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US crop insurers accept $6bn subsidy cut

US crop insurers have agreed a deal with the US Department of Agriculture (USDA) that will see federal subsidies cut by $6bn over the next decade.

Agriculture Secretary Tom Vilsack announced last week that all 16 companies that participated in the 2010 scheme have signed agreements for 2011 accepting the new terms.

US crop insurers receive federal subsidies, including access to federal government-backed reinsurance, as part of the Department of Agriculture's attempts to ensure that all farmers have access to affordable cover.

But in 2008 a Farm Bill that passed Congress tasked the department with renegotiating the rates of subsidy to reflect increases in commodity prices.

Vilsack said that the new terms have laid the foundation for a more sustainable subsidy scheme.

He went on: "USDA appreciates the efforts of the companies to negotiate a new agreement in good faith, with straightforward and constructive dialogue to develop an agreement that works for the companies, producers and taxpayers."

Trade body National Crop Insurance Services struck a very different note earlier this month, when its president Bob Parkerson said that it was "vexed" by the reductions in funding.

"I think our definition of 'negotiate' was very different from USDA's," Parkerson said. "They made a few concessions to some of the technical aspects of the agreement, but they didn't budge on the $600mn-a-year cut in funding, despite the damage that it will do to the financial foundation of the programme."

Under the new agreement each insurer will still be eligible to receive an administrative and operating subsidy, which will be a proportion of premium written. However, this payout will now be subject to a cap.

In explaining the adjustments, USDA pointed to increased commodity prices in recent years. The department's figures show that as a result payments to insurers had risen from $1.8bn in 2006 to $3.8bn in 2009 at a time when the total number of policies decreased.

Analysis commissioned by the USDA showed that crop insurance companies have achieved a 17 percent rate of return over the last 21 years. It predicts that rates of return will fall to 14.5 percent as a result of the changes to the programme.

There has been speculation that the changes may drive some crop insurers out of the market, although there is no evidence of this occurring as yet.

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