Crop insurance fuels shocking U.S. rents

Neither the outcome of the U.S. election nor the fast-approaching budget “fiscal cliff” bothered any of the 250 gawkers and bidders at a 1,170-acre land rental auction Nov. 10 in Thurman, Iowa.

That’s right, an auction, where the right to crop a family’s five parcels went on the block that Saturday at the appropriately named Skyline Sportsman Club.

Minutes later, every notion about local land values had surpassed any skyline: nearby Omaha, the more distant Des Moines and even that of super-tall Chicago. The winning bids were:

Tract One, 196 acres, all tillable, $545 per acre.

Tract Two, 158 acres, all tillable, $470 per acres.

Tract Three, 296 acres, all tillable, $520 per acre.

Tract Four, 104 acres, all tillable, $485 per acre.

Tract Five, 417 acres, all tillable with some grain storage, $615 per acre.

As stunning as those prices are — an average $548 per acre — the terms of the rental deal are even more stunning.

Jim Hughes, whose firm, Jim Hughes Real Estate in Glenwood, Iowa, brokered the deal, said the land was rented for only two years. Cash rent terms for 2013 are 25 percent of the day of auction and the remainder on March 1, 2013.

For 2014, 25 percent is due Jan. 1, 2014 and the balance on March 1, 2014.

In short, you pay, then pray, then plant.

Hughes described the renters as “local farmers who are willing to risk grain prices and weather on a two-year, $550 an acre rental deal rather than a 30-year, $12,000 an acre purchase deal.”

Well, mostly.

Many ingredients go into the rocket fuel that pushes land values and rents to the moon: commodity prices, aggressive local farmers, excess machinery capacity, cheap labour, low interest rates and federal farm program benefits.

However, a new, major ingredient is federal crop insurance, the heavily subsidized program that delivers an ironclad guarantee on locked-in revenue regardless of weather, commodity prices and federal farm payments.

In 2012, 62 cents of every $1 in federal crop insurance premium were paid by taxpayers.

“Oh, crop insurance played a definite role in the prices,” Hughes said. “It’s the best thing that ever happened to farmers.”

Bruce Babcock, professor of economics at Iowa State University and a faculty member of ISU’s Center for Agricultural and Rural Development, agreed: “If you can lock in 85 percent of your expected revenue (the level permitted under current federal crop insurance programs), you’ve taken virtually all the risk out farming,” he said.

And it will get better. Part, if not all, of the remaining 15 percent of crop revenue presently not insured under the federal program is almost certain to be covered if and when Congress finally approves a 2012 farm bill.

Both the Senate and House of Representative versions raise subsidized coverage over 90 percent.

Babcock said that’s an unbelievable move at a time when there is a bipartisan call in Congress for all Americans to assume more risk in the marketplace to cut federal spending, such as taking cuts in federal programs like food assistance, retiring at an older age and paying more taxes.

But when it comes to the farm bill, Congress is proposing to “ratchet down market risk (raise the level of subsidized crop insurance) while doubling down on the cost of these programs rising?” he said. “This is just insane.”

Babcock is right: how can farmers and farm groups ask taxpayers to underwrite an expansion of an al-ready highly subsidized revenue insurance program that guarantees farm income and higher land values but does not, and cannot, guarantee food production or conservation compliance?

Farmers better come up with an answer quickly because the question will be asked.

Alan Guebert is an Illinois-based agricultural columnist.

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