Where corn don’t grow: Achieving rational farm subsidy rates

WASHINGTON (Oct. 11, 2017) – Cutting the federal subsidy that farmers receive to buy crop insurance from the current average of 62 percent of premiums back to the 1990s level of 40 percent of premiums would save the U.S. Department of Agriculture roughly $34 billion over the next decade, a new policy study by the R Street Institute finds.

While there has been extensive analysis of other proposals to rein in the cost of the heavily subsidized Federal Crop Insurance Program—including capping annual premium subsidy to any given farm and setting a means-tested income threshold—the new study by R Street Associate Fellow Vincent Smith is among the first to consider the impact of a straightforward cut in the percentage of crop insurance premiums subsidized by taxpayers. In his research, Smith finds that even a more modest reduction in the average subsidy rate to 50 percent would save $2.14 billion annually, a roughly 25 percent reduction in the cost to taxpayers.

“There is no empirical evidence that private insurance markets would offer multiperil crop insurance of the sort currently offered through the Federal Crop Insurance Program at prices sufficiently low that farmers would be willing to buy it,” Smith writes. “In effect, this means that, through the crop insurance program, the federal government has artificially create a substantial market—$10 billion a year in gross revenues from premiums—for a product that no one would want if they have to pay the actual cost of it themselves.”

The savings realized by cutting the premium subsidy rate come not only from the absolute level of premium assistance extended to farmers, but because farmers would substantially reduce their participation in the program as the subsidies decline. For example, at the 40 percent level of total premiums, participation rates would decline by about 20 percent, Smith finds.

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