Even though crops may fail again, landowners are shielded by taxpayers from the full burden of their bad bets.

Drought helped drive the cost of crop insurance to a record $17.2 billion, the US Department of Agriculture said April 29. The government covers more than 60 per cent of payouts, spending about seven times more than a $1.4 billion program that helps farmers adapt to climate change.

The subsidies encouraging farmers to ignore addressing extreme weather are harder to justify when automatic budget cuts remove 5 per cent from most US programs and lawmakers prepare to craft a new five-year farm law.

“We have given farmers incentives to take on more risk rather than give them an incentive to create a permanent solution,” said Vincent Smith, a professor of agricultural economics at Montana State University in Bozeman. “You want to move toward programs that allow them to alleviate problems before the fact.”

Disaster declarations by the USDA have become commonplace over the past decade, as farmers face the disruption of traditional growing seasons.

I’m skeptical of this article by the San Fransisco Gate. It pegs the possible closures of 100+ farms fully on the drought of 2012 (and the journo throws in a few suicides for window dressing, which is frankly dishonorable imo). The piece concludes by showing that farmers want more government handouts.

Drought has impacted farmers. Feed prices are up, and farmers are indeed forced to sell their cattle at discounted prices. There’s no doubt about that.

But farm closures are just not that simple (nor as bleeding-heart, as SFG would have you believe). Bad management, broken or malfunctioning equipment, deferred maintenance, poorly negotiated contracts, over-reliance on government assistance, environmental requirements, failing to meet CAFO restrictions, milk pricing caps, bad loans, miss-timed market economics, poor year-on-year planning, and on and on and on. Dozens of issues kill a business. And it’s more likely that a mix of these issues would cause a dairy farm to go belly-up.

The article does not explore any of these issues. And they are incredibly complicated. It doesn’t even bother to show how farmers depend upon (and are rightly confused by) the insane interactions and contradictions between government hand-outs and strict regulations.

California farmers receive tens of millions of tax-payer funded insurance subsidies - every year. They also receive millions more from disaster relief programs (scroll to ‘livestock’ to see several programs) as well as price protection programs. These pots of cash are run by the USDA, again paid for by the American taxpayer. This is in addition to California subsidies and regulations.

There’s no doubt that droughts are terrible. But to bundle 100+ businesses in one sweeping article is not only misleading, it’s sloppy. Let me know think.

The nation’s drought and high corn prices are devastating California’s $8 billion dairy industry to the point where farmers can’t afford to feed their cows - and their professional trade organization has been regularly referring despondent dairymen to suicide hotlines.

Experts in the industry estimate that by year’s end California, the largest dairy state in the nation, will have lost more than 100 dairies to bankruptcies, foreclosures and sales. Milk cows are being slaughtered at the fastest rate in more than 25 years because farmers need to save on corn costs. According to the Western United Dairymen, a California trade group, three dairy farmers have committed suicide since 2009, despairing over losing their family’s dairies.

“I’ve never seen it as dire as it is now,” said Frank Mendonsa, a Tulare dairyman who serves on the Western United Dairymen board. “Pride is just eating these guys up. People are calling me and asking me what to do. It becomes like a counseling session to stop people from hurting themselves. But it’s not just losing our jobs that is driving the desperation. We’re losing our houses, in some cases the same houses that our grandparents lived in, and we’re losing our entire identities.”

The problems started in 2009, when milk prices bottomed out and grain prices soared, partly due to the government’s ethanol mandate. Congress is requiring that gasoline producers blend 15 billion gallons of ethanol, made from corn, into the nation’s gas supply by 2015. Dairy farmers were forced to borrow against their land and cows to make their bills.

This finely written article explains how this year’s record drought affects insurance payouts to farmers for losses. Farmers insurance is subsidized by the Dept. of Agriculture. And the rates are capped, as well. Thus, farmers in the program only pay 40% of their insurance costs. Imagine the government paying 60% of your insurance premium for, say, your car. Socialism indeed.  

Thousands of farmers are filing insurance claims this year after drought and triple-digit temperatures burned up crops across the nation’s Corn Belt, and some experts are predicting record insurance losses — exacerbated by changes that reduced some growers’ premiums.

G.A. “Art” Barnaby, a Kansas State University Extension specialist in risk management, estimates underwriting losses on taxpayer-subsidized crop insurance will hit nearly $15 billion this year. He expects a staggering $25 billion in crop insurance claims to be filed by growers across the nation, driven primarily by one of the worst droughts in the U.S. decades. His loss estimate is based on a loss ratio of $2.50 for every dollar paid in premium.

The U.S. Department of Agriculture’s Risk Management Agency made changes to the insurance program in the past year which are expected to increase the underwriting losses from the drought. The changes meant farmers in some states paid smaller premiums this year for corn and soybeans. Not only that, the agency adjusted yields for those crops upwards to reflect recent trends, Barnaby said.

“Anyone that is concerned about whether this will be sustainable over time will have to ask the question whether this was a good idea to cut rates,” said Barnaby, who 20 years ago helped develop the insurance program. “Now, as a farmer, I like paying a lower rate. But my guess is the rates were not cut that much to be noticeable, but in aggregate they do make a difference.”

The rate reductions were based on the assumption that new technology, such as genetically modified, drought-resistant seeds, would eliminate or reduce big losses, Barnaby said. “So it is ironic they got hit the first year out.”

Under taxpayer-subsidized crop insurance, farmers pay about 40 percent of the premium cost and the federal government picks up the rest. The government sets the rates and the underwriting rules, but the private companies get to pick the contracts they want to take a risk on. Coverage is based on both yield and price. An underwriting loss or gain represents the difference between premiums paid and amount of claims paid.

Read it: Roxana Hegemen of the Associated Press

Should tax payers pay to help insure people who choose to live in hazardous areas? This is a tough conversation to have, but we should have it. (Dearest libertarians, please exit the convo here).

Simply, people’s homes and businesses are often located in dangerous areas. The most popular danger is flooding, and millions(!) of properties are located in flood plains. It’s very risky. Property owners need insurance to help lower risk and protect their ‘investment.’ The higher the risk from environment, the higher the insurance premium.

But, there comes a point in that risk equation where insurance companies will stop offering insurance to cover at-risk buildings and properties. So of course this creates a problem for property owners. If private insurance companies refuse to insure risky property, who should? Should you?

For one example (again simplified), in order to get a mortgage from a bank, the property owner has to show proof of insurance. But how can they get insurance if their home is deemed a high risk? The answer is tax payers. FEMA covers insurance for at-risk property owners through something called the National Flood Insurance Program. It’s funded by taxpayers, and (again simplified) insures millions of properties that cannot obtain insurance on the market. If one of these properties is flooded, part of the cost (not all of it) is paid for by you, the taxpayer.

Now, the portion of FEMA’s budget that covers the NFIP is about to expire, and FEMA put out this press release:

“Many businesses, commercial owners, homeowners and renters purchase flood insurance to reduce the escalating costs of repairing damage to buildings and their contents caused by floods.

As we approach a potentially active hurricane season, FEMA’s Administrator, W. Craig Fugate, is engaging Congress to strongly recommend reauthorization of the National Flood Insurance Program (NFIP) which will expire on May 31, 2012.

The NFIP plays a key role in our Nation’s efforts to prevent and recover from flood disasters. Reauthorization of the NFIP before it expires on May 31, 2012, is essential to our Nation’s efforts to prevent and recover from flood disasters. Floods are the number one natural disaster in the United States in terms of lives lost and property damaged. The NFIP identifies areas of flood risk; it encourages communities to implement measures to mitigate against the risk of flood loss; it provides financial assistance to help individuals recover more rapidly from flooding disasters; and it lessens the financial impact of flood disasters on individuals, businesses, and all levels of government.

In recent years, a series of short-term reauthorizations and temporary suspensions of the NFIP have eroded confidence in the program among stakeholders, including state governments, tribal governments, local communities, individual policyholders, mortgage lenders, and the private insurance industry. In addition to disrupting the program’s day-to-day operations, short-term reauthorizations and temporary suspensions create significant uncertainty regarding the federal government’s long-term commitment to underwriting and indemnifying flood losses. In the absence of such a commitment, our stakeholders are less likely to make the investments needed to successfully sustain, strengthen, and grow the program — thereby undermining the NFIP’s effectiveness and efficiency over time.

A two year re-authorization will send a clear signal to citizens, communities, and private sector partners that the federal government will continue to support our nation’s efforts to manage flood risk. If Congress does not re-authorize the NFIP before it expires on May 31, 2012:

• Property owners will be unable to complete new mortgage transactions. Property owners who would normally be required to purchase flood insurance to fulfill lending requirements will be unable to obtain affordable coverage. The National Association of REALTORS estimates that a lapse in authorization jeopardizes an estimated 1,300 sales each day or about 40,000 mortgage closings per month.
• The Disaster Relief Fund will bear additional costs when flood strike. Property owners who are unable to obtain flood insurance coverage may seek and be eligible for assistance from the Disaster Relief Fund. Consequently, failure to reauthorize the NFIP will result in transferring a portion of the costs of flood losses that otherwise would have been paid by the NFIP to the taxpayer through the Disaster Relief Fund.
• The NFIP may have to halt payment of claims for recent events, including Hurricanes Irene and Lee, if a lapse in authorization substantially reduces cash flow into the program from premiums or a significant flood event follows the lapse and drains the remaining, non-renewable funds.

FEMA’s mission is to support our citizens and first responders to ensure that as a nation we work together to build, sustain, and improve our capability to prepare for, protect against, respond to, recover from, and mitigate all hazards.”

Tell me what you think? Should the National Flood Insurance Program continue to be funded? Should anything be put in its place?