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Impacts to the federal crop insurance program will grow in the futures due to climate change with costs to the program expected to rise as crop variability increases, according to a new report, “Climate Change: The Fiscal Risks Facing The Federal Government,” released by the Office of Management and Budget (OMB).
“Climate change is already affecting agricultural production and negative impacts are, on average, expected to grow more severe over the course of this century,” the report said. “Some effects may be positive—higher levels of carbon dioxide in the atmosphere tend to increase plant growth (so-called “CO2 fertilization”) and water-use efficiency. However, negative effects from increased extreme heat and drought, more intense precipitation and soil erosion, growing stress from disease and pests, shifting soil moisture and water availability for irrigation, and higher concentrations of ozone are generally expected to outweigh positive effects, reducing yields and increasing uncertainty for producers.”
The costs to the program in the form of more fiscal burden from providing subsidized crop insurance to farmers “could increase by billions of dollars each year by late-century due to the effects of climate change,” the report said. With the program required to have premiums that are “actuarially fair” – calibrated to match the value of total expected losses on insured acres, the report noted, the premium subsidies in 2015 amounted to about $6 billion.
One of the primary impacts to the program would be “increasing the riskiness of crop production due to the impacts of shifting weather patterns and climate disruptions on yield, or the impacts of climate-related production challenges at home and abroad on crop price volatility,” the report observed. “However, in some instances crop vulnerability could also decline due to the physiological response of crops to higher CO2 levels. Mean production levels could also increase or decrease, affecting the total liabilities covered by the crop insurance program.”
Modeling done by USDA’s Economic Research Service (ERS) shows that “unmitigated climate change” could boost annual premium subsidy costs for corn, soybeans, and wheat by 40 percent by 2080 compared to a projected reference scenario characterized by historical weather patterns. The analysis also assumed that current law and current average coverage rates are both held constant.
With some greenhouse gas (GHG) reductions, the analysis assumes that under a mitigation scenario the average projected cost increase for the crop insurance program across the five GCMs is about 23 percent.
“The absolute fiscal impact of such an increase will depend largely on the total liabilities insured by the program in 2080, a product of future trends in agricultural productivity and global crop demand,” the analysis noted. Under a reference scenario of no climate change, gross revenue for corn, soybeans, and wheat is $223 billion, compared to $122 billion in 2012.
In the 2080 reference scenario, the total premium subsidy for these crops is $10.6 billion, which, relative to the $5.4 billion actual subsidy in 2012, mirrors the increase in total revenue, the report said. “Given this baseline, the fiscal impact of modeled increases in premium subsidies would be $4.2 billion each year in the unmitigated climate change scenario, the equivalent of approximately $1.0 billion each year in today’s economy. Three of the five GCMs produce estimated increases between $2.4 billion and $4.9 billion.
The following graphic depicts estimated percentage increases in total premium subsidies in 2080 in an unmitigated climate change scenario compared to a future characterized by historical weather patterns. Estimates are graphed for three crops under five global change models – the Hadley Centre Global Environment Model (HadGEM), Community Climate System Model (CCSM), Canadian Earth System Model (CanESM2), Model for Interdisciplinary Research on Climate (MIROC), and Goddard Institute for Space Studies model (GISS).
Yield shifts can be as important in changing yield risk as shifts in yield variability, the report said. The analysis used in the report builds on that done by ERS “by estimating not only mean yields and prices but also yield risk and price risk when producers optimize planting decisions based on expectations but are exposed to weather variability—both as observed historically and as affected by various climate change scenarios. ERS then estimates total premiums and premium subsidies for revenue protection policies—the most popular insurance product for producers of major field crops.”
Plus, there are several factors that will affect the future of the program, the report said, such as “a combination of strong demand growth and strong crop yield growth that continues historical trends would result in higher gross revenues, which in turn imply higher liabilities and therefore higher premiums and associated subsidies.” Further, the report pointed out the design of the insurance program and farmer participation decisions will also determine program costs. This assessment isolates the impact of climate change by assuming baseline levels of demand and supply growth, and holding program design and farmer participation decisions constant.
Other variables noted. First, the models may underrepresent the full impact of climate change, they do not place constraints on irrigation water supply, they do not capture changes in global crop prices due to climate-related events outside of the United States and the models likely underrepresent the potential for adaptation by producers and the agricultural sector in general.
Another factor at play is the ongoing research in boosting crops’ drought tolerance. Plus, an increase in risk “may prompt farmers with crops that are not currently insured (roughly 15 percent of nationwide planted acreage of principal field crops in 2015) to purchase some level of coverage,” the report observed. “This effect would increase total premiums and premium subsidies. On the other hand, increases in risk raise the actuarially fair price of insurance, which may induce farmers to purchase lower levels of coverage to reduce their total premium expenditure. This effect would reduce total premiums and premium subsidies.”
Comments: The report offers up potential impacts and as with any long-term study, may variables could alter, perhaps dramatically, the outcomes laid out in the report. But it also presents issues for policy-makers to consider as they move forward with the process of developing US farm programs in the future.
