Federally funded crop insurance affects entire ag industry
July 26, 2013
One rancher from the White River, SD area, wonders if current crop insurance policies – and taxpayer dollars being used to subsidize them – are tightening a noose around the necks of cattle producers.
"It appears that revenue-based crop insurance is artificially inflating land values and rental rates," said Eric Iversen. "And in order for livestock producers to compete with neighboring crop farmers, maybe it's time to introduce a revenue-based livestock insurance program. I've got a 'proven yield' on my pastures and can calculate how many pounds of live cattle have been produced off each acre for the past several years; why can't I get the same coverage as the crop farmer who keeps production records?
"I don't blame farmers. A government-subsidized program that guarantees revenue and practically eliminates risk would be hard to pass up. Knowing your profit likelihood before you put the crop in the ground seems too good to be true, especially if you don't have to worry about drought, flood, grasshoppers or the market." The problem lies not with the farmers or their strategies, but with the farm policies that encourage more and more rangeland with limited ability to grow a crop to subject to a plow just because there is artificial profit potential there, said Iversen.
A specialist with the University of Iowa Extension program explained the basics of revenue protection on their website, "Insurance against poor crop yields has been available for many years. However, income from crop production can be low even when yields are not. A risk management tool known as Revenue Protection (RP) insurance addresses this problem." He added, "Revenue Protection insurance guarantees a certain level of revenue rather than just production. It protects you from declines in both crop prices and yields. The guarantee is based on market prices and the actual yield on your farm."
Iversen, who operates a purebred Angus cow-calf operation along with his wife and four young children relies on deeded and leased summer grazing. He took a harder look at the affects of federally subsidized revenue-based crop insurance when, during the fall of 2012, in the midst of a severe drought, he wrote a rent check with absolutely no guarantee that there would be grass or water for his cattle come spring. "I try to be a good manager. I had improved the water, left adequate grass, kept the fence up … was I willing to turn the lease back and let someone else take advantage of that? No, but where is my protection if we didn't get rain and I had to sell my cows this spring?
"The point is, I've got risk too. My dad always said to plan for the worst and hope for the best," Iversen added. "I don't let calves die in a spring blizzard and then wait for an indemnity check; I've never even applied for one. I knew when I quit my town job that there would be risk. A guaranteed income was not one of the luxuries. I work hard and save up on the good years to prepare for the tough ones, that's how you make a living.
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"I farm just enough acres to know that my crops have the potential to generate several hundreds of dollars per acre, 10 times what I can expect to return from an acre running cattle. How long will it be before the profit margins of running cows become too thin to justify the risk? And what does that mean for my kids and the future of the livestock industry in South Dakota? A shift in attitude from grazing to farming could alter the South Dakota landscape," he said.
He went on to say that it seems as though a program or insurance product is too good when you hope a crop planted in the fall fails so that you can collect a revenue payment, and then plant a replacement crop on that same ground, potentially generating more income than initially expected. Even local bankers have agreed that rich crop insurance policies are discouraging some crop farmers from making the best use of their acres, and allowing the exploitation of insurance programs beyond their intended use.
According to USDA-RMA Risk Management specialist John Lockie out of the Billings, MT, office, there are a few federally subsidized options available to grassland operators. "There is Pasture, Rangeland and Forage Insurance (rainfall index or vegetative index) for either grazing land or hay land, Forage Production and Forage Seeding Insurance for an alfalfa based hay crop, Livestock Risk Protection for declines in price on the Chicago Mercantile Exchange for cattle (fed and feeder) swine and lamb, Livestock Gross Margin for declines in price with a feed component to the calculation for cattle, dairy and swine, and a new Annual Forage Insurance using a rainfall index.
"The products are available and utilized by many, but ranchers typically self-insure and aren't used to utilizing these types of programs," he explained.
Iversen is familiar with government subsidized drought insurance programs for rangeland. In fact he utilized the federal rainfall insurance this past spring. But he says it doesn't go nearly as far as the crop insurance policies. "They simply limit the financial impact of grazing losses in the event of a severe rainfall shortage and are not associated with the revenue generating ability of the land."
He doesn't necessarily support the idea of another subsidized program, but Iversen is driving home the point that if revenue based insurance is necessary for crop farmers, it should be available for livestock producers because they both have risk. "I think insurance should be available to both farmers and livestock producers to recover only input costs in the event of a catastrophic event and not be tied to revenue generating potential. And I don't think the federal government needs to subsidize the cost of the premiums on the front end or the insurance companies on the back end when the benefits paid out exceed the premiums paid in. We all accept a certain level of risk when we enter this business as do our local lumberyards and hardware stores and we shouldn't rely on the government to subsidize our way of life," he concluded.
South Dakota School and Public Lands Commissioner Jarrod Johnson worries that current farm insurance policy could be providing crop farmers with an incentive to break up "prime" grazing land to turn it into "marginal" farm ground, with no promise of long-term federal support.
"I know ag producers are in a quandary, what do you do? You make more money by putting a crop in and it not growing. Are we going to farm the government or ranch the ground? My concern is, we as producers have seen government subsidies come and go. We've seen PIC (Productivity Innovation Credit), we've seen DCP (Direct and Counter-cyclical Payment Program) payments, we've seen CRP (Conservation Reserve Program). Usually a new farm bill is passed every five years but the implications will have permanent effects. With federal finances as they are, it seems that cutbacks are likely. And where do we go then, after we've broken up some really good native pasture to try and grow a crop in an area that just won't allow it especially on a dry year? Farming is different in areas that receive less than 14 inches of rain than those that are even in the 14 to 16 inch range. Annual crops have to germinate annually to offer erosion protection in a prolonged drouth."
Johnson, whose agency oversees over 768,000 acres, with roughly two-thirds of their holdings west of the Missouri River, said he is approached more and more by leasees who request permission to break up native sod. He is concerned that producers are jumping in for a "short term gain potential" when nobody knows how long the subsidy will be available.
"We have ag leases and grazing leases," he said, explaining that only the ag leases can be farmed. While the state agency has the ability to transition a grazing lease into an ag lease, there's limited capabilities to change it back. The leasee wouldn't be required to seed it back to grass if he decided that crop farming wasn't lucrative, and even if Johnson's office went to the legislature and found the funding to do it themselves, "You can't just seed it to alfalfa and say 'it's ok now;' you'll never get the intricacies and synergies provided by native rangelands, back," he said.
As a side note, Johnson finds it interesting that wildlife groups haven't shown more support for the preservation of rangeland. "A lot of these groups need to acknowledge that grazing is one of the best ways to maintain and protect wildlife habitat."
Currently serving as the president of the Western States Land Commissioners Association which is the nation's second largest land manager following the BLM, Johnson said that other states also deal with the question of how to best utilize school trust lands, and the association plans to take up the issue this summer at their annual meeting.
Former South Dakota Secretary of Agriculture, former legislator and western Haaken County rancher Larry Gabriel also voices concern over the federal subsidies that finance many of the country's crop insurance policies.
"Some say they've got to do the same thing for livestock, but I say, two wrongs don't make a right. I'm a rancher, I don't buy crop insurance. I don't believe the retired school teacher should subsidize my operation. When I was the secretary of agriculture, I argued that we [the government] should continue crop insurance for beginning farmers and ranchers, pay the current rate of 62 percent for first 10 years, then 40 percent for next 10 years, then farmers should be able to go on their own after that," Gabriel still be believes this strategy for insurance would be adequate. "We were in New Zealand a year ago, and the farmers were proud that they have no government programs; they farm for the market. They try to be studious of what the market signals are telling them. They've learned that they need to react to what the market is telling them and if they don't they will go out of business," Gabriel said.
Gabriel said that when the New Zealand government got into a serious debt problem, not unlike the U.S. financial situation, they cut almost all of their government farm subsidies. "Some of the big farmers had to sell a bunch of their land and young people came in and bought some and they have a thriving, healthy ag economy now," he said.
"I believe the newer versions of crop insurance in this country where they can purchase revenue insurance are really adding fuel to the rising cost of land whether it is purchase price or rental rates." Gabriel said he is reminded of the ag industry when he was a child, when "farmers just kept buying land and not even farming it, they were farming the government programs. Now they aren't farming programs but they are farming crop insurance, which is subsidized at around 62 percent. The money the federal government is putting into these programs is money they don't have, money they are borrowing from China. Our children and grandchildren are going to have to pay it off. I'm getting frustrated with friends and colleagues in Washington D.C., it doesn't seem like there is any logic on either side of the aisle," he concluded.
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