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The US federal agricultural insurance program: Time for reform?

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Vincent Smith
BOOK LAUNCH
Agricultural Policy in Disarray: Reforming the Farm Bill
Co-Hosted by IFPRI and American Enterprise Institute
DEC 12, 2018 - 12:15 PM TO 01:45 PM EST

Published in: Government & Nonprofit
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The US federal agricultural insurance program: Time for reform?

  1. 1. The US Federal Agricultural Insurance Program: Time for Reform? Vincent H. Smith, Joseph W. Glauber, and Barry K. Goodwin
  2. 2. A Cautionary Tale for Developing Countries • The US Federal Crop Insurance Program is often held up as a positive example of an effective program but • Almost of all of the program’s expansion since the early 1980s has been driven by increasingly substantial subsidies • The program’s existence is now only sustained by subsidy rates through which the government pays over 70 percent of the total costs of the program and on average farmers receive over $2 for every $1 of premium they themselves actually “invest” out of their own funds
  3. 3. US Crop Insurance Program in Disarray Some more Information: • Farm businesses don’t buy multiple peril crop insurance if they have to pay the commercial cost of the insurance because they have cheaper and more efficient ways of managing risk (and there is no evidence of market failures that justify intervention by the government). • Subsidized crop insurance encourages farm businesses to adopt high risk production practices that waste resources because taxpayers cover their losses (shades of the 2008 mortgage crisis and the 1980s savings and loans crisis) and causes farms to expand crop production on fragile lands.
  4. 4. US Crop Insurance Program in Disarray Some Basic Information (cont.): • Farm businesses receive an average of about $5.6 billion a year in subsidies from the federal government. About 81 percent of that money goes to the largest 20 percent of farm businesses. Over 65% goes to the largest ten percent of those businesses • On average, for every $1 a farm business owner pays in premiums, they get back more than $2: that’s a 100% average annual return on their “investment.” • Crop insurance companies and reinsurance companies (to a considerable extent owned or controlled by foreign companies) are given an average of about $2.5 billion a year by the US taxpayer and make substantial economic rents in the process. • USDA spends an additional $80 million a year or more on administering the program and funding education for crop insurance agents and farmers. • By any measure, crop insurance is an expensive way of giving relatively wealthy farmers subsidies. Writing checks would be a lot cheaper!!!!!!!!
  5. 5. Crop Insurance Subsidy Payment Distributions by Crop Sales Deciles (from Bekkerman, Belasco and Smith: Volume 1, Chapter 2)
  6. 6. Total Acres Insured and Estimated Program Participation Rates
  7. 7. Government Expenditures on Premium Subsidies and Administration and Operations Subsidies: 1981-2015 ($ millions) $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Premium Subsdies A&O Subsidies
  8. 8. Producer and Total Loss Ratios, 1981 to 2015
  9. 9. The Gold Plated Revenue Insurance Story • The Harvest Price Option Revenue Insurance Product, now described by RMA as “Revenue Insurance,” is widely viewed as Cadillac insurance • It enable farmers to receive more revenue than they expected when they planted a crop by valuing crop losses at harvest time prices when those prices are unexpectedly high • Subsidies for HPO began in 2000 • Since then HPO revenue insurance has become the dominant form of insurance for those crop for which it is available
  10. 10. 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenue Coverage Share of Total Liability for All Crops
  11. 11. -3000.0 -2000.0 -1000.0 0.0 1000.0 2000.0 3000.0 4000.0 5000.0 6000.0 Dollars(InMillions) Year Figure 10. Insurance Company Revenue streams, 1980-2014 A+O Costs Underwriting Gains Total Co. Revenue (A+O+U/G
  12. 12. Figure 11. Company and government shares of net underwriting gains in the federal crop insurance program, 1992-2016 -8000 -6000 -4000 -2000 0 2000 4000 6000 8000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Government Company
  13. 13. Reforming The Federal Crop Insurance program Ideally, from any reasonable society wide perspective, the entire federal crop insurance program which: • Has complex and in many dimensions adverse environmental and trade relations impacts, • Encourages farm business managers adopt wasteful production and management practices • Annually wastes over $8 billion in scarce federal funds • And overwhelmingly gives subsidies to large scale farms that have no need of any financial help, Should be terminated.
  14. 14. Reforming The Federal Crop Insurance program Alternatively: • The Harvest Price Option should no longer be subsidized (saves about $2 billion a year for the taxpayer) • Subsidies could be rolled back to pre 2000 levels (taxpayers would pay about 40 percent of a farm’s premiums instead of 60 percent and the savings would be in the $3 to $4 billion range) • Farmers should no longer receive prevented planted coverage (fraud, and mismanagement by the companies and loss adjusters, appears to be rampant for this coverage) • Premium subsidies could be capped on a per farm basis (at, say, $40,000 a farm as proposed in the AFFIRM act)

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