* Biggest food stamp cuts since 1996 welfare reform law
* Bill creates three new types of crop insurance coverage
* Cuts $40 billion in 10 years, half in food stamps
* Food stamp cuts are tallest hurdle for farm bill
By Charles Abbott
WASHINGTON, May 15 (Reuters) - A Republican-controlled panel in the U.S. House of Representatives on Wednesday approved the biggest cuts in food stamps for the poor in a generation and a potentially expensive expansion of federally subsidized crop insurance.
The House Agriculture Committee approved a five-year, $500 billion farm bill on a 36-10 vote. The next step will be debate by the full House, which is likely to start in June.
Congress is months late in writing a new farm law. The Senate Agriculture Committee advanced its version on Tuesday and the full Senate is set to begin debate on Thursday.
The House and Senate bills each end the $5 billion-a-year direct-payment subsidy, long a target of reformers, and spin off at least three new types of crop insurance.
Almost half the savings in the House bill would come from a $20.5 billion cut over 10 years in spending on food stamps for low-income Americans.
The House plan would restrict eligibility and require closer accounting of certain costs. It would be the largest cut in food stamps since the 1996 welfare reform law, experts say.
Food stamps are seen as the make-or-break issue for the latest farm bill, rather than crop subsidies, which have traditionally been the focus of debate.
An urban-rural partnership traditionally carries farm bills to passage - city lawmakers back generous farm subsidies in exchange for well-funded nutrition programs - but threatens to shatter this time around.
The farm bill died last year amid Democratic opposition to Republican demands for $16 billion in food stamp cuts. The bill was never debated by the full House.
A STEP TOO FAR?
"This goes too far," Democrat Jim McGovern said of the latest bill. The Massachusetts lawmaker lost 27-17 on a mostly party-line vote when he tried to eliminate the food stamp cuts in the new bill.
Iowa Republican Steve King said high food stamp enrollment would "expand the dependency class" and Austin Scott, a Georgia Republican, suggested it was unfair that "nutrition is getting five times as much as production agriculture" in the bill.
About 2 million people, or 4 percent of participants, would lose food stamps under language in the new House bill to eliminate so-called categorical eligibility, created by welfare reform, according to the Center for Budget and Policy Priorities, a non-partisan think tank.
Some 45.6 million people, many of them impoverished elderly or working-poor families with children, received food stamps at latest count.
While the bill expands crop insurance spending by $9 billion over a decade, it would cut traditional subsidies by $22 billion, according to the Congressional Budget Office. Aides to Agriculture Committee Chairman Frank Lucas said the farm safety net would shrink overall.
Federal payments could surge above current levels if commodity prices fall sharply, said agricultural economist Vince Smith of Montana State University. When crop insurance and crop supports are considered together, "the government is responsible for a much larger share of any farm income shortfall," Smith said.
Cotton growers would get a special revenue insurance program to replace subsidies that the World Trade Organization says violated trade rules. The government would pay 80 percent of the premium. Peanuts would get a separate revenue insurance program.
"Companies underwriting federal crop insurance are likely to be among the major beneficiaries of the new farm bill when it becomes law," said analyst Mark McMinimy of Guggenheim Washington Research Group.
U.S. commodity prices are at historically high levels so farm program changes may not be felt immediately for most crops. However, the Senate and House farm bills set peanut supports slightly above the projected market price and raise the "target" price for rice by 27 percent to 33 percent.
Both versions of the bill would make slightly more land available for growing crops by shrinking the Conservation Reserve, a program that pays farmers to idle fragile land for 10 years or more. The House would cap the reserve at 24 million acres and the Senate at 25 million acres, down from the 27 million acres now idled.