farmgate: Does The Public Get Its Money's Worth From Crop Insurance Subsidies?
Risk management is an integral part of every family, every farm, and every company or organization. Some risk is managed well and some is not. In agricultural production, the expense of managing weather and production risk traditionally has been borne by USDA to ensure farmers will financially survive to plant another crop and guarantee affordable food for the populace. But that process is complex, costly, and increasingly controversial. How would you answer the question of whether USDA should subsidize agricultural risk management tools?
The question of governmental support for farmers’ risk management will receive either strong support or opposition, and a lesser number of folks who ride the fence. One of those with strong opinions is Iowa State University ag economist Bruce Babcock, whose thoughts are published in the Spring edition of the Iowa Ag Review. Babcock describes the programs as complex in their administration, and adds that crop insurance agents are paid commissions fully funded by taxpayers, most of the RMA (crop insurance) program risk is borne by taxpayers, and all of the FSA program risk is paid for by taxpayers.
Babcock contends price support programs and crop insurance programs are expanding rapidly without being questioned, “Fundamental questions that never seem to be addressed by those who support taxpayer subsidies for risk management are whether the public receives any benefits from these subsidies, and if it does, whether the benefits outweigh the costs.”
The Iowa State economist says risk is a real production cost and will vary by region and crop; and should be treated as any other production input. Subsequently, Babcock says farmers should try to reduce the cost of managing risk, “If farmers fully understand the risks they face and private markets exist to allow them to pay for desired levels of risk reductions, then the efficiency with which agriculture operates cannot be increased through subsidized risk management. The reason we have so many subsidized risk management programs is either that the private sector is incapable of providing the kind of tools that farmers desire or that Congress uses the subsidies to meet some other objective.”
Babcock says the futures market is available to farmers to offset their price risk, and even weather contracts traded on the CME could be used as yield insurance. But he says farmers will not use those tools, “Because taxpayers fund a crop insurance program that offers insurance agents a large commission to get farmers to sign up for an insurance policy that pays out, on average, twice what a farmer is asked to pay as a premium. Private insurance companies are willing to insure a farmer's yield because a large portion of the risk of this insurance is borne by taxpayers. Why should a farmer care about weather contracts when taxpayers provide more reliable coverage against low farm yields at a small fraction of the true cost of insurance?” And he rhetorically asks why farmers would not sign up for the ACRE program and crop insurance to get “double compensation if harvest prices fall dramatically.”
Babcock believes farmers would participate in risk management programs if they were on their own to do so, and he wonders why US producers require risk management subsidies when those programs do not exist in other countries. He contends there are many areas of the US where crop production is a high risk exercise, and if risk management subsidies were eliminated, it would not hurt crop production in low risk areas because the risk cost is small. Babcock says, “a large proportion of the subsidies do not even flow to farmers but rather go to the crop insurance industry. Instead of looking at taxpayer benefits of expanded production in high-risk areas, it is more instructive to look at the political benefits of this expanded production, and at the lobbies that guard against changes in risk management policy.”
Babcock says Congress continues to support the status quo, which is not surprising if it maintains the industry of agriculture. But he says it is not easy to understand the support of the crop insurance industry, since it duplicates FSA programs. He suggests more public awareness will result in change or the need to save money to finance the rest of the federal budget.
Summary:
The cost of agricultural risk management is high, but for the most part has been borne by various government programs funded by taxpayers. Such programs have had Congressional support although they support crop insurance companies and agents, as well as the agricultural production industry. Alternatives exist for farmers to offset their risk through futures exchanges, however, may not have the incentive to do so if the government continues to provide subsidized risk management programs.
Posted by Stu Ellis on April 28, 2009 12:27 AM to farmgate