Obama Offers $18 Billion Fix to Bloated Crop Insurance Program
This week, President Obama released a 2017 fiscal year budget proposal that would save taxpayers more than $18 billion and better protect America’s land and water.
The budget includes two reforms to the broken federal crop insurance program:
- Cutting overly generous premium subsidies by 10 percentage points for so-called revenue protection policies that guarantee farmers the projected price at planting time or the harvest price – whichever is higher.
- Lowering the large payouts growers receive through “prevented planting” coverage, which encourages farmers to plow up wetlands and plant on other risky and environmentally sensitive land.
So what does this mean?
The federal crop insurance program we have today is a far cry from the safety net most people expect. On average, America’s taxpayers subsidize 62 percent of growers’ premiums. Taxpayers also pay private insurance companies to sell and service the policies while at the same time picking up most of the cost of payouts when bad weather strikes.
Reforming the Harvest Price Option
People assume that crop insurance pays farmers when they experience losses due to unforeseen events like droughts, hail or insects. However, most crop insurance policies are revenue-based, not yield-based, meaning that farmers can insure themselves against revenue losses caused by low prices, low yields – or both.
The best example of how far crop insurance has strayed from a safety net is the so-called revenue protection policies. These policies guarantee the projected price at planting time or the harvest price – whichever is higher. As a result these policies ask taxpayers to subsidize the risk growers face when they secure higher prices by selling crops before they are harvested. Because these policies are costlier than traditional revenue coverage, taxpayers more heavily subsidize them. That provides even greater incentives for farmers to choose this option.
The President’s budget estimates that lowering the premium subsidies for harvest price coverage by 10 percentage points would decrease the number of growers choosing this more expensive coverage option, reduce the number of high-indemnity payouts and save taxpayers $16.9 billion over 10 years.
Reforming “Prevented Planting” Coverage
Crop insurance policies also cover growers when they can’t plant a crop because of extreme weather or other factors. EWG analysis has shown that in some parts of the country, such as the Prairie Pothole Region of the northern Great Plains, prevented planting coverage works more like an income support program than an insurance program.
The reason is simple.
In regions of the country where shallow wetlands are interspersed with cropland and grassland, excessive moisture during certain parts of the year is the norm, not the exception. As a result, this type of insurance encourages farmers to plow up wetlands or plant on other risky and environmentally sensitive land in order to receive payouts. Between 2000 and 2013, the 195 counties in the Prairie Pothole Region generated nearly $5 billion in prevented planting payouts – 61 percent of all prevented planting payouts nationwide.
Despite the Department of Agriculture’s attempts to tighten controls over prevented planting payouts, a 2013 report by the Inspector General’s office found that USDA’s Risk Management Agency was creating incentives for growers to buy prevented planting coverage through excessive payments and high coverage levels.
Lowering the large payouts that growers collect through prevented planting insurance, as the Obama Administration has proposed, would be a much-needed first step. For other proposals to reform the program, read EWG’s “Boondoggle” report.
Generating Real Savings
The modest reforms put forth in President Obama’s 2017 budget proposals would be important first steps toward more fundamental reform of the broken crop insurance system. Overhauling the program would keep a fiscally and environmentally responsible safety net in place while saving billions of dollars that could be invested instead in programs to promote healthy diets and protect the environment.