.”
Some smaller farmers concede that in good years they could probably pay for crop insurance themselves.
“It’s a great product,” says Kevin Raun, a farmer in Minden, Neb., who received some insurance money last year for a partial loss of his corn crop. “I’m just saying that when prices are good, we can afford to pay our premiums.”
Why subsidies persist
Yet some critics of the subsidies concede that some federal support for crop insurance is probably necessary. Without subsidies, they say, many farmers would not buy insurance at all, especially in parts of the country where farming is less risky, such as the central Midwest. This would drive up premiums for farmers who live where farming is riskier, such as the Dakotas, and who need insurance more badly.
The Senate farm bill contains modest limits that would reduce insurance subsidies to farmers earning more than $750,000 a year. Advocates of still-greater restrictions, such as limiting subsidies to $40,000 per farmer, have so far been rebuffed. The House, which is expected to take up its own farm bill later this month, will be starting with a version that cuts food stamps more deeply and offers more generous support to farmers, especially cotton farmers in the South.
Attempts to reduce farm subsidies have often languished because of the influence of powerful farm groups, agribusiness interests, and farm-state representatives. Change is also difficult because of the inclusion in the farm bill of food stamps and other nutrition programs, which enjoy the support of urban constituencies.
“These are very common-sense reforms,” says Sheila Karpf, a farm policy analyst with the Washington-based Taxpayers for Common Sense and the daughter of Nebraska corn and soybean farmers. “In the end, they don’t pass. Special interests get in the way. It happens again and again.”