#subsidycap

Is a $125k subsidy cap for crop insurance an attack on family farms?

Depends.

It’s well known that a family farm is the same size or less than the operator being asked, while a corporate farm is easily defined as one acre larger.

Unprepared to make the family farm debate, the impact of this subsidy cap would vary largely on cropping practices, geography, etc...

Example:  In Southwest Nebraska, most producers carry optional units at the 65% to 75% level.  These elections are driven by practice (irrigated), primary risk exposure (hail) & the ability to cover that risk with private products (production & companion hail).

Example:  A producer carrying an 80% Enterprise unit would max the subsidy out at 5,208 acres while a producer carrying a 65% Optional unit would hit the $125k cap at 12,500 acres.

In other words, locations who rely heavily on Enterprise units will see this subsidy cap as a very large issue.  Regions that rely more heavily on private products would see a much smaller impact.

My bet is this cap will see strong resistance for two reasons

1 - “If you give an inch, you’ll end up giving a yard.”

2- Corn belt states leverage the Enterprise Unit more heavily & ag policy is driven by their interests.

(Example on an irrigated farm in Chase County, Nebraska below.)

  We’re going to go ahead and bypass the discussion concerning the importance of crop insurance for farmers and rural communities for now.  Assuming the purpose of changes to crop insurance is to save the government money, will proposed changes be effective in saving money?  (If you’re in a hurry, skip to bottom for answer.)

The cuts:

$40,000 cap on crop insurance subsidies.  I think the real winners here are lawyers & accountants.  Many of these larger farms are still family operations.  I would expect the creation of additional entities as crop insurance simply is not practical to purchase without the subsidy.  We may also see larger producers exit the program altogether while leveraging privately available marketing & crop insurance tools to mitigate risk.  Crop insurance has been a monumental success & has helped eliminate ad hoc disaster aid.  If the participation pool is drastically reduced, it is reasonable to expect the return of ad hoc disaster aid when mother nature is at her worst.  Remember, ad hoc disaster is 100% subsidized, not 60% subsidized.

$500,000 income restriction.  Whether farmers or investors, the people in this income class are often comfortable navigating complex regulations.  I would expect to once again see these producers circumvent these limitations through the creation of different entities, flex leases, etc.  Do not expect them to stand idly and pay and extra 60% for crop insurance.

Eliminate subsidy for harvest price option.  In Chase County, an irrigated farmer who purchases a 70% RP policy has a 130 bushel guarantee.  This policy will cost him $12.66 per acre.  The government subsidy is $18.21.  If the HPO was eliminated, that same 70% policy would cost the farmer $8.38 per acre while the government subsidy would drop to $12.07 per acre.  In other words, the government would reduce subsidy expenses by over 30%, right?  Not so fast...  Farmers who can not protect price, will likely look to protect more bushels.  If a producer decided he needed to max out yield coverage in order to safely forward contract corn while still maximizing subsidy dollars, he may elect an 85% Enterprise Unit.  An 85% Enterprise Unit without the harvest price option will guarantee the farmer 157 bushels per acre at a cost of $14.44.  The government subsidy?  $16.28.  The effective savings?  10%.

The Verdict:

These cuts will successfully save the government a little bit of money, but will not deliver promised results.  Expect unintended consequences on rural economies as producers and bankers must employ more conservative financial projections as they look to make the capital purchases main street relies on.  The proposed changes increase regulation and fail to provide any kind of meaningful reform for the American farmer & American taxpayer.