Will the proposed cap on crop insurance affect your ability to repay your loan?
In February 2014, Senators Jeanne Shaheen, D-N.H. and Tom Coburn, M.D., R-Okla. are proposing new caps on crop insurance premium subsidies. The cap would limit payouts of $40,000 to $70,000 per year, per farm. They believe it will affect less than 1.3% of producers and reduce the deficit by $1 billion in ten years.
Whether or not the existing program has been successful is debatable. It is argued that the current distributions are disproportionate, leaving those that need the payouts without aid and giving large payouts to those that don’t. With no means of testing or payment limitations in place, the question is, are the wealthiest producers receiving unnecessary aid without regard to income. However, wouldn’t it make sense that the largest producers could potentially have the largest losses and therefore a large subsidy is needed and justified in order for the producer to stay in business? While there are many uncontrollable variables that can influence an operation’s farm profit or loss, management is one factor that can be controlled and should be utilized for success.
Additional arguments include whether or not high subsidies are leading to increased land values and, if so, does this put barriers in place for the small producer. These potential barriers would mean that many are unable to obtain the needed land and farm financing to produce their crops.
Higher land values also results in higher farm loan debt for borrowers. For a borrower to ensure repayment on their farm loan, no portion of the repayment plan should rely on subsidies for crop insurance premiums. Farm production costs can be high and need to be managed with much thought and realistic expectations. Maintaining contact with their farm lender is important for borrowers who may find they are struggling with repayment. Farm lenders may be able to offer various options and work with the borrower to prevent unwanted loan default.
The cap on crop insurance is currently only a proposal. Good planning and strategizing will prevent this possible new legislation from affecting a borrower’s repayment ability on their farm loan. Work with your lender and know where you stand financially to ensure a sound and profitable financial future.