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The Money Crop
Crop Insurance Program

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"By the end of the year, some farmers can receive up to $280,000 simply by having another miserable year of failure." New York Times, December 24, 2000.

Crop insurance reimburses farmers when crop production falls below average yields as a result of bad weather or severe market losses. The U.S. Department of Agriculture heavily subsidizes crop insurance through its Office of Risk Management in three ways: 1) it pays the administrative costs of the private insurance companies that actually issue the policies; 2) it guarantees the insurance companies against losses that exceed the premiums; 3) it pays an average of 40 percent of each farmer's insurance premium.

Crop insurance primarily benefits farmers who grow crops on marginal land, because those are the lands that experience large losses frequently. Since crop losses increase premiums, and the government pays a percentage of those premiums, the higher the losses, the higher the government subsidy. The program now costs around $1.5 billion per year. Moreover, in the last two years, Congress has added special emergency subsidies, bringing costs up to around $1.9 billion.

Green Scissors Proposal
Lower the reimbursement rate to private insurance companies to a level that would match what they receive in the private market; 2) reduce or eliminate the subsidies; 3) charge different rates based on varying risk, taking into consideration repetitive loss history and land quality.

Current Status

In June 2000, President Clinton signed the Agricultural Risk Protection Act (H.R. 2559) guaranteeing more than $15 billion in taxpayer-funded bailouts for farmers. Provisions in the bill reduced the costs to farmers of buying insurance for both crop failures and market losses. The bill also included provisions intended to benefit specific constituencies, such as direct payments to tobacco producers and assistance for wool and mohair growers, and included $7.1 billion in "emergency relief" for farmers - marking the third time in four years that a bailout has been deemed necessary. Congress is scheduled to reauthorize the Federal Crop Insurance Program in 2001.

Program Hurts Taxpayers

The program directly costs taxpayers almost $2 billion annually, and costs billions of dollars more indirectly. The program provides incentives to produce crops on marginal, disaster-prone land that would otherwise not be harvested. These incentives lead to overproduction, which lowers crop prices. The lower prices in turn trigger billions in additional government subsidies, both in special emergency bills and in agricultural price guarantees, such as loan deficiency payments.

Private insurance companies participating in the federal crop insurance program have collectively earned $528 million in underwriting gains since 1990. General Accounting Office reports also show that the government paid about 22 private insurance companies a total of $80 million more than the costs of selling and servicing crop insurance from 1994 to 1995.

Program Hurts the Environment

Crop insurance has greatly reduced wildlife habitat and caused increased soil erosion, fertilizer and pesticide use. Economists believe that the program has caused tens of millions of acres of grasslands, wetlands and woodlands to be converted to crop fields. The effect of this subsidy may have fully cancelled out the benefits of the 36 million-acre Conservation Reserve Program, a program that allows farmers to retire environmentally sensitive cropland.

Contacts

• Tim Searchinger, Environmental Defense, (202) 387-3500.
• Cena Swisher, Taxpayers for Common Sense, (202) 546-8500 x108.