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Changes to Farm Safety Net Programs Raise Concerns

Farmers know they’ll lose $5 billion in annual direct payments when a new farm bill passes. But up until now, few growers have complained about that prospect, because they know they can still count on buying federally subsidized crop insurance.

However, those popular crop insurance policies may start coming with some strings attached. The Senate farm bill (S 954) would add a means test to the insurance program for the first time and would also begin requiring policyholders to comply with rules for protecting wetlands and preventing soil erosion.

“There is consternation out here in the countryside,” said David Miller, director of research and commodity services for the Iowa Farm Bureau, that state’s largest and most powerful farm organization. The crop insurance restrictions are “making the Senate bill less attractive to people,” he said.

The crop insurance restrictions have become a key issue this year because some large farms are starting to drop out of traditional commodity programs and are relying exclusively on insurance. More growers may follow suit with the elimination of direct payments.

Commodity programs have long carried a number of restrictions, including caps on how much money an individual can receive, personal income limits for subsidy eligibility and conservation requirements. The names of subsidy recipients and the amount of money they receive also are made publicly available. But information on crop insurance beneficiaries is kept confidential, by law.

Critics of the insurance program say the means tests and conservation provisions are needed both to curtail farm consolidation — the concern is that the heavy premium subsidies enable mega-farms to get bigger than they otherwise would — and to prevent environmental problems.

Those provisions, plus others the House is likely to debate, would preserve “a generous safety net” but “reduce the incentive to plow up lands that farmers wouldn’t otherwise if they were responding to market signals and would make the farm safety net much more equitable,” said Scott Faber, vice president of government affairs for the Environmental Working Group.

The House Agriculture Committee’s farm bill (HR 1947) contains no new restrictions on crop insurance. But several amendments expected to be debated on the House floor include proposals to cap the amount of premium subsidies any one farmer can receive. The conservation compliance measure and adjusted gross income limit also are likely to be proposed as amendments.

Senate Agriculture Chairwoman Debbie Stabenow, D-Mich., added the conservation compliance provision to her committee’s bill as the result of a deal reached among farm groups, the insurance industry and conservationists. That agreement, which required conservationists to lobby against any additional restrictions on crop insurance, was intended to head off any further amendments. That’s why farm groups and insurance companies signed off on it.

However, over Stabenow’s objections, the Senate also approved an amendment 59-33 that would slash premium subsidies for farmers with an adjusted gross income of more than $750,000. Farm groups oppose that income limit. Even though it’s relatively high now, once it’s part of the program, Congress could easily reduce it.

“You’ll come around the next go-around and drop that” to a lower level, and “then, after a while, it doesn’t make any sense,” said Art Barnaby, a Kansas State University economist who specializes in crop insurance.

That’s what worries Miller, who estimates that up to 1,000 policyholders in Iowa could be affected by the $750,000 AGI limit. “When you go down this path, now it’s $750,000, what is it next year? It can easily be lowered,” he said.

Barnaby said some large farms may simply organize their legal structures to get around the $750,000-per-person income limit.

He and other economists say the premium increase would have a bigger effect on some regions than on others. The Senate amendment would reduce the federal premium subsidy by 15 percentage points for farmers with an AGI of more than $750,000.

Many of those high-income farmers likely would reduce their coverage level, and some in the Plains and Southern states might skip on insurance altogether, or least drop down to a premium-free catastrophic policy that the U.S. Department of Agriculture offers, economists say. Those farmers already buy lower levels of coverage than farmers in Iowa and other Midwestern states where plentiful rainfall and good growing conditions keep premiums lower.

Farmers who now buy policies to guarantee, for example, 85 percent of their projected revenue may purchase 80 percent coverage instead. The government subsidizes just 38 percent of an 85 percent policy, but 48 percent of an 80 percent coverage. The higher subsidy could offset the premium increase. The effect isn’t as great at lower coverage levels, however. For example, the premium subsidy for 65 percent and 70 percent coverage is the same.

Even though rich farmers would be buying less coverage, especially at higher levels, that would not be enough to force the USDA to raise premiums for other growers to keep the program actuarially sound, the concern that’s been raised by farm groups, said Chad Hart, an economist at Iowa State University. “The rates are based off a 30-year average experience,” Hart said. “Having a few guys shift doesn’t affect that at all.”

That issue is important because the Senate amendment would require the USDA to analyze the impact of the means test and stop it from taking effect if it would result in a “significant increase” in rates paid by other farmers. The amendment doesn’t define what a significant increase would be, but if Hart is right, it would likely be hard for the USDA to make a case for blocking the premium increase.

The conservation requirements would affect all farmers, regardless of income, and some are already grumbling.

In North Dakota, some farmers have dropped out of commodity programs and drained wetlands in recent years, something they were prohibited from doing if they still collected direct payments. Under the Senate bill, if they want to keep buying crop insurance, those wetlands would have to be restored. “That creates a difficult situation for farmers,” said Sen. John Hoeven, R-N.D.

He proposed amendments to soften the bill’s wetlands rules — one proposal would keep farmers from having to restore those drained wetlands — but was unsuccessful. He’s now looking to the House for help with that issue, he said.

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