2012 crop insurance payouts were more than double farmers’ losses

Garage Of Green Furrows

The verdict is in – crop insurance, as currently structured, results in massive overspending on the part of the federal government.

Just how much overspending? According to a recent study by agriculture economist Bruce Babcock from Iowa State University, the 2012 drought resulted in almost $7 billion in unnecessary payments. To put this in perspective, the FY 2013 budget request for the entire National Science Foundation is only $7.37 billion.

What caused this colossal overspending?  The federal government subsidizes 60 percent of the cost of farmers’ crop insurance policies. The goal is admirable: to protect farmers from losses due to unforeseeable circumstances, such as natural disasters. But the subsidies are so large they encourage farmers to over-insure their crops by purchasing the Cadillac of crop insurance policies, termed “revenue protection.”

Under simple “yield protection” policies, farmers insure yield-per-acre and, if yields fall (such as, due to a drought or flood) they receive a per-acre payout at a price determined before the policy’s purchase. Under “revenue protection-harvest price exclusion” policies, farmers insure the revenue-per-acre, so if prices fall, the farmer is made whole.

Revenue protection policies protect farmers against both falling prices and falling yields. They offer farmers the best of both worlds, and go even further.  When yields fall and prices rise, revenue protection pays out the yield-per-acre at the higher market price, making payouts to farmers both larger and more likely. This increased coverage costs a pretty penny, but fortunately for farmers, the majority of those pennies come from the taxpayer.

This wouldn’t be a $7 billion problem, except that Uncle Sam also encourages insurance companies to sell these policies by agreeing to bear part of the burden when catastrophe strikes. Therefore, when disaster occurs, it’s the taxpayer who is on the hook for large payouts. According to Babcock, “in 2012, taxpayers  will absorb almost 75% of the gross underwriting loss.”

Had farmers opted for one of the other policies, the payouts would have provided something closer to the farmers’ actual losses, which Babcock estimates to be around $6 billion. But most of the claims filed were insured through the revenue protection policy, resulting in a payout of $12.7 billion. For a program that’s designed to be a safety net, paying out more than twice the estimated loss seems generous, to say the least.

With the Senate’s latest Farm Bill headed to committee mark-up this week, let’s hope that sensible steps are taken to protect taxpayers while still protecting farmers. Otherwise, natural disasters will continue to wreak havoc – on the taxpayer wallet.

Comments

  1. It’s interesting to read an article like this since I am a farmer who has always participated in the Risk Management Insurance tools offered by USDA. I have yet to have a year in which I would not have done much better if I hadn’t had a disaster loss and had been able to harvest the crop which I planted and tended with every hope of filling a bin. Crop insurance will never financially replace a full harvest. I choose to be a farmer so I don’t complain about the Governments decisions impacting my markets just days before harvest I have a wonderful way of live but a vacation day every now and then would be nice along with affordable health insurance so I wife could have an option of staying home with the kids. I wish you’d write an article on how I have to complete in a marketplace with foreign produce raised with chemicals banned in the US and they pay their labor a rate for a day that I pay for an hour. We pay above $10 an hour for harvest labor. Processing Companies ship produce to US factories cheaper than local farmers can produce it can market it locally. Local farmers have more licences than any other business their size. Every scale, pump, truck, has a permit and inspection fee, since I see other farmers produce I have a resale permit, I roast peppers another inspection and permit. Every time we turn around we have to hire representation to fight of aggressors to our water rights. I have a wonderful life, as I get up and do what I want to do everyday and If I’m cussing the boss, I know I deserve it. I hope that your readers will take a few minutes and visit a farm close to them. get to know the man who feeds you and your children. Remember I won’t sell anything I wouldn’t feed to my own children! Does the same go for the place you get your groceries?

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  1. [...] children. It does this, among other ways, by raising the target prices for crops, expanding the exceedingly generous crop insurance program, keeping in place the costly ethanol and energy programs that drive up food [...]

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