Agri-Pulse just published the comments made during the House hearings on the Farm Bill (Volume 8, No. 21, May 23, 2012). During the hearings, policymakers continue to propose payment limits and the latest is a proposal to limit the subsidy in crop insurance to $40,000. The average farmer is paying $18.28 per acre for buy-up coverage (Table 1). That means the average subsidy per acre for all levels of buy-up coverage is $29.06. These dollar amounts were based on the actual coverage purchased in 2011 and if famers were to maintain their current level of coverage, on average it would only require 1,377 acres of owned and cash rented acres to hit the limit. The average subsidy for CAT insured farmers is $15.04 per acre, so they will hit the limit with 2,660 acres based on 2011 premium costs set by the Risk Management Agency (RMA). If they are cash renting, which is very common in the Corn Belt, then all of the subsidy will count in the farmer’s limit. Because cash rented land is treated the same as owned land, these limits are more likely to hurt young farmers who probably cash rent more land than they own. Clearly, lenders have encouraged crop insurance coverage to protect their collateral, so payment limits will affect the available credit.
These are average premiums reported in Table 1 based on the national aggregate book of business. The 1,377 acres to hit the limit is an average and the national insurance book is dominated by corn and soybeans. However, even on a corn-soybean farm the maximum acres could be less than 600 acres as cited by Ruth Gerdes, Auburn, Nebraska in her House testimony. Dan Carothers, Bakersfield, California, testified that as little as 50 acres would put some specialty crop producers over this proposed limit. Because the 1,377 acres is an average for the 2011 year, some farmers will need more acres while others will need less, depending on the year (premium cost change based on strike price and option premiums), type of coverage, level of coverage, crop, and location. Farmers with annual paid premiums on buy-up coverage between $9,000 and $17,000 will start to hit the proposed $40,000 subsidy limit, depending on the type and level of coverage. Farmers can talk to their agent to see if they would be over the limit. Because of premium cost changes between years, one should look at more than one year when checking for the effect of a subsidy limit.
Payment limits have many unintended consequences, especially with a proposed national farm policy based on risk management rather than transfer payments under the Direct Payment (DP) program. DP paid up to $40,000 every year, while a risk management policy will pay nothing in most years but limits payments in the catastrophic years when farmers really need the cash because of an arbitrary payment limit.