Environmental Group Says $7.8 Billion Wasted by Crop Insurance Program

January 6, 2014

A report commissioned by the Environmental Working Group (EWG) says that the federal crop insurance program over-compensated Corn Belt farmers by $7.8 billion during the 2012 drought. Insurance payouts that year totaled $14 billion whereas $6.2 billion would have been sufficient to support corn and soybean farmers’ revenue, according to calculations by Iowa State University economist Bruce Babcock.

Extending an earlier analyses done for EWG, Babcock in this latest report, “Cutting Waste in the Crop Insurance Program,” concludes that most, if not all, government support for the crop insurance program is wasteful because “it could be cut out with no harm to the public interest.”

“Lawmakers finalizing a farm bill have a golden opportunity to cut wasteful spending while maintaining a strong safety net and erasing budget cuts that hurt hungry families and the environment,” said Craig Cox, EWG’s senior vice president for agriculture and natural resources. “There is still time to seize that opportunity.”

EWG has long supported means-testing for insurance subsidies, which would mean the largest and most successful farms would pay more for insurance. Critics of means-testing argue that these farmers are the best risks and would respond to higher prices by purchasing less insurance, thereby driving up the premiums for small and mid-sized farmers.

Babcock’s report takes aim at a popular type of crop insurance policy known as Revenue Protection, claiming it over-compensates farmers in bad years because it doesn’t take into account the added revenue that farmers earn when they sell their crops at drought-inflated prices. The report claims that “most farmers who suffered a yield loss in 2012 actually ended up with more revenue than they anticipated when they planted” thanks to insurance payouts.

“Making somebody more than whole after a loss clearly fails any test of efficient use of taxpayer funds,” Babcock writes.

The report is also critical of the $1.3 billion yearly payout to private insurers that sell and service crop insurance policies. Babcock found that from 2002 to 2012 the companies enjoyed about $10 billion in underwriting gains while taxpayers suffered a net 
loss of $700 million. He says taxpayers paid more to insurance companies than to farmers in six of the last 12 years.

Crop insurers called EWG’s previous similar report “one-sided” and claim the 2012 figures “cherry-picked” by Babcock are anomalous expenditures that do not represent the full picture.

In a recent year-end message, Tom Zacharias, president, National Crop Insurance Services, wrote:

“In the mid to late 2000s, U.S. agriculture generally experienced good weather. As should be expected, crop insurance companies earned positive returns. Private crop insurance and reinsurance companies use the years of low losses to build surplus in order to use the accumulated surplus to pay claims in the catastrophic years. This lets the ‘high times carry the low.’ In fact, in 2012, crop insurance companies lost money, as well as in 1983, 1984, 1988, 1993 and 2002.”

NCIS has argued that before farmers received any crop insurance indemnity payments in 2012, they paid $4.1 billion in premiums for their crop policies and then absorbed $12.7 billion in losses due to the deductibles on the policies, for a total farmer cost of nearly $17 billion.

The EWG report makes recommendations on how Congress could reduce the subsidies to farmers and insurance companies. The report recommends that Congress eliminate proposed new crop insurance add-ons, such as the Supplemental Coverage Option, from the pending farm bill and scale back premium subsidies in the existing crop insurance program.

“Simply ending subsidies for the Revenue Protection policies that wildly inflate insurance payouts and reducing payments to companies by 30 percent would save enough money to fully fund SNAP [food stamps] and conservation programs,” said EWG’s Cox. “These simple changes would be a down payment on more far-reaching reforms.”

Congress has been debating a giant farm bill that contains the crop insurance and food stamp programs but the House and Senate have been unable to agree on a final version.

Topics Profit Loss Pollution Agribusiness

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