Federally Subsidized Crop Insurance Lacks Economic or Environmental Justification

The United States has many policies designed to preserve industries or avoid specific harms. Too often, these programs result in unintended consequences that harm taxpayers while failing to achieve the hoped-for outcomes. One major failure in policy is crop insurance, which was initially designed to help impoverished farmers but has since ballooned into corporate welfare that also incentivizes terrible environmental practices.

Federally subsidized crop insurance began in the 1930s during the Dust Bowl. At that time, about 25 percent of the U.S. population lived on farms, and the government was concerned about their welfare. The idea of crop insurance was simple: Farmers would pay a small premium to participate in the program, and if crop yields fell short or prices dropped, the farmer would still be covered financially. As it was part of President Franklin D. Roosevelt’s New Deal, the program was more about providing economic relief amid the Great Depression than it was about improving insurance access to farmers.

Nearly a century later, federally subsidized crop insurance still exists through the federal crop insurance program (FCIP), and it has become a staple of the farming industry despite its growing costs. The program is subsidized because payouts exceed premiums—on average by $10 billion per year. And, because the FCIP is subsidized, the opportunities for private insurers to offer comparable premiums are limited. Even though the FCIP is managed by private companies, it has never been left to the private sector.

The problem with federally subsidized programs like the FCIP is that they create incentives that are often in contrast to the policy objectives. A non-agricultural example of this dynamic is the National Flood Insurance Program (NFIP), which subsidizes flood insurance for coastal properties. Because the NFIP effectively reduces the real cost of living on the coast, the program encourages people to live in flood zones, when properly functioning insurance should have the opposite effect and force residents of flood zones to financially reckon with the risk they incur.

Crop insurance is problematic because it creates a system where the only agricultural activities eligible for insurance are those that are favored by the government, which is sometimes out of step with environmental conservation goals or even the long-term viability of farms. In fact, it was only starting in 2020 that crop insurance allowed for the consideration of “cover crops.” Cover crops were never eligible for insurance because they are not sold, so there is no revenue to be insured. But the use of cover crops preserves the long-term health and productivity of soil. The lack of consideration to soil health in the crop insurance program meant that taxpayers were effectively paying farmers to not preserve the long-term health of their soil, which is at odds with how a properly functioning, privatized program that values long-term returns on farmland would work. Decades of neglect to soil health, partially owing to these subsidies, have created problems such as soil erosion and reduced carbon sequestration.

Another environmental problem with the FCIP is that because it is under government control, the choices as to what crops are covered under the FCIP are subject to political, rather than market forces. While there is little in the way of research to estimate the FCIP’s effect on the production decisions for specific crops, research has consistently shown that subsidized insurance influences farmers’ behavior. This means that the effects of the insurance subsidy can also run counter to economic and environmental concerns, such as water scarcity, that would otherwise encourage farmers or financiers to transition to more sustainable or more profitable crops.

In addition to the fact that the FCIP disincentivizes environmental conservation, it is also an economically flawed program. The FCIP was designed during a time when there were more farmers, smaller farms, and little incentive for the establishment of a privatized insurance market for agriculture. In 2023, the dynamic is the opposite, and most farming is done at industrial scale by large corporations. An estimated 56 percent of crop insurance subsidies go to the top 10 percent of recipients. These are well-capitalized customers that private insurers would have a financial interest in servicing if publicly subsidized insurance wasn’t already available.

All subsidies entail a cost from taxpayers, which reduces their after-tax income and diminishes their ability to invest in their preferred activities. Given that subsidies entail a negative economic impact outside of the subsidy beneficiaries, it is ideal that subsidies should be directed toward activities that address some sort of collective action problem or hoped-for outcome. For example, government subsidies for food purchases through the Supplemental Nutrition Assistance Program are intended to ensure that all Americans have access to food regardless of their income level.

But the FCIP doesn’t clear that bar; the subsidies go to corporations and farmers, who already generally earn higher incomes than most Americans. Because the subsidies predominantly go to Americans who would engage in the economic activity even without the subsidy (farming is profitable even without the FCIP), the program functions as a wealth transfer from taxed Americans to subsidized corporations and farmers. And as the subsidies grow, their negative economic impact worsens.

Simple reforms could be adopted to eliminate the wasteful aspects of the FCIP. The subsidy component of the premiums could be reduced or eliminated to make the program function more like a conventional insurer that would need enough premiums to cover losses. Means testing could be incorporated into the FCIP to ensure that the subsidies protect only those farmers for whom the insurance makes or breaks their farm viability. And small reforms to the program could be implemented, such as eliminating the “harvest price option,” which causes the program to pay out much larger subsidies than what is needed to cover expected losses to a farmer if the price of a failed crop increases after planting.

Effectively, the FCIP encourages farmers to engage in practices and grow crops that are subsidized, which overrides concerns about long-term soil health, productivity or environmental harm that can come from a subsidized action. There also isn’t any good economic justification for the FCIP, since it primarily benefits large agriculture producers, which isn’t aligned with the program’s original intent of bailing out small, family-owned farms during the Great Depression. Simply put, potential FCIP reforms like means testing or reducing the guaranteed profit elements of the program could go a long way to alleviating taxpayer burdens while steering farmers to do what is good for farming and not just what is needed to capture a subsidy.