Direct Subsidies Could Be Finished, but You're Still Supporting Farmers

While the next farm bill is still in flux, it's thought that crop insurance, which already runs billions of dollars every year, will be greatly expanded


Federal farm subsidies have long been the scourge of food policy critics who decry taxpayer support for agriculture that has resulted in billions of dollars in handouts primarily benefiting large producers.

Enemy no. 1 was the direct payment subsidy program. From 1995 to 2010, the program paid out $167.3 billion to grain and commodity farmers to produce, regardless of their actual production. The underlying idea was that the government needed to provide a safety net to ensure farmers remained solvent.

But now, with crop prices at sustained high levels for the past few years and increased scrutiny of the program's flaws, direct payment subsidies are on their way out with the 2012 farm bill renewal, saving taxpayers more than $4 billion a year.

Instead of offering up those savings to help chip away at America's deficit, though, policy makers are using those funds as a justification to expand revenue-guarantee programs and crop insurance -- a program that has drawn criticisms and already costs taxpayers billions of dollars a year.

Critics say farmers (primarily corn, soybean, cotton, and wheat producers) are able to buy publicly subsidized crop insurance policies that can guarantee them a level of revenue that's out of reach for many struggling Americans. Proponents of crop insurance point to the importance of maintaining a robust agriculture system as vital to American independence and security. Agriculture also faces unique challenges like unpredictable weather patterns.

"Because we are a nation that hasn't really experienced food shortages in recent memory, folks forget the role that [farmers] play on a lot of different levels," said Mike Torrey, executive vice president of Crop Insurance and Reinsurance Bureau, a lobbying group for the crop insurance industry.

But administration of the program has come under fire from agriculture economists as well as the independent agency, the U.S. Government Accountability Office.

"It's an inefficient delivery system," said Tom Cook, deputy director of GAO's Natural Resources and Environment team. "It's a system that a large percentage of the federal expenditures for this program end up going to just the delivery of the program, to the middle men: insurance companies and insurance agents"

Crop insurance used to be delivered through the government, but was shifted to the private sector in 1980 to boost participation -- which it has. Now, it is administered through 15 private companies, but is heavily subsidized by public funds. The government pays the insurance companies up to $1.3 billion a year, or more than 75 percent of their operating costs, to offer the program. In addition, taxpayers cover about 60 percent of farmers' premium costs.

In total, from 2000 to 2010 taxpayers contributed more than $42 billion to the industry, according to a 2010 Congressional Research Service report.

"I think that there is a service benefit to producers through the private sector delivery," said Keith Collins, former chief economist for the U.S. Department of Agriculture. "But it does come at a cost. When private companies deliver the product, they have to get paid to deliver the product."

While the next farm bill is still in flux, it is generally believed by those involved in negotiations that crop insurance will be expanded. Collins points out that the overall safety net for farmers is diminishing.

Here's a look at some of the debated areas for crop insurance in its current form.


"Crop insurance started out as insurance against crop loss or yield loss. It was yield insurance until the late 1990s," said Bruce Babcock, an agriculture economist at Iowa State University. "Then people realized that farmers pay their bills with revenue so a couple of revenue insurance products were developed to allow farmers to buy insurance against revenue losses."

In non-insurance speak, this means farmers can guarantee up to 85 percent of their revenue. So, for example, if yields were high, but prices dropped at harvest compared to earlier in the year when the policy was purchased, farmers could still receive compensation for loss of income.

While there are two general forms of crop coverage, yield-based and revenue-based, most farmers opt for the more expensive revenue-based insurance because they know the majority of the cost will be covered.

The crop insurance industry is "selling a product that farmers have to be subsidized to buy," said Babcock. "It does provide value to farmers but they wouldn't find the value high enough to buy it if they had to pay for it with their own money rather than taxpayers' money."

Babcock has developed crop insurance policies and worked as a consultant for the USDA Risk Management Agency, the federal agency that oversees crop insurance. Recently, Babcock, in accordance with non-profit Environmental Working Group, released a report called "The Revenue Insurance Boondoggle: Taxpayer-paid windfall for industry."

But revenue-based insurance provides an important security for farmers, according to National Farmers Union President Roger Johnson. Because the cost of doing business goes up with rising crop prices -- fertilizer, seed, and equipment manufacturers know they can take advantage of the market -- a sudden drop in the market means costs could exceed revenue.

And although he is in favor of government support for the industry, Johnson said changes are necessary but will be difficult to make.

"There needs to be fundamental reforms to how crop insurance is funded over the longer term, but there is really not much political appetite for doing that right now because crop insurance products are very popular. They are understood to be very necessary for farmers."


"In a way, it's backwards how historically we've tried to run safety net programs," said Johnson. "As a general rule, one would think when commodity prices are high -- particularly when yields are strong -- the need for the farmers should fall. The way crop insurance is currently structured, that is not what happens. Because of all these revenue products, taxpayer costs go up when the market goes up. It's a difficult issue to sell to the public. It is a difficult issue to resolve."

As prices in the market rise, so do premiums to insure the increasingly expensive crops. Without caps to the program, taxpayer contributions can go up as far as prices will take them.

"Under today's policy, you can farm a county, you can farm two counties and we will still pay 100 percent of that subsidy amount. It's insane policy," said Ferd Hoefner, policy director for the National Sustainable Agriculture Coalition.

In 2000, the government paid $1.35 billion to subsidize premiums. That figure rose to more than $7 billion in 2011 -- a result of more acreage covered and higher market prices.

Placing a cap on premium subsidies can be difficult, said Collins, who chaired the Federal Crop Insurance Corporation for seven years and who now works for the trade association National Crop Insurance Services. "You are trying to insure stability of businesses. Saying only a certain portion of the value of your business can be insured wouldn't make much sense to me."


Guaranteeing revenue reduces risk and means farmers can be bolder with their expansions.

"The thing that traditionally kept farms operating at modest size was the risk was too great [to expand]," said Hoefner who has been involved in farm bill negotiations since 1977. "But now we've taken the risk out of it," which means larger, established farmers can expand with the help of taxpayer backing.

Johnson, who represents small- and medium-sized farmers, agrees. "If you cant make enough money producing widgets because you can't get enough price for the widgets, you close down factories and you take resources out of the sector. That does not happen in agriculture. The land that's out there in production is going to be used in production regardless of what the prices are. The most that will happen is that farmers will go broke and other farmers will pick up the land and produce."


A handful of crops account for most of the coverage. The USDA has approved more than 100 crops to be included in the program, but policies covering corn, soybeans, wheat, and cotton accounted for 87 percent of premium subsidies in 2011, according to USDA data.

These crops are four of the most widely planted in America. But beyond that, "there's no policies for some [fruit and vegetable] crops; there's no carrot policy, there's no lettuce policy," said Collins.

For the crops that are covered, because policies traditionally have to be filed per crop, farmers who grow a diverse mix find the process too time consuming and costly.

The government tried addressing this issue by creating a program that looks at a farm's adjusted gross revenue, but "it's not been popular," said Collins. "It's a very complicated product. It's still not well structured to their operation because it doesn't value the product at retail prices, the price they are getting at farmers markets or a roadside stand. I think there's work to be done there, it's a legitimate complaint about crop insurance."

Image: David Hughes/Shutterstock.