December 13, 2017
For years, one presidential budget after the next has proposed modernizing our federal crop insurance program. Historically, those proposals have fallen by the wayside; but this week the U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA) made a small but significant step forward by updating the crop insurance program’s “prevented planting” policy.
Prevented planting coverage protects farmers when extreme weather or other covered conditions prevent them from undertaking planned crop plantings. Under this policy, producers could previously pay a premium to “buy up” additional prevented planting coverage – an option that created defacto revenue streams for the largest agribusinesses because of the savings generated by taxpayer subsidies. By reining in this option, RMA will save taxpayers an estimated $1.4 billion while making the program stronger and more defensible.
We at the National Sustainable Agriculture Coalition (NSAC) have long called for this change (see our 2018 Farm Bill platform), and applaud RMA for taking this step toward modernizing the federal crop insurance program. We hope that this will be the first of several steps the Administration takes toward making federal crop insurance more efficient, effective, transparent, and equitable.
Generally speaking, most farmers only have a certain window of time to plant a crop so that it has enough time to mature during the growing season. If they miss this window and are prevented from planting their planned crop, this can severely impact their income and ability to farm the following year. In order to insulate farmers from some of this risk, RMA provides prevented planting coverage (when planting is prevented because of extreme weather or other covered causes) as part of their basic crop insurance policy.
Prevented planting coverage is only designed to compensate the farmer for their sunk costs, not to compensate them for the whole cost of production or loss of sales. Covering only what has already been spent is a sensible approach given that the costs traditionally incurred later in the season (i.e., harvest, pesticide and herbicide, and irrigation costs) would have been avoided if the crop wasn’t planted.
In order to calculate the payment rates for a prevented planting claim, RMA uses a set of cost factors that determine the percentage of a full loss that a prevented planting payment will cover. For example, the corn and canola coverage factor is 55 percent.
The previously offered buy-up option allowed farmers to purchase (or “buy-up”) an additional 10 percent of coverage for a premium. Buying up significantly increased producers’ indemnity given the marginal costs and large potential returns on the policy – especially given the fact that the additional premium costs were subsidized by taxpayers at the same rate as the rest of the policy, at an average of 62 percent.
Because the base indemnity rate is designed to cover only costs that a farmer would have already incurred, buy-up coverage essentially provides producers with extra compensation. According to a 2013 report by the Office of the Inspector General (OIG), the increased payment associated with buy-up may have encouraged some farmers to seek claims when they would have otherwise pursued alternative options.
Earlier this year, RMA adjusted their coverage factors based on this report, which also suggested that RMA adjust their prevented planting buy-up provision. Based on recommendations from the report, RMA will lower their buy-up option from 10 percent to 5 percent. Leaving the option for producers to purchase some amount of buy-up coverage is intended to cover the variability each farm has in terms of its cost structure; lowering the rate is intended to reduce potential abuse of the option.
Of course, every farm is different in terms of its cost structure, so there will be some variability, which may be a rationale for keeping the 5 percent buy-up option. According to the OIG report, the buy-up option was reportedly responsible for about $4.6 billion in indemnities between 2008-2011.
When a farmer makes a prevented planting claim they can pursue one of two follow up actions: not replant and receive the full insurance payment, or attempt to replant and receive no payment or a reduced payment depending on the outcome of the replanting. According to the OIG report, this creates a disincentive to replant for some farmers because they face a dual risk of a lower (or no) payment and the potential for a reduced yield on future crop insurance purchases. This creates potential problems locally and throughout the food system by lowering the overall supply of an available crop. An excessive buy-up option can further exacerbate potential supply issues by increasing the potential payout for not replanting. In fact, OIG report found that only 0.1 percent of prevented planting acres were replanted.
Buy-ups and the increased incentive to not replant fields can also have an impact on soil health. With only 0.1 percent of prevented planting acres being replanted, that means that tens to hundreds of thousands of acres each year could potentially be left fallow. Because there is currently no requirement or incentive as part of prevented planting (or crop insurance generally) to plant cover crops, these unplanted or “naked” soils are left vulnerable to wind and water erosion, which can strip away valuable topsoil and cause increased runoff into lakes and rivers. NSAC is encouraging RMA to more strongly incentivize conservation practices like cover cropping and to collect data on where cover crops are planted on covered acres.
Reducing the percentage of buy-up coverage available for prevented planting is a good first step, but there is significantly more that needs to be done to modernize the federal crop insurance program. NSAC recommends that RMA and Congress work together to create an incentive for farmers receiving a prevented planting payment to plant a cover crop when it is agronomically appropriate to do so.
NSAC also urges Congress to remove the penalty for attempting to replant. As noted previously, farmers face a penalty for attempting replant since their Average Production History (APH), which impacts their future crop insurance coverage, can be negatively impacted. There is no APH penalty when a farmer does not replant, which creates an incentive to leave fields fallow.
Congress should also seek to limit on the number of consecutive years for which a farmer can file for prevented planting coverage. Logically, the repeated inability to plant should serve as a strong signal that the crop or the land (or both) are not suitable for production. However, there are currently 65 counties in the United States where there have been prevented planting payments for 14 straight years. It can be hard to draw hard conclusions without better reporting and evaluative data from RMA; but claims repeated for this many consecutive years suggest the program is being abused and crops that could potentially thrive in these areas are not being planted.
Currently, a field only needs to have a successful crop one in every four years in order to be eligible for prevented planting coverage. NSAC recommends that this be decreased to one in three or two in five years. This change will better ensure that the land in question is suitable for planting and that the crops being attempted are appropriate for that particular geography and climate.
Lastly, NSAC recommends that Congress tighten RMA’s standard that requires evidence that other farmers with similar tracts in an area with a prevented planting claim have also been prevented from planting before approving a claim. The current standards for determining this are quite loose. In order to be fair to farmers and accountable to taxpayers, RMA must adapt quantifiable metrics for this standard and implement enforcement uniformly.
As we enter 2018, NSAC will work with the House and Senate Agriculture Committees to reform and strengthen the crop insurance program in the 2018 Farm Bill.