President Has Crop Insurance in His Crosshairs

The President’s Fiscal Year 2016 budget just came out and one of the areas that he has identified for savings is reduction in the subsidies for crop insurance.  Quoting the budget directly:

“Overly generous benefits have almost eliminated the risk in farming at a cost to taxpayers in the billions. The Budget includes reforms that are designed to reduce the distorting aspects of the program while maintaining its place as an insurance program and a key component of the farm safety net. Specifically, the Budget proposes to reduce the subsidy for the premium on the harvest price protection revenue insurance, and tighten the prevented planting crop insurance rules saving an estimated $16 billion over 10 years.”

To be more specific, the budget calls for savings in the next four years of:

• 2016 – $1.125 billion (a 21% reduction in total estimated premium subsidy ($5.332 billion current CBO estimate)
• 2017 – $1.374 billion (a 25% reduction)
• 2018 – $1.560 billion (a 27% reduction)
• 2019 – $1.614 billion (a 27% reduction)

It appears the President would like to phase-in the reduction in subsidy at a 21% rate the first year, 25% the second and then about 27% each year thereafter.  The government currently subsidizes about 59.5% of total premiums on an annual basis. If this was fully phased in, the premium subsidy rate would drop to about 43%.

If  a farmer incurred a current $100,000 annual crop insurance premium, they would be currently be paying about $40,500 in net premiums.  Under President Obama’s proposal, this premium would increase to about $57,000.

Many conservatives in Congress view the premium subsidy in a somewhat negative light also, therefore, some of these changes have some chance of passage.

The total exposure to crop insurance risks have risen from $67 billion in 2007 to almost $110 billion now (based primarily on the rise in crop prices).

Paul Neiffer, CPA