Crop insurance and transparency

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Every year, as the U.S. Government Accountability Office has reported, a substantial number of wealthy farmers and land owners receive individual crop insurance premium subsidies in excess—and in many cases well in excess—of $100,000.  The owners of some very large farms are given taxpayer-funded annual premium subsidies of over one million dollars.

In fact, from a broad social welfare perspective, the federal crop insurance program is a disaster.  Not only does the program transfer taxpayer funds to relatively or very wealthy farmers and landowners, but it does so in ways that encourage economic waste.  As has been well documented by researchers, the program encourages moral hazard behaviors that increase the overall riskiness of agricultural production in various ways. For example, farmers who purchase the heavily subsidized crop insurance products use fewer inputs that reduce their risk of crop loss.  They are also more likely to plant crops on highly erodible lands where, again, the likelihood of a crop loss is much higher.  And who bears the cost of farmers taking more risks as a result of the federal crop insurance program?  Answer: taxpayers, not farmers.

Why do most farmers purchase federal crop insurance and do less to manage crop losses?  The answer is straightforward.  The typical farmer who insures their crop using the federal government's crop insurance pays a premium out of their own pocket that is less than 40 percent of the estimated actuarially fair premium.  In other words, if a typical farm pays $10,000 each year for the federal crop insurance policy it purchases, on average it can expect to get more than $20,000 a year back, and the dollar payoff will be larger when the risk of crop losses is greater.   No wonder farms, to an important extent, abandon managing their risks of crop loss through their production practices when taxpayers are required to reimburse them for most of the crop losses they experience.

Moreover, partly because of provisions in the 2014 Farm Bill, the federal crop insurance program is anything but transparent with respect to who receives the subsidies and in what amounts.  For example, the 2014 farm bill terminated the Direct Payments program, an entirely transparent income transfer program for farmers, and replaced it with additional heavily subsidized crop insurance programs, as well as other subsidy policies, that are far more opaque.  In fact, many of the new farm bill initiatives are intended to obfuscate the extent to which relatively wealthy farm households benefit from farm programs. 

Given that such is the case, initiatives-such as a recent amendment from Representatives Kind and Petri to the current Agricultural Appropriations bill-that are intended to increase the transparency of crop insurance and other farm subsidy programs is a good step in the right direction.

 

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Vincent H.
Smith

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