Research & Commentary: Crop Insurance Reform

Published May 15, 2012

Farmers buy crop insurance for protection against the financial impact of natural disasters affecting their crops and the loss of revenue caused by declines in agricultural commodity prices. The federal government currently dominates the crop insurance market. It sets most prices, pays more than 60 percent of farmers’ premiums, and decides what the program covers.

Legislation being considered in Congress would expand the crop insurance program even further. Under the 2012 Farm Bill, a five-year, $480 billion piece of legislation, the U.S. Senate Agriculture Committee introduces several reforms to the crop insurance program, eliminates certain subsidies—particularly the “direct payments program” (which subsidizes farmers even if they do not grow crops—and expands others. The crop insurance program, which would add $3.2 billion over the next decade to a program with a $9 billion annual budget, gets the biggest expansion of all.

In particular, the Senate bill diverts most of the savings from eliminating direct payments into a new “shallow loss” insurance program that would compensate farmers if their income drops by as little as 5 percent. The Congressional Budget Office reports that repealing direct payments would save $44.6 billion over the next decade, but the new “agricultural risk coverage” adds $28.9 billion to the budget over ten years. In addition, the losses the program would compensate for need not be from floods, droughts, frosts, or other weather-related catastrophes, but would instead be driven largely by market fluctuations in commodities prices.

Supporters of federal government crop insurance, including crop insurance agents and agricultural trade groups, say subsidizing crop insurance is an efficient and fair way to protect farmers from disaster and allow them to rebuild—more efficient and fair than private insurance or ad hoc government aid. They contend crop insurance is an important safety net for farmers, who are vulnerable to extreme weather events that can destroy their entire product at once.

Opponents of government crop insurance, however, say the current federal program has become excessively expensive, complex, overreaching, and inefficient. Those supporting reform or cancellation of federal crop insurance contend the defects of the current system have been exacerbated by stakeholders taking advantage of it, exploiting what was once a good program.

The following documents offer more information about crop insurance and farm subsidies from differing perspectives.

Senate Bill Would Revamp Federal Crop Insurance Program
Charles Abbott of the Insurance Journal examines the changes to crop insurance in the Farm Bill and speaks to several critics and proponents of the reforms about the effect of the proposed changes. 

Pressure Builds to End Crop Insurance Subsidies
The Heartlander digital magazine reports on the growing call for reform of the federal crop insurance program, noting its growing costs and problems of waste and abuse. 

Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining
The Government Accountability Office conducted this study at the behest of Congress to identify opportunities for reducing the cost of the crop insurance program. The objectives were to determine (1) the effect on program costs of applying limits on farmers’ federal crop insurance subsidies, as payment limits are applied to other farm programs, and (2) the extent to which USDA has used key data-mining tools to prevent and detect fraud, waste, and abuse in the program. 

Double Indemnity: Crop Insurance and the Failure of U.S. Agricultural Disaster Policy
The American Enterprise Institute examines the federal crop insurance program and presents five options for reform or elimination. 

Green Scissors 2011: Cutting Wasteful and Environmentally Harmful Spending
The 2011 annual report from the Green Scissors coalition identifies more than $380 billion in government subsidies that damage the environment and waste tax money. 

Farmers Say Crop Insurance Critical to Kansas Agriculture
Insurance Journal canvasses several farmers and agricultural interests in Kansas on why crop insurance is important to them. 

The Bad Harvest: Crop Insurance Reform Has Become a Good Idea Gone Awry
Jerry R. Skees of the University of Kentucky discusses how the crop insurance program, once a good idea, was changed by its stakeholders into a program so heavily subsidized that it may be more inefficient and inequitable than ad hoc assistance. 

How Farm Subsidies Harm Taxpayers, Consumers, and Farmers, Too
Brian Riedl of The Heritage Foundation examines the negative effects of farm subsidies, including crop insurance, on taxpayers, consumers, and farmers. 

Crop Insurance Subsidy Hurts Farms and Environment
Heartland Institute Vice President Eli Lehrer argues the nation’s crop insurance program is a $6.5 billion annual waste of taxpayers’ money and one of the most egregious examples of corporate welfare in the vastly overweight federal budget. 

Downsizing the Federal Government: Agricultural Subsidies
This article from the Cato Institute examines farm subsidies and their effects on the economy and budget, offering several reasons why the subsidies should be repealed. 

Ryan’s Plan for Farm Subsidies
Sallie James of the Cato Institute discusses Rep. Paul Ryan’s (R-WI) plan for significant cuts in farming subsidies as part of his 2012 budget resolution.