Farm and industry groups warn USDA about crop insurance cuts

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

Washington, April 12 – Some of the nation’s largest farm organizations wrote to Agriculture Secretary Tom Vilsack on Friday, expressing “grave concern” about the potential impact on the farm safety net if crop insurance cuts further reduce the spending baseline. The Congressional Budget Office (CBO) baseline assumes a $3.9 billion savings over 10 years as a result of the cuts proposed in the ongoing renegotiation of the Standard Reinsurance Agreement (SRA).

USDA officials are currently renegotiating the SRA with the nation’s crop insurance companies. The agency’s first proposal would have cut $8.4 billion and the second draft would have cut $6.9 billion over 10 years – levels that the industry has rejected as unacceptable.

Congress was not “credited” with a savings mandate for the SRA renegotiation provision included in the 2008 farm bill, the groups explain in their letter. “However, CBO appears to be basing its savings on what it believes to be a plausible outcome to those negotiations. We further understand that if the final negotiations provide more than $3.9 billion in reductions, CBO will immediately update its baseline to reflect those savings and Congress will not be credited with the savings either.”

“These reductions in the federal crop insurance program may undermine this component of the farm safety net and will sharply reduce the agriculture budget in the advent of a baseline budget farm bill. It would make a potential budget reconciliation process next year extremely difficult.”

For the full text of the letter, see below.

The letter was sent the same day that reinsurance giant Aon Benfield,  released its analysis of the U.S. crop reinsurance market, which reveals that proposed changes to the Standard Reinsurance Agreement (SRA) by the USDA could induce “challenging market conditions” for reinsurers participating in the Federal insurance program, likely reducing profits by 20-30% and leading some companies to withdraw from the program.

Joseph Monaghan, head of Aon Benfield’s Agriculture practice group, said: "Our study reveals that over a 10 year period, reinsurers participating in the MPCI program have experienced favorable returns due to relatively low loss experience resulting from few adverse weather events.  “However, the proposed changes to the program would have the likely effect of reducing participants’ margins, which could see potential reductions in capacity.”

The crop study highlights that if the latest RMA proposals had been in place from 1998 to 2008, participating insurers’ underwriting gains would have been reduced by nearly $560 million. Reinsurers state that while the period witnessed relatively few crop losses, the potential for significant losses still remains. Additionally, the RMA has proposed significant changes to the expense reimbursements. If these changes had been in place in 2009, crop insurer profits would have been reduced by more than $300 million.

Mr. Monaghan added: “In recent years, an increased number of reinsurers have started to write crop reinsurance, primarily attracted by the low volatility and diversification of this line of business. As a result, terms and conditions for crop reinsurance have become more competitive and insurers have benefited from lower pricing.”  For more on the report: http://aon.mediaroom.com/index.php?s=43&item=1885

The full text of the farm groups’ letter follows:

The Honorable Tom Vilsack
Secretary
U.S. Department of Agriculture
1400 Independence Ave., SW
Washington, DC 20250

Dear Secretary Vilsack:

We are writing to express our grave concern regarding the March 2010 budget baseline established by the Congressional Budget Office (CBO). That baseline assumes a $3.9 billion savings over 10 years as a result of the cuts proposed in the ongoing renegotiation of the Standard Reinsurance Agreement (SRA).

Congress was not “credited” with a savings mandate for the SRA renegotiation provision included in the 2008 farm bill. However, CBO appears to be basing its savings on what it believes to be a plausible outcome to those negotiations. We further understand that if the final negotiations provide more than $3.9 billion in reductions, CBO will immediately update its baseline to reflect those savings and Congress will not be credited with the savings either.

These reductions in the federal crop insurance program may undermine this component of the farm safety net and will sharply reduce the agriculture budget in the advent of a baseline budget farm bill. It would make a potential budget reconciliation process next year extremely difficult.

If the situation is left unaddressed by the Agriculture Department, reasonable savings obtained in an SRA renegotiation cannot be properly credited to Congress to apply toward improving crop insurance for producers or to help meet potential reconciliation instructions. This does not bode well for any policies under the jurisdiction of the House and Senate Agriculture Committees.

We urge you to stay the ongoing SRA renegotiations, reinstate the current SRA, and allow Congress to address this issue legislatively in order to preserve the budget baseline.

Sincerely,

American Farm Bureau Federation
American Soybean Association
American Sugar Alliance
National Association of Wheat Growers
National Barley Growers Association
National Corn Growers Association
National Milk Producers Federation
Southern Peanut Farmers Federation
USA Rice Federation
Western Peanut Growers Association

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