A USDA crop insurance program that reimburses farmers for “prevented planting” creates disincentives for them to raise crops, an internal audit says.
The program likely pays farmers more than they actually spent on pre-planting expenses incurred prior to disruptions from flooding or drought, according to an audit from the agency’s Office of Inspector General.
Generous coverage under program provided “over $480 million in potentially excessive prevented planting payments” thereby giving farmers an incentive to “actively seek prevented planting payments, rather than plant a crop or enroll land in a USDA conservation program when possible,” the audit said.
Premiums for prevented planting insurance are also heavily subsidized by the federal government, contributing to the “moral hazard” posed by the program’s current structure, auditors said.
The term refers to the increased risks people are likely to take when the costs are borne by others.
In Iowa, for example, farmers stand to gain about $300 per acre from the prevented planting program, compared to less than $150 per acre for enrolling in the Conservation Reserve Program, the audit said.
The way the program is set up also creates an uneven playing field for different crops — for example, growers who are prevented from planting corn receive better coverage than those who intended to plant wheat, the audit said.
“This inconsistency does not lend itself to fair and equitable coverage for producers,” according to auditors.
The program also effectively penalizes farmers who plant a second crop on the affected acreage, the audit found.
Farmers who plant a second crop receive a reduced payment for the “prevented” crop.
The “prevented” crop is also counted toward their “actual production history,” which reduces the farm’s average yield for future insurance purposes.
If the grower decides not to plant a second crop, though, he gets a full insurance payment and his production history isn’t dented.
“As a result, producers currently plant only 0.1 percent of prevented planting acres to a second crop,” the audit said. Prior to 2000, when the yield rules were changed, more than one-third of farmers planted a second crop.
“During interviews, producers acknowledged the economic disincentive to planting a second crop caused by the resulting assignment of yield on the first crop,” the audit said.
The USDA’s Risk Management Agency said the yield calculation was based on its interpretation of a law passed by Congress, but the auditors said the statute could be interpreted differently.
The RMA agreed to consult with USDA’s inhouse attorneys to see if it would be lawful to reduce the historic yields of all farmers who claim prevented planting, whether they plant a second crop or not.
The agency also said it would determine whether the coverage levels are excessive by next June, which would allow any potential policy changes to be in place for the 2015 crop year.