R Street Institute

Real Solutions

Record drought leads to…lower crop insurance premiums?

Nov 28, 2012
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issues: Agriculture, Conservation, Federal Government Affairs
The Department of Agriculture’s Risk Management Agency, the entity which administers crop insurance for farmers across the country, just released word that premiums are actually going down for a wide range of crops. This is…surprising, given the widespread drought that covered much of the nation this season and led to . In spite of “exceptional” drought conditions in states like Oklahoma, Kansas, Nebraska, and Georgia, the premiums RMA will charge on several different crops will drop, in some cases quite significantly. For example, Texas suffered some of the worst drought conditions in the country, and yet its farmers stand to see substantial premium reductions. While cotton premiums will rise 5 percent and there will be no change to corn, there will be a 12 percent drop in premiums for rice, a 5 percent fall for grain sorghum, and a 14 percent decrease for soybeans.

I am not an economist or an actuary and I don’t play one on TV, but there’s something about that math that strikes me as a bit odd given the circumstances. In a year of record drought and a potential doubling of insurance payouts to $28 billion, it seems incongruous to have premiums dropping. If there’s a “silver lining” of sorts (and perhaps the best explanation of this oddity), it’s that taxpayers will now be on the hook for slightly less in crop insurance premium subsidies. Taxpayers pick up roughly 60 percent of the tab for producers’ insurance premiums and as much as 24 percent of administrative costs for private crop insurance companies.

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