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The Two Sides of Crop Insurance The Two Sides of Crop Insurance

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House Agriculture Committee

The Two Sides of Crop Insurance

A combine harvests corn in a field near Coy, Ark.(AP Photo/Danny Johnston)

photo of Michael Catalini
September 18, 2013

Call it a Washington story.

Depending on whom you talk to, the crop-insurance program is either an essential risk-management tool that helps farmers when disaster strikes or a Robin Hood-in-reverse scheme that takes from the poor and gives to the rich.

Crop insurance pays farmers when their production under-performs; the federal government pays a substantial portion of the premiums. Outside analysis and economic experts boldly assert that the program, which grew up over the past several decades, subsidizes rich farmers at the public's expense.

 

"People who are not on the House or Senate Ag committees are basically saying, 'Why are we giving rich people lots of money when we have budget deficits and we're cutting programs to help very poor people?' " said Vincent Smith, an economics professor at Montana State University and a scholar at the American Enterprise Institute.

The program, which subsidizes the cost of insurance for producers to the tune of 62 percent, sets up a moral hazard for farmers, Smith argues. The thinking goes like this: If the government is willing to pay most of the cost of insurance, farmers have an incentive to use fewer pesticides and herbicides and to farm marginal lands, because they're shouldering less risk, paying only 38 percent of the cost of insurance premiums.

This dynamic explains why the program has faced scrutiny lately. "A Depression-era program intended to save American farmers from ruin has grown into a 21st-century crutch enabling affluent growers and financial institutions to thrive at taxpayer expense," blasted a recent Bloomberg News article that took a critical look at the crop-insurance program.

But the program also has powerful defenders, including House Agriculture Committee Chairman Frank Lucas, R-Okla. Advocates argue that the program—which cost taxpayers almost $14 billion last year, according to Agriculture Department figures—saves the government from bailing out farmers when disasters happen. "Without crop insurance, these farmers would have no way to recover from these devastating conditions unless the government would step in to provide immediate, unplanned, and unbudgeted disaster assistance," Lucas said in a radio address. "With crop insurance, farmers are able to plan for disasters by paying for coverage. This coverage doesn't make them whole, but rather helps them survive."

Legions of lobbyists also defend the program. In 2012, farm and crop-insurance interest groups spent $52 million trying to influence the government, according to the Sunlight Foundation. Promoting the crop-insurance program against critics has become a major business. Several dozen interest groups wrote a joint letter to senators during the farm-bill debate in March urging a "strong, meaningful and affordable" program.

"In agriculture, one thing is for certain: Crop loss will occur in some part of the United States each year. The significant, widespread crop losses of 2011 and 2012 have clearly demonstrated the need for crop-insurance protection and the public-private partnership of program delivery," they wrote.

Keith Collins, a former chief economist at USDA who works with National Crop Insurance Services, a nonprofit that advocates for the program, pointed to the drought that hit the Southwest last year. Compensation for drought-related damage amounted to about $17 billion. If it weren't for the crop-insurance program, advocates say, the cost of that crisis would have been passed on to consumers.

"If you didn't have a subsidy, you'd have to charge for that. And so your premium rates for insurance for the kinds of risk that crop insurance covers would be very high," Collins said. "It's not like an automobile accident that sort of occurs randomly throughout society. But once you have a drought or you have a major flood or a hurricane, you get these systemic losses."

Payouts, though, have been a source of criticism, with detractors charging that crop-insurance company executives are reluctant to make them. To some extent, that's just how the business works, some advocates say.

"Insurance companies are in the business to earn an adequate return on their investment; that's what they do for a living. So for them to not want to pay losses, that's their behavior," said Thomas Zacharias, president of National Crop Insurance Services.

At the same time, advocates say, payouts would arguably be less if the government ran the program rather than just subsidized it, on the assumption that a program run entirely by the public sector would be less efficient. "The incentive to pay losses at the margin would not be as great as the private sector," Zacharias said.

But opponents say the real issue is whether government should be subsidizing producers at the level it does. Smith pointed to conservative lawmakers who have raised this issue—but, he notes, they're not on the Agriculture Committee.

"They've all been saying farm subsidies are not bailing out Grapes of Wrath [farmers] who are facing rapacious landlords," Smith said. "This is not Steinbeck's Grapes of Wrath story. In general, most people are not going to like a policy that takes money from the average taxpayer and gives to people who are richer. That's what crop-insurance policy does."

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