July 26 (Bloomberg) -- This year’s once-in-a-generation drought may leave many crop farmers largely unscathed as they are protected by taxpayer-subsidized insurance, a program Congress is moving to make more generous.
With prices for corn, soy and wheat escalating along with estimates of the drought’s severity, government-backed revenue- insurance policies offered through units of companies such as ACE Ltd. and Wells Fargo & Co. probably will be paying out billions of dollars in claims. And the program is designed so that the larger the losses for insurers, the greater the share of the payouts the government will pick up.
Farmers “are laughing all the way to the bank,” Bruce Babcock, an Iowa State University economist and critic of the insurance program, said at a presentation in Washington July 19. “If the price goes up, you could end up better off than anticipated if you have a crop loss.”
“I’m not saying this is anything illegal, or immoral,” he added. “It’s just the way it is.”
In 2011, with a drought in Texas and other weather woes, government-run crop-insurance programs paid out a record $10.8 billion. Of premiums paid in 2011, farmers chipped in $4.5 billion, while the government paid $7.4 billion, according to data published by the department.
Because of the program’s reinsurance rules, insurers made a $1.7 billion profit even with those record payouts, while the government took an underwriting loss of about $500 million, Pat Engel, a spokeswoman for the USDA Risk Management Agency, said in an e-mail.
Jeff Scates, who farms corn and soybeans on 15,000 acres in Shawneetown, Illinois, said this year demonstrates the need for an effective insurance program. He said he may lose as much as 80 percent of his crop because of the dry conditions. With insurance, he said he can recoup 75 percent of his potentially lost revenues.
Because of vagaries in how the system is administered by the government and the costs of seeds and fertilizer, “you’re never whole,” he said in an interview. “I’m definitely in favor of the crop-insurance program. It gives us skin in the game. If everyone buys it, everyone is in the game.”
Like auto, fire, and other forms of insurance, farmers pay into the program each year, collecting only when they suffer losses. In each of the previous 10 years insurance companies made more in premiums than they paid out to farmers.