February 13, 2015
On Thursday February 12, Senators Jeff Flake (R-AZ) and Jeanne Shaheen (D-NH) teamed with Representative John Duncan (R-TN) to introduce legislation in both the Senate (S.463) and House (H.R.892) to eliminate the subsidy for the Harvest Price Option (HPO) within the federal crop insurance program.
The Congressional Budget Office has estimated that this legislation, if passed into law, will save the federal government $19 billion over 10 years. This proposal is similar one made by the President as part of his FY16 budget, released last week.
This new legislation would eliminate the subsidy that farmers get for electing to add HPO to their crop insurance policy. This add-on allows farmers to have their insurance revenue guarantee based on the harvest price instead of the projected price when the harvest price ends up being higher.
This legislation would not eliminate HPO and would not impact the premium subsidy on the underlying policy provided to farmers by the federal government. This legislation would only eliminate the subsidy for adding on HPO. Farmers could still add-on this optional coverage, but would have to pay the full actuarially fair premium to get this add-on product.
Most farmers currently elect HPO because it can be very lucrative and because the government premium subsidy makes it a relatively cheap hedge against risk. In 2012, adding HPO to a farm’s coverage increased its revenue guarantee for corn by 32 percent.
During the 2012 drought, the cost to the federal government of HPO was about $6 billion more than it would have been if only the projected price had been available.
What is the Harvest Price Option
A standard revenue insurance policy locks in a guaranteed level of revenue based on expected production and the expected price of the covered crop. If your revenue at the end of the season falls below that level because of low prices or low production you receive an indemnity.
HPO is an add-on to the standard revenue insurance policy that allows a farmer the option to have the policy’s revenue guarantee be based on the price of the crop at harvest or at the projected price set before the season begins, whichever is higher.
This is advantageous to the farmer because the price of a crop can change over the course of the growing season due to a variety of factors. As an example, in 2012 the pre-season estimated price for corn was $5.68, but rose to $7.50 by harvest time.
The higher revenue guarantee as a result of HPO means it is more likely the farmer’s end of season revenue will be less than the guarantee making it more likely they will receive an indemnity.
When you add in the HPO subsidy on top of the policy’s underlying subsidy it makes HPO even more attractive because you get this added hedge and get the federal government to pay for a majority of it.
The Explosion in Crop Insurance Subsidies and How it Impacts Farmers and the Land
Since 2000, when the effort to promote crop insurance ramped up, premium subsidies have risen from 37 percent to an average of 62 percent. Subsidies can run as high as 80 percent for certain products and coverage levels.
The result of the increased subsidies has been the removal of a considerable amount of the risk associated with growing crops, particularly corn, soybeans, rice, cotton, and wheat, which receive the vast majority of the subsidies. The consequences of this much-reduced level of risk include:
When this much risk is removed, farmers tend to plant on more marginal land, which can include erosive hillsides, sensitive wildlife habitats, and areas more prone to runoff, which can harm water quality.
The removal of most of the risk of farming also allows the largest farms and outside investors more leverage to purchase more land which makes it harder for mid-size family farms to expand and survive and new and beginning farmers to get into farming.
Our nation’s credit and crop insurance programs should work for all farmers and ranchers including beginning farmers, operators of small and mid-sized family farms, and operators of highly diversified farms, including sustainable and organic agriculture. It should not favor one kind of crop or method of production over another and should not remove so much risk from farm that farmers are moved to farm the program rather than the land.