Sunday, April 20, 2008

Buy some crop insurance, and good things might happen (wink, wink)...

Another meta-problem with our farm policy is if subsidies guarantee profits, everybody wants a slice. Or worse yet - we could get into a SUBSIDY FIGHT, as farm bill interests scrounge for funding for their constituents.

I was just talking to my insurance agent, after buying hail insurance for the second time in my life. (Last year a couple of storms made my heart beat fast - although there was no damage - and I think it's time for my heart to get its aerobic exercise some other way, now).

Crop insurance has become a VERY lucrative business. And everybody and his cousin is showing up to sell.
GAO investigators found that crop insurance companies had rates of return averaging 30 percent in 2005 and 24 percent in 2006, compared with a "benchmark" return of 6.4 percent for sellers of property and casualty insurance. The USDA has also paid the companies $6.6 billion to cover administrative costs in the past decade. Much of that has been passed on to local crop insurance agents -- some of them farmers -- who constitute an influential lobby that has fought changes in the program. The GAO noted that the USDA expects the allowance to increase by as much as 25 percent by 2008 because it is tied to crop prices, now rising sharply, "without any corresponding increase in expenses for selling and servicing the policies." "It's a hell of a deal," said Rep. Elijah E. Cummings (D-Md.). Rep. John J. "Jimmy" Duncan Jr. (R-Tenn.), a committee member, said, "Anybody who's fiscally conservative would be horrified by what we've heard." [More]
And it's not just the nasty ol' left-wing MSM pointing out the horrendous waste, it's farm economists. The numbers are truly mind-boggling - but then so are most farm subsidy schemes.
The crop insurance industry enjoyed another banner year in 2007, collecting $6.5 billion in premiums yet paying out only $3.2 billion in losses. I estimate that the industry will collect a record $2.8 billion from taxpayers. In contrast, the net amount that farmers received from the program in 2007 was only $750 million. Interestingly, since the beginning of this decade, the $11.3 billion in net payments to farmers (indemnities received minus farmer-paid premiums) is about equal to the amount that taxpayers have paid the industry ($11.1 billion). Overall, taxpayers have spent more than $22 billion since 2000 delivering about $11 billion in net payments to farmers, making crop insurance one of the least-efficient means by which taxpayers support the farm sector. [More, via Farmgate]
That's stupefyingly wasteful spending. But it may be about to get weirder. Federal regulations negate the power of the marketplace to bring premiums in line with risk and profit. Because premiums to farmers are fixed by the government, there is no room for competitors to offer better deals and gain market share.

Or is there?

According to full-line insurance agents, one workaround centers on seemingly unrelated services/products/benefits being "unofficially" bundled with the policy. If your lender is also your insurance agent, how "arms-length" is the underwriting policy determining your interest rate, for example?

Now it looks like grain merchandisers will also be looking for a dollop of this insurance gravy. I can envision marketing programs with benefits offered "coincidentally" with crop insurance purchase, for example. After all, one of the big selling points for crop insurance was the confidence to forward sell early to lock up profits.

But forward selling has become problematic, so if grain originators want to limit margin exposure, wouldn't a more involved relationship with fewer, selected growers provide enough bundled obscurity to make buying crop insurance from them look like a really good deal compared to a mere insurance company competitors? Just as lenders have subtle enticements, grain merchandisers could likely find hard-to-prove incentives to help capture a share of the crop insurance windfall.

And ditto with fertilizer companies.

And seed dealers. (If Monsanto worked to get the biotech discount, why not pick up the profit, too?)

So, my guess is this boondoggle product will soon become the "French fries" of farm inputs: "You want crop insurance with that?"

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