The Two Sides of Crop Insurance

In this Aug. 16, 2012 file photo, a combine harvests corn in a field near Coy, Ark.  Thousands of farmers are filing crop insurance claims this year as drought and triple-digit temperatures burn up much of the corn belt. The Agriculture Department has paid $1.4 billion to date, but the bulk of claims hasnít been filed yet as the corn and soybean harvests have just begun.
National Journal
Michael Catalini
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Michael Catalini
Sept. 18, 2013, 4:30 p.m.

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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