* Could boost crop insurance cost by 40 percent -report
* Supplemental Coverage Option covers 90 pct of crop revenue
* Insurance group says report is one-sided and slanted
WASHINGTON, Oct 10 (Reuters) - An insurance provision in the U.S. farm bills proposed by the House and Senate could have corn, soybean, and wheat farmers making more money in a bad year, such as during a drought, than in a good year, an environmental group said on Thursday
In a 20-page report, the Environmental Working Group criticized the proposed Supplemental Coverage Option (SCO), which is in both the House and Senate versions of the Farm Bill, claiming it would have increased crop insurance payments during last year's drought by $6.8 billion on top of the record $17 billion that was paid out.
A corn farmer in central Illinois during that drought would have had crop revenue of about $1,300 a acre, or $200 an acre more than he had expected at planting time, said agricultural economist Bruce Babcock of Iowa State University.
SCO payments would be "windfall gains" on top of traditional payments and revenue from crop sales, making it unnecessary, said Babcock, a crop insurance expert who wrote the report for the "green" group.
"The best year they ever had (financially) would have been their worst year in terms of drought," said Babcock.
The Environmental Working Group works to gain more funding for conservation and small-farmer programs.
There would be a "substantial" SCO payout this year due to lower market prices and yield damage in the western Corn Belt and U.S. Plains, he said, although the corn crop is forecast to be record-large and soybeans the fourth-largest ever.
EWG said the SCO could cost more than the $5 billion-a-year direct-payment subsidy that it would replace. Farm-state lawmakers said they would end the direct payment as part of farm subsidy reform.
FARM COUNTRY SUPPORTS CROP INSURANCE
Farm groups gave priority to strengthening crop insurance in the pending farm bill. Farmers pay premiums every year but collect only in bad times, say defenders of the taxpayer-subsidized system.
The House and Senate still must agree on a final compromise version of the Farm Bill.
"Yet another one-sided and slanted 'report,'" said the trade group National Crop Insurance Services about the EWG report.
It said the report used "the extreme and unrepresentative" 2012 drought along with unrealistic commodity prices to arrive at an inflated price tag, rather than look at likely performance over good and bad years.
Crop insurance is the largest part of the farm safety net. Crop insurance spending was forecast to increase by up to 10 percent over the coming decade, to around $10 billion a year, in farm bills passed by the Senate and House of Representatives.
The SCO would be a county-based revenue policy that would cover the gap between a farm's individual insurance coverage and 90 percent of projected crop revenue. The government would pay 65 percent of the premium and there would be no limit on payments.
The Senate would require growers to practice conservation to qualify for crop insurance subsidies and have growers with more than $750,000 a year in adjusted gross income pay a larger share of the premium. Neither proposal is in the House bill.
SCO would trigger payments more often than other so-called revenue programs proposed in the new farm bill, said analysts Keith Collins and Harun Bulut in the economics journal Choices.
Iowa State's Babcock said a simple reform would improve SCO dramatically. Revenue guarantees should be based on prices expected at planting time rather than harvest, he said. Prices rise sharply when crops are bad, creating an offset for poor yields.