Policy Studies Agriculture

Achieving rational farm subsidy rates

Several proposals to reform the heavily subsidized Federal Crop Insurance Program have received considerable attention. However, one initiative that has not been given much consideration is a straightforward cut in the amount by which the federal government subsidizes the premiums farmers pay for their crop insurance coverage. Currently, the government pays an average of 62 percent of the total premiums paid into the crop insurance pools from which indemnities are provided to farmers who experience reimbursable losses. This policy study examine the effects of reducing the federal subsidy rate to either 50 or 40 percent of the total premium, with corresponding increases in farmers’ share of the premium payments. Results indicate that reducing the average subsidy rate to 50 percent would reduce annual federal spending on the crop insurance program by as much as $2.14 billion annually, a roughly 25 percent reduction relative to current subsidy costs. Reducing the average subsidy rate to 40 percent would likely generate annual savings well in excess of $3 billion, amounting to about $34 billion over 10 years.

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