In the wake of the farm belt drought in the summer of 2012, the government-funded crop insurance program paid U.S. farmers as much as $7.8 billion more than they suffered in losses, according to new research by an Iowa State University economist.

Farmers lost some of their crop due to the weather, but they were able to sell the rest at much higher prices than usual — think supply and demand. Farm incomes have soared to record levels.

The cost of the excess payments ultimately falls on taxpayers. The government pays most of the bills for an insurance plan that doesn't just protect against the usual hazards of farming, but guarantees that producers receive periodic windfalls. Without the subsidies, this type of insurance would be so expensive that no farmer would buy it. With the subsidies, it's a can't-miss deal.

Yet rather than fix the crop insurance program, Congress is poised to expand it as Republicans and Democrats near agreement on a five-year farm bill, which will set spending on farm programs and food stamps.

Crop insurance isn't a bad idea. Farming is a risky enterprise and farmers need a safety net to protect them from the vagaries of the weather and crop disease. It is in the national interest to promote sound risk management so America's food production can withstand unpredictable events such as the drought of 2012.

But Congress doesn't seem interested in focusing crop insurance as a safety net.

A type of crop insurance called Revenue Protection overcompensates farmers in bad years because it fails to take into account added revenue that farmers earn when they sell their crops at higher prices prompted by reduced supply, according to the research conducted by Iowa State's Bruce Babcock and commissioned by the nonprofit Environmental Working Group.

Farmers suffered losses of about $6.2 billion in the 2012 drought, but insurance paid them $14 billion, according to Bacock's research.

If new subsidies being proposed in Congress had been in effect, those payouts would have ballooned by another $6.5 billion. Farmers would have reaped $20.5 billion for losses of $6.2 billion.

This is also a good deal for the private insurance companies, many of which are foreign-owned. In recent years they have received an average of $1.3 billion in federal subsidies to sell and service crop insurance. From 2002 to 2012 the companies pocketed about $10 billion in underwriting gains.

That money went from government coffers to the likes of Swiss-based ACE Limited and QBE Insurance Australia. Those same companies enjoyed reinsurance at government expense, so that in the occasional bad year such as 2012, they absorbed only part of what would be a severe loss for them. Government covers most of it.

In six of the past 12 years, according to Babcock, taxpayers paid more to insurance companies than to farmers for this costly and excessive insurance, which is now poised to be greatly expanded.

The last farm bill expired in 2012. Stopgap extensions have since run out. The pressure is on to pass a new bill this month.

Senate and House versions of the legislation conflict in several key areas, most notably proposed cuts to food stamps for the poor. House lawmakers want a cut of nearly $40 billion over 10 years in the SNAP feeding program, a savings achieved mainly by tightening qualifications. The Senate has proposed $4 billion in savings over 10 years, achieved by reducing benefits rather than purging the rolls. A compromise is likely, and one conferee recently pegged the prospective cut at $8 billion.

There will be some things to like in the farm bill, including reasonable curbs on food stamp growth and an end to direct payments to farmers, a waste of $5 billion a year that should have been eliminated years ago.

But a big expansion of crop insurance would be a mistake. It should be a genuine safety net, not a guarantee of good times in bad times.

Source - http://articles.chicagotribune.com/