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Crop Insurance: A never-ending disaster

Thursday, November 14, 2013

 

As the cost of crop insurance has ballooned – from less than $500 million a year in the 1990s to more than $14 billion in 2012[1] – the program’s most ardent defenders keep repeating the same mantra: Crop insurance is better than budget-busting ad hoc disaster programs.

A close look at the data over the past 40 years shows that nothing could be further from the truth. The reality is that since Congress expanded the crop insurance program in 2000, crop insurance programs have been more costly than the disaster programs they were designed to replace. In fact, when spending is adjusted for inflation, it turns out that crop insurance has cost as much as all disaster spending since 1975. What’s more, nearly one-half of all disaster spending occurred after crop insurance subsidies were greatly increased.

Oops.

In theory, crop insurance could ultimately be a better option than disaster programs. But the insurance subsidies have become far too generous. Taxpayers now cover more than 60 percent of an individual farmer’s premium costs as well as paying for any excess losses and the insurance companies’ administrative costs. 

In all, taxpayers pick up more than 70 percent of the total costs of the program. 

And in the current farm bill Congress is looking to expand its generosity yet again, re-routing the savings from eliminating direct payments and other programs into more crop insurance offerings to ensure that farmers of all types are covered for losses as small as 10 percent.

Congress began to provide regular disaster payments to commodity producers in the 1970s. Between 1975 and 1981, disaster outlays by the Commodity Credit Corporation totaled $3.57 billion (around $12 billion adjusted for inflation).[2] Between 1985 and 2000, Congress provided another $17 billion ($27 million adjusted for inflation) in emergency assistance. 

In response to the rising cost of disaster aid, Congress passed the Agriculture Risk Protection Act of 2000 – injecting $8.2 billion in new federal spending into the crop insurance program over a five-year period in an effort to get more farmers to sign up –primarily by raising premium subsidies from 30 percent to 62 percent. 

The logic was that if more farmers had insurance, the cost of providing disaster support would drop substantially, both through larger insurance pools and by reducing the number of farmers relying solely on ad hoc payments. 

As a result, the federal subsidy to the crop insurance program averaged $3.7 billion a year between 2000 and 2009, up from an average of $1.1 billion a year in the 1990s and about $500 million in the 1980s. In 2011 and 2012, that support topped $10 billion annually.  Nearly three-fourths of federal spending on the program between 2000 and 2009 went to subsidize premiums.

Even as the cost to taxpayers of the crop insurance program tripled, Congress nevertheless passed a disaster aid bill every year between 2000 and 2007, at a total cost of $36.5 billion.[3] The money provided for ad hoc payments during that period nearly equaled what had been spent on all previous disaster legislation since 1975.

Of that total, more than $7 billion was specifically for crops covered by crop insurance.

During that same seven-year period, total taxpayer contributions to crop insurance added more than $30 billion to the total cost of the farm “safety net.”  In the years since, it almost equaled that $30 billion again.

Creating a crop insurance program that provides a fiscally and environmentally sound safety net for farmers – and that comes in cheaper than ad hoc disaster relief – is a goal we all share. But that is not what Congress has done, nor is it what the proposed “reforms” in the current farm bill will provide. 

The result is that every year will be a crop insurance disaster – for taxpayers.

[1] Dennis Shields, "Agricultural Disaster Assistance," Congressional Research Service Report RS21212, August 29, 2013.

[2] Barry Goodwin and Roderick Rejesus, “Safety Nets or Trampolines?” Journal of Agricultural and Applied Economics, 40,2 (August 2008):415–429.

[3] Ralph Chite, "Emergency Funding for Agriculture: A Brief History of Supplemental Appropriations, FY 1989 - FY 2006," Congressional Research Service Report RL31095, July 3, 2006.