Economist says crop insurance shield for 2012 drought too large

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U.S. farmers have collected a record $17 billion in crop insurance payments on drought-hit 2012 crops but the system could have spent half as much and still saved growers from ruinous losses, an insurance specialist said on Wednesday as the debate over the cost of farm programs heats up again.

Lawmakers are expected to begin work on a farm policy bill that includes crop insurance subsidies this week.

Agricultural economist Bruce Babcock of Iowa State University said lush subsidies encourage farmers to buy high levels of coverage and ultimately drive up the cost to taxpayers.

Crop insurance has zoomed in cost in the past decade and is now the most expensive part of the farm safety net.

The Environmental Working Group (EWG), an advocacy organization which commissioned Babcock's study, said Congress should reduce the federal subsidy of insurance premiums.

The government now pays 62 cents of each $1 of premiums, picks up part of the administrative costs as well, and covers 75 percent of losses in bad years, such as 2012.

"Making farmers pay a larger share of the incremental cost of Cadillac insurance coverage would be a good place to start," the group said in a report. "Over-generous subsidies have turned crop insurance into more of a farm income support program than a risk-management program."

In his study, Babcock compared payments through so-called revenue protection policies, the most popular type of coverage, with policies that set stricter limits on potential payouts.

Payments that stemmed from the devastating 2012 drought would have been halved, Babcock estimated, with a revenue policy based on crop prices that prevailed in spring, before crops were planted, and not the high harvest, when prices were much higher.

That type of policy, called "harvest price exclusion," is widely available and would have put "a solid floor" on crop revenue in 2012's drought, said EWG. Babcock said premium subsidies make it less attractive than policies that use windfall prices.

"I'm a critic of the subsidies," said Babcock, who writes frequently about crop insurance. "I think crop insurance is potentially a valuable tool for farmers to use to manage their risk."

The EWG report said that while taxpayers have been on the hook for insurance payouts to farmers, insurance companies have had a windfall of $10.3 billion in underwriting gains since 2001.

Senators voted in 2012, in a farm bill proposal that died at the end of the year, to require the wealthiest farmers to pay a larger share of premiums and to require all growers to practice soil and water conservation in order to qualify for subsidized policies.

A crop insurance trade group and the U.S. Agriculture Department, which oversees crop insurance, had no immediate comment on Babcock's study.

Crop insurance is sold by 15 companies including arms of Wells Fargo, Deere, Archer Daniels Midland Co and Ace Group.

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