Monday, September 21, 2009

My aversion to crop insurance...

Is not unusual in the Third World.

There are higher-yielding varieties of groundnut than those that farmers in Malawi tend to plant, but getting them to switch is tough. Better seed is pricey, increasing their risk. So researchers from the World Bank ran an experiment. With local NGOs, they offered the farmers loans. Some loans even came with a crop-insurance policy: if the season was dry and the yield a dud, the debt would be forgiven. The farmers' risk was lowered. Of farmers offered conventional loans, 33% signed up. With the added incentive of insurance, 18% did. The researchers were puzzled.

It's been more than 30 years since microfinance began its fantastic rise, spreading billions of dollars in credit to hundreds of millions of overlooked borrowers around the world. Insurance is the next big promise of financial services for the poor.
But there aren't many takers.
That's not from lack of interest on the part of suppliers. The Gates Foundation has plowed millions of dollars into microinsurance initiatives, and in June, LeapFrog Investments raised $44 million for the world's first microinsurance-investment fund. The few billion uninsured people worldwide have big insurers angling for their business--with not many standout results. "We haven't really figured out a good model," says Monica Brand of the microlending juggernaut ACCION International.
Xavier Giné, a World Bank economist in Malawi, has seen microinsurance sputter time and again, even in areas where microloans thrive. Unforeseen economic behavior is driving these opposite outcomes, he says. "When we think about credit, lenders need to trust the borrower. But in insurance, it's the exact opposite. You have to trust that the insurance company will pay the claim." It's hardly a stretch that people new to financial institutions don't. (My crop fails, and you pay me? Ha!) In India, Giné has found, it's actually risk takers who are more willing to buy insurance policies: the thing meant to hedge against risk is seen as risky. And perhaps not without reason. Insurers didn't pay off in Bangladesh in the 1990s, one of the earliest attempts at microinsurance. [More]

To my knowledge, my friend Dave B. and I are the only producers around here who have never had crop insurance.  Mouths drop open when I mention this west of the Mississippi River.

However, this may not be a bad long term strategy.  As more producers and lenders rely on crop insurance to make the numbers work out, what happens if Deficit Hawks target the massive subsidies and premiums rise to real actuarial levels?
For although these senators question or don’t want a government option for health care reform, they see highly subsidized federal crop insurance in a much different light. In this, they’re joined by most of the Blue Dog Democrats in the House and fellow farm state senators.
All of them see “government crop insurance” as great; so, since 2001, about 58 percent of the farmer’s annual premium has been paid with taxpayer dollars. This subsidy is available to all farmers — big and small, rich and poor. That makes government-run crop insurance a major perk, one that’s prized by everyone from the smallest part-time farmer to the largest full-time producers who grow most of today’s crops.
And these crop insurance subsidies were not even affected by the prosperity of record grain price caused by the energy boom. Even after federal data had shown that total crop values jumped from $44 billion in 2005 to $90 billion in 2008, Congress still failed to end premium subsidies. [More]

While Alan drives me crazy with his crusading, I stand with him on this one.  While I still have the scars to prompt my recalcitrance to bet against Big Ag in any subsidy battle, I could see a Gramm-Rudman-type universal spending reduction affecting the ag budget.

Crop insurance has been berra, berra good for crop insurance companies and farmers who think risk should be someone else's responsibility.
What is not so easy to understand is why we choose to fund a vast network of insurance agents to induce farmers to buy heavily subsidized crop insurance, and why we need to pay private insurance companies large amounts of money to service the insurance contracts. Regional political interest in supporting agriculture in high-risk areas could be accomplished at much lower expense by eliminating program duplication through program consolidation, and by administering all programs through the FSA (as we are doing with SURE, ACRE, LDP, CCP, and DP). This would save on aggregate program expenditures, and it would save the large fees currently paid to crop insurance agents and companies.
One straightforward explanation for why attempts at such a consolidation were not successful in the 2008 farm bill is that crop insurance agents and companies have their own supporters in Congress. Together, supporters of crop insurance agents, crop insurance companies, and of agriculture in higher-risk regions make a formidable barrier to agricultural reform.
Different lobbying groups often need to support each other's priorities in order to keep the political coalition together. Thus, we see that the new FSA-administered SURE disaster program, which was a priority of senators from Montana and North Dakota, requires that farmers buy crop insurance, which automatically increases compensation to that industry.

It is possible that reform will come about simply through public awareness of the excesses of the risk management subsidies. But if history is any guide, it will take something more. Perhaps the need to finance trillion-dollar deficits as well as federal programs that provide benefits like clean air and water, transportation infrastructure, and nutrition will eventually force Congress to economize by increasing the efficiency of risk management programs in agriculture. [More]

To put it more bluntly, if crop insurance would be to vanish tomorrow, folks like me would still be farming pretty much the same. Others would not.  It is crucial to realize what your business plan is based on.


Tom Degan said...

Hey, Democrats! Although I left your silly party over a decade ago, my heart is still essentially with your platform and agenda. That being said, I would ask all of you to think of me as Dr. Degan, your loving and trusted family veterinarian. After a complete and thorough examination of your beloved pets, it grieves me to offer you this final diagnosis:

Your Blue Dogs must be put to sleep.

The Democrats are not going to distinguish their party by trying to sell themselves as Republican Lite. They're not going to turn America around by foolishly preserving the policies of the last thirty years. They need to educate their constituency by showing them the folly of their abhorrence of things "Left" and "Liberal". Three-quarters-of-a-century ago, American democracy was saved by a government that was decidedly left-of center in all but a few areas. It can happen again. But it's only going to happen if WEEDA PEEPOLE refuse to turn right at the next crossroad. It is only down the road.

Now if you'll excuse me, Dr. Degan has some Blue Dogs on his table that need to be put out of our misery.

Tom Degan
Goshen, NY

Anonymous said...

What would the producer landscape look like without the crop insurance support? Would cash rents be more in line with crop shares? Would financing be available for more or fewer farmers? Would production be enhanced or forfeited to manage risk? I think by supporting the crop insurance, the Government is telling us to go for it; which is perhaps the best thing for this country.

I know the agents get a good deal, but do you really think the Government could actually do it cheaper?

Bill Harshaw said...

Conservatives in the health care battle don't mention crop insurance. It's my pet example of a case where we had both public and private options, but the public option did not mean the demise of the "private" insurance policies.

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