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The Grim Reapers of Crop Insurance

Friday, August 24, 2012

The private insurance companies delivering the federal crop insurance program do so at great cost to taxpayers.

The U.S. Department of Agriculture's Farm Service Agency (FSA) is often described as overstaffed and inefficiently structured for its mission, which is to deliver and monitor a variety of federal subsidy and conservation programs. Currently, FSA operates offices in over 2,100 countiesalmost all of those with any measure of agricultural production. Many of the offices are located within 20 miles of one another, and some don’t even have staff.

The county-based structure for FSA offices might have been reasonable in the early 1930s, when FSA (with a different name) was developing its infrastructure. At that time, farms were much smaller and far more numerous, 30 percent of the national workforce was directly involved in farming, transportation was much more costly, forms had to be processed by hand and by typewriter, and, to a large degree, program administration required face-to-face meetings between farmers and FSA employees.

Between 2006 and 2010, the insurance companies received an average of $1.44 from the taxpayer for every $1 of subsidy farmers received.

Things, of course, are vastly different today. So much so that even Secretary of Agriculture Tom Vilsack and most members of the congressional agricultural committees have acknowledged that there is an efficiency problem. In January, Vilsack announced that 131 FSA offices would be closed. The secretary’s action represents a de minimis response: Many more FSA county offices could almost surely be shut down and the FSA workforce correspondingly reduced, with no loss in effective administration of farm programs. And if a new Farm Bill actually rationalized and reduced the complexity and scope of farm subsidy programs, further workforce reductions would be more than justified.

In response to the recent downsizing proposals, the National Association of FSA County Office Employees (NASCOE) union has been searching for new FSA missions. It has set its sights on the federal crop insurance program which, while managed by a different USDA agency—the Risk Management Agency (RMA)—is currently being delivered by private insurance companies at a total annual cost to taxpayers of between $3 and $4 billion. Private companies sell and service the subsidized insurance products that are authorized by RMA, functions for which they are compensated through subsidies for administration and through underwriting gains, both of which have increased rapidly since 2000 (see Figure 1). Farmers also receive large premium subsidies. As a result, farmers typically pay about one-third of the total cost of their insurance policies, but between 2007 and 2011, over half of the total tax subsidies ended up in the hands of the insurance companies. The Congressional Budget Office estimates that every year insurance companies will continue to receive subsidies of between $3 billion and $4 billion for delivering the program.

VSmith 3.30.12 Figure 1

NASCOE claims that the FSA offices can deliver the whole federal crop insurance program much less expensively than the private agricultural insurance companies, saving taxpayers between $1.5 and $2 billion a year. NASCOE’s estimate is probably reasonably accurate. The only issue is whether the service provided to farmers would be quite as good. However, the proposal has been dismissed by Vilsack, the current administrator of RMA, and members of the Senate Agricultural Committee.

The reason is simple: Insurance companies and insurance agents are currently the most effective and intense lobbying groups with respect to the federal crop insurance program. The 16 or so private companies and agents that deliver federal crop insurance don’t want to lose their annual taxpayer-funded $3-4 billion boondoggle (at an average of between $200 and $250 million in annual gross revenues for each company). So they flood the halls of Congress, the Office of the Secretary of Agriculture, and the sixth floor of USDA’s South Building (where RMA locates its leadership in Washington) with what sometimes seems like a Cecil B. DeMille cast of thousands of lobbyists. And they have been very successful in achieving their goal of keeping the delivery program to themselves.

In January, Vilsack announced that 131 FSA offices would be closed.

Congress, the secretary of Agriculture, and RMA have been appallingly lax in their fiscal duty to taxpayers and the country as a whole. The current delivery system is an extremely expensive way of subsidizing farmers. For example, between 2006 and 2010, the insurance companies received an average of $1.44 from the taxpayer for every $1 of subsidy farmers received. Matters have not improved much recently, notwithstanding changes in 2010 in the agreement between USDA and the insurance companies that moderately reduced payments to the companies. For the agricultural secretary, Senate agricultural committee members, and the current RMA administrator to claim or imply that the current system is ideal, or even okay, is not credible.

At the very least, there is an urgent need for a comprehensive third-party review of the federal crop insurance delivery system. Other countries deliver subsidized crop insurance much less expensively (at less than 30 cents per dollar of subsidy). Moreover, over 94 percent of the subsidized crop insurance policies sold to farmers in 2011 could easily be delivered over the Internet without the involvement of any insurance agent or company or, for that matter, FSA office. RMA already has an important piece of the software that would be needed in place (what RMA currently calls its “cost estimator”).

It would be even better for taxpayers and the economy as a whole if Congress would simply end the federal crop insurance subsidy. The program encourages farmers to adopt unnecessarily risky production practices, distorts markets at a high social cost, and—by protecting farmers against the consequences of their own bad decisions—damages agricultural productivity and the industry’s global competitiveness over the long run. However, it is easy for Congress and the farm lobbies to sell subsidized crop insurance as a Good Samaritan program to the general public. So we are probably stuck with a genuinely wasteful program for a long time.

If that is the case, we certainly don’t need to subsidize a wasteful agricultural insurance industry at the same time, no matter how many publicly funded lobbyists that industry has. Nor, by the way, do we have to buy into NASCOE’s “make work for us” arguments and simply shift the job of delivering federal crop insurance to the FSA. Let’s just find the least costly way of doing the job.

Vincent H. Smith is a visiting scholar at the American Enterprise Institute.

FURTHER READING: With Michael Wohlgenant, Smith coauthors “Bitter Sweet: How Big Sugar Robs You.” He also writes “Shallow-Loss Insurance Assumes an Ignorance” and “Farmers Facing Loss of Subsidy May Get a New One.” Douglas Nelson and Alexander Rinkus discuss “The Hi-Tech Agriculture Imperative.” Blake Hurst explains “Why I’m ‘Ginned Up’ about Regulation.”

Image by Darren Wamboldt / Bergman Group

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