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Cutting Waste in the Crop Insurance Program

Thursday, December 19, 2013

Cutting Waste in the Crop Insurance Program

PDFCongress could dramatically cut spending on the federal crop insurance program without sacrificing anything other than the political objective of propping up a crop insurance industry that only exists because of taxpayer support. Cutting this spending would not necessarily mean providing farmers with less money, because the freed-up funds could be spent on programs that benefit both farmers and the public.

The need for crop insurance reform is best illustrated by the excess payouts to corn and soybean farmers that followed the 2012 drought, the first widespread drought in the Corn Belt since 1988. Many farmers lost much of their crop, but these yield losses led to sharply higher corn prices that buffered the financial impact for farmers who still had some crop to sell. Almost all Corn Belt farmers buy a type of insurance called Revenue Protection. They like it because when market prices rise after they buy the insurance, any loss in yield is compensated at the new, higher price. Thanks to the large insurance payments corn farmers got under these Revenue Protection policies in 2012, most of those who suffered a yield loss actually ended up with more revenue than they anticipated when they planted. Overall, corn and soybean farmers collected about $7.8 billion more in insurance payouts in 2012 than they would have gotten if the loss calculations had factored in the higher prices.

Because Revenue Protection provides this "Cadillac" insurance coverage, it has a "Cadillac" price tag, and taxpayers end up picking up most of the tab. Industry subsidies, in the form of administrative reimbursements and subsidized re-insurance, rise when farmers buy the more expensive insurance. And in years when Revenue Protection coverage does not generate large, taxpayer-funded payouts, it results in large windfall gains for the companies. 

Because taxpayers pay most of the higher premiums for Revenue Protection coverage, farmers have a strong incentive to buy these plans. If they had to pay the extra cost themselves, their "need" for Revenue Protection would lessen considerably.

A sensible reform would be to provide farmers with enough of a subsidy to ensure that they participate in the program, but to limit it so that they buy only the level and type of insurance they actually need. Farmers who value higher coverage levels would pay the higher price to get it. This was the way that premium subsidies were implemented prior to the crop insurance "reform" of 2000 that dramatically increased subsidies. The stated reason was to get more farmers to enroll in the program and lessen the need for Congress to provide ad hoc disaster assistance, but the subsidy largesse resulted in giving farmers wasteful incentives to buy the most expensive insurance.

Congress is currently poised to make things worse by passing a new program, called the Supplemental Coverage Optoin, on top of existing crop insurance.  This coverage would mirror the policies that farmers currently buy and result in even more over-compensation.  If this program had been in place in 2012, corn and soybean farmers would have received an additional $6.5 billion on top of the payouts that had already made 2012 a profitable year.

A sensible subsidy structure could maintain crop insurance enrollment while reducing program costs by at least $20 to $30 billion over 10 years. More ambitious reform would save billions more. Currently the government entices the private sector to take on some of the risk of crop insurance through overly generous reinsurance agreements, with the result that taxpayers cover most payouts in high-loss years and the companies make billions in low-loss years. Rather than subsidizing companies with federal dollars, it would be cheaper and more efficient to provide a county-level revenue insurance program through the farm bill. The private sector would be free to offer farmers additional add-on insurance on commercial terms to those farmers who want additional risk management help and are willing to pay for it themselves. 

There is no valid economic argument for having taxpayers taking on so much of farmers’ risk. Congress should instead make investments that would ensure agriculture can prosper and sustain itself in the future, focusing on issues such as renewable energy, transportation, clean water and food safety that address the interests of both agriculture and the public.