Crop Insurance

An Annual Disaster

November 5, 2015

Crop Insurance: Disaster Assistance – or Income Support?

Passing ad hoc disaster assistance was a challenge for Congress, particularly after such programs could no longer be considered “off-budget.” But at least those payments only went out when a weather-related disaster occurred.

Crop insurance, however, has grown into an annual disaster program with payouts that are far more generous and more frequent than under the old regime of ad hoc disaster payments. The payouts are so generous and so frequent that they more resemble an income support program than a safety net for farmers facing serious financial losses because of bad weather. Payouts to farmers from the crop insurance program have been and still are far more generous than disaster payments because crop insurance policy deductibles are much smaller, the price at which losses are paid out is much higher and crop insurance guarantees crop prices in addition to crop yield.

Deductibles

Farmers had to lose at least 35 percent of their crop before qualifying for a disaster payment. Crop insurance policies will generate payouts if farmers lose as little as 15 percent of their crop or revenue. The average deductible for a corn insurance policy in 2013 was 26 percent and for soybeans 24 percent.

Prices

Disaster programs paid out at a fraction of the actual market price for the crop. Between 1990 and 2008, the price used to calculate a disaster payment ranged from 42 to 65 percent of the market price. In contrast, crop insurance policies pay out at the full market price, set when the policy is bought. In fact, under the most popular policies, the price at which the policy pays out can actually increase over the course of the growing season.

Revenue vs. yield

Crop insurance policies most favored by farmers guarantee per acre revenue rather than per acre yield, as disaster programs did. This means crop insurance policies are insuring against a drop in price as well as a loss in yield. The real impact of the differences between disaster payments and crop insurance payouts were made clear in the 2012 drought, which most people would consider a weather-related disaster. According to EWG’s “Taxpayers, Crop Insurance, and the Drought of 2012” report:

  • Revenue crop insurance policies paid out more than yield policies. Switching from revenue to yield policies would have decreased crop insurance payouts by 22 percent in 2012.
  • Crop insurance overcompensated farmers. In many cases farmers who had revenue insurance actually had higher revenues than if there had not been a drought.
  • Taxpayers could have provided farmers with a secure floor under their finances for less than half of what their crop insurance cost.

Ad hoc disaster payments only went to producers in those counties that were seen to have suffered a disaster because of bad weather in a particular year. In contrast, crop insurance policies generated payouts year after year and in far more counties than disaster payments did (Figure 2).

Figure 2: Crop insurance payouts go to counties year after year. 

 

Source: EWG, from 2012 Farm Subsidy Database and USDA Risk Management Agency, Summary of Business Reports and Data.

The number of counties eligible for disaster assistance exceeded those eligible for crop insurance payouts in six years between 1995 and 2008 before major ad hoc disaster payments ended. The number of counties that received ad hoc disaster payments varied widely over the period, apparently in response to weather. Only 309 counties got disaster payments in 1998 compared to 2,687 in 1999. In contrast, the counties generating crop insurance payouts varied hardly at all – from 2,277 counties in 1997 to 2,610 in 2002.

Between 1995 and 2012, only 37 counties received an ad hoc disaster or SURE payment every single year. However, 1,943 counties received a crop insurance payout every year- 18 years in a row. The number of counties that received an ad hoc disaster or SURE payment varied widely from year to year, while the number of counties getting crop insurance payouts held steady year after year.