What is in this article?:
The previous discussion frames a policy issue that has taken on more interest as the amount of money spent on the crop insurance program has increased. As the discussion has illustrated, crop insurance makes its largest payments to areas of the county that have the most risk, in particular yield risk. This understandable and expected outcome of the program has, however, raised the policy question of whether crop insurance is disproportionately benefiting more risky areas of production, which could then lead to increased production in more risky areas.
In addition, risky production areas may also be associated with increased levels of environmental sensitivity. There is evidence from academic studies to support this concern, but, in the authors' view, the evidence at this time does not suggest that the impact is substantial. However, most of the studies predate the large increase in crop insurance cost that started after the 2000 crop insurance act. Thus, updated studies, using the current levels of subsidies and participation might find a larger impact. We think that such studies are important so that the discussion can proceed on a more contemporary factual basis. For a discussion of the existing studies, see Daniel A. Sumner and Carl Zulauf. Economic and Environmental Effects of Agricultural Insurance Programs. The Council on Food, Agriculture, Resource, and Environmental Economics. July 2012. Pages 8-12. Available here.
It is also important to raise for discussion potential solutions to the issue, so that their impacts can also be evaluated. It is not unknown that a perceived policy fix results in making a situation worse. We will discuss a significantly different approach to providing insurance premium subsidies that would also mitigate to a large extent the differential impact of insurance on production decisions.
At present, risk subsidies are based on a percent of total premiums. These subsidies vary by unit structure and coverage level, as can be seen in Figure 4. A straight percent of subsidy will subsidize more heavily those areas with higher risk, as total premiums will tend to be higher in riskier areas.
An alternative policy is to establish a premium subsidy that is equal to a given percent of a crop's gross revenue per acre. Starting from the perspective of no change in current spending on crop insurance, current spending levels on farm premium subsides suggest a subsidy per dollar of gross revenue of crops equal to 3-4% of the value of the production. Farmers would be free to choose whatever level and type of coverage they desire because the premium subsidy is not tied to a particular insurance product or particular coverage level. For example, a farmer could chose to "spend" his subsidy only for yield insurance, or only for the harvest price option, or only for prevented planting. The result would be that farms would be able to make decisions that are best for their farm situation, without evaluating the impact of the different subsidy levels on their decisions. You would of course change the distribution of net insurance payments from the distributions in Figures 1 and 2. These are important trade-offs that would have passionate supporters on all sides.
What this post ultimately illustrates is that the general public is becoming more involved in the discussion over the operation and performance of crop insurance. This change is consistent with other policies that evolve from being a small spending program to a large spending program. The resulting increase in spending brings other actors to the discussion because the size of spending on the program is such that it now potentially impacts the amount of money available for other spending priorities. In addition, the higher is the spending on a program, the greater are the impacts of the program, both its positive and negative impacts.
Supporters of crop insurance need to understand this shift in the political, social, cultural and economic environment in which crop insurance is being discussed. Supporters of crop insurance need to adjust their arguments so that they speak not just to agents, farmers and insurance companies, but also to the general public. Simply put, crop insurance supporters need to address the negative impacts that others see in crop insurance, either by supporting research that in an unbiased way refutes the criticism or by offering alternatives that mitigate the concern. Failure to do so is likely to lead to a smaller program and perhaps its disappearance. Ultimately, it was the inability or unwillingness of the farm community to address concerns with direct payments that has led to its questionable future. It will be interesting to see if the supporters of crop insurance can make this transformation.
Graphic Source: U.S. Department of Agriculture, Risk Management Agency. Data accessed in February 2013 at http://www.rma.usda.gov/