Farmers’ safety net may strain taxpayerPublished 11:28am Thursday, July 5, 2012
By Jennifer Bjorhussurvival
One of the largest farm real estate booms in decades could be getting a boost from an unsuspecting player: the U.S. taxpayer.
The government foots the bill for a large chunk of the nation’s enormous crop insurance program, which essentially guarantees farmers a profit. That, in turn, removes a lot of the risk from large rent commitments or bidding big for land at auction.
While agricultural economists say they don’t think anyone has researched a connection among the program, farm rents and high land prices, some farmers and other observers say it exists.
Commodity prices are the flames under cropland values, which have reached levels not seen in a century, even adjusted for inflation. But as 48-year-old farmer Darwyn Bach sees it, crop insurance is “throwing a little gas on the fire.”
Designed as a safety net, crop insurance was meant to cushion farmers from the multitude of risks that farming is famous for, from hailstorms to floods. But now, about 80 percent of the country’s crop insurance policies are revenue policies, protecting farmers not only from weather and yield losses, but also from drops in prices.
The insurance guarantees farmers a certain price for their corn, soybeans, sugar beets and more than 100 other crops, regardless of the whether the weather’s bad.
Nearly all farmers have it. It shifts revenue risk from the farmer to taxpayers, who share it with more than a dozen private insurance companies the government works with. Farmers paid $4.2 billion for their premiums last year, while taxpayers shelled out $7.4 billion, including at least $94 million for Minnesota farmers.
Iowa State University economist Michael Duffy said he thinks the larger factor in land values is that farmers have been generating record levels of income and therefore want to expand operations.
“It’s more of an indirect impact in my mind,” Duffy said of the crop insurance. “Does it have an effect? Yes. Has anybody measured it? No.”
The insurance program would be expanded under the five-year farm bill currently being debated in Congress to help make up for the elimination of direct subsidy payments to farmers.
The insurance payouts to farmers vary greatly year to year. In 2011 — a year that brought major floods, droughts and hurricanes — the program paid out a record $10.7 billion.
Supporters, including Rep. Collin Peterson, D-Minn., the ranking member of the House Agriculture Committee, argue that the insurance is critical to avoiding costly bailouts and protecting farmers.
Bach, a hog and crop farmer near Montevideo, Minn., says that by eliminating a significant part of farming’s risk, the insurance is helping stoke land prices and driving up the rents.
Bach rents most of the 520 acres he farms, about half of which he grows corn on. He’ll pay $60 an acre to insure his corn this year — a one-time payment of $15,900 he’ll make in October.
The policy he bought guarantees him 85 percent of the sale price of his proven corn yield, or about $940 an acre, based on a price that’s been set, he said. It costs him about $480 an acre to grow the corn.
That’s a guaranteed profit of $460 an acre. Bach still has to pay rent out of that, but figures he’ll pocket about $200 an acre — an “exceptional” amount, he said.
For farmers who own their land, the guaranteed profit could be more like $460 an acre, he said. For a 1,000-acre operation, that’s a guaranteed $460,000.
“That’s ridiculous,” Bach said.
To Bach, the insurance affects farm rents the most. The rent on part of the land he farms doubled last year to $280 an acre, up from $140 in 2010. That’s because the owner got two higher offers from other farmers, he said.
Bach said that he agreed to the steep increase because he can afford it, and that crop insurance is a big part of that. “When you remove that risk factor, then you can be more aggressive in bidding for rent,” he said. “We don’t have any risk up to that guaranteed minimum. It’s basically guaranteeing a profit for us now.”
Bach said he has “mixed feelings” about the program. It removes risk, but he said it also contributes to farmers tearing up poorer land, or land that might be in conservation, and putting it into production.
Plus, as he sees it, it puts beginning farmers at a disadvantage because they don’t have the crop history to establish the good coverage level that more-experienced farmers have.
Big coverage, booming prices
A Star Tribune analysis of government crop insurance data and local land values tracked by Steven Taff, an agricultural economist at the University of Minnesota, suggests that crop insurance could be playing a role in escalating prices.
On average, farmland in the 10 Minnesota counties that received the most in crop insurance premium subsidies between 2009 and 2011 — Polk was No. 1 with nearly $46 million — appreciated an average of 18 percent during that time. That’s twice the average rate at which land values rose in the 10 counties toward the bottom of the subsidies list.
It isn’t clear exactly why certain counties receive more in insurance premium subsidies. It’s likely that counties receiving the most subsidies have more valuable crops, and so would be buying more expensive insurance policies with costlier premiums.
Taff, who reviewed the analysis, said the findings are consistent with the idea that the insurance could be affecting prices, although other factors, such as how productive the crop land is, likely play a role, as well.
“It’s the old moral hazard problem,” he said. “Insurance encourages people to do risky things. That’s kind of what it’s designed to do.”
That’s what bothers Craig Cox, an executive at the Environmental Working Group, a health and environment watchdog. A vocal opponent of farm subsidies, Cox said he thinks the program “greases the gears at a huge cost to taxpayers.”
“The taxpayer is guaranteeing a large portion of your revenue,” Cox said. “That allows you to pay a lot more for land.”