It’s not uncommon for a bank to ask for proof of insurance prior to lending you money. If the car, boat, or home for which you are seeking financing is destroyed, the bank needs some peace of mind that insurance will be there to cover the loss of its investment.
Agricultural loans are no different—except those loans are much larger than the ones most of us take out. And the risks that farm borrowers – particularly small farm borrowers – face every day are much greater than those facing everyday citizens.
Crop insurance has been the best tool to mitigate this extreme risk, which ranges from Mother Nature, to volatile markets, and heavily subsidized foreign competitors.
Better risk management also made it possible to obtain essential capital during the down economy, and the relationship has paid big dividends for rural economies.
The Federal Reserve of Kansas City noted, “In 2010, rural America was at the forefront of the economic recovery.”
But that success story is under attack right now in Washington, as lawmakers target crop insurance for yet another round of funding cuts and new regulatory burdens. The most serious threat comes from an amendment to subject crop insurance participation to a means test.
In other words, insurance benefits would be stripped away from larger, well-established farms and ranches. It seems innocent enough. After all, no taxpayer likes the idea of government dollars being spent on wealthy people when so many others are struggling.
But this amendment holds serious unintended consequences and could wind up harming not only small farmers, but farmers and ranchers of all sizes and income brackets, right along with the local economies they keep afloat.
Think of it this way. If you removed all the safe drivers from the auto insurance pool, or all the homeowners outside of floodplains, house and car insurance wouldn’t be affordable for anyone. That’s because insurance companies have to spread risk and delivery cost out across a diversified customer base to make products more available for all. For every risky policy, you need one with little risk.
If the amendment passes, the farmers left in the insurance pool will have to fork over more for premiums, and even then, their quality and speed of service will likely diminish as insurers wrestle with shrinking profit margins or losses.
Some will argue that the government shouldn’t be involved in crop insurance at all. That’s not realistic.
That would leave America in the same position it was in before we had a vibrant crop insurance system, when costly ad hoc disaster bills came before Congress nearly every year and taxpayers—not private insurers—bore all the risk.
For this reason, the country’s major financial institutions are urging Senators to vote no on all crop insurance amendments that would harm the crop insurance infrastructure.
Damaging the effectiveness and affordability of what’s left of Iowa farmers’ safety net and their most important risk management tool would only worsen the economy as a whole.
Alan Rosendahl is a Senior Vice President at Iowa State Bank and a farmer who resides in Kesley, Iowa.
This op-ed appeared in Agri-News on June 28, 2012