Insurance often farmers’ best crop
Taxpayers heavily subsidize premiums, insurers’ payouts
WASHINGTON — Crop insurers and the U.S. Department of Agriculture say a subsidized insurance program helps stabilize food prices for consumers while protecting farmers from weather-related losses. But others argue that the federal crop insurance program has been marred by fraud, encourages farmers to gamble on risky plantings and illustrates why government spending is so difficult to control.
The program insured $117 billion worth of crops last year, including almost all the corn, soybeans, cotton and wheat grown in the U.S. The government pays 18 approved insurance companies to run the program, pays farmers to buy coverage and pays the bills if losses exceed predetermined limits.
And the cost is increasing. The U.S. Department of Agriculture last year spent about $14 billion insuring farmers against the loss of crops or
income, almost seven times more than in fiscal 2000, according to the Congressional Research Service.
With a showdown over the nation’s finances looming this fall, the growing insurance tab is a bipartisan target. President Barack Obama sought this year to cut almost $12 billion from the program over the next decade while his ideological opposite, Republican House Budget Committee Chairman Paul Ryan of Wisconsin, has called the subsidized insurance “crony capitalism.”
Yet the president and the Republicans’ chief budget hawk are no match for the farm and insurance lobbies, which spent at least $52 million influencing lawmakers in the 2012 election cycle.
Federal crop insurance began in the shadow of the 1930s Dust Bowl, which scorched the soil and left farmers impoverished. Until 1980, when the government began paying about one-third of farmers’ premiums, few farmers participated.
In 2000, Congress made the subsidies more generous, so that farmers now pay only about 38 percent of their insurance bills. By last year, almost 1.2 million policies covering 282 million acres of farmland were in force.
Each year, farmers choose from a menu of insurance options — and by law, insurers are obligated to cover all who apply. More than seven in 10 policies guarantee income rather than yield.
The Washington-based Environmental Working Group, which supports more federal aid for conservation, says subsidies give farmers an incentive to buy “Cadillac” policies that over-insure their holdings and drive up costs. Some policies protect as much as 85 percent of a farm’s average yield.
In April, Obama’s fiscal 2014 budget recommended slicing $11.7 billion from the program over the next decade by raising out-of-pocket costs for farmers and cutting administrative subsidies for insurers. Ryan also has called for trimming the program’s spending.
Instead, a House-approved farm measure would expand crop insurance to guarantee as much as 90 percent of a farm’s income and extend coverage to peanut farms, while the Senate version covers farmers against even the modest losses they currently pay out of pocket.
Taxpayers are helping farmers pay their bills even as farm income this year is expected to top $120 billion, its highest inflation-adjusted mark since 1973, according to the USDA’s Economic Research Service. Farm income has doubled over the past four years thanks to rising land values and surging exports.
In 2011, the median income of commercial farm households — those deriving more than half their income from farming — was $84,649, almost 70 percent higher than the median income in the U.S. as a whole.
“We have been subsidizing some of the farmers who least need it in a way that is really costing taxpayers a lot of money,” said Sen. Jeanne Shaheen, D-N.H. “We’re never going to solve our budget challenges if that’s what we’re doing.”
Even as manufacturers and retailers struggle to rebound from the recession that ended four years ago, farm equity ended 2012 at $2.5 trillion, up 37 percent since the start of the recession in December 2007 — compared with a less than 1 percent gain in net worth for all U.S. households over the same period.
Citing “the record-breaking prosperity of American farmers,” Ryan said in March that “taxpayers should not finance payments for a business sector that is more than capable of thriving on its own.”
FOOD-PRICE STABILITY
The planned expansion of crop insurance reflects a move in the nation’s farm policy away from direct payments to farmers. Unlike direct farm aid payments, which are capped at $40,000 per farm, there is no limit on crop insurance subsidies.
In 2011, the latest year for which data are available, 26 farmers each got subsidies of more than $1 million, and more than 10,000 received $100,000 or more. One grower of tomatoes and peppers in Florida received a subsidy of $1.9 million, according to the Environmental Working Group. Congress has barred the USDA from revealing the identities of payout recipients.
The Congressional Budget Office said crop insurance will cost taxpayers about $90 billion over the next decade. If droughts like last year’s become more frequent, that could prove a conservative estimate: A February USDA report warned that even if the greenhouse gases that many scientists link to climate change stabilize, “land surface temperatures will continue to rise for decades,” permanently altering planting zones.
Advocates say that with direct payments ending, crop insurance is all that stands between farmers and the unpredictable forces of nature. In the event of ruinous drought or disease, the program automatically disburses aid, often within 30 days, much faster than ad hoc bailouts, which can take more than a year.
Without government-subsidized insurance, financially hobbled farmers might take land in and out of production, causing food prices to gyrate, according to Tom Zacharias, president of the National Crop Insurance Services, an industry group, who says the insurance costs about 2 cents per meal.
The USDA’s Risk Management Agency determines the policies’ costs and terms, while leaving marketing and claims payments to private companies. That means there’s no real price competition among the 18 approved insurers.
Jim Handsaker, 65, of Story City, Iowa, farms about 3,400 acres of corn and soybeans with his brothers and sons. He said he paid about $70,000 to $80,000 in crop insurance premiums last year. The taxpayers paid even more — since an average of almost two-thirds of premium costs are paid by the government.
“I have a lot of problems with the federal crop program,” Handsaker said. “It doesn’t matter who you purchase it from, it’s the same.”
Subsidized insurance also gives farmers an incentive to plant on land where crops may or may not flourish, he said, adding that he knows individuals who are “farming the program” with the intent of making an insurance claim rather than harvesting a crop.
Rep. Ron Kind, D-Wis., said he expects that trend to worsen.
“You’re going to see a lot of unproductive land brought into production because the taxpayer will cover the losses from all these riskless decisions,” said Kind, whose proposal to limit program subsidies fell 10 votes short of passage in June. “My concern is that this is eliminating all risk.”
SOWING CORRUPTION
Harry Dean Canady will learn next month whether he’ll spend the rest of his life in prison for cheating taxpayers of more than $1 million and threatening to kill the U.S. agents who brought him to justice. Canady, 64, pleaded guilty in December to defrauding the federal crop insurance system and is behind bars pending sentencing.
His thievery was just a sliver of the largest fraud in the program’s 75-year history, a case that has ensnared 41 North Carolina tobacco farmers, insurance agents and claims adjusters whose law-breaking cost taxpayers close to $100 million, federal prosecutors said.
“The system has checks and balances in place,” said Banu Rangarajan, 45, the assistant U.S. attorney who led the prosecution. “The problem is all the checks and balances here were involved in the fraud. The adjusters were paid off. The agents were paid off. Everybody was paid off.”
In recent years, prosecutors have targeted crop insurance fraud in states including California, Florida, Tennessee and Minnesota. Gregory Torlai, 52, a Stockton, Calif., farmer, was sentenced in 2011 to 30 months in prison after filing $340,000 in false claims, including for lost crops on a rock-and-garbage-strewn lot he tried to pass off as a wheat field.
In Iowa, soybean farmer Mark Hoffman, 54, drew a 20-month sentence in 2005 and was ordered to repay $2.3 million after involving his wife Susan, 52, and son Justin, 31, in a scheme to cheat the government.
An earlier North Carolina case featured a husband-andwife team that had employees throw ice cubes at their tomato plants and beat them with sticks before filing more than $9 million in phony hail damage claims. Robert Warren, 66, was sentenced in 2005 to a prison term of 76 months. His wife, Viki, 60, got 66 months.
Canady was part of a ring of corrupt adjusters, brokers and farmers centered on Robert Carl Stokes, a Wilson, N.C., insurance agent who pleaded guilty in 2009 to defrauding the government and two private insurers of more than $16 million. Other rings operated elsewhere in tobacco country as growers and distributors took advantage of lax oversight to bilk the government, as shown by court documents, plea agreements and interviews with investigators.
The USDA’s Risk Management Agency, which administers crop insurance, largely relies on technology to police the program. Government sleuths use weather data to verify claims of storm damage. Images from orbiting satellites can show whether a field was inundated with flooding or even planted with crops in the first place, while high-powered computers detect unusual or overly frequent claims.
In the past two years, the agency has introduced new software to make better use of field inspection reports and held seminars for farmers and insurance agents to underscore the need for compliance. Some innovations followed a March 2012 Government Accountability Office study, which concluded: “RMA may be missing opportunities to identify and prevent losses to the federal government that result from waste, fraud and abuse.”
But even as mounting crop insurance costs mean taxpayers have more at stake, there are fewer people minding the store. Over the past three years, the program’s total liabilities grew about one-third to $117 billion. Meanwhile, the Risk Management Agency’s workforce fell 9 percent to 455 employees, and the department’s inspector general’s office, which handles criminal investigations, lost 6 percent of its staff, or 35 individuals.
The Risk Management Agency, in a written statement, said of the North Carolina case: “The criminal actions of a few individuals do not suggest a systemic problem.”
Last year, data mining identified 2,465 insurance policies — 0.2 percent of the total — with unusual losses. The USDA and its insurers are responsible for conducting spot checks of those policies.
“We are extremely vigilant with extensive focus on adjuster, staff and agent training, utilization of data mining, interaction with RMA, and an intensive annual audit program,” Wells Fargo & Co. said in a statement.
PROFITS INSURED
Meanwhile, insurers like Wells Fargo & Co, the nation’s fourth-largest bank, are receiving large subsidies from the crop insurance program at taxpayers’ expense.
In 2012, taxpayers spent $14 billion paying more than 60 percent of farmers’ insurance premiums, the insurance companies’ operating costs and the lion’s share of claims triggered by a historic drought, according to the Congressional Research Service.
The government doled out $1.4 billion last year just to cover the administrative costs incurred by the companies.
The crop insurance program directly subsidizes government-approved insurers and indirectly benefits several other financial institutions — many based in tax-advantaged venues such as Bermuda or Switzerland — that reinsure those risks.
The program is designed to provide companies a 14.5 percent return on equity — a mark higher than that earned last year by companies such as JPMorgan Chase and General Electric.
Since insurers are required to cover all eligible farmers, they pass on about 55 percent of total program risk to the government or private reinsurance companies, compared with about 10 percent for other types of insurance, according to Fitch Ratings. That helps shield them in the worst years from ruinous claims.
Crop insurers have banked underwriting gains — the premium revenue remaining after claims are paid — in all but two years since 1993. Those private gains cumulatively topped $10 billion in the past decade, according to Risk Management Agency annual reports.
From 1989 to 2009, before the government took steps to rein in runaway profits, the companies averaged a 17 percent return on equity, well above the 12.7 percent deemed “reasonable” in a 2010 report for the Risk Management Agency by Seattle-based analytic firm Milliman Inc.
Tom Zacharias, president of the National Crop Insurance Services, said the current profit levels are needed to maintain private sector participation. His group also said the business is less profitable than other types of property and casualty insurance.
The No. 1 ranked crop insurer, Wells Fargo’s Rural Community Insurance Services, last year reported $2.45 billion in crop insurance premiums. One of 88 separate Wells Fargo businesses, the insurer was profitable for nine of the past 10 years and for the decade as a whole, said Mike Day, chief executive officer of the Anoka, Minn.based company.
Second-ranked Ace Ltd., a Zurich, Switzerland-based insurer, which declined to speak about its participation in the program, reported $2.7 billion in net income last year.
Ace is among several companies and groups that spend a lot of money to drum up support for the subsidy program in Congress.
Forty-three groups that wrote a joint letter to members of the Senate in March defending crop insurance collectively spent more than $52 million on lobbying during the 2012 election cycle, according to the Washington-based nonprofit Sunlight Foundation.
Individual companies including Ace, with $2.2 million, and Deere & Co., with $1.4 million, also cited crop insurance in their lobbying reports.
Agribusiness employees also have been generous in funding political campaigns, contributing $91 million to candidates in the 2012 elections, up from $70 million four years earlier, according to the Center for Responsive Politics, a Washington-based research group.