Warning From America On EU Risk Management Proposals

Alyn Smith MEP, Scottish full member of the European Parliament's Agriculture and Rural Development Committee, has welcomed a new study on the impact of the current US Farm Bill (presented to MEPs in a special session) as further evidence of the malign impact of publicly-funded crop insurance and risk management programmes, and a clear warning to EU policy makers not to adopt such proposals at the heart of the new Regulation on Rural Development in CAP reform.

The European Commission have proposed new Rural Development options to support with European funds subsidies for crop insurance, mutual funds and an Income Stabilisation Tool, designed to compensate farmers for excessive drops in income in bad marketing years: these programmes run along the lines of existing programmes in the US Farm Bill.  However, real world experience from the US reveals a number of significant flaws.  In budgetary terms, they are very expensive.  Taxpayers subsidise about 60% of the premiums across multiple crop insurance programmes, leading to a cost rising from around $2b in 2005 to $7.5b in 2011, equivalent to around a third of the EU's entire annual Rural Development budget.  Moreover, payments fluctuate from year to year depending on market conditions leading to great budgetary uncertainty.  Second, the programmes are extremely inefficient: the study calculated that taxpayers were in effect paying $2 of support for every $1 of support actually received by farmers in protection against risk.  Around 16 private insurance companies manage the schemes and make "excess profits" while in practice returning most of the actual risk to the taxpayer: administrative and operating costs reimbursed by the government to the companies run at 22-24%.

Publicly-subsidised crop insurance was also criticised for creating moral hazard, and encouraging farmers to take on excessive risks, such as "plant crops in more risky areas, and create incentives for diversifying less, hence accruing the use of pesticides" or even incentivising the bringing into production of more vulnerable land. Finally, crop insurance schemes, while currently not counted towards crop-specific support under the US's Aggregate Measurement of Support quota at the WTO, could easily be vulnerable to challenge from a trading partner, due to the crop-specific nature of the contracts.  A successful challenge would leave the US in violation of its
international trading requirements.

Alyn said:

"This is important information, and fully bears out the opinion of Henry Waxman (ex-Chair of the House Oversight and Government Reform Committee) that insurance is "a textbook example of waste, fraud and abuse in federal spending."

"I have always been strongly opposed to subsidies from European funds for crop insurance and income insurance tools, because the financial commitments could potentially be extortionate and gobble up the entire Rural Development Budget; because we should not be spending European funds on hand-outs to insurance companies; and because, in a time of limited financial resources, we should be focusing help on measures which prevent risk through upgrading our agri-landscape systems, such as agri-environmental schemes and diversification tools, not on compensatory measures for disasters which already have occurred.

"If Europe wants to act on risk management, it should focus on the proposals for mutual funds, where farmers pool their own resources to help deal with common risks and problems, not through subsidising the profits of private insurance companies.  Farmers are of course welcome to invest their own money as they see best fit to deal with their risks, but limited taxpayers money should and can be far more
effectively spent."