the revenue insurance boondoggle

7/31/2019 The Revenue Insurance Boondoggle

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THE REVENUE INSURANCE BOONDOGGLE:A TAXPAYER-PAID WINDFALL FOR INDUSTRY

Allies o big agribusiness are

pushing to trade direct payments or

a system that guarantees income a

taxpayers expense or the richest

o corporate agriculture businesses,

which are already doing ar better

than most o the U.S. economy.

-Environmental Working Group

ENVIRONMENTALWORKINGGROUP

by Bruce BabcockProessor o Economics, Iowa State UniversityPreace by Craig CoxSenior VP or Agriculture and Natural Resources, EWG


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ENVIRONMENTAL WORKING GROUP2

www.ewg.org

Table o Contents

Preace ............................................................................................................................................................................3

Full Report ......................................................................................................................................................................7

Agriculture in the Cross Hairs .......................................................................................................................................7

Crop Insurance Cuts Curbed Windall Profts .............................................................................................................8

Revenue Insurance or Yield Insurance: Which Should be Subsidized? ...................................................................11

How Revenue Insurance Works ..................................................................................................................................16

Revenue Insurance as Index Insurance ......................................................................................................................18

Double Indemnity ........................................................................................................................................................21

Reorm Options ...........................................................................................................................................................22

Reerences ....................................................................................................................................................................25


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THE CROP INSURANCE BOONDOGGLE3

Preace

By Craig Cox

Senior Vice President or Agriculture and Natural Resources

and Nils Bruzelius

Executive Editor

Environmental Working Group

As a Congressional Super Committee presses to meet its Nov. 23 deadline to come up with a defcit

reduction proposal, powerul arm state legislators and agricultural industry lobbyists have moved to hijack

the process o rewriting the ederal arm bill and enact a new, multi-billion dollar entitlement or the largest,

most proftable arming operations. Their goal is to have the 12-member committee adopt their scheme,

drated entirely behind closed doors, while shutting out everyone else with a stake in the outcome including

taxpayers and advocates or healthy ood, rural revitalization, children, conservation, public health and the

environment.

The champions o big agriculture are trying to pass o their scheme as budget reorm by letting it be known

that they are ready, at long last, to part with the long discredited arm subsidy programs known as direct

payments, which send out cash even during years o record-high arm income. You dont even have to be a

armer to get a payment. It has become clear, however, that allies o big agribusiness are pushing to trade

direct payments or a system that guarantees income at taxpayers expense or the richest o corporate

agriculture businesses, which are already doing ar better than most o the U.S. economy.

At the heart o this scheme is an expansion o the ederal revenue insurance program, an already heavily

subsidized program that insures business income wont all below a revenue guarantee something

that would be the envy o any other industry even as it enriches the insurers. This paper by renowned

agricultural economist Dr. Bruce Babcock, who developed one o the frst revenue insurance products, clearly

demonstrates that the justifcations or preserving and expanding this taxpayer-subsidized program are hollow.

Big agricultures supporters argue that the revenue insurance program should be immune rom budget cuts

because it has already been trimmed and urther cutbacks will leave armers vulnerable and put Americas

ood supply at risk. The reality is ar, ar dierent. Babcocks close analysis shows that the supposed cuts did


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little more than make a trivial dent in the windall profts that insurance companies and agents reap rom the

program, while the taxpayer-subsidized premiums entice growers to buy expensive and unnecessary policies

that can pay out even i they suer no crop loss at all.

The little noticed transormation o crop insurance into a business income guarantee has done all o this, and

more:

doubled the cost to taxpayers o the heavily subsidized system to $8 billion a year.

produced billions in windall profts to insurance companies.

delivered big payouts to agribusinesses that suered only paper losses.

Environmental Working Group, which has long advocated or meaningul reorm o the nations misguided

arm and ood policies, commissioned Dr. Babcock to do this analysis o the revenue insurance program. It

confrmed our worst ears.

We are releasing it now in order shine the spotlight o truth on the shameul eort to exploit the ederal defcit

reduction eort in order to give Big Ag, and its insurers, a business income guarantee no other sector o the

economy enjoys. The arm bill is ar too important to be let to the subsidy lobby and its champions on the

Agriculture Committees. The Super Committee and the leadership o the House and Senate must not let

themselves be used as pawns in the subsidy lobbys chess game. Instead, the renewal o the arm bill should

be done in an open and transparent process that recognizes these acts and embraces these basic principles

and values:

Taxpayers do not and should not guarantee business income or anyone.

It is time to cut through the maze o arm subsidies programs to get back to what most people would

consider a saety net stepping in when working arm and ranch amilies suer unpredictable and

potentially crippling losses caused by bad weather.

Crop insurance, which began as part o such a saety net, has undergone expensive mission creep. Over

80 percent o crop insurance policies now insure business income even i there is no yield loss caused

by weather. This has doubled the cost to taxpayers and opened the door or large payments to producers

who suer only paper losses, and or windall profts or insurance companies.

Direct payments never had anything to do with a saety net and should have been eliminated years ago.

It is entirely possible to construct a true saety net that protects working arm and ranch amilies rom crippling


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crop ailures AND save billions o dollars that can be used to reduce the defcit and reinvest in critical

conservation and ood programs a saety net or amilies, children and our land and water. Heres how:

Eliminate direct payments, counter-cyclical payments, loan defciency payments, ACRE (Average Crop

Revenue Election) and SURE (Supplemental Revenue Assistance Payments). (Savings: $57 billion over ten

years).

Provide every armer with a FREE crop insurance policy that covers yield losses o more than 30 percent;

and eliminate ederal premium and other subsidies or revenue-based or other crop insurance products.

(Savings: $26 billion just in premium subsidies over ten years).

Have the ederal government take bids rom insurance companies to service the policies, eliminating

windall profts and encouraging the private sector to develop and oer innovative options or armers to

increase their insurance coverage but not at taxpayers expense.

Require producers to meet a basic standard o conservation practices in order to be eligible or publicly

fnanced crop insurance.

Ensure ull transparency by requiring USDA to make available inormation about who is getting the ree

policies, the taxpayer cost o providing those policies and how much armers receive in insurance

payouts.

This proposal would generate approximately $80 billion in savings over 10 years nearly our times more than

the $23 billion in cuts proposed by the Agriculture Committees and nearly three times more than the $30

billion proposed by the Obama Administration and House Republicans.

An open arm bill process could develop our idea and others that would meet or exceed defcit reduction

targets proposed by the Agriculture Committees and the Administration while still providing resources to

invest in critical ood and conservation programs programs with ar more public beneft than the duplicative

and wasteul proposal to guarantee business income or producers o a handul o avored crops.

This reinvestment in amilies, good ood and conservation must include these elements:

Maintain unding or the Supplemental Nutrition Assistance (SNAP) and the Women, Inants and Children

(WIC) programs in order meet the needs o amilies and children during these difcult economic times.

Add incentives to SNAP to make it easier or participants to aord resh ood.

Ensure that schools have the money they need to meet the new ederal school lunch standards and make

sure that school lunches provide children with resh ruit and vegetables every day.


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Restore cuts to critical conservation programs that protect our soil, clean up our water and preserve

habitat or fsh and wildlie. This should include adding $10 billion above the current baseline o $64

billion to restore unding or the Wetlands Reserve Program, and increasing unding or technical

assistance.

Increase unding or programs that provide new market opportunities or sustainable and organic armers

and ranchers, create new jobs and increase access to healthy ood by strengthening the local ood

economy.

The eort to reshape the nations ood and arm policies is at a critical point. I Big Agriculture and its lobbyists

succeed in exploiting the Super Committee process or their own selfsh interests, it will stymie the prospects

or true reorm or years to come. Americans who believe in healthy ood, in protecting public health and the

environment, in ensuring proper nutrition or children and the less ortunate, must speak up now. We must call

on our representatives in Congress to stand frm against this cynical attempt to turn defcit reduction into a

guarantee o prosperity or large-scale agricultural interests.


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The Revenue Insurance Boondoggle:A Taxpayer-paid Windall or Industry

by Bruce BabcockProessor o Economics, Iowa State University

Agriculture in the Cross Hairs

Agricultural programs ace signifcant budget cuts as Congress and the Obama Administration strain to

meet defcit reduction goals. Conservation, nutrition, commodity and even once-sacrosanct direct payment

programs are all vulnerable. One program that does not seem as vulnerable is crop insurance. The ranking

member o the House Agriculture Committee, Collin Peterson (D-Minn.), was quoted as telling a Minnesota

arm audience recently, I am against making any cuts in crop insurance... any changes in crop insurance.

One reason Peterson and others give or resisting cuts to crop insurance is the 2010 agreement between the

US Department o Agriculture and insurance companies that changed the programs operating rules beginning

with this years crop. These changes are expected to reduce the programs costs by about $6 billion over 10

years,1 a 7.5 percent cut in a program projected to total $74 billion over the next decade, according to the

Congressional Budget Ofce.

Senate and House Agriculture Committee members regularly argue that any additional cuts to the industrys

subsidies will spell the demise o the entire program. In response to the Administrations proposal to limit

subsidies, House Agriculture Committee Chairman Frank Lucas (R-Okla.) and Sen. Pat Roberts (R-Kan.),

minority leader on the Senate Agriculture Committee, said in a joint statement: The Presidents policy

priorities reveal a lack o knowledge o production agriculture and ail to recognize how wholesale changes

to arm policy would impact the people who eed us. For example, cutting $8 billion rom the crop insurance

program puts the entire program at risk. We have heard again and again rom producers that crop insurance

is the best risk management tool available. In jeopardizing this program, the President turns a dea ear to

Americas armers.


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Industry advocates go urther. Jerry Hagstrom2 reported in the trade weekly Agweek that, A coalition o

crop industry companies and agents also said, On behal o crop insurance companies, agents and producers

who have stated that ederal crop insurance is the cornerstone o U.S. arm policy, we strongly oppose the

administrations reckless cuts to crop insurance. The administrations proposal does not modernize crop

insurance or implement it more efciently, as it purports to do. To be clear, the administration proposal would

end ederal crop insurance. Given the bad economy, high unemployment, recent deep cuts and widespread

natural disasters, the administration proposal is divorced rom reality and is an attack on rural America.

The intense political support or the crop insurance program is a reection o how hard and eectively

the industry lobbies Congress. Crop insurance companies and independent agents are dependent on

ederal subsidies or their livelihood. Farmers, their suppliers and companies that buy arm products would

hardly notice i commodity or conservation subsidies were eliminated, but a large portion o the insurance

companies and agents business would disappear. This creates a powerul incentive or the industry to lobby

hard while eeding highly sel-serving inormation to Congress and the media.

Congress should take a close look at what exactly was cut in the 2010 agreement as well as why the programs

costs have grown so rapidly. That will clearly reveal that the 2010 cut to the crop insurance program simply

reduced but did not come close to eliminating windall profts that agents and companies had enjoyed

since 2006. Neither the integrity o the program nor armers benefts were aected. In addition, a close

examination shows that or the major commodity crops, the way crop insurance premiums are subsidized has

enticed armers to buy the most expensive type o insurance, contributing heavily to the programs rising costs

This insurance can pay out even i a armer has not suered any loss and duplicates the coverage armers can

obtain rom traditional commodity programs. Far rom showing that crop insurance should be protected rom

cuts, a clear-eyed analysis shows that it is possible to provide a strong, crop insurance-based arm saety net

at much lower cost. The savings could be used to support programs that provide public benefts or as defcit

reduction.

Crop Insurance Cuts Curbed Windall Profts

It is easy to calculate the impact o the agreement reached in the summer o 2010 between crop insurance

companies and the USDA by looking at what eect it would have had on the industry and program costs i

it had been in place in previous years. Figure 1 shows how much crop insurance companies earned on each

policy sold. This revenue consists entirely o government payments to cover both administrative and operating


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costs and net underwriting gains, which are based on the amount o premiums collected and payouts on

claims. The lower the payouts, the greater the underwriting gains. Shown are both the actual revenue collected

(blue bars) as well as what the revenue would have been had the current operating agreement been in place

rom 2000 to 2010 (green bars).

The average revenue rom 2000 to 2006 was about $1,000 per policy. During these years, armers were well

served by the program, agents made a good living and insurance companies made a decent return. This level

o taxpayer subsidies was sufcient to support a healthy industry and a strong saety net or armers. Beginning

Figure 1. Company Revenue per Crop Insurance Policy Sold

Data Sources: 2000 to 2009: RMAs Response to Comments on Milliman Study; 2010: RMA Summary o Business reports and

authors calculations.


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in 2007, however, per-policy revenue increased dramatically, primarily because o rising crop prices. That might

have been reasonable i the cost o servicing policies had increased with higher prices, but the vast majority

o the companies costs do not vary with commodity prices. Rising prices have no eect on the insurers cost

o visiting armers or sending them emails, nor on the cost o salaries, claims adjustments, ofce space or

computer equipment. The only industry cost that might vary with commodity prices is the cost o reinsurance,

but the ederal government provides extensively subsidized reinsurance as part o its contribution. Thus most

o the increase in revenue per policy driven by rising crop prices represents windall proft or the insurance

industry.

Figure 2. Crop Insurance Industry Windall Profts rom 2007 to 2010


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The agreement did cap administrative and operating reimbursements (A&O) at $1.3 billion a year. The eect o

this cap can be easily calculated. Taking the average revenue per policy rom 2000 to 2006 as a measure o the

cost o providing the service, the higher subsidy in subsequent years amounts to windall proft, shown by the

blue bars in Figure 2. The green bars show what profts would have been had the current agreement to cut

crop insurance been in place rom 2007 to 2010. Actual windall profts over these our years amounted to $8.3

billion. Under the renegotiated agreement, these profts would have been reduced by only about 13 percent.

The industry would still have enjoyed a windall o $7.2 billion.

These windall profts demonstrate that much can be cut rom the program without sacrifcing the industrys

ability to service armers policies. But there are additional reasons why taxpayer unding or crop insurance

could be reduced without asking armers to do without a strong saety net.

Revenue Insurance or Yield Insurance: Which Should be

Subsidized?

Most people think that the USDAs crop insurance program provides payments to armers when they lose a

crop. This is understandable, since its advocates justiy the program on the grounds that armers have little or

no control over the hail, wind, oods and drought that can cause crop damage and reduce yield. It comes as a

surprise to many people that a large share o the taxpayer-supported subsidies go to protect armers against

adverse price movements, not yield losses. In 2011, only 17 percent o armed acres were covered by yield

insurance, while 83 percent carried revenue insurance.3

There are good reasons why most armers buy revenue insurance. Farmers pay their bills with dollars o

revenue. A high price does little good or a armer with a poor yield, and a good yield is o little value i prices

are low. But the revenue insurance that armers buy is much more expensive than yield insurance because

it protects against both upside and downside price risk.4 For example, the average unsubsidized premium

across all the 15 percent deductible Revenue Protection policies in Champaign County, Illinois was $52 per

acre in 2011. The average unsubsidized premium or a 15 percent Yield Protection policy in Champaign County

was only $28 per acre. The higher premiums or Revenue Protection translate directly into higher taxpayer

costs because premiums are subsidized on a percentage basis, as are ederal reimbursements to insurance

companies. Premium subsidies or Revenue Protection policies total $26 per acre, whereas premium subsidies

total only $11 per acre or Yield Protection policies. Across the 230,000 insured corn acres in just this one


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county, this dierence amounts to $3.45 million in extra subsidies.

Figure 3 shows that or all crops except rice, per-acre premium subsidies or revenue insurance are much

greater than the direct payments that have received so much attention rom budget cutters. Rice is the

exception only because direct payments or rice growers are so much larger than or other crops. Farm groups

themselves are acknowledging that it is time or direct payments to end. Far more attention should be ocused

on the act that the crop insurance program has become much more costly than direct payments.

It is useul to understand why there has been such large growth in the cost o the crop insurance program.

One reason is the movement o armers rom yield insurance to revenue insurance, which began in earnest

Figure 3. Comparison o 2011 Revenue Protection Subsidies to Direct Payments


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in 1998 and 1999 when the armers share o revenue premiums dramatically decreased because o increased

government subsidies. Because revenue insurance costs more, this movement increased both premium

subsidies and subsidies to industry. Beore 1998, premium subsidies or revenue insurance were limited to the

subsidy amounts that armers could receive or yield insurance.

One can estimate the cost o extending subsidies to revenue insurance rather than just yield insurance by

comparing the per-acre taxpayer cost o providing each in 2011. This accounts or the increase in commodity

prices, because the same price is used to calculate the cost o both types o insurance. Taxpayer costs include

premium subsidies as well as the companies expected underwriting gains and administrative and operating

(A&O) reimbursements. The level o underwriting gains or 2011 has not yet been determined, so it is assumed

to equal to 15 percent o unsubsidized premiums, just below the average percentage that crop insurance

Table 1. Estimated costs o crop insurance in 2011Source: Summary o Business statistics rom USDAs Risk Management Agency.


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companies have received rom the government since 2001.

Table 1 breaks down taxpayers total 2011 cost o subsidizing crop insurance into its three components

subsidies to lower the premiums that armers pay; subsidies paid directly to companies or administrative

and operating expenses; and companies underwriting gains. A&O reimbursements are limited to about $1.2

billion or the nine crops listed under the agreement negotiated in the summer o 2010. The costs presented

are or all types o insurance purchased in 2011, but armers overwhelmingly choose revenue insurance.

Policies to insure corn, soybeans, wheat and cotton alone account or 95 percent o taxpayer costs in 2011.

Table 2 shows how much taxpayers would have paid in 2011 i the program insured only yield. Limiting the

program to yield insurance would reduce the cost o insuring corn by $1.9 billion, soybeans by $895 million,

Table 2. Estimated costs o crop insurance in 2011 i only yield insurance were purchasedSource: Summary o Business statistics rom USDAs Risk Management Agency and authors calculations.


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wheat by $625 million and cotton by $433 million. The cost o premium subsidies alone or these our crops

would drop by a total o $2.8 billion.

Figure 4 illustrates the magnitude o the cost increases that extending subsidies to revenue insurance imposes

on taxpayers. Subsidizing revenue insurance about doubles taxpayer costs rom $4.7 to $8.6 billion.

The question then becomes, what value are taxpayers getting or the extra $4 billion a year they spend

by subsidizing revenue insurance? Is that amount really necessary to build a strong saety net? Or could

subsidizing yield insurance alone do the job, leaving armers who want the extra beneft o revenue insurance

to pay or it out o their own pockets? Examining the extent to which revenue insurance actually covers on-arm

losses provides an insight into this question.

Figure 4. Subsidizing Revenue Insurance Doubles Taxpayer Cost


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HowRevenue

Insurance Works


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Revenue insurance is designed to protect

armer income rom an unexpected drop.

Because revenue equals price times yield,

a drop in revenue can be caused by a drop

in price, a drop in yield, or both. Revenueinsurance policies need to establish both

anticipated revenue and actual revenue.

Anticipated (or projected) revenue equals

a armers established crop insurance yield

which is based on a armers own records

multiplied by the projected price established

just beore the armer signs up or insurance.

A armer then chooses a coverage levelpercentage, which typically varies rom 65

percent to 85 percent o projected revenue, in

5 percent increments. The revenue guarantee

equals this coverage level times anticipated

revenue. The dierence between anticipated

revenue and the revenue guarantee is the policy

deductible. This deductible creates a strong

incentive or armers to take good care o theircrops.

Actual revenue equals actual yield times the

harvest time price. I actual revenue alls below

a armers revenue guarantee, the insurance

makes up the dierence. In major production

regions such as the Corn Belt, lower than

expected yields are oten associated with higherthan expected prices. This means that the cost

o providing this type o revenue insurance can

be lower than the cost o providing simple yield

insurance. Sometimes yield insurance pays o

but revenue insurance does not because higher

prices oset the low yields.

However, ew armers buy this type o pure

revenue insurance. Most buy revenue insurance

that increases the revenue guarantee i the

all harvest price is higher than the anticipatedprice. When this happens, the new guarantee

equals the old guarantee multiplied by the

ratio o the harvest price to the projected

price. Farmers buy this more expensive orm

o revenue insurance or two reasons. One

is that this provision protects them against

the additional risk they take on i they enter

into a orward contract. A orward contractis a promise by a armer to deliver a certain

amount o grain in the uture at an agreed-upon

price. I the armer does not produce enough

grain, he or she must buy additional grain on

the open market to deliver. I the cost o this

purchased grain is greater than the price in the

orward contract, the armer suers a loss that is

compensated by this revenue insurance.

The second reason that armers buy this

provision is that taxpayers pay a large portion o

its cost. Most o us would buy more insurance

i its price were cut in hal. Farmers are no

dierent. Current premium subsidies encourage

even those armers who do not orward contract

to buy this expensive type o revenue insurance.


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Revenue Insurance as Index Insurance

Revenue insurance was developed because o a recognition that revenue more accurately reects a arms

fnancial health than simply crop yield.5 Farmers determine what crops to plant based on the revenue

they expect to generate rom their various crops at harvest and their production costs. Revenue insurance

guarantees are based on market conditions (price levels) beore planting just beore the insurance contracts

are signed. The system assumes that the average level o harvest-time utures prices at that moment captures

the value armers expect rom their harvest. This average utures price, reerred to as the anticipated or

projected price, is used as an indicator because the mechanism by which armers orm their expectations

about market prices cannot be measured exactly. This projected price is then used to set the revenue

guarantee that triggers an insurance payout i harvest revenue (price times yield) alls below the guarantee.

It is straightorward to calculate harvested yield because armers report what they harvest. It is much more

difcult to determine the price they receive or their crops, because armers dont provide actual sales receipts.

In addition, many armers orward contract at least a portion o their production. This means they receive

the going price at the time they entered into the contract, not the price being oered or the crop at harvest.

Other armers store their production and sell throughout the marketing year (beore and ater harvest). And

some sell all their production at harvest.

To keep revenue insurance policies simple, companies use the average o harvest-time utures prices to set

the value o harvested production regardless o when, and or how much, a armer actually sells the crop. This

average is only an indicator o the actual market prices armers receive. Because ew, i any, armers actually

sell all their harvested production at this average utures price, revenue insurance is a type o index insurance.

The index determines whether a armer suered a loss because o a drop in crop prices. There is no direct

connection to the price the armer actually got.

The problem with index insurance is it can result in a mismatch between payments and loss. Farmers who

have not suered an actual loss can still receive a payout, and armers who do suer a loss can end up with

no compensation. An example rom 2008 illustrates how this can happen. The springtime utures prices used

to set projected price and determine the revenue guarantee or 2008 was $5.40/bushel or corn and $13.36/

bushel or soybeans, reecting a short-term spike in commodity prices early that year. The projected prices

or both crops were well above the prices that armers had expected to get or their crops when they made


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their production plans as early as the all and winter o 2007. During the all and winter o 2008, however, crop

prices ell rom these loty levels. The harvest-time utures price that one revenue insurance product (Revenue

Assurance) used to value crops ell to $3.74/bushel or corn and $9.22/bushel or soybeans.

The average price armers actually received in 2008 turned out to be $4.06/bushel or corn and $9.97/bushel

or soybeans (Figure 5). These prices were $0.32/bushel (9 percent) higher or corn and $0.75/bushel (8 percent

higher or soybeans than the prices used to determine whether a armer deserved a payment rom his or her

revenue insurance policy.

Because the harvest-time utures price was about 30 percent lower than the springtime utures price, many

armers who bought revenue insurance were judged by the program to have suered a loss. But the reality,

Figure 5. Average Price US Farmers Actually Received or Corn and SoybeansSource: National Agricultural Statistics Service, USDA.


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as shown in Figure 5, was that the prices armers actually received or their corn and soybeans in 2008 was

essentially the same as they received in 2007, and dramatically higher than in 2005 and 2006.6

Supporters o revenue insurance correctly point out that i armers had made fnancial plans that year based

on $5.40/bushel corn and $13.36/bushel soybeans and were then orced to sell at 30 percent lower prices, they

indeed might have suered a loss. But, most o their fnancial plans are made in the late summer and all o the

year beore a crop is planted. For example, most cash rental agreements or Iowa cropland in Iowa or the 2008

were determined by Sept. 1, 2007. And most armers decided on what type o seed to buy that all.

The best signal about uture market conditions was the price levels on the December 2008 corn utures

contract and the November 2008 soybean utures contract. The monthly average price levels or these two

contracts or August 2007 through February 2008 are shown in Figure 6. When corn and soybean armers were

Figure 6. 2008 Average Harvest-Time Futures Prices


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making most o their production plans or 2008, corn was valued at about $4/bushel and soybeans were valued

at $9-to-$10/bushel. It wasnt until the beginning o 2008 that price levels rose signifcantly. This implies that

most armers fnancial plans were based on $4 corn and $10 soybeans, not the $5.40 corn and $13.36 soybean

used to set the revenue insurance guarantee. I the actual price armers received or corn was $3.74/bushel,

as assumed by the policies, the price dropped by only 6.5 percent rom the levels used to make their fnancial

plans, rather than the 30 percent drop the policies projected. In act, soybean prices dropped by only about 3

percent.

This example shows the inherent weakness o using an index o revenue gain or loss as the basis or

determining whether a armer should get a payout. In 2008, substantial indemnity payments were made to

armers whose revenue insurance policies assumed a loss when in reality they suered no drop in price at

all. Farmers had made their cropping plans based on prices that were nearly the same those or which they

actually sold their crops. Farmers using more aggressive marketing strategies could have enjoyed revenues ar

higher than average and still have gotten an insurance payment.

Double Indemnity

Some arm groups are currently advocating enhanced revenue insurance options as part o the next arm

bill, particularly in the ACRE (Average Crop Revenue Election) program that insures arm revenue at the state

level. This would sharply increase the likelihood that armers in a state that experienced a widespread climate

disaster or price shock would be compensated twice or the same loss.

Because ACRE is not integrated with the crop insurance program, armers can already get paid twice or

the same decline in revenue. For example, when a major drought hits a state, arm yields drop triggering

crop insurance payments and the state average yield also drops thereby triggering ACRE payments.

Unexpected price declines can also trigger both ACRE payments and revenue insurance payouts. In either

situation, armers get compensated twice or the same event. Moving to a crop reporting district basis or as

proposed by the National Corn Growers Association, or to a county basis as proposed by the National Cotton

Council, would increase the odds o double payouts because individual arm yields are more correlated with

district and county yields than with state yields.

Even i ACRE programs were ully integrated with crop insurance, adding another revenue insurance program


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on top o existing crop insurance programs eectively reduces armers deductibles. Lower deductibles

increase the incentive or armers to arm the program in an eort to lower production costs and increase

insurance payouts, rather than making decisions based on market signals.

Reorm Options

This analysis demonstrates that there are ample opportunities or budget savings in the crop insurance

program. Rather than being immune rom budget cuts, crop insurance should be one o the frst places that

Congress looks to or savings. Below are a ew recommendations or reducing spending on crop insurance

while providing armers with a strong saety net.

Reduce Industry Windall Profts Further: The renegotiated operating agreement between the government

and the crop insurance industry reduced windall profts by capping cost reimbursements. However, the new

cap still provides much higher subsidies than industry needs to provide armers with a high level o service.

Furthermore, the renegotiation did little to reduce underwriting gains profts generated when premiums

exceed payouts. A return to pre-2007 subsidy levels would save as much as $2 billion a year.

Reduce Subsidies: Current insurance subsidies create incentives or armers to buy the most expensive kind

o revenue insurance because the subsidies increase as the cost o the insurance increases. I the ederal

contribution to crop insurance premiums were fxed, armers would think twice because they would be paying

the additional premium with their own money, not taxpayers. This could be accomplished by giving armers

a per-acre voucher that provides a fxed level o assistance that they could use to buy either yield or revenue

insurance whichever best suits their risk management needs. Only those who highly value the extra coverage

provided by expensive revenue insurance would choose to buy it. Other armers would fnd that less expensive

yield insurance sufced. This simple change would reduce program costs by at least $2 billion a year without

limiting the type o insurance that armers can buy.

The Obama Administration proposal to make a small cut in the percentage premium subsidy would not lead to

substantial savings because armers would still pay much o the additional cost o expensive revenue insurance

with taxpayer dollars.

Another simple option is simply to give armers a ree yield insurance policy. This would be the taxpayers


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contribution to the arm saety net. I armers wanted to buy more coverage, they could pay the additional cost

themselves. The data in Table 2 provides an indication o the potential cost savings o this approach. Based on

the yield insurance coverage levels that armers actually purchased in 2011, the total cost o the premiums to

the government or these major crops would have been $4.8 billion i all acres were insured with ree yield

insurance. At a cost o $500 million to administer this ree program, the savings would be almost $3.3 billion in

2011 alone.

Dont Duplicate Coverage: There is no reason armers need two saety nets, one in the crop insurance

program and another in the commodity title o the arm bill. Congress should decide once and or all where

the saety net or armers should reside. I the decision is that its up to the private sector to provide it, the

logical course is to reorm the current crop insurance program by eliminating the insurance industrys windall

profts as well as insurance-type commodity programs, including ACRE and SURE. I Congress concludes that

it would be more efcient to provide a saety net through USDAs Farm Service Agency (FSA), it should design

an easy-to-deliver program in the commodity title that protects armers against major production risks and

rees private insurers rom ederal oversight. A privatized crop insurance program could then oer policies to

armers who wish to fll in any gaps in coverage.

Recent proposals to lower insurance deductibles under the guise o covering shallow losses would be

especially counter-productive. Meaningul deductibles serve a public purpose by reducing the likelihood that

armers will alter their production practices to maximize their opportunities or an insurance payout. Lowering

deductibles would create incentives or growers to arm the program instead o their felds. The last thing

Congress should do is to adopt one o the growing number o proposals that would modiy ACRE and SURE to

create a new saety net on top o the existing revenue insurance program. Unortunately, momentum seems to

be building to do exactly that.

One proposal currently attracting attention, called Aggregate Risk and Revenue Management (ARRM), was

proposed by Sens. Brown, Thune, Durbin and Lugar. This program pays armers when two things happen

simultaneously: (1) crop revenue alls below an established crop revenue guarantee calculated or the arms

crop reporting district (a collection o adjacent counties) and (2) crop revenue or the insured arm alls below a

guaranteed amount established or that insured arm. The details o the plan are complicated, but in essence

ARRM is designed to reduce a armers deductible to only 10 percent when combined with a revenue insurance

policy that covers revenue shortalls below 75 percent. Taxpayers would cover the total cost o reducing the


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www.ewg.org

deductible, and the armer would pay no additional premium or the extra protection.

A ederal program to cover shallow losses would exacerbate all the problems that current revenue insurance

programs create because it would:

multiply moral hazard the tendency to create incentives or risky behavior by socializing most o the

risk o producing the covered crops.

create signifcant incentives to increase production o the handul o covered crops encouraging

plowing up environmentally sensitive land and discouraging diversifcation o cropping systems.

distort markets and recouple arm subsidies to the kind and amount o avored crops produced.

increase the potential or large payouts to arm businesses that suer only paper losses.

The only rationale or a new ederal revenue guarantee program on top o existing revenue insurance

programs is that it seems politically easier to deend than direct payments. I Congress judges that the existing

yield and revenue insurance program is not providing adequate coverage, it should provide armers with an

ARRM-like program through the arm bill, end insurance subsidies and set the insurance industry ree o direct

government control. A ew straightorward steps can be taken to create a cost-eective and easy-to-deliver

saety net through the Farm Service Agency (FSA). Insurance payments should either be based on a fxed

number o acres or on yield shortalls only. I revenue protection must be oered, each years guarantee should

be adjusted to reect current market conditions.

There are two pending county revenue protection proposals that come close to meeting these criteria. One

was originally proposed or the 2008 arm bill by the National Corn Growers Association; the other was oered

recently by the American Farm Bureau. Running either o these programs through FSA, rather than through the

crop insurance program, would greatly reduce administrative costs. And either could serve as the oundation

or a strong arm saety net. Privatizing the crop insurance industry would then allow armers who need

additional protection to buy it rom insurers in a manner that would look more like the unsubsidized auto and

lie insurance than what crop insurance is today: an over-regulated, over-subsidized industry whose ortunes

rise or all with the eectiveness o its Congressional lobbying eorts.


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THE CROP INSURANCE BOONDOGGLE

Reerences

1. According to Shields (2010), some portion o the $2 billion in savings that was not used or defcit reduction

will be spent to support premium discounts or producers and the Pasture, Rangeland, and Forage crop

insurance program. Thus the cut to crop insurance will be less than $6 billion.

2. Hagstrom, J. Agweek, Congress Pushes or Farm Program Fixes.

http://www.agweek.com/event/article/id/19171/accessed on September 29, 2011.

3. As o Sept. 29, 2011, RMA Summary o Business reports indicate that 36.77 million acres were insured with

Yield Protection while 175.7 million acres were insured with Revenue Protection. The crops or which these

products are available are corn, soybeans, wheat, cotton, rice, sorghum, canola, barley and sunowers.

4. Unexpected price increases may result in a loss to armers who orward contract their crop and do not

produce enough to ulfll their orward contract.

5. An even more accurate indicator o arm amily fnancial health would be arm revenue minus production

costs plus o-arm amily income. This would require basing insurance payments on tax returns, much as

people who qualiy or the earned-income credit do. Farm groups would bitterly oppose such a proposal.

6. The National Agricultural Statistics Service (NASS) surveys buyers or inormation about how much they

pay or crops on a monthly basis. The season average prices in Figure 1 are the average price paid over the

marketing year.

the revenue insurance boondoggle

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