Re-evaluating the Agriculture Department's Federal Crop Insurance Program



By: Erin Murphy, Staff Member

President Obama has vowed to reduce the nation's deficit. However, one federal program had a record cost last year.[1] The 2012 bill for the Agriculture Department's federal crop insurance program could reach $16 billion, up from $9.4 billion in 2011.[2] The crop insurance program was established in the 1930s to aid farmers who experienced crop losses.[3] A discussion of the expansion of the program can be found here.[4] In addition to the cost of administering the program, a record $11.4 billion has been paid out in indemnities to farmers for crop losses in 2012.[5] Some officials believe this number could reach $20 billion.[6] In addition to these costs, the Agriculture Department also spends millions of dollars annually in grants to industry trade groups and universities to promote enrollment in the crop insurance program.[7]

Critics of the program claim the program only benefits insurance companies and large farmers.[8] The insurance companies that sell the policies receive approximately $1.3 billion annually for their services.[9] The government could also pay an additional $7 billion to cover losses and other costs by the insurance companies.[10] Thus, insurance companies greatly benefit because the government pays the companies a large amount to administer the program and the company incurs very little risk as the government covers their losses. Large farmers also benefit. The 2012 net income for farmers may reach $114 billion, the second highest in 30 years.[11] Thus, as farmers experience losses, the program insures the farmers against revenue losses, thereby protecting their net incomes.

As this program reaches a record cost, Congress must reevaluate the program's implementation approach in light of the nation's deficit. Congress must heed the words of critics and address the inequitable benefit the program grants to insurance companies and farmers. Agreements with the insurance companies administering the program should be renegotiated. The fees the government pays the insurance companies must be lowered. Further, the government must discontinue backing the companies against all losses. Rather, the insurance companies themselves must experience some risk. If the government continues to allow the insurance companies a windfall for merely administering the program, the program will no longer serve the purpose intended: to aid farmers who have experienced crop losses. In addition, the government must place some responsibility on the farmers themselves for the crop insurance they receive. If the government continues to pay 62 percent of the farmers' insurance premiums, the farmers themselves have little incentive to farm responsibly and prudently.[12] The farmers themselves must experience some personal financial incentive to farm in a manner that minimizes losses. Congress must address the record cost of the program by realigning the administration of the program with the goal of the program.
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[1] Ron Nixon, Record Taxpayer Cost is Seen for Crop InsuranceThe New York Times (January 15, 2013), http://www.nytimes.com/2013/01/16/us/politics/record-taxpayer-cost-is-seen-for-crop-insurance.html?_r=0.
[2] Id.
[3] Id.
[4] Jocelyn Arlinghaus, Crop insurance: The agricultural equivalent of the mortgage crisis?Kentucky Journal of Equine, Agriculture, and Natural Resources (August 23, 2012), http://www.kjeanrl.com/search/label/crop%20insurance.
[5] Nixon, supra note 1.
[6] Id.
[7] John Soloman, USDA agency's largesse grows crop insuranceThe Washington Times (December 30, 2012), http://www.washingtontimes/com/news/2012/dec/30/usda-agencys-largesse-grows-crop-insurance/.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Nixon, supra note 1.