OMAHA (DTN) -- The $4 trillion savings plan offered Monday by President Barack Obama eliminates direct payments and significantly cuts taxpayer subsidies for crop insurance over the next decade.

Speaking in the Rose Garden, detailing the merits of his job package, budget cuts and tax-reform plan, the president specifically mentioned a need to change farm programs.

"We reform agricultural subsidies, subsidies that a lot of times paid large farms for crops they don't grow," Obama said of his package.

The White House plan includes increasing taxes for millionaires and cutting loopholes the administration states would increase revenue by $1.5 trillion over 10 years. Bringing home all the troops from Afghanistan and Iraq would save another $1.1 trillion. The administration's plan also includes $580 billion in savings over 10 years from mandatory programs, which is where cuts to agriculture spending come in. Another $430 billion would be saved in interest payments.

The White House stated a net savings of $33 billion would come from agricultural programs over 10 years. The plan proposes eliminating direct payments to save $30 billion, as well as $8.3 billion in cuts to crop insurance. Another $2 billion would be saved in conservation. That's $40.3 billion in total cuts to agriculture programs, but the plan also extends the Supplemental Revenue Assistance (SURE) program through 2016, which negates some of the savings.

In its recommendations, The White House noted the agriculture sector is doing well economically compared to other parts of the economy. Income in 2011 is forecast at $103.6 billion, up $24.5 billion from 2010, "the highest inflation-adjusted value for net farm income in more than 35 years."

The plan supports the president's explanation of the problem with direct payments, included in his Rose Garden address: "The direct payment program provides producers fixed annual income support payments for having historically-planted crops that were supported by government programs, regardless of whether the farmer is currently producing those crops -- or producing any crop, for that matter."

The White House also stated that direct payments don't vary and have the effect of raising rental rates for land. Further, "more than 50% of direct payments go to farmers with more than $100,000 in income," the White House stated.

Though direct payments account for $5.2 billion a year, the administration recognized $3 billion in savings from the cut.

The National Corn Growers Association released a new commodity/crop-insurance plan last week that could save $15 billion over 10 years, based on cutting direct payments.

The president's plan cuts another $8.3 billion out of crop insurance over 10 years by changing contract conditions, reducing administrative expenses, altering CAT premiums to companies, and boosting farmer premiums. Crop insurance has become an anchor of defense for farmers in terms of improving risk management.

The crop insurance industry already took a $6 billion cut in the growth of spending over 10 years as part of a new standard reinsurance agreement with USDA. There was significant grumbling at the time, but the agreement showed the agricultural community was willing to take cuts. Insurers and supporters on Capitol Hill have used that contract to show the crop-insurance industry has already taken a cut.

Participation in crop insurance has soared since 2000, according to the White House, with a participation rate of 83%. Right now, the federal government pays more than 50% of a producer's actual policy premium. The president calls for shaving two basis points off any premium subsidies that are currently offered above 50%, saving $2 billion over 10 years. Farmers who have premium subsidies of 50% or less would not be affected.

A USDA spokesman stated in an e-mail this language on shaving basis points means a 56% premium subsidy would be cut back to 54%.

The White House acknowledged the $6 billion in savings already garnered under last year's renegotiation of the standard reinsurance agreement, but stated there are still "additional opportunities for streamlining the administrative costs of the program." Crop insurers' rate of return on investment should be around 12%, the White House stated, but is expected to be closer to 14%. The administration wants to go after that 2-percentage-point difference and lower the insurers' return on investment to 12%, which the administration states would save another $2 billion over 10 years.

The administration also wants to lower the cap for administrative and operating expenses USDA pays insurers implementing the program. The current cap is based on 2010 premiums, "which were among the highest ever." The White House proposes lowering the administrative-expenses payout to companies based on 2006 premium levels, before the current spike in higher commodity prices raises the administrative and operating expenses dramatically. The administration wants to set a cap at $900 million, then adjust annually for inflation. Such a plan would save $3.7 billion in administrative and operating expenses payout over 10 years.

Another $600 million in savings over 10 years would come from changing the premium for catastrophic, or CAT, insurance coverage. The premium is fully paid by the federal government, so it would not affect farmers who use CAT insurance.

The plan would also reduce the growth of conservation spending by $2 billion over the next decade. The White House noted that even under the proposal, conservation spending would be projected to grow by $60 billion over the next 10 years.

While the SURE program is expected to end Sept. 30, the administration proposes extending it to cover the 2012 to 2016 crop years. The administration notes SURE covers farmers at a revenue level essentially 15% higher than their crop-insurance guarantee. Yet payments also are capped to cover all but 10% of a farmer's expected farm income.

Chris Clayton can be reached at chris.clayton@telventdtn.com

(AG/CZ)

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