Vincent Smith BOOK LAUNCH Agricultural Policy in Disarray: Reforming the Farm Bill Co-Hosted by IFPRI and American Enterprise Institute DEC 12, 2018 - 12:15 PM TO 01:45 PM EST

1. The US Federal Agricultural
Insurance Program: Time for
Reform?
Vincent H. Smith, Joseph W. Glauber, and Barry K. Goodwin

2. A Cautionary Tale for Developing Countries
• The US Federal Crop Insurance Program is often held up as a positive
example of an effective program but
• Almost of all of the program’s expansion since the early 1980s has
been driven by increasingly substantial subsidies
• The program’s existence is now only sustained by subsidy rates
through which the government pays over 70 percent of the total costs
of the program and on average farmers receive over $2 for every $1
of premium they themselves actually “invest” out of their own funds

3. US Crop Insurance Program in Disarray
Some more Information:
• Farm businesses don’t buy multiple peril crop insurance if they have
to pay the commercial cost of the insurance because they have
cheaper and more efficient ways of managing risk (and there is no
evidence of market failures that justify intervention by the
government).
• Subsidized crop insurance encourages farm businesses to adopt high
risk production practices that waste resources because taxpayers
cover their losses (shades of the 2008 mortgage crisis and the 1980s
savings and loans crisis) and causes farms to expand crop production
on fragile lands.

4. US Crop Insurance Program in Disarray
Some Basic Information (cont.):
• Farm businesses receive an average of about $5.6 billion a year in subsidies
from the federal government. About 81 percent of that money goes to the
largest 20 percent of farm businesses. Over 65% goes to the largest ten
percent of those businesses
• On average, for every $1 a farm business owner pays in premiums, they get
back more than $2: that’s a 100% average annual return on their
“investment.”
• Crop insurance companies and reinsurance companies (to a considerable
extent owned or controlled by foreign companies) are given an average of
about $2.5 billion a year by the US taxpayer and make substantial
economic rents in the process.
• USDA spends an additional $80 million a year or more on administering the
program and funding education for crop insurance agents and farmers.
• By any measure, crop insurance is an expensive way of giving relatively
wealthy farmers subsidies. Writing checks would be a lot cheaper!!!!!!!!

5. Crop Insurance Subsidy Payment Distributions by Crop Sales Deciles
(from Bekkerman, Belasco and Smith: Volume 1, Chapter 2)

6. Total Acres Insured and Estimated Program Participation Rates

7. Government Expenditures on Premium Subsidies and Administration and
Operations Subsidies: 1981-2015 ($ millions)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Premium Subsdies A&O Subsidies

8. Producer and Total Loss Ratios, 1981 to 2015

9. The Gold Plated Revenue Insurance Story
• The Harvest Price Option Revenue Insurance Product, now described
by RMA as “Revenue Insurance,” is widely viewed as Cadillac
insurance
• It enable farmers to receive more revenue than they expected when
they planted a crop by valuing crop losses at harvest time prices when
those prices are unexpectedly high
• Subsidies for HPO began in 2000
• Since then HPO revenue insurance has become the dominant form of
insurance for those crop for which it is available

10. 0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Revenue Coverage Share of Total Liability for All Crops

11. -3000.0
-2000.0
-1000.0
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
Dollars(InMillions)
Year
Figure 10. Insurance Company Revenue streams, 1980-2014
A+O Costs Underwriting Gains Total Co. Revenue (A+O+U/G

12. Figure 11. Company and government shares of net underwriting gains in the federal crop insurance program,
1992-2016
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Government Company

13. Reforming The Federal Crop Insurance program
Ideally, from any reasonable society wide perspective, the entire
federal crop insurance program which:
• Has complex and in many dimensions adverse environmental and trade
relations impacts,
• Encourages farm business managers adopt wasteful production and
management practices
• Annually wastes over $8 billion in scarce federal funds
• And overwhelmingly gives subsidies to large scale farms that have no need of
any financial help,
Should be terminated.

14. Reforming The Federal Crop Insurance program
Alternatively:
• The Harvest Price Option should no longer be subsidized (saves about
$2 billion a year for the taxpayer)
• Subsidies could be rolled back to pre 2000 levels (taxpayers would
pay about 40 percent of a farm’s premiums instead of 60 percent and
the savings would be in the $3 to $4 billion range)
• Farmers should no longer receive prevented planted coverage (fraud,
and mismanagement by the companies and loss adjusters, appears
to be rampant for this coverage)
• Premium subsidies could be capped on a per farm basis (at, say,
$40,000 a farm as proposed in the AFFIRM act)