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Babcock: Farmers Should Pay More for Crop Insurance

May 10, 2013
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By Bruce Babcock, Iowa State University

When somebody else pays for their drinks, most partygoers find they want and need more than a modest amount to drink because at an open bar, the cost of a drink is the time spent waiting in line for service. At a cash bar, lines are shorter because most people find they just don’t need that much to drink when they have to pay for it.

What holds for drinks also holds for crop insurance. Since 2001, taxpayers have paid more than two-thirds of the tab for farmers’ crop insurance purchases. Almost all of this federal largess goes to producers of corn, soybeans, wheat and cotton, with the largest subsidies filling the pockets of the largest and wealthiest farmers.

Advocates for continuing these subsidies claim that the fact that farmers buy large amounts of the most expensive and heavily subsidized crop insurance product is proof of the importance of the program. But using farmers’ current crop insurance decisions to measure how much they value insurance is as valid as measuring the value of drinks by how much alcohol is consumed at an open bar.

Crop insurance subsidies were dramatically increased in 2000. Since then, farmers have increased the amount of insurance they buy and have overwhelmingly chosen to insure their crops with Revenue Protection. This is the champagne of crop insurance products. It protects against revenue shortfalls when crop prices decline and against yield shortfalls when crop prices increase.

Revenue Protection can cost up to 80% more than regular revenue insurance that only protects against revenue shortfalls. Most of this 80% extra cost is paid for by the taxpayer. The record $12.7 billion insurance payout to corn and soybean farmers in 2012 was more than twice what they would have been had subsidies not induced farmers to buy Revenue Protection rather than regular revenue insurance.

Sen. Jeff Flake, R-Ariz., and Rep. John J. Duncan Jr., R-Tenn., recently introduced legislation that would sharply reduce the powerful incentive farmers have to increase their consumption of crop insurance.

The extent to which farmers’ purchases of insurance would change under the Flake-Duncan proposal is reflected by the $40 billion in tax dollars that the Congressional Budget Office estimates would be saved over 10 years. Tellingly, the bill would not restrict farmer choice over the type of crop insurance they could buy or eliminate subsidies. It would only reduce the taxpayer portion of the tab.

Just as charging for drinks dramatically reduces alcohol consumption, increasing the farmers’ share of the cost of managing their risk would dramatically reduce their use of insurance. This policy change would dramatically lower taxpayer costs while simultaneously improving agricultural efficiency.

Rather than taxpayers taking the risk out of crop production, which in fact encourages farmers to adopt more risky business and production strategies, changing the program would allow those farmers who can best manage their production and price risk to reap the highest rewards. Returns would flow more to good farmers rather than just to any farmer who uses taxpayer dollars to buy the most insurance.

Perhaps we are entering an era in which Congress will need to be more accountable for the subsidies it provides to farmers and other industries. If so, then Congress and the administration should seek to spend money on programs only where there is a clear public interest at stake and even then only on programs where that clear public interest is being met in a cost-effective manner. The crop insurance program fails both tests.

In an attempt to rationalize the program’s $9 billion annual average cost, its supporters argue that this is a small price to pay for stability in our food supply. But the idea that the U.S. food supply depends on a taxpayer-provided "safety net" is ludicrous.

The United States produces large surpluses of food for the export market, and farming has never been as profitable as it is now. Simply put, the only public interest at stake in the farm subsidy debate is the increase in interest on the national debt.

It may be too much to expect Congress to actually eliminate subsidies to a program that serves no broad public purpose, but perhaps it is not too much to ask for greater cost-effectiveness. A simple first step would be to ask farmers to pay a greater share of the cost of insuring their crops. Just as conversion of open bars to cash bars reduces excessive consumption of alcohol, this step would dramatically reduce farmers’ over-consumption of insurance.

Bruce Babcock is a professor of economics at Iowa State University and a contributor to the American Enterprise Institute’s American Boondoggle Project.
 


 

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COMMENTS (9 Comments)

sharon - coloma, MI
Seriously, you think the farmers reap the crop insurance that is paid for by the taxpayers? The benefit of that money that you are talking about is going to the foreign and domestic crop insurance companies which also includes the amount the farmer pays for crop insurance, plus all the other insurances carried on the farm. This is not a cash bar; far from it.
4:54 PM May 15th
 
Aggiexpert - West Des Moines, IA
A land-grant institutional label, like Iowa State or Univ. of Illinois, does not lend itself to unbiased research and objectivity that it once did.
ISU's Babcock was paid tens of thousands of dollars beyond his professorial salary for developing the crop insurance products he helped develop and promoted, at least as long as he was being paid. Now, Babcock has a new pimp, the Environmental Working Group, and his "research" and opinions have amazingly changed. University professors who receive private "consulting" fees should disclose these conflicts of interest whenever they opine their views. Babcock crows for whoever pays him. Clearly, farmers are not the only ones slurping at the public money trough for private gain.

Iowa State should be ashamed to have their image as an unbiased, objective agricultural research institution so perverted.
9:09 AM May 14th
 
CHA CHO - NE
I agree with Marty from Wyoming. Let's follow the money. Mr. Babcock, lets take a moment and take a wild guess of whose lawyers wrote the rules for our current insurance laws. I will say the insurance companies. So the next time your are at an open bar, try paying for your drinks like it is a cash bar. Probably won't work. Someone said get rid of the subsidy, I say get rid of the USDA
11:33 PM May 13th
 
TOM - KENNEWICK, WA
It is one thing to soften a total loss, it is another thing to have a profit almost locked in no matter how risky your business model is.

This sort of thing causes moral hazard and creates over-production and costs tax dollars the whole time it is happening.

In the old days the government used to keep prices low by buying up surplus grain and dumping it on low production years, now they are doing it through crop insurance programs.

While the government has an interest in keeping food prices low and the food supply high this could be done much cheaper if the farmer had to do more buy-in and the free market was brought to bare.

There are actually folks planting corn who don't know they will have the moisture for it because they can lock in their profit thy could care less. It takes away the farmers skin in the game.
11:54 PM May 12th
 
PrecisionTy - DE
Comparing farmers' risk management plans to people buying drinks at a bar is completely ridiculous. If Babblecock thinks that increasing the cost of crop insurance to farmers is going to dramatically decrease the "over"-consumption of insurance, then he must have bumped his head. Crop insurance is a very important safety net to have, especially here on the east coast, where hurricanes like to completely wipe fields out. Losing a large portion of fall harvest without crop insurance would have a lot of farmers in serious trouble. Now, finding a way to prevent megafarms from making bookoo bucks off of crop insurance every year would make more sense. Precision ag systems, such as GPS planting and yield maps, are helping to decrease crop insurance abuse. There are definitely some who abuse the system, as with anything else, but pointing the finger at the farmer seems ludacris on this topic. As Marty said, follow the real money trail.
4:09 PM May 10th
 
PrecisionTy - DE
Comparing farmers' risk management plans to people buying drinks at a bar is completely ridiculous. If Babblecock thinks that increasing the cost of crop insurance to farmers is going to dramatically decrease the "over"-consumption of insurance, then he must have bumped his head. Crop insurance is a very important safety net to have, especially here on the east coast, where hurricanes like to completely wipe fields out. Losing a large portion of fall harvest without crop insurance would have a lot of farmers in serious trouble. Now, finding a way to prevent megafarms from making bookoo bucks off of crop insurance every year would make more sense. Precision ag systems, such as GPS planting and yield maps, are helping to decrease crop insurance abuse. There are definitely some who abuse the system, as with anything else, but pointing the finger at the farmer seems ludacris on this topic. As Marty said, follow the real money trail.
4:09 PM May 10th
 
Minnesota Farmer - Brownsdale, MN
Get rid of the subsidy completely, we dont need it and it is absoulutely a waste for the taxpayer to finance the farmer while the farmers are writing off huge machinery expenditures every year. This is completely out of control and also going to backfire on everyone connected to agriculture. Farming is leaving the hands of the true farmers and going to the paper shufflers with this income security we call crop insurance. Wake up, cheap premiums are purchasing your exit fron farming as you can not compete with someone running 40000 acres on a very thin margin per acre in required profit.
11:16 AM May 10th
 
marty - torrington, WY
I find it puzzling to read this article for example,
I insured 154.9 acres of irrigated winter wheat this year. My policy coverage is 85/100. the total gross premium is $13,986, the premium subsidy is $5,315 and I pay $8,671 so with just that information you can see the reasoning of Mr. Babcock's 2/3rds argument. However, if he would delve in to the actual policy a little more he would see that an additonal $2,587 in subsidy was paid to the insurance provider for administrative and operating. Crop insurance is big business and in my case the company is getting $17.00 an acre for A&O multiply that times the number of acres insured out there annually and you can see. So Mr. Babcock explain to us how Risk Management treats the money collected in premiums. In truth the government has control over all of the premium money. The real expendature is what they pay to the private insurance providers. Instead of casting stones at the farmer follow the real money trail.

11:02 AM May 10th
 
marty - torrington, WY
I find it puzzling to read this article for example,
I insured 154.9 acres of irrigated winter wheat this year. My policy coverage is 85/100. the total gross premium is $13,986, the premium subsidy is $5,315 and I pay $8,671 so with just that information you can see the reasoning of Mr. Babcock's 2/3rds argument. However, if he would delve in to the actual policy a little more he would see that an additonal $2,587 in subsidy was paid to the insurance provider for administrative and operating. Crop insurance is big business and in my case the company is getting $17.00 an acre for A&O multiply that times the number of acres insured out there annually and you can see. So Mr. Babcock explain to us how Risk Management treats the money collected in premiums. In truth the government has control over all of the premium money. The real expendature is what they pay to the private insurance providers. Instead of casting stones at the farmer follow the real money trail.

11:02 AM May 10th
 



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