‘Everyone in Here is a Millionaire’

By Ray Lehmann | Right Street Blog | August 15, 2012

That headline comes us by way of “Grandpa” Straub, a farmer from Fairbury, Ill. who also serves as the star of the latest edition of National Public Radio’s always excellent Planet Money podcast.

Amid a worst-in-a-generation drought that has seen farm state members of Congress from both sides of aisle clamor for immediate passage of a $1 trillion Farm Bill – a debate that has even spilled over into the presidential campaign, with President Barack Obama blaming recently tapped Mitt Romney running mate Rep. Paul Ryan, R-Wis., for holding up the bill Planet Money offers a much more sane take on the impact the drought is actually having on America’s farmers.

In short, they aren’t doing as bad as you might think they are. In fact, they’re almost certainly still doing better than most of the country.

The primary reason for this is the federal crop insurance program, under which the federal government offers subsidized reinsurance to approved private insurance companies that provide crop insurance, while also offering subsidies to the companies to market and administer the policies and paying roughly 60% of farmers’ premiums, which last year cost taxpayers $9 billion. Thus, even as the drought does threaten to wipe out harvests, farmers enjoy a fairly cush taxpayer-subsidized safety net, along with the reassurance that post-drought crop prices are almost certain to rise.

Reporting from a claims seminar in Fairbury, Planet Money’s reporters talk to several generations of the Traub family, who confidently intone that, even without the insurance payouts, they’re doing plenty well to survive the record drought. Pressed on whether he thought the government should be picking up most of the tab for his crop insurance premiums, Jim Traub (one of Grandpa’s sons) responds:

“Oh, I have an aversion to it, but they think they should have. So you’re not going to turn it down, because society’s kind of that way. I don’t see the government’s going to be less involved in crop insurance.”

While the farmers might not be especially worried, one would still think these have to be rough times for the crop insurers themselves, right? Not necessarily.

As of last Friday, the 15 federal crop insurers had paid out $822 million in claims this year, according to trade group National Crop Insurance Services Inc. NCIS projects total crop losses for the year are likely to exceed the roughly $11 billion paid out in 2011, and could even reach $20 billion. According to a study conducted on behalf of NCIS by Milliman, crop insurance indemnities in a dozen drought-affected states are projected to reach $8.8 billion. Minus $6 billion in premiums, that would mean underwriting losses of $2.8 billion.

Should claims reach that high, there could be some claims to private reinsurers as well, with Munich Re projecting it could pay out as much as $200 million on agricultural loss covers. But taxpayers will absorb much of the blow, as they did in 2011, when the federal government paid about $7 billion of the $11 billion in claims. Under the crop insurance program, the insurers cede about 20% of their premiums and 40% of their losses to the U.S. Department of Agriculture’s Risk Management Agency, which sets the Standard Reinsurance Agreement. Economist Vincent Smith of Montana State University projects there could be $18 billion of crop losses this year, with taxpayers footing the bill for up to $10 billion of that total.

Indeed, Fitch Ratings has projected that the losses crop insurers will bear, while they certainly will impact earnings, aren’t likely to have a material effect on the major crop insurance companies’ financial strength. In fact, the two largest crop insurers – Wells Fargo and Ace Ltd. – both said last month they expected losses to be manageable, with Ace Chief Executive Officer Evan Greenberg noting the drought could harden rates for next year’s coverage.

“It’s possible,” Greenberg said. “It’s going to depend on global crop conditions as well as projected U.S. weather conditions.”

Which raises the question – if farmers would do fine without crop insurance, and if crop insurers remain in good shape despite the worst drought in at least 50 years, then why does Congress continue to pass bills to expand this lavish safety net for one of the most well-off sectors in the country?

Planet Money talked to agricultural economist Dan Sumner of the University of California at Davis, who has some theories about how the program persists. Sumner recalled the sage words of Norfleet Sugg, former executive secretary of the North Carolina Peanut Growers Association and later head of the Agricultural Council of America, who explained to him: “The peanut program is so complicated, there’s only three people in the world that actually understand how it works. It’s my job to keep it that way.”

Sumner told the podcast:

“As much as we tried, we weren’t going to be able to capture the essence of these programs. They were just too complicated. Every time somebody proposes one more complicated government program, I can’t help but think part of that is, the less the average taxpayer or the average analyst can figure out what this thing is about, or the average congressman for that matter, they throw up their hands and think, well, the industry must know what they’re talking about.”

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Latest Comments

  • August 28, 2012 at 11:31 am
    Wes King says:
    Interesting take but the article totally neglects how the drought is hurting small livestock farmers and small to medium specialty crop (fruits and veggies) producers. While i... read more
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