The U.S. government is looking to cut costs and one of the avenues under consideration is to reduce spending on crop insurance, but the industry says such reductions could hurt rural areas.

USDA is negotiating a new deal with crop insurance companies, which posted profits of 26.4 percent last year. Of course, crop insurance covers part a farmer’s losses when his or her crops fail and helps provide credit for spring planting. While farmers pay premiums, the government subsidizes the program to keep it affordable. Last year, it paid crop insurers $3.8 billion.

“The federal crop insurance program is an important part of the farm safety net, but costs have escalated to an unsustainable level and we need to take steps protect taxpayers,” USDA Secretary Tom Vilsack said.

Earlier this year, USDA proposed cutting $8.4 billion in spending on crop insurance over 10 years. Its first revision brought that down to $6.9 billion. A third draft is being prepared.

The opposition lies largely with insurance company profits. A study for the Risk Management Agency found the crop insurance industry’s profit in 2009 was the second-highest in 21 years and more than double the 10.7 percent the agency considered “reasonable” for last year. Over the past 21 years, the study said, companies averaged a 17 percent return, compared with a “reasonable” rate of 12.7 percent.

The agency also said government payments to crop insurance providers have more than doubled in the past three years while the number of policies hasn’t grown. “If you look back since the mid-1990s, the companies have lost money in this program only one year-- 2002, and it wasn’t that much of a loss,” Murphy said, citing it at 0.5 of a percent.

Brian Riedl, a budget analyst with the conservative Heritage Foundation, said he doesn’t like the government telling people what a reasonable profit should be, but the crop insurance system needs reform.

Dale Shelley, who farms about 2,700 acres about 60 miles northwest of Minneapolis, said insurance helped him through a drought and hail damage in 2008. Without it, he would have had to borrow money to buy seed and fertilizer in 2009.

“The government wants cheap food,” Shelley said. “To raise cheap food, we have to have a guarantee of something to keep us afloat.”

Bob Parkerson, president of National Crop Insurance Services, Overland Park, Kan., said the companies are legally required to maintain huge reserves. That’s because they have to pay out large sums when there are widespread crop failures, he said.

The industry employs about 18,000 people, mostly in rural communities, and those jobs could be at risk if the federal government cuts too deep, Parkerson said. That could mean too few employees to serve farmers well since writing policies and handling claims for crop insurance is labr-intensive. Policies must be rewritten every year, so if there are fewer agents, they might not have time to drive out to farms, determine clients' needs and provide advice, he added.

His group cites a study concluding crop insurance is less profitable than the broad segment of the industry that includes insurance on homes, cars, businesses and individuals. USDA’s proposal would likely cut profits by up to 30 percent, which could prompt some companies to end or scale back their participation, the study noted. 

Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark), and 29 other senators wrote to RMA Administrator Bill Murphy late last month about the magnitude of the proposed cuts.

Farm groups also have objected to the potential loss of several billion dollars in federal spending on agriculture. They fear any cuts now would mean less money for agriculture in the 2012 farm bill. Chandler Goule, vice president of government relations for the National Farmers Union, said savings should be put back into other risk-management tools for farmers.

Source: Associated Press