By Thomas P. Zacharias, President, National Crop Insurance Services

The Environmental Working Group’s (EWG) most recent report entitled Plowed Under (August 6, 2012) deserves a few candid observations. By all outward appearances, the document appears to be a standalone “research effort.”

As such, the report has no real analytical or science‐based foundation. The report attributes recent crop land use conversion rates to the existence of crop insurance. How is this substantiated? By way of a series of mapping overlays, EWG associates loss of wildlife habitat solely due to farmers’ use of crop insurance. There is no demonstration of any formal analysis, such as statistical or economic considerations. It is not obvious that the reportunderwent any form of peer‐review, nor is there is any reference in the report to any similar analysis that has been published in peerreviewed journals.

This is quite unfortunate and irresponsible. Fortunately, one does not have to search too far to find a series of peer‐reviewed studies on this very topic. I have provided such a review of the subject here.

So, what do we know…

In a paper presented at the 2011 Annual Meeting of the Agricultural and Applied Economics Association, authors Miao, Feng, and Hennessy (Iowa State University) find crop land use effects attributable to crop insurance to be quite small. Conversely, the authors find product price to be the more dominant factor in farmer’s land use decision. This is consistent with most published literature.

More recently in the August 2012 Journal of Agricultural and Resource Economics, authors Walters, Shumway, Chouinard, and Wandschneider find “…. small, but not universal, tendency for increased crop insurance participation to create “noticeable” environmental effects …evidence shows both positive and negative effects as cropping patterns change. On average, the contribution of crop insurance to adverse environmental effects is slightly less than 1%…” A careful reading of their paper also indicates that product price is the dominant factor in farmers’ acreage decisions, again consistent with the existing literature.

These are peer‐reviewed studies that are based on formal analytical and statistical techniques; not for the faintof heart. This should be the essence of the policy debate. The assertion by EWG that farmers are planting on less‐productive land simply and solely to collect insurance indemnities is unfounded.

Partial and incomplete analysis of important agricultural and environmental policy issues does not serve the public well, particularly in the midst of the Farm Bill debate and the current drought situation in the Midwest. Maybe farmers are praying for rain instead of drought, and maybe policy makers are praying for intellectual honesty instead of glib, one‐line headline seekers.Farmers are probably not laughing at ill‐informed critics,nor are they laughing at burned‐out corn and soybean fields.

Who can know the heart?

(OVERLAND PARK, Kan.) — “The Environmental Working Group has an unprecedented track record of promoting and funding misleading and flawed analysis, as well as mischaracterizing data to generate news headlines. Its latest attack on farmers’ most important risk management tool is no different. For example:

• EWG seems to be criticizing government support of crop insurance. Yet, EWG fails to mention that it is promoting a plan on Capitol Hill to provide farmers with 100 percent subsidized crop insurance coverage administered by the government instead of efficient private insurers.
• The same fruit and vegetable growers EWG supposedly champions are likely some of the largest crop insurance benefit recipients on its list of ‘offenders.’
• EWG fails to account for the fact that these ‘subsidies’ are premium discounts that are accounting transactions that take place within the USDA. There are no government subsidy checks to farmers. Unless indemnities are paid to a farmer, there is no outlay on that famer’s policy. Even when there is a loss, taxpayer cost is minimized by government underwriting gains on other policies, which is why CBO estimates for crop insurance have historically been so much higher than actual costs.

“Only telling part of the story is nothing new for EWG when it comes to agriculture. Its controversial database of direct and counter cyclical payments quietly combines multiple years, and in many cases multiple farmers, to distort the facts. Ironically, many of the ‘rich and famous’ subsidy recipients EWG has used in the past to make news headlines about farm program payments receive only conservation subsidy payments that EWG supports.

“Crop insurance is extremely popular with lawmakers from both sides of the aisle, as well as with farmers, their lenders, and nearly everyone with a stake in rural America. That is because crop insurance gives producers a fighting chance after disaster strikes or markets collapse. After recent reductions in farm policies, it is the single most important risk management tool remaining for U.S. farmers and ranchers.

“One must question the motive of EWG. Is it to leave America’s farmers and ranchers without the ability to survive and successfully manage agricultural disasters?”

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Below you will find NCIS’ response to the Los Angeles Times article “Farm Insurance Fraud is Cheating Taxpayers out of Millions” from February 6, 2011.

NCIS Response To the Editor: 
(These comments are based on letters submitted to the editor of the Los Angeles Times by Dallas Smith, former Deputy Under Secretary of USDA, and Keith Collins, former USDA Chief Economist and a crop insurance industry consultant, as well as other material.)



Beginning with its sensationalist headline, the Los Angeles Times misrepresents the occurrence of fraud in the Federal crop insurance program. The article fails to tell the success story that private insurers and their licensed agents now provide coverage on $80 billion of America’s agricultural production.

The industry shares the Times’ disdain for fraud, and has implemented effective and unprecedented measures to deter and identify false claims. The program has been a pioneer in the use of data mining, utilizes the large field staff of the Farm Service Agency to spot check questionable operations, employs over 4,700 certified crop loss adjusters and conducts numerous claim reviews. These measures have driven the incidence of program abuse far below other lines of property and casualty insurance.

The Times reports, without evidence, “a wave of scams sprouting across the nation.” Six cases are mentioned. One case, in California, was uncovered by USDA in 2001. Another case mentioned, in North Carolina, was uncovered in 2000. Many measures to prevent fraud and abuse have been implemented since these old cases were first discovered. Moreover, the Times fails to note that 13.3 million crop insurance policies have been sold since 2000. Again without evidence, the Times and Professor Bruce Babcock simply assert that companies have little incentive to fight fraud. To Babcock, it “makes sense.” In reality, the companies take on substantial risk and making unwarranted payments reduces industry profitability. The companies, along with their large, professional loss adjuster workforce, have every incentive not to make unmerited payments. The crop insurance industry, in partnership with USDA, has zero tolerance for fraud, and is making every effort to root it out and protect America’s farmers and taxpayers.

The Times also erred in stating that companies and agents “reap most of the benefits” of the crop insurance program. The article stated farmers received “$1.7 billion” in premium subsidies, implying insurance companies received more than farmers. In fact, farmers received $5.4 billion in premium subsidies in 2009. They received another $1.6 billion in delivery cost subsidies paid to companies on their behalf. Otherwise, such delivery costs would be built into premium rates, the practice in all other lines of insurance. In addition, farmers received the benefits of risk protection that enables farm survival in the event of catastrophe.

The article quoted Babcock as saying the industry keeps the most profitable customers and shifts the riskiest, least profitable customers to taxpayers. Unfortunately the Times failed to note that the companies retain risk on the vast majority of policies. Nor did the Times explain that while the companies can cede some policies to the government, the government sets premium rates, not companies, and companies must sell to any farmer wanting insurance. These regulatory requirements cause the companies to take risks over which they have no control and that explains why companies are permitted to cede some, and only some, of the risky policies to the government.
Original Los Angeles Times article can be found here.

Farmers buying crop insurance as enterprise units get increased federal subsidy
Chris Clayton, AgFax — November 3, 2010

Tom Zacharias, newly-named president of National Crop Insurance Services, said enterprise units have expanded the opportunity for farmers to manage their risk. “I would say, in general, it has been very well-received,” Zacharias said. “There is evidence enterprise units have moved producers from CAT (catastrophic) to buy-up coverage,” Zacharias said. Zacharias said he has heard insurance representatives say that about 40 percent of their business is enterprise units. In the Corn Belt, it looks as if there is more uptake for enterprise units on single-crop ground. There have even been increased sales in other regions of the country, such as the Mississippi Delta. More acres and more diversification reduce the likelihood of a payout, so it reduces the premium substantially, while it increases the premium subsidy. “It provides a pretty good discount,” Zacharias said. “The benefit to the producer is reduced premium.” The benefit to the insurer is reduced risk….

NCIS Response to Chris Clayton
Thank you for the recent discussion we had regarding the status of the crop insurance program which focused on the recent experience with the new enterprise unit pilot program authorized by the 2008 Farm Bill. I appreciate the article you released on November 3 calling attention to this new and popular feature of crop insurance.

I do, however, have a concern regarding the final portion of the piece, and apologize for not contacting you sooner. Your article ended with the following statement attributable to Professor Bruce Babcock: “Of the $13 billion in support for crop insurance, more than $7 billion went to the companies. Farmers received $6 billion in net indemnities,” Babcock testified. “Crop insurance failed the cost-effectiveness test, because it simply makes no sense for taxpayers to spend $13 billion to deliver $6 billion in net payments to farmers.” I take exception with these statements for two reasons: (1) the supposed “efficiency/effectiveness” metric does not accurately measure either efficiency or program benefits and costs and (2) the numbers reported are for 2008 and 2009; they look backward at only two selected years and do not reflect recent program changes and future expectations.

Issue (1). The metric — $7 billion “to the companies” compared with farmers receiving “$6 billion in net indemnities”— does not accurately portray the underlying economics of crop insurance. Let me explain why it is misleading and not a useful comparison.

Farmers’ net income (indemnities less farmer premium) is being compared to company gross income (A&O payments plus underwriting gains). A&O is a producer subsidy paid to the companies on behalf of the producer. The appropriate comparison would be net income to net income. That comparison shows farmer net income for 2008 and 2009 of $6 billion and company net income of, at most, $3.4 billion (assuming A&O payments equal delivery expenses), not $7 billion. In fact, company income would be less than $3.4 billion, as actual delivery expenses for 2008 exceeded A&O payments (this can be found in the Grant Thornton analysis on company profitability). Final expense data for 2009 is not yet available, so company net income cannot yet be determined exactly.
Benefits of crop insurance should not be inappropriately measured as net indemnities to farmers. Farmers buy and benefit from insurance even when indemnities are zero. As you are aware, crop insurance provides farmers with the opportunity to better manage their marketing plans and obtain financing from year to year. Although these types of benefits are difficult to measure explicitly, they are of value and Babcock fails to acknowledge them.

Issue 2. Using only two years, 2008 and 2009, to judge the program is also inappropriate. Because prices and yields vary greatly from year to year, crop insurance premiums and performance are better judged on long-term experience. Moreover, while 2008 may have been a typical year, 2009 had the third lowest level of losses relative to premium in the 29 year history of the program. It was a rare year, which distorts Babcock’s metric. The metric also does not reflect the changes in the new Standard Reinsurance Agreement (SRA), which reduced company funding by $6 billion over 10 years as compared to expected funding prior to the new SRA, nor does his data fully reflect the cuts made in the 2008 Farm Bill. If premiums remain at this year’s level of less than $8 billion, and RMA’s estimates of the expected company rate of return on retained premium for 2011-2015 are used, then future expected net income (net underwriting gains) of the companies would range from $1.0 to $1.2 billion per year, about 30% less than the level used by Babcock. In addition, A&O payments are capped in the new SRA at about $1.3 billion per year, again about 30% less than the level used by Babcock.

I certainly have no issue with articles that comment on crop insurance program costs. My only hope is that such articles make meaningful comparisons and use relevant data.

Thanks again for the recent interview, and please feel free to contact me if I can answer any questions you may have in the future.

Regards,

Tom Zacharias
President
National Crop Insurance Services