Policy Documents

Crop Insurance Subsidy Hurts Farms and Environment

August 28, 2011

(The following article originally appeared in the Grand Forks Herald)

America’s crop insurance program, a $6.5 billion annual waste of taxpayers’ money, is one of the most egregious examples of welfare for business in the nation’s vastly overweight federal budget.

While moving the nation’s finances towards balance is going to require some hard choices, eliminating the crop insurance program should be an easy one. For the program is much more than a waste of money. It also is bad for the farm economy it is supposed to support and dreadful for the environment.

The program enjoys significant and understandable support from the businesses that directly benefit from it. Why shouldn’t it? Under current law, the companies that write crop insurance are more-or-less guaranteed significant profits on every policy they underwrite.

Agents who sell the policies make even more than the insurers, and farmers get significant help with paying their premiums.

Taxpayers pick up about half the tab, and farmers are disqualified from nearly all other federal aid if they don’t buy insurance.

For all this, the current program — sold as a potential savior of the family farm when Congress expanded it massively in 1996 — hasn’t done anything to achieve its supposed purpose.

In fact, sweeping social and economic trends have continued to push the family farm into decline.

Agents, on the other hand, do just fine in the program. In fact, the enormous commissions they earn servicing policies have served to reduce competition between the companies that write crop insurance. More than four dozen companies wrote crop insurance two decades ago, but fewer than 20 do so today.

While there’s little doubt crop insurance subsidies stabilize some individual farmers’ finances, it’s not as clear that these payments make much sense for the farm economy as a whole.

Because they know the government will subsidize their insurance costs, farmers have very few incentives to avoid planting in relatively risky areas. Since insurers that take part in the program can keep on their own balance sheets policies they believe will be profitable and still collect a variety of fees for servicing money-losing ones the government underwrites, they have no incentive — or, in most cases, ability — to charge higher rates to farmers who make foolish planting decisions.

The result: Farmers plant different (and often less disaster-resistant) crops than they would if taxpayers didn’t pick up so much of their insurance costs. This change tends to lower the relative market prices, and thus, the incentive to grow crops in less disaster-prone areas.

The program also causes environmental harm. Many of the most disaster-prone areas to grow crops — near bodies of water that flood and in arid climates subject to drought — are among the most important to preserve. Subsidizing crop insurance thus encourages farmers to tear up wilderness, spray pesticides and destroy natural habitat so they can grow more.

In fact, almost all the goals of the conservation reserve program, the infamous $1.8 billion effort that pays farmers not to grow crops in environmentally sensitive areas, probably could be accomplished simply by eliminating federal subsidies for crop insurance.

Eliminating crop insurance would have some costs. Some farms are commercially viable only because of crop insurance and would almost certainly have to radically change their practices or shut down if the subsidies ended.

But on balance, the crop insurance program is a narrowly focused subsidy that uses tax money to benefit a very small group of businesses. It is not a public benefit by any reasonable definition of the term; and as Congress looks for ways to cut the budget, the crop insurance program should be a prime target.

Lehrer is vice president of Washington operations for The Heartland Institute and national director of the institute’s Center on Finance, Insurance and Real Estate.