During the discussion portion of today’s House Agriculture Committee hearing to review the state of the rural economy, Committee Chairman Mike Conaway (R., Tex.) had a detailed conversation with Secretary of Agriculture Tom Vilsack about crop insurance issues.
A video replay and transcript of that discussion is available below.
Rep. Conaway: Mr. Secretary, again thanks. Crop insurance clearly the backbone of our safety net. And, you know, for several budgets in a row the administration has proposed additional cuts on top of the money that was cut out in 2008, on top of the money that was cut out as a result of the SRA.
You’re on record with Politico saying that you think the returns are way too healthy. And trying to get at—I’m a CPA, and return on investment, and whether or not somebody’s making money, that’s a pretty mathematical computation, and there seems to be some differences of opinion. RMA thinks that they’re making in the 6% range, well south of the 14% cap that’s put into the farm bill.
We’ve had crop insurance, reinsurance folks come to us saying they’re exiting the business, they’re thinking legitimate, or very…making some very difficult decisions as to whether or not they can continue to allocate capital to this important initiative. It’s a public-private team that I think has driven the success of crop insurance. And so can you give us your thoughts on can RMA share with us just how they compute the numbers, and can we get a better sense of what, you know, why the administration believes that crop insurance folks are making too much money?
Sec. Vilsack: Well, first of all, Mr. Chairman, I certainly acknowledge the importance of crop insurance as a critical component to the safety net. Over $55 billion has been paid out since I’ve been Secretary in crop insurance payouts, so obviously it’s extraordinarily important. You know, it’s a balance between producers, insurance companies, and the taxpayer. And the reality is that both the General Accounting Office, our own Inspector General have raised questions and concerns about various aspects of the program.
What we have proposed in one reform is the preventative planning program. Essentially it creates a current disincentive for the planting of the second crop. We think that should be dealt with and addressed. In terms of the harvest price option loss coverage, that’s a question of whether or not we, or you, or us believe that the partnership should be more of a 50-50 partnership instead of a 65-35 partnership in terms of the level of subsidy.
Bottom line is I think you can look at any one year and you can make a conclusion about whether or not this is a profitable or not profitable enterprise. The reality is if you look at a long period of time—and I think it’s important because folks can point to a year where maybe it was net a loss, one or two years out of the last 15 or 16—we can also point to a place where that return on premiums was 34%, 32%, 32%. So you have to look at the longer, the long trend. And I think what we’ve found is that this enterprise can be actuarially sound at 12%. On balance, over history, the return has been somewhere between 14 and 17%. So it’s just a matter of the long-term. This is a healthy industry, and we’re seeing an expansion of the number of insurance policies and crops being insured, so I think the—
Rep. Conaway: You’re clearly seeing that, but you’re not seeing an expansion of the number of folks, and if this was such a profitable business, there would be folks trying to get in it. And what we’re being told is that there are folks getting out.
Sec. Vilsack: Well—
Rep. Conaway: So it seems like there’s some sort of a mindset at OMB that they don’t want a public-private partnership, they want this fully public, and that makes no sense to many of us.
Sec. Vilsack: Well, I don’t think that’s quite accurate—
Rep. Conaway: Which part?
Sec. Vilsack: —Mr. Chairman. I think that OMB’s position and our position is that it’s a balance. It’s a proper balance and a partnership. When subsidies are as high as 65, 70, 80%, the question is, is that the right level.
Rep. Conaway: And those have been coming down.
Sec. Vilsack: They—
Rep. Conaway: And those early years—I mean, these guys are in the arena for today forward. And I, you know, I got the historical back look, but the trend’s in the wrong direction. And much of that happened before the 2008 Farm Bill as well as the reinsurance agreement that was done in 2011, so I’m hard pressed to be able to…for those previous years to be used as an excuse for the cuts.
Sec. Vilsack: Well, again, I think we’ve seen years where the profits have been pretty good and years when it’s not.
Rep. Conaway: All right, which year was that ? Which year was that post 2011?
Sec. Vilsack: Well, I can…I’ll get that to you.
Rep. Conaway: Okay.
Sec. Vilsack: I think it’s 2012, 2011-2012.
Rep. Conaway: All right, 2012 was a disaster drought year. But the other thing is I’d like to get, if we could, some sort of an agreement that whatever RMA’s using to drive the conversation, that that would be shared with the rest of us so we can see the numbers. That isn’t rocket science. This is premiums in, expenses out. What expenses get included in the number ought to be a part of the conversation. So I think we can at least start talk—rather than talk about what it ought to be, we ought to be talking about what it is and then talk about what it ought to be.
Sec. Vilsack: Well, I’m happy to provide you, but 2011 was 18%.
Rep. Conaway: Was what?
Sec. Vilsack: Eighteen percent.
Rep. Conaway: Yeah, and the 2011 was prior to the SRA renegotiation which stripped another $8 billion out of the system, so I got you on that. I understand the 2008, but I think this is an important industry. All of us believe that. Your statement is full of compliments to the crop insurance system. We need to keep it in business. And my personal opinion is we need to keep it as a public-private partnership, so I think—
Sec. Vilsack: I don’t disagree with that, Mr. Chairman. I think you’re right about that.
Rep. Conaway: Okay, thank you. My time has expired.