Limiting premium subsidies for crop insurance

Field of crops after harvesting in the summer

One of the most persistent inaccurate claims made by some farm-lobby advocates, not to mention elected representatives with agricultural constituencies, is that any change to the Federal Crop Insurance Corp. program that does not expand subsidies to farmers will devastate U.S. crop production. Whether the proposal is a modest reduction in subsidies to private crop insurers, as was debated in November 2015 thanks to a provision of the 2015 bipartisan budget act, or a proposal to place modest caps – in the range of $40,000 to $50,000 – on the premium subsidies an individual farm may receive, the outcry from farm-subsidy proponents is the same.

Such claims not only are unsubstantiated, but they also are inconsistent with available evidence on the determinants of crop production. However, relatively little data-based evidence has been collected on the extent to which farm revenues, or any other aspect of farmers’ lives, would be affected by premium subsidy caps.

Also under explored are the potential impacts of various proposals to restrict farm subsidy payments based on an individual farm family or landowner’s taxable income. Some federal farm subsidy programs – with the crop insurance program as a notable exception — already prohibit payments to farm families or farm owners with annual taxable gross incomes that average more $900,000 over a three-year period. Economists generally have regarded such caps as ineffective, as anything short of draconian enforcement mechanisms would still leave farm owners able to reconfigure the structure of their ownership to avoid such payment restrictions. Therefore, the focus has been on the extent to which caps on crop insurance premium subsidies to farms would affect the farm sector.

Two major questions are examined in this study. The first is whether different premium-subsidy caps would have any impact on the subsidies farms receive – if so, how many farms would be affected and how many would not. The second is the extent to which those farms affected by premium-subsidy caps would see a substantial reduction in the gross income from their crop operations (market revenues plus government subsidies), not simply in dollar terms, but in terms of the likely proportional declines in their gross incomes. Net farm-income effects are not considered, for two reasons. First, all estimates of farm costs of production are highly imprecise and include many outlays that would be viewed as consumption expenditures for nonfarm households. Second, at the farm level, costs genuinely associated with the production of a crop vary substantially among farms, not least because of wide variations in soil quality, topography, climate and management skills. However, if the reductions in gross incomes that result from premium caps are negligible in percentage terms, then the impacts on farm household incomes are also almost surely negligible.

The analysis is based on publicly available data collected by U.S. Department of Agriculture agencies through three major vehicles: the most recent (2012) agricultural census; the annual survey of farms carried out by the National Agricultural Statistical Service; and the data on federally subsidized crop insurance premium rates and program participation rates that are provided, maintained and collected by the USDA Risk Management Agency. The focus is on farms producing major crops that are heavily insured in 12 states. Six are “Corn Belt” states in which corn and soybeans are major crops: Illinois, Indiana, Iowa, Minnesota, Nebraska and Ohio. Three – Kansas, North Dakota and Oklahoma – historically have been viewed as “wheat” states, although corn is now raised more extensively in Kansas and North Dakota than in the 1990s and early 2000s. The other states are Georgia (cotton and peanuts), Arkansas (rice) and Texas (cotton and wheat).

The approach is to identify typical crop-oriented farm operations in each of the states by farm size, in terms of acreage allocated to the crops of interest; to identify typical crop insurance products used by producers in the states; to obtain representative premium rates for the requisite products; to identify the crop insurance coverage levels (the amount of protection on a per-acre basis) selected by most producers for each crop; and to calculate premiums and premium subsidies for each size class of farm.

We find only about 9 percent of the estimated 254,233 farms in the 12 states that plant corn, cotton, peanuts, rice, soybeans and wheat would experience a reduction in their crop insurance premium subsidy payments under a $50,000 premium subsidy cap. The absolute size of the reductions in those payments, in dollar-amount terms, would be relatively small for most of the affected farms and would be close to negligible relative to their annual average revenues from market sales, which for the vast majority of the affected farms are well over $750,000 a year (and in many cases, are in the multiples of millions of dollars).

More substantial premium caps would affect a larger proportion of farms. For example, a $30,000 premium-subsidy cap could affect premium-subsidy payments of an estimated 14 percent of all farms considered in the analysis. A $10,000 premium cap would affect 37 percent of farms considered in the analysis. However, even in the case of a $10,000 premium-subsidy cap, the financial impacts would be modest and manageable for nearly all farms.

Despite these generally modest and negligible impacts, regional and crop-specific differences with respect to the effects of the premium caps are likely to result in vigorous lobbying efforts by agricultural commodity groups to prevent legislation that propose such caps. In addition, because effective premium-subsidy caps may reduce the demand for many widely used federal crop insurance products, the crop insurance industry also is likely to oppose the introduction of such limits on premium-subsidy payments.