WASHINGTON, March 18, 2015 – Eliminating the Harvest Price Option (HPO) in crop insurance would leave growers without some key income protection when a severe drought drives up market prices but leaves producers with little to sell, says Art Barnaby, a Kansas State University economist who helped develop the provision more than two decades ago.
With the HPO, farmers can insure their crop revenue against just that turn of events – poor crop yields and rising prices. HPO allows the grower’s revenue guarantee to be calculated at the harvest price.
An amendment to reduce or eliminate HPO premium subsidies could come up as a cost-saving amendment during the fiscal 2016 appropriations process.
President Obama proposed in his fiscal 2016 budget to slash the premium subsidies by 10 percentage points, and bills were subsequently introduced in the House and Senate to simply eliminate the subsidies. The Congressional Budget Office estimated that the president’s proposal, which would also tighten rules for prevented planting coverage, would save nearly $12 billion over 10 years.
The first version of HPO was created as a result of the late 1980s drought that devastated farmers on the Plains. Farmers in Kansas were hit hard financially, Barnaby says, because the rise in market prices at the time meant that the old price-based deficiency payment system wouldn’t trigger payments to growers. Barnaby calls that a “safety net hole.”
Fast forward to now and Congress has created the new Price Loss Coverage, which works essentially the same way as the old deficiency payments did. Payments to farmers are triggered only when commodity prices fall below a fixed level, known as the reference price. When commodity prices rise above the reference price, which would almost certainly happen during a major drought, no PLC payments are made.
“A short crop with high prices eliminates the government help right when it is needed because farmers have few bushels to sell,” Barnaby said in an email.
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