To hear the agricultural lobby and farm state representatives in Congress tell it, making any cuts to the subsidies farmers receive from the federal government to help them buy crop insurance would absolutely devastate U.S. crop production. Such claims are repeated so often and so vociferously that the play no small role in helping the farm lobby beat back on any attempt to rein in their federal largesse, most recently in the November 2015 debate over a provision of the bipartisan budget act.
It therefore might surprise some to learn that capping the premium subsidies a farmer may receive at $50,000 a year – as was proposed during the last farm bill negotiations by Sens. Jeanne Shaheen, D-N.H., and Pat Toomey, R-Pa. – would have absolutely no impact on roughly 90 percent of farms in major farm states. In fact, according to analysis I completed recently for the R Street Institute, more draconian caps of $30,000 or even $10,000 also would have little or no impact on the overwhelming majority of farmers’ bottom lines.
Using publicly available data from the most recent agricultural census on farm size and crop mix – as well as information from U.S. Department of Agriculture and the Risk Management Agency on crop prices, premium rates, premium subsidies and the proportion of farms that signed up for different levels of coverage and types of policies – I simulated the impact of $50,000, $30,000 and $10,000 premium subsidy caps for about 250,000 representative farms that plant corn, cotton, peanuts, rice, soybeans and wheat in 12 geographically diverse farm states, from Minnesota to Georgia and from Texas to Ohio.
Under terms of the federal crop insurance program, the USDA’s Risk Management Agency (RMA) determines “actuarially fair” premiums for various crop insurance products and contributes, on average, about 60 percent of the cost of the premium, with farmers paying the remaining 40 percent. The government also pays additional subsidies to cover the administrative and operating expenses of the insurance companies who manage the policies on the government’s behalf.
As one would expect, the bigger the farm, the bigger the taxpayer-financed premium subsidies. Over the years, this has prompted some policymakers to propose capping the size of the premium subsidies any given farm can receive from the federal government. In my analysis, the roughly 24,000 farms that would be affected by a $50,000 annual cap generally are large enough to plant several thousand acres to major crops, have annual crop sales revenues well over $1 million and, for the most part, carry very little debt. Many of those farms would experience very small reductions in their revenues as a result of the cap.
The effects of a premium subsidy cap of $30,000 also would be small, with absolutely no impact on 86 percent of the farms considered in the analysis. The additional farms that would feel some impact generally have market receipts of $500,000 to $750,000, depending on their location and crop mix and many would lose only about $1,000 and $3,000 a year in reduced premium subsidies.
A $10,000 premium cap would have more widespread effects, but still would leave about 63 percent of the farms unaffected. For the largest farms – those that would be affected even by the $50,000 cap – the impact of a $10,000 cap on gross revenues could be more substantial. But given their size, income and net worth, those large farms would have plenty of financial capacity to deal with such a cap.
According to the Congressional Budget Office, over the next four or five years, federal crop insurance subsidies are expected to increase total U.S. farm revenues by an average of about $6 billion annually. That’s less than 2 percent of the $370 billion the USDA’s Economic Research Service expects farmers to receive from the sale of crops and livestock each year over the same period. Even if crop insurance subsidies were terminated altogether, the sky would not fall and U.S. agricultural output likely would remain largely unchanged.
Essentially, the current federal crop insurance program is an income redistribution program, through which taxpayer funds are reallocated mainly to large and wealthy farm operations. Very few crop insurance subsidies are paid to genuinely small farm operations. There is every reason for taxpayers, policymakers and other groups concerned with rational public policy to support capping federal crop insurance subsidies.