Who's on the hook for nearly $17 billion paid to farmers?

Apr 23, 2013

The extent and degree of 2012 crop losses is clear in this map of crop insurance policy payouts.
Credit USDA Risk Management Agency

Nearly $17 billion has been paid out to farmers in crop insurance indemnities to cover the losses from the catastrophic drought of 2012, the government reported this week.

It’s a record, of course, though far below the $20 billion estimates being thrown around last summer. The map with this post gives a clear indication of where the money has gone. The counties in deepest red have received more than $10 million in indemnities, which puts quite the bulls-eye on Nebraska ($1.5 billion in total indemnities); Kansas ($1.4 billion); Iowa ($2 billion); Missouri ($1.15 billion); and Illinois ($3.4 billion). And yes, Illinois is at the top of the national leader board. We know that many, many farmers are happy they had crop insurance last year.

To see maps for other time periods from the RMA, click here.

But what we don’t know yet is if the 15 companies that provide federally subsidized crop insurance are facing an overall underwriting loss. Indemnities have certainly outstripped the $11 billion paid in premiums ($7 billion of which was subsidized by the government). The overall loss ratio of 1.33 means that for every $1 paid in premiums, $1.33 has been paid out in indemnities. (In Illinois, the ratio is at an astounding 4.38 in the government’s latest report.)  But some of those indemnities are covered by the government and private reinsurers. The key for insurers’ bottom line is whether or not they minimized their exposure to the Corn Belt.

“They (insurers) allocate some of the risk to themselves. If they guessed right, they can still make money,” said Pat Westhoff, program director with the Food and Agricultural Policy Research Institute and professor at the University of Missouri.

Crop insurers actually haven’t suffered an underwriting loss since 2002, when the loss ratio was 1.39. Indeed, a document from the U.S. Department of Agriculture’s Risk Management Agency indicates that between 2005 and 2011, crop insurance companies have had a “gain” of more than $10 billion. Over the same time frame, the government had a “loss” of around $27 billion, which includes the premium subsidies.

But back to 2012. Bruce Babcock, an agricultural economist at Iowa State University, recently estimated that between premium subsidies, crop loss payments and administrative costs, U.S. taxpayers will end up paying about $11 billion for the crop insurance program in this record-breaking season.

How that huge number affects policy moving forward is the big question. The budget proposal President Barack Obama sent to Congress April 10 includes $11.7 billion in cuts to federal crop insurance subsidies over the next decade. And Republican Sens. Jeff Flake, of Arizona, and John Duncan, of Tennessee, have introduced bills to reduce the crop premium subsidy to pre-2000 levels — 37 percent vs. the current 62 percent.

In the meantime, we’re well into the 2013 crop year. Earlier this month, Futures International LLC projected that almost 24 percent of the planted hard red winter wheat acreage will be abandoned this year, the most since the 2002 drought.