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IL: Crop insurance leaves taxpayers with bill for lingering drought

By   /   July 25, 2012  /   1 Comment

Gov. Pat Quinn examines the corn crop in a drought-stricken area of southern Illinois on July 16.

By Jayette Bolinski | Illinois Statehouse News

SPRINGFIELD – Crop insurance — not disaster aid — will cover the losses of most Illinois grain farmers hurt by the summer’s severe drought.

Even so, the state’s taxpayers will be on the hook for millions of dollars – billions nationwide – because of a flawed program that has quietly mutated since 2000, one environmental watchdog group says.

“There’s really a lot of smoke and mirrors behind this crop insurance program,” said Craig Cox, senior vice president of the Environmental Working Group, which tracks farm subsidies. “We’re growing more and more concerned about who is this program being designed to benefit – crop insurers and farmers, but certainly not taxpayers.”

Gov. Pat Quinn is seeking disaster designations for most of Illinois, because of the drought. Illinois has had the warmest first half of the year on record, and rainfall is at least seven inches below normal levels.

Twenty-six counties already hold the disaster designation. Quinn asked the U.S. Department of Agriculture to add 69 counties to the list, meaning farmers in most of the state’s 102 counties would be eligible for loan programs through the USDA.

Congress no longer authorizes the ad hoc disaster programs of old, which sent billions in one-time cash payments flowing into the countryside. These days, lawmakers must find cuts elsewhere in the federal budget to pay for such programs. The U.S. Department of Agriculture can provide low-interest loans and other conservation programs to help farmers.

Loans, though beneficial for emergencies, really aren’t much help to farmers hurting because of drought conditions, which occur gradually, said John Hawkins, spokesman for the Illinois Farm Bureau.

“Floods happen right now. You’ve got a lot of damage that you have to get rid of like sand in fields and trees and debris. That’s something (in which) you can bring a bulldozer down, and trucks,” Hawkins said. “But with drought, it’s such a slow process because it happens over a series of months that it just kind of creeps up on you, and by the time you figure out ‘I’m really in trouble,’ it’s already too late.”

That’s where crop insurance, which about 80 percent of Illinois farmers have, comes in.

But it doesn’t work like traditional home or auto insurance policies, in which a person or a business takes out a policy, experiences a problem, has an adjuster examine the damage and receives a check to cover that damage based on the limits set when the policy was purchased. Major changes to the crop-insurance program in 2000 have taxpayers picking up more of the tab, Cox said. They pony up millions to help cover premiums, administrative costs and revenue guarantees.

For example, Cox said:

  • Taxpayers cover about two-thirds of the premiums for crop insurance policies. The cost to taxpayers has grown from $1.5 billion a year in 2002 to $7.4 billion last year, he said, citing USDA figures. Plus, taxpayers foot another $1.3 billion a year for overhead costs for the insurance companies, such as administering the policies, adjusting the policies, examining the crop losses and more.
  • Taxpayers, not the crop insurance company that sold the policy, are on the hook for most of the payout when a farmer suffers a loss. Cox said the formula used to determine the risk sharing on policies is complicated, but the bottom line is as the losses get bigger, the taxpayer pays more. “And when losses get really big, like they’re likely to be this year because of this horrible drought, taxpayers are going to end up on the hook for the vast majority – over 90 percent – of the loss,” he said.
  • The latest crop-insurance policies, which are the most popular policies in the Corn Belt, have something called “revenue protection,” insuring a crop based on dollars per acre instead of bushels per acre. The insurers may have no idea how much a farmer gets for his crop at the end of the season, but they pay out an amount based on the insurer-established harvest price and the actual yield. If it’s less than the per-acre guarantee established when the policy was taken out, the company pays the difference.
  • In addition, these revenue-protection policies allow the guaranteed payment to be adjusted according to grain-price fluctuations. If the price of corn or soybeans, for example, rises during the growing season, the policies calculate the guarantee based on the highest price.

“That’s turned crop insurance on its head,” Cox said.

“It’s no longer simply protecting a farmer from a loss of yield. It’s now protecting the farmer against a loss in yield, a drop in prices or a combination of the two. Taxpayers pick up a big chunk of that premium. And so these policies have become insanely popular. It’s really hard to find a corn or soybean farmer that still insures his or her crop with an old-fashioned yield-protection policy.”

The cost to the government for the crop insurance program in Illinois between 1995 and 2011 was more than $1 billion, according to figures from the Environmental Working Group based on USDA data.

Think taxpayer dollars here.

The reality, Cox said, is that disaster assistance really isn’t needed for grain farmers.

“If that farmer loses his entire crop, he’s going to get more money from the insurance policy than he expected to get if he saw no loss in yield at all and sold his entire crop under the insured price when he bought that insurance policy,” Cox said.

Not necessarily so, Hawkins said, noting not every farmer will be made whole by their crop insurance. The goal is to at least get them some money so they can start again the next year.

Food is a national-security issue, he said.

“If you don’t have somebody raising it, we’d be in a world of hurt. Farm programs are there to ensure that we have an affordable, safe food supply. I think if you did away with disaster aid or some of the other, even crop insurance, you would insert an extremely high level of volatility on farm owners,” he said.

“If we have another year like this, you’d probably have a lot of people just get out of the business. People wouldn’t be very eager to enter (farming) either, because of the investment and time. Whenever you have a disaster like this you’re always glad there is crop insurance or some kind of cushion there that farmers can depend on to get them through the short times so that when we have normal crops we’ll still be there.”

Any business, particularly farming, is inherently risky. Typically.

But in this case, it’s the taxpayers who will pay. Again.

It could be a record year for insurance payouts because of the drought, which stretches across much of the country. Estimates run from nearly $20 billion by the chief economist for the USDA to $40 billion by the president of the Iowa Farm Bureau, Cox said. No one will know until the harvest is in and the insurance companies make their payments.

Illinois is nowhere near the top of the heap when it comes to total crop-insurance costs by state. At $902 million, it ranks 16th. Texas’s costs are $7.8 billion. Also in the top 10: North Dakota, Kansas, South Dakota, North Carolina, Minnesota, Oklahoma, California, Missouri and Georgia.

In terms of disaster assistance, Illinois received $318 million between 1995 and 2011. The largest amount of disaster money funneled into Illinois came in 2010, when farmers received nearly $61 million. The smallest amount – $21,000 – came to the state in 1998.

In 2011, disaster payments for Illinois totaled $45.2 million, coming in sixth among states last year, behind Texas, Oklahoma, North Dakota, Kansas and Montana.

During the severe drought of 1988, most farmers did not have crop insurance and relied heavily on government disaster aid. Hawkins said this summer’s drought is the first real test of the crop insurance program in Illinois.

Cox agreed.

“There are very few people who have taken the time to really dig into what the crop insurance program has become since that 2000 act. This has happened very quietly,” he said. “This year, with this drought and these huge payouts and the way these new-fangled policies work, it may indeed draw a lot of attention.”

The Environmental Working Group supports crop insurance, Cox said, but the organization questions how much taxpayers should be responsible for and why taxpayers should be on the hook for the costs. It’s OK for taxpayers to compensate farmers for a significant loss in yield, but that’s about it, he said.

“We think lawmakers ought to just be really smart about what they do in response to this drought,” he said.

“Assistance really needs to go to the people who are really hurting, and we shouldn’t simply do one of these disaster programs that sends money out willy-nilly, regardless of whether it’s going to someone who is already going to be made more than whole by crop insurance, or whether it’s going to a livestock farmer that’s really facing the potential financial viability of their operation.

“Disaster assistance ought to be really carefully targeted to those producers who really need it.”

Jayette Bolinski can be reached at jayette.bolinski@franklincenterhq.org.

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Jayette Bolinski

  • Mark

    Without crop insurance my farm would be up for sale. Back in 1983 it almost did sell. took 23 years to pay that debt. Remembered when they used food as a pawn in the trade wars. That about lost the farm also. The government does not have the right to use food as a weapons. All I hear is Environmental Working Group wants to do away with crop insurance. BULL CRAP ! I don’t think the full truth is being told. I don’t read about how the government was making money on the crop insurance ? Where that story ? Until 2012 they made money. They were partners in a business decision.