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In the past few decades, the federal crop insurance program has become a major source of subsidies for farmers, with more than 300 million acres and 130 crops enrolled in the program. Although a number of other programs faced budget cuts in the 2014 Farm Bill, legislators protected subsidies for the federal crop insurance program from any cuts and expanded the scope of the program.
The total cost of the federal crop insurance program is likely to average about $8 billion a year over the next 10 years, of which on average about $5.5 billion a year will flow to farmers, enhancing their incomes, and $2.5 billion will flow to private crop insurance companies and agents.
In addition to being expensive, the federal crop insurance also encourages farmers to waste resources, is disproportionately targeted to large and successful farm operations that have no need of federal assistance, and has the potential to engage the US in World Trade Organization disputes with other countries over the trade impacts of US agricultural policy. In light of these problems, some experts argue that the federal crop insurance program should be eliminated, although this option is unlikely to be popular with farmers, insurance companies, and farm state legislators.
A viable alternative is to replace the entire crop insurance program with a “no cost to farmers” disaster aid program based on indexes of plant growth constructed for each covered crop. If the crop insurance program is continued, at the very least, as some legislators and successive administrations have proposed, a costly and heavily subsidized endorsement called the Harvest Price Option should be terminated, with a potential savings in taxpayer outlays of close to $2 billion. Other changes, such as farm level caps on premium subsidies, reductions in premium subsidy rates, and introducing price competition among insurance companies should also be considered.
Once criticized and recommended for elimination, over the past 35 years the federal crop insurance program has become the largest and one of the most popular subsidy programs among farmers. Currently, close to 300 million acres are enrolled in the program, with an estimated participation rate of about 85 percent of eligible area and a total liability (coverage in force) of $100 billion. Federally subsidized insurance is now available for more than 130 crops, with modest coverage also available for livestock and dairy producers.
The program has expanded from products that offer limited coverage on a farm’s crop yields to policies that insure producers’ gross revenues, indemnify yield losses at the harvest price when it is higher than at planting time, and provide supplemental policies that allow producers to recapture a portion of the base policy’s deductible when losses are widespread in a county. By any measure, federal crop insurance has become a centerpiece of the suite of US federal farm programs, one that requires annual average subsidies in excess of $8 billion.
The program’s current popularity among farmers and farm state legislators stands in sharp contrast to its status 40 years ago. Before the 1980 Crop Insurance Act, the program operated on a limited basis with coverage offered for a limited number of crops in a limited number of counties.1 The 1980 act recast crop insurance as a primary means of protecting producers against natural disasters. To encourage participation, standing disaster programs were eliminated, producers were offered subsidies covering up to 30 percent of premium costs, and private companies were enlisted to actively sell insurance coverage to producers (as opposed to the more passive way it had been offered previously through United States Department of Agriculture (USDA) county offices).
After the 1980 act was passed, the program rapidly expanded in county and crop coverage but not in participation, which remained modest. When a widespread drought struck the Midwest and Northern Great Plains in 1988, only 25 percent of the area eligible for coverage was enrolled nationwide, prompting large ad hoc disaster assistance from Congress. Many perceived the crop insurance program as a failure, so much so that the Bush administration recommended eliminating the program and returning to a standing disaster program as part of its 1990 Farm Bill proposal.
Instead, Congress passed additional legislation in 1994 and 2000 that increased premium subsidy rates to an average of more than 60 percent of the premium costs. Participation then expanded. Producers enrolled more of their crop area in the program, and many chose higher levels of insurance coverage. As a result, by 2015 average coverage levels were more than 70 percent of expected yields or revenues. Penetration levels for crop insurance have been sufficiently high to obviate the need for supplemental disaster assistance. As an example, consider the 2012 drought, which was a weather event widely viewed as more severe than the 100-year drought that struck the Midwest and Northern Great Plains in 1988. Crop insurance indemnities in 2012 totaled more than $17 billion, but in contrast to 1988, Congress refrained from passing ad hoc legislation.
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