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USDA to cut subsidies as insurers post big profits

MINNEAPOLIS -- The federal government wants to save taxpayers billions of dollars by reducing spending on crop insurance after years of big profits by insurers, but the industry claims the reductions could hurt rural areas.

The U.S. Department of Agriculture is negotiating a new deal with crop insurance companies, which posted profits of 26.4 percent last year.

Crop insurance covers part of farmers' losses when their crops fail and helps them get credit for spring planting because lenders know they will be able to repay their loans. While participating farmers pay premiums, the government subsidizes the program to keep it affordable. Last year, it paid crop insurers $3.8 billion.

"The federal crop insurance program is an important part of the farm safety net, but costs have escalated to an unsustainable level and we need to take steps protect taxpayers," U.S. Agriculture Secretary Tom Vilsack said.

Earlier this year, the U.S. Department of Agriculture proposed cutting $8.4 billion in spending on crop insurance over 10 years. Its first revision brought that down to $6.9 billion. The agency is now preparing its third draft, which Bill Murphy, administrator of the USDA's Risk Management Agency, expects to release in early May. A study done for the Risk Management Agency found the crop insurance industry's profit in 2009 was the second-highest in 21 years and more than double the 10.7 percent the agency considered "reasonable" for last year. Over the past 21 years, the study said, the companies averaged a 17 percent return, compared with a "reasonable" rate of 12.7 percent.

Dale Shelley, who grows corn, soybeans, oats, alfalfa and grass seed on about 2,700 acres about 60 miles northwest of Minneapolis, said insurance helped him through a drought and hail damage in 2008. Without it, he would have had to borrow money to buy seed and fertilizer in 2009 instead of paying cash.

"The government wants cheap food," Shelley said. "To raise cheap food, we have to have a guarantee of something to keep us afloat."