The way farmers use crop insurance has fundamentally changed — and that’s been costly for taxpayers.
Instead of buying insurance policies that exclusively protect their crop’s yields from disastrous weather, federal data shows that the majority of farmers are purchasing revenue-based plans that also guard incomes when crops are hit by dismal market prices.
The change has helped push the crop insurance program’s price tag from about $3 billion per year to more than $8 billion.
“The story used to be that this was a program to manage weather risk farmers could not control,” said Ohio State University professor Carl Zulauf. “It was a very short, a very concise, a very simple story, but over the years crop insurance has moved away from that.”
The U.S. Department of Agriculture’s Risk Management Agency now administers more than a dozen different types of government-subsidized insurance policies, and farmers can pick plans based on individual or county production history.
Overall, insurance policies exist for more than 100 crops.
Revenue-protection policies that jointly insure yields and revenue have rapidly grown in popularity, according to data.
In 2011, about half of all crop insurance policies sold were for revenue-protection plans.
By 2015, more than two-thirds of the 2.24 million policies sold were for revenue-protection.
“The program has become increasingly complex over time,” Zulauf said. “It’s clear that it’s not just yield anymore that you’re insuring.”
Low prices hurting farm income
In the United States, corn and soybeans are the top commodities and the most heavily insured crops.
Consecutive growing seasons with record harvests have created a huge grain surplus and slashed the price of both.
After peaking at more than $8 per bushel in drought-stricken 2012, the price of corn has fallen to less than $4 per bushel. Soybeans have experienced similar but not as dramatic price declines, as well.
Although production has thrived, farmers’ incomes have plummeted and triggered major crop insurance payouts.
“When production is fine, it leads to lower prices,” said Doug Yoder, crop agency manager for Country Financial. “And that’s what we’re seeing right now.”
Revenue-protection crop insurance policies paid out $14.5 billion the past two years combined.
That accounted for the bulk of all insurance payouts.
Agriculture officials say that revenue-based insurance policies are essential to modern agriculture because farmers have little control over what their product ultimately sells for, and that leaves them uniquely vulnerable to price drops compared to other jobs. Farmers can just as easily go out of business from bad prices as bad weather, but revenue-protection plans provide stability, they say.
“For taxpayers, if you want to have a readily available and affordable food supply, if you want to preserve rural economies, then I think it’s important to protect these revenue-based insurance policies,” said Sam Willett, a senior director of public policy for the National Corn Growers Association.
Recent USDA estimates predict that 2016 will likely see the lowest farm income since 2002, which could mean another year of large insurance payouts.
“We’re probably going to have average to above average yields this year,” Yoder said. “But we still anticipate farmers having significant losses.”
Critics call for cuts amid rising costs
Despite its established role as a key risk management tool for farmers, critics continue to argue that the multibillion dollar crop insurance program has grown far too costly.
“The cost of the program has expanded for a number of reasons,” Zulauf said. “You have increased participation, the number of acres in the program has increased, coverage levels have increased and the number of crops being covered has increased.”
“Crop insurance is now a large expenditure item,” he said.
While farmers pay expensive out-of-pocket premiums, more than 60 percent of that cost is subsidized by the federal government, though crop-insurance supporters point out that farmers do not directly receive any funds.
Subsidies did not consistently exceed $1 billion until after 2000.
In 2015, they totaled $6.1 billion, according to data.
Government subsidies going to pay for revenue-protection policies accounted for more than three-quarters of that amount.
“Does the public really want to insure something other than yield?” Zulauf asked. “That’s the underlying question here, and I think that we really haven’t discussed it in a full-blown sense.”
The federal government also covers administrative expenses for the group of companies authorized to sell crop insurance.
A White House budget proposal released in February recommended slashing subsidies by $18 billion over the next 10 years, but so far policymakers have rejected proposed cuts.
“The price tag of crop insurance is now probably the largest single expenditure related to agriculture, even though funding for other ag programs has dissipated and gone away,” Yoder said. “Crop insurance is the largest remaining pot of money that goes to agriculture.”