'Free' Crop Insurance Might Save Taxpayers $18.5 Billion

Environmental Working Group's 2012 Farm Bill proposal might reduce federal budget outlays over 10 years and provide reliable safety net.

Published on: Apr 23, 2012

The halls of Congress are overflowing with ways to cut the federal budget – and costs of the 2012 Farm Bill now under consideration. But a proposal by the Environmental Working Group, an environmental advocacy group, is getting a lot of looks.

One reason is that it's based on a crop_insurance_study by Iowa State University Ag Economist Bruce Babcock. Babcock was a key writer behind the Livestock Gross Margin insurance policies for beef cattle, dairy and swine offered via USDA's Risk Management Agency.

COSTLY CROPS: While insurance is meant to reduce crop loss revenue risks, EWG sees a reformed crop insurance program a way to reduce farm program budget outlays.
COSTLY CROPS: While insurance is meant to reduce crop loss revenue risks, EWG sees a reformed crop insurance program a way to reduce farm program budget outlays.

EWG's proposal to reform the federal crop insurance program, reportedly could save taxpayers up to $18.5 billion over 10 years and provide more farmers with a reliable safety net. Babcock was commissioned to analyze the impact of offering farmers an almost-free insurance policy covering 70% of average crop yield at 100% of the market price for the lost crop.

If farmers were charged a small fee to cover administrative costs, taxpayers would save $10.4 billion over 10 years and cover every acre planted with corn, cotton, rice, soybeans and wheat in 2011. Savings would grow to $18.5 billion over 10 years if only the acres insured in 2011 were covered by the new safety net. "The reality that giving away free insurance would actually save money underscores how inefficient the current system is," writes Babcock.

Under the current system, farmers only pay a small portion of the policy premiums. And, private insurers selling the policies pay less than half of the damage claims from crop revenue losses, contends the EWG.

Taxpayers pick up the rest, plus pay administrative costs and agents' commissions, according to Craig Cox, EWG's Senior Vice President for Agriculture and Natural Resources. The result is that one taxpayer dollar goes to insurance companies and agents for every dollar sent to farmers to pay claims.

The cost of the current crop insurance system has soared from $2.4 billion in 2001 to nearly $9 billion in 2011 as a result of high commodity prices, premium subsidies that lead farmers to buy more expensive insurance, and substantially higher 2011 crop losses.

"Dr. Babcock's analysis shows that Congress could craft a farm bill that provides an effective farm safety net, protects food stamps, fully funds conservation programs and invests in healthy food while still meeting deficit reduction targets." Cox concludes, "That's the farm bill that taxpayers and consumers want."