The 2014 Farm Bill continued a movement that began more than 20 years ago to expand federally subsidized crop insurance as the main agricultural safety net.
The bill was hailed by many as a success, as it forced farmers to have more “skin in the game.” Whether we are talking about crop insurance or other federal programs, the “skin in the game” argument is used a lot and is usually ideological — not necessarily more economically efficient.
Twenty20.
Let’s start with the example that Brian Wright provided in a 2014 Choices article on crop insurance:
Consider a deal where, for about 200,000 farmers, every dollar they can pay to the government in crop insurance premiums will give them an expected return of $1.90, as J.W. Glauber reported was the case for 1990 to 2011. Imagine that it costs the taxpayers at least $1.10 to get farmers paid that expected a 90-cent profit (Glauber, 2013).
There are two things to unpack here.
First, you may be unsettled by the fact that farmers receive an average profit of $0.90 by simply participating in federal crop insurance. No other type of insurance (that I am aware of) is this lucrative for consumers.
However, if this amount of support for farmers is found to be socially acceptable, then this brings us to the second point. In this example, the taxpayer is paying $2 to effectively transfer $0.90 to the farmer and $1.10 to the insurance industry.
The insurance industry is an important part of the delivery system for crop insurance through the public/private partnership. Basically, the Risk Management Agency is an agency under the USDA that operates and manages the insurance policies, while private insurance companies sell the subsidized policies to farmers. The federal government reimburses insurance companies for their operating expenses and provides them with underwriting gains. Based on figures from the commonly sited Environmental Working Group study, taxpayers paid an average of $1.7 billion per year to the insurance industry between 1995-2012. Of this $28.6 B over 17 years, 42% ($12 B) came in the form of underwriting gains.
While it might be justifiable to support farmers to this degree, are taxpayers interested in providing the same level of benefits to the insurance industry? My guess: No.
So, what do we do? Agricultural safety net programs come in forms other than insurance. Take for example, the Livestock Forage Program (LFP). This program is a disaster program that provides payments to ranchers who are in areas experiencing drought, as determined by publicly available weather information. Other suggestions have included the offering of “free insurance” based on county-level yield performance, offerings which are effectively disaster programs.
All of these programs could operate without the insurance industry and result in substantial savings to the taxpayer. While these programs will not protect against every idiosyncratic loss a farmer experiences, they can be designed to provide protection against systemic risks and deep losses.
So, moving forward, let’s find a way to support agriculture and save your $1.10.
Eric J. Belasco is an AEI visiting scholar focused on federal agricultural support programs. Visit his blog here.
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