WASHINGTON, Oct. 28, 2015 - Almost every year, the White House has proposed some type of crop insurance cut and farmers and the industry fought back, arguing that it is now the primary form of risk management. But with House Speaker John Boehner preparing to step down and “clean the barn” of tough issues, and GOP leaders eager to nail down a sweeping, two-year budget agreement before he left, the time proved to be ripe for a significant cut to crop insurers. A small group of tight-lipped negotiators have been meeting since last month to cut the deal, with details emerging less than two days before today’s anticipated vote.
Among other things, the budget deal would cut $3 billion over 10 years by requiring the Agriculture Department to renegotiate its Standard Reinsurance Agreement (SRA) with the crop insurance companies and lower the cap on the rate of return on premium to 8.9 percent, from the current 14.5 percent. Since 2011 the industry’s rate of return has varied from a loss of 15 percent in fiscal 2012, a drought year, to a gain of 13 percent in fiscal 2014, according to USDA.
The chairmen of the House and Senate Agriculture committees, and the ranking Democrat on House Agriculture, Collin Peterson, all said the proposal originated at the White House, and that GOP leaders kept the committees completely in the dark until the last minute. Sources briefed on the talks said crop insurance, conservation and nutrition cuts were all discussed, but only cuts to crop insurance were accepted. The White House was equally tight-lipped. Even top officials at the Agriculture Department were unaware of the provision until late Monday, sources tell Agri-Pulse.
“I’m extremely upset with the process,” Senate Agriculture Chairman Pat Roberts, R-Kan., told Agri-Pulse. “What we’ve done is open up the farm bill… If they needed $3 billion I would have been more than happy to put together a package with (ranking Democrat Debbie) Stabenow.”
House Agriculture Chairman Mike Conaway predicted the cut would force many insurers out of business and was organizing a last-ditch effort Tuesday to persuade GOP leaders to remove the cut from the budget bill before Wednesday’s vote. Plan B – should Conaway’s effort fail -- was to try to roll back the cut through the fiscal 2016 omnibus spending bill.
Conaway stopped short of criticizing Boehner for going along with it. “This is one of those deals where a tight group had to negotiate it. They can’t have everyone at the table,” he said, referring to the budget agreement. “They should have known ahead of time, and did know ahead of time, that I would object” to the insurance cut.
A USDA spokesman responded to the congressional criticism by noting that Republicans, including the likely next speaker, Paul Ryan, have proposed cutting crop insurance in the past. “The reality is this is a negotiated agreement between two sides and it’s unfair for some people to suggest this was solely an administration proposal when congressional Republican budget proposals going back several years have proposed similar cuts.”
Because the SRA must be renegotiated, the first savings from the cut wouldn’t kick in until fiscal 2018, and then would only amount to $36 million, according to the Congressional Budget Office. By 2021, the annual savings are estimated at $434 million.
The impact of the cut on the industry will depend in part on the SRA negotiations, which USDA would be required to complete by the end of next year, said Kansas State University economist Art Barnaby.
There are 17 companies that currently sell policies, but one, Wells Fargo, is trying to sell its business. The industry argues that its actual rate of return is actually less than 4 percent. If that were cut as low as 2 percent “there will be more companies for sale,” said Barnaby said. He said cuts to insurers could theoretically lead USDA’s Risk Management Agency to raise premiums. “Like a balloon, if (you) push on one side it will pop out on the other side.”
University of Illinois Professor Gary Schnitkey agreed that the 36 percent cut in crop insurance is “significant” and “would seriously hamper the (crop insurance) delivery system.”
The SRA also determines how much agents earn on the policies through limits on the companies’ administrative and operating reimbursement. The existing SRA, which took effect in 2011, capped A&O reimbursement at $1.3 billion and indexed it to inflation.
Joe Glauber, USDA’s former chief economist, said the budget requirement would likely be difficult to carry out in part because USDA and the industry don’t agree on how to calculate rate of return. He said the impact on companies could vary widely depending on how underwriting gains and A&O are affected.
The crop insurance issue aside, the budget deal could provide a boost to a number of programs important to agriculture because the agreement would raise spending caps in fiscal 2016 and 2017. Food-safety advocates already are pressing appropriators to use the extra money to increase the Food and Drug Administration’s funding for implementing preventive measures required by the Food Safety Modernization Act.
The National Sustainable Agriculture Coalition wants to restore cuts that appropriators proposed to the Environmental Quality Incentives Program and Conservation Stewardship Program. “These shortsighted cuts severely limit the capacity of farmers and ranchers to improve soil and water quality, protect pollinators and habitat, conserve water, and prepare for extreme weather events,” the group said.
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