Giving It Away Free

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ENVIRONMENTAL

WORKING

GROUP

GIVING IT AWAY FREE

FREE CROP INSURANCE CAN SAVE MONEYAND STRENGTHEN THE FARM SAFETY NET

A simple, freeprogram to insure farmers

against actual crop losses at full market price

would be cheaper and fairer than todays

hopelessly inefcient and costly system

by Bruce Babcock

Professor of Economics, Iowa State University

Preface by Craig Cox

Senior VP for Agriculture and Natural Resources, EWG

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http://www.ewg.org
http://www.ewg.org/http://www.ewg.org/


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Acknowledgments

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under extreme time pressure.


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GIVING IT AWAY FREE3

Preface

Weaving a safety net that works for famers and taxpayers

CZ$SBJH$PY

Senior VP for Agriculture and Natural Resources, EWG

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OFUGPSGBSNFSToBGSFFJOTVSBODFQPMJDZUIBUXPVMEDPWFSQFSDFOUPGBWFSBHFZJFMEBOEQFSDFOUPGUIF

market price for the lost crop. EWGs proposal grew out of a previous paper%S#BCDPDLQSFQBSFEUIBUEFUBJMFE

the

aws in the current revenue insurance programs.

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Now, some lawmakers are proposing to plow most of the savings from nally ending the discredited direct

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the same farm businesses that have been rewarded with direct payments for years. Sold as reform, this bait and

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%S#BCDPDLTSFQPSUTIPVMEHJWFQBVTFUPMBXNBLFSTCFJOHBTLFEUPTXBMMPXUIJTiSFGPSNw5IFQBQFSNBLFTB

compelling case that:

t The current crop and revenue insurance system is seriously awed and needs an overhaul, despite the chorus

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t It is very possible to construct a safety net that works for farmers, saves taxpayers billions of dollars and is

better for the environment than the current system.
http://static.ewg.org/pdf/Crop_Insurance.pdfhttp://static.ewg.org/pdf/Crop_Insurance.pdf


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of the policy premiums and pay insurance companies to sell the policies. Highly protable insurance companies

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If this is not reason enough to make lawmakers skeptical, a report released by the Government Accountability

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as distorted as the distribution of the direct payments that the insurance would replace and far more expensive

to deliver.

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t reducing or ending premium subsidies for revenue protection policies, particularly those that insure more

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t DBQQJOHUIFBNPVOUPGQSFNJVNTVCTJEJFTBOJOEJWJEVBMPSGBSNCVTJOFTTDBODPMMFDU

t SFRVJSJOHGBSNTUPQSPUFDUTPJMXFUMBOETBOEHSBTTMBOETJOSFUVSOGPSQSFNJVNTVCTJEJFTBOE

t making public the identities of the farm businesses participating in the insurance programs and the amount

of premium subsidies and indemnities each farm business receives.

#VU%S#BCDPDLTUIPSPVHIBOBMZTJTTIPXTUIBUJUXPVMECFFWFOCFUUFSoGBSCFUUFSoUPSFQMBDFUIFDVSSFOU

complicated system of premium subsidies and policies with a single, simple and free yield protection policy

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CBEXFBUIFSoBUQFSDFOUPGUIFDSPQTNBSLFUQSJDF'BSNFSTXPVMECFBTLFEUPQBZBTNBMMGFFUPDPWFSUIF

much lower costs of delivering this program. The private sector would be free to develop innovative insurance

products that farm operators could buy at their own expense, if they chose, to place atop the core of the safety

net provided at taxpayers expense.
http://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdf


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This approach would chart a course toward a scally responsible, effective and environmentally sound safety net

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t 'JOBMMZBDIJFWFBQFSNBOFOUGBSNMFWFMEJTBTUFSQSPHSBNUIBUFMJNJOBUFTUIFOFFEGPSBEIPDEJTBTUFSSFMJFGo

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t 3FEVDFEJTUPSUJPOJOQMBOUJOHEFDJTJPOT

t &MJNJOBUFUIFOFFEGPSBOFMBCPSBUFQSFNJVNSBUJOHTUSVDUVSFBOE

t Require growers to buy a single policy that covers all of the insured crop grown in a county, rather than

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terrain.

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could create a scally responsible and effective safety net, fully fund conservation programs, invest in programs

that increase access to healthy food and still meet or exceed decit reduction targets.

The only thing standing between taxpayers and the kind of farm bill they want is the power of the subsidy

lobby now augmented by lobbyists for the crop insurance industry. Now, more than ever, the farm bill is far too

important to be left to the agriculture committees.


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Giving It Away

Free Crop Insurance Can Save Moneyand Strengthen the

Farm Safety NetCZ#SVDF#BCDPDL

Professor of Economics, Iowa State University

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decit or shifting the funds to programs that truly serve public needs, such as agricultural research or reducing

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crop insurance program to support commodity growers. To make it look better to the public, its being dressed

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What is surprising is the lack of discussion of why anyQVCMJDNPOFZTIPVMECFTQFOUPOBOFXiTBGFUZOFUwXIFO

the existing federal crop insurance program already costs so much and provides farmers with such extravagant

protection. If the current system of crop insurance isnt working, why not abolish it along with direct payments

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CJMMJPOoIBTGPVOEJUTXBZJOUPGBSNFSTQPDLFUT5IFPUIFSCJMMJPOXPVOEVQJOUIFDPGGFSTPGDSPQJOTVSBODF

companies and in commissions paid to insurance agents. It strains credibility to claim that a program that costs

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incentives to buy more insurance, and more expensive types of insurance, than they would buy if they had to

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their crops, farmers are using the subsidies to also buy costly revenue insurance. Such policies protect them


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against price uctuations that can cost farmers money when they have locked in a selling price but dont have

enough production to sell. Its no wonder that farmers buy it, because thanks to subsidies, this more expensive

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Another reason the program costs so much is that insurance companies have to be paid large subsidies to

induce them to take on a small portion of the risk of having to make large payouts. And nally, the agents who

sell these policies earn commissions far in excess of what a competitive market would pay.

As a result, crop insurance is so costly that taxpayers would be better off if the insurance were simply given away

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ve crops get from existing crop insurance today.

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effective, because otherwise farmers paying with their own dollars wouldnt buy them.

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Federation have embraced the idea that its sound policy to deliver a more efcient and effective farm safety

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crop insurance program. The milk producers are advocating a milk margin insurance program to be delivered

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be delivered as crop insurance although with much lower delivery costs than current crop insurance products.

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efcient use of tight farm bill funds.

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re even as it saves farmers and taxpayers money. And it would avoid public backlash against a wasteful system

that today makes payments to farmers even when they have no real losses.


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Introduction

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for farmers. Some commodity groups argue that the way to do this is to set higher target prices for commodity

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measures to protect farmers from revenue losses that conventional crop insurance doesnt cover because the

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they would protect farmers against small losses that are not compensated by existing crop insurance, which is

designed to cover deeper losses. However, both higher target prices and shallow loss protection would require

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still strengthen the safety net, let alone nd funds for other farm bill programs, including conservation, research

and nutrition.

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decit reduction targets. The appeal of the crop insurance program is easy to understand. After all, who can be

against protecting farmers against the vagaries of nature?

Just like homeowners who buy insurance against damage to their homes, farmers buy crop insurance to insureBHBJOTUMPTTFTGSPNPPEESPVHIUTIBJMBOEQFTUT#VUVOMJLFIPNFPXOFSTXIPCVZJOTVSBODFGSPNDPNQBOJFT

that must charge enough in premiums to pay for damage claims plus the cost of running their businesses,

farmers pay only small portion of the true cost of their insurance. Their premium dollars pay none of the cost of

administering the program and less than half of damage claims. Taxpayers pay the rest.

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the claim reimbursements that the government pays to insurance companies. Secondly, the premium subsidieshave given farmers an incentive to buy the most expensive insurance available with the lowest deductibles. Unti

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extra dollars worth of insurance. It is no wonder that farmers have responded by purchasing more insurance.


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coverage against crop losses, most farmers now buy insurance against both crop losses and movements in

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harvest prices to determine when a payout is due. With the exception of rice and barley, a large proportion of

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There are obvious reasons why RP is popular. It provides protection against drops in revenue caused by either

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Figure 1. Taxpayer Cost of the Crop Insurance Program Has Soared

$2

$4

$6

$8

$10

20112010200920082007200620052004200320022001

million

$


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prices rise at harvest. That means that if a farmer with an RP policy does suffer a crop loss, the added revenue

from selling the remaining crop at the higher harvest price does not reduce the insurance payout.

#VUBHPPEEFBMGPSGBSNFSTJTOPUOFDFTTBSJMZUIFNPTUFGDJFOUVTFPGUBYQBZFSNPOFZBOEJUSBJTFTJNQPSUBOU

questions:

t How much does the current subsidy structure cost taxpayers?

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providing protection against severe crop losses?

t $PVMETJHOJDBOUTBWJOHTCFPCUBJOFECZMJNJUJOHUBYQBZFSTDPOUSJCVUJPOUPUIFDPTUPGDSPQJOTVSBODF

t Would farmers be hurt if subsidies were limited?

Figure 2. Proportion of Insured Acres Covered by RP in 2011

0%

20%

40%

60%

80%

100%

Wheat

Sunow

ers

Soybeans

RiceGrainSorghum

Cotton

CornCanola

Barley


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Getting answers to these questions is difcult, because the crop insurance program is very complex. This

complexity serves the purposes of those who want to protect the existing programs structure. It is easier to

defend a program when most critics dont quite understand its nuances.

An Alternative

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insurance program with its costly and complicated set of regulations and subsidies, why not simply give farmers

a free yield protection (YP) insurance policy?

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solid foundation on which they could add additional risk management tools through the private sector. It would

be the taxpayers contribution to a basic safety net for producers of eligible crops. It would cap the burden on

taxpayers and could produce signicant budget savings by eliminating both federally paid premium subsidies

and underwriting payouts to crop insurance companies. Simplifying administration of the system would produce

even more savings.

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farmers would be better off than under the current program, which benets the crop insurance industry as much

as farmers.

The reality that giving away free insurance would actually save money underscores how inefcient the current

system is. In addition, this alternative system would also reveal which risk management products can actually

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The Potential Savings

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QFSDFOUPGUIFFYQFDUFENBSLFUQSJDFXPVMEQSPEVDFTBWJOHTJOUISFFXBZT


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Lower Premium Subsidies

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policies.

Underwriting Gains

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Figure 3. Net Underwriting Gains Paid to Crop Insurance Companies

-0.5

0

0.5

1.0

1.5

2.0

2.5

2011

2010

2009

2008

2007

2006

2005

20042003

2002

2001

billion

$


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DPNQBOJFTFOKPZFEBUPUBMPGCJMMJPOJOOFUVOEFSXSJUJOHHBJOTGSPNTFMMJOHUBYQBZFSTVCTJEJ[FEJOTVSBODF

QPMJDJFT'JHVSF5IFSBUJPOBMFGPSUIFTFQSPUTJTUPBMMPXUIFDPNQBOJFTUPNBLFNPOFZJOZFBSTXIFOQBZPVUT

on claims are lower than premiums collected in exchange for shouldering some of the losses in years when

QBZPVUTBSFHSFBUFSUIBOQSFNJVNT*OUIFPSZUIJTSJTLTIBSJOHBSSBOHFNFOUSFEVDFTUIFHPWFSONFOUTFYQPTVSF

JOIJHIMPTTZFBSTJOFYDIBOHFGPSJODSFBTJOHUBYQBZFSDPTUTJOMPXMPTTZFBST#VU'JHVSFTIPXTUIBUUIJTJTDPTUMZ

UPUBYQBZFST&WFOJOIJHIMPTTZFBSTTVDIBTDPNQBOJFTDPMMFDUFEMBSHFVOEFSXSJUJOHHBJOT0OMZJOPOF

ZFBSEJEDPNQBOJFTIBWFBOFUVOEFSXSJUJOHMPTT5IFQSPQPTFEGSFFQFSDFOUZJFMEQSPUFDUJPOQSPHSBN

XPVMEFMJNJOBUFUIFBEEFEDPTUUPUBYQBZFSTPGVOEFSXSJUJOHHBJOTCZIBWJOH64%"T'FEFSBM$SPQ*OTVSBODF

$PSQPSBUJPOQBZBMMDMBJNTEJSFDUMZ

Reduced Delivery Costs

$SPQJOTVSBODFDPNQBOJFTBSFBMTPHFOFSPVTMZDPNQFOTBUFEGPSUIFPWFSIFBEBOEBENJOJTUSBUJWFDPTUTPGUIF

QPMJDJFT$VSSFOUMZUIFHPWFSONFOUNBLFTTPDBMMFEi"ENJOJTUSBUJWFBOE0WFSIFBEw"0QBZNFOUTUPDSPQ

insurance companies to cover the cost of administering the program and to compensate them for costs that,

in a private insurance market, would be built into the premium. These include agent commissions, the cost of

BEKVTUJOHMPTTFTBOEPGDFFYQFOTFTJODMVEJOHFNQMPZFFTBMBSJFTBOEJOGPSNBUJPOUFDIOPMPHZFYQFOTFT5IF

"0QBZNFOUTBSFTFUBTBQFSDFOUBHFPGUIFQPMJDZQSFNJVNT"T'JHVSFTIPXTXIFOQSFNJVNTJODSFBTFE

EVFUPIJHIFSDPNNPEJUZQSJDFTBOEHSFBUFSVTFPGSFWFOVFQSPUFDUJPOQPMJDJFT"0QBZNFOUTBMTPJODSFBTFE

ESBNBUJDBMMZFWFOUIPVHIUIFOVNCFSPGQPMJDJFTBENJOJTUFSFEGFMM*O64%"T3JTL.BOBHFNFOU"HFODZ

3."DBQQFEUIFSFTVMUJOHXJOEGBMMQSPUTUIBUDPNQBOJFTXFSFFOKPZJOHCZMJNJUJOH"0QBZNFOUTUP

CJMMJPOBZFBS&WFOXJUIUIJTDBQJOQMBDFBOEBEKVTUJOHGPSJOBUJPOIPXFWFSUIFJOEVTUSZJTTUJMMFOKPZJOHMBSHF

XJOEGBMMQSPUTGSPN"0SFJNCVSTFNFOUT

Delivery Costs Loom Large

It is not easy to estimate the actual cost of delivering crop insurance. Industry has every incentive to claim highe

DPTUTUPKVTUJGZMBSHFSUBYQBZFSSFJNCVSTFNFOUT0ODFBGBSNFSTJHOTVQGPSDSPQJOTVSBODFUIFQPMJDZJTTFMG

renewing, so current agent commissions are far above what a competitive market would pay.

0OFFTUJNBUFPGUIFQFSQPMJDZDPTUJTUIFBENJOJTUSBUJWFGFFPGQFSDSPQQFSDPVOUZUIBU64%"DIBSHFT


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GPSDBUBTUSPQIJD$"5QPMJDJFT3."FTUJNBUFEUIBUGSPNUPUIFOPOBHFOUDPTUTBWFSBHFEQFS

policy. *OGPSNB&DPOPNJDTJOBSFQPSUGPSUIF/BUJPOBM"TTPDJBUJPOPG'4"$PVOUZ0GDF&NQMPZFFTXIJDI

SFQSFTFOUTDPVOUZMFWFMFNQMPZFFTPG64%"T'BSN4FSWJDF"HFODZ'4"FTUJNBUFEUIBUJUXPVMEDPTU'4"BO

BEEJUJPOBMNJMMJPOBZFBSoBCPVUQFSDFOUPGUIFUPUBMQSFNJVNWBMVFJOoUPBENJOJTUFSUIFQSPHSBN

5IJTXPSLTPVUUPBDPTUPGQFSQPMJDZ8IBUBMMUISFFFTUJNBUFTNBLFDMFBSJTUIBUUIFDPTUPGEFMJWFSJOHUIF

DPWFSBHFXPVMECFMPXFSJG64%"JNQMFNFOUFEUIFQSPHSBNJUTFMGPSDPOUSBDUFEXJUIJOTVSBODFDPNQBOJFTBUB

set price per policy, to be determined by competitive bid.

4BWJOHTJOEFMJWFSZDPTUTMPPNMBSHFJOUIJTBOBMZTJTPGNBLJOHBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZUIFCBTJD

TBGFUZOFUUIBUUBYQBZFSTQSPWJEFUPGBSNFST0WFSUIFQBTUZFBSTPGUIFDVSSFOUDSPQJOTVSBODFQSPHSBNOFU

4PVSDF64%"3JTL.BOBHFNFOU"HFODZ

Figure 4. A&O Payments to Crop Insurance Companies

0

0.5

1.0

1.5

2.0

2.5

2011

2010

2009

2008

20072006

2005

20042003

2002

2001

billion$


16/36


JOEFNOJUJFTUPGBSNFSTJOTVSBODFQBZPVUTNJOVTQSFNJVNQBZNFOUTUPUBMFECJMMJPOo UIFGBSNFSTDBTI

CFOFUGSPNUIFQSPHSBN5IFUPUBMDPTUUPUBYQBZFSTPWFSUIJTQFSJPEXBTCJMMJPOUIFTVNPGUIF

CJMMJPOOFUJOEFNOJUZQBJEUPGBSNFSTBOEUIFCJMMJPOJOVOEFSXSJUJOHHBJOTBOE"0SFJNCVSTFNFOUTQBJE

to companies).75IJTNFBOTUIBUUBYQBZFSTQBJEDFOUTJOEFMJWFSZDPTUTGPSFWFSZEPMMBSPGOFUCFOFUUIBU

farmers received.

Given the importance of increasing the efciency of all government programs in the face of the large and growing

federal debt, it is surprising that this very inefcient means of providing a farm safety net has not caught the

attention of avid budget cutters. The crop insurance program is so inefcient that both farmers and taxpayers

would be better off if the insurance were given away rather than delivered through the current system.

"MPPLBUUIFDPTUTPGDSPQJOTVSBODFGPSDPSOTPZCFBOTBOEXIFBUJO#PPOF$PVOUZ*PXBBOE4UVUTNBO$PVOUZ

/PSUI%BLPUBCFBSTPVUUIJTDPODMVTJPO

Impact of Free Yield Insurance

4UVUTNBO$PVOUZJTJO8FTU$FOUSBM/PSUI%BLPUBXIFSFZJFMETBSFMPXFSBOESJTLJTNVDIIJHIFSUIBOJO*PXB

#PPOF$PVOUZ#PPOF$PVOUZJOSVSBM$FOUSBM*PXBXJUITPNFPGUIFNPTUQSPEVDUJWFGBSNMBOEJOUIFDPVOUSZJT

POFPGUIFMFBTUSJTLZQMBDFTUPHSPXDPSOBOETPZCFBOT%FTQJUFUIFEJGGFSFODFTJOZJFMEMFWFMTBOESJTLBMNPTU

BMMBDSFBHFJOCPUIDPVOUJFTJTJOTVSFE64%"T3JTL.BOBHFNFOU"HFODZ3."SFQPSUTUIBUBDSFTP

TPZCFBOTBOEBDSFTPGXIFBUXFSFJOTVSFEJO4UVUTNBO$PVOUZ#PPOF$PVOUZGBSNFSTQMBOUFE

BDSFTPGDPSOBOEBDSFTPGTPZCFBOTJOBOEBMNPTUBMMUIFBDSFTXFSFJOTVSFEQFSDFOUPGDPSO

BDSFTBOEQFSDFOUPGTPZCFBOBDSFT

'BSNFSTJOCPUIDPVOUJFTBSFCJHCVZFSTPGSFWFOVFQSPUFDUJPO31JOTVSBODF*UDPWFSTNPSFUIBOQFSDFOUP

JOTVSFEBDSFTJO#PPOF$PVOUZBOEQFSDFOUPGTPZCFBOBOEQFSDFOUPGXIFBUBDSFTJO4UVUTNBO$PVOUZ

5IFNPTUQPQVMBSDPWFSBHFMFWFMJO#PPOF$PVOUZJTQFSDFOUGPSCPUIDPSOBOETPZCFBOTBOEJO4UVUTNBO

UIFNPTUQPQVMBSMFWFMJTQFSDFOUGPSCPUITPZCFBOTBOEXIFBU:JFMEJOTVSBODF:1JTBMTPBWBJMBCMFJOCPUIDPVOUJFTCVUDPWFSTPOMZQFSDFOUPGJOTVSFEBDSFTJO#PPOF$PVOUZBOEQFSDFOUJO4UVUTNBO$PVOUZ

0OFSFBTPOTPGFXGBSNFSTJOUIFTFUXPDPVOUJFTCPVHIU:1XBTUIBUUIFQFSBDSFTVCTJEZJTTPNVDIMPXFSUIBO

GPS31'JHVSFTIPXTUIBUUIFBWFSBHFQFSBDSFTVCTJEZGPSGBSNFSTXIPCPVHIU31JO#PPOF$PVOUZJO


17/36

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XBTEPVCMFUIBUSFDFJWFECZGBSNFSTXIPCPVHIU:1'JHVSFTIPXTUIBU31TVCTJEJFTGPS4UVUTNBO$PVOUZJO

XFSFBMTPNVDIMBSHFSUIBO:1TVCTJEJFT*GQSFNJVNTSFFDUXIBUDSPQJOTVSBODFDPNQBOJFTXJMMQBZPVU

for these policies over the long run, farmers who select RP will get up to double the net indemnities that farmers

who choose YP get. RP provides more coverage and a much greater return on their premium dollars. The more

generous net indemnities and the large subsidies the industry gets to administer RP are the reason for the

explosive increase in the cost to taxpayers.

5BCMFCFMPXTIPXTXIBUUIFJNQBDUXPVMECFPOGBSNFSTUBYQBZFSTBOEUIFJOEVTUSZPGBQSPHSBNUIBUHBWFB

GSFFQFSDFOUZJFMEQSPUFDUJPOQPMJDZUPBMMGBSNFSTXIPQVSDIBTFESFWFOVFQSPUFDUJPO31GPSDPSOTPZCFBO

BOEXIFBUJO#PPOFBOE4UVUTNBO$PVOUJFT.PSFXJMMCFTBJEMBUFSBCPVUXIBUPQUJPOTUIFTFGBSNFSTNJHIU

Figure 5. Average Per-Acre Subsidies for Boone County, 2011

$

peracre

0

5

10

15

20

25

30

35

Soybean-RP

Soybean-YP

Corn-RP

Corn-YP

85807570658580757065


18/36


have if they wanted additional risk protection, but for now this analysis assumes no other taxpayer support fo

the farm safety net.)

"T5BCMFJMMVTUSBUFTUIFJNQBDUXPVMEWBSZTJHOJDBOUMZBDSPTTDSPQTBOESFHJPOTCVUUIFUBYQBZFSTBWJOHTXPVME

CFMBSHF#FDBVTFZJFMESJTLJTTPNVDIIJHIFSJO4UVUTNBOUIBOJO#PPOF$PVOUZBQFSDFOU:1QPMJDZXPVME

CFNPSFWBMVBCMFUPGBSNFSTJO4UVUTNBOUIBOUPUIPTFJO#PPOF$PVOUZPOBEPMMBSQFSBDSFCBTJT5IFGSFF

percent YP policy would also be a better value for farmers than a current RP policy because yield risk in Stutsman

$PVOUZJTBHSFBUFSQSPQPSUJPOPGUPUBMSFWFOVFSJTLUIBOJO#PPOF$PVOUZ*O#PPOF$PVOUZCZDPOUSBTU31

provides relatively more price protection, so replacing RP with YP represents a drop in value for those farmers.

Figure 6. Average Per-Acre Subsidies for Stutsman County, 2011

$

peracre

0

10

20

30

40

50

Wheat-YP

Wheat-RP

Soy-YP

Soy-RP

85807570658580757065


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5IFEJGGFSFODFTBSFTIPXOJO5BCMFJOUIFSPXUJUMFEi/FU'BSNFS*NQBDUw5IFBWFSBHFWBMVFPGBQFSDFOU

:1QPMJDZJTHSFBUFSUIBOUIFBWFSBHFWBMVFPG31QSFNJVNTVCTJEJFTGPS4UVUTNBO$PVOUZTPZCFBOGBSNFST#Z

UIJTNFBTVSF4UVUTNBO$PVOUZTPZCFBOGBSNFSTXIPDVSSFOUMZCVZ31QPMJDJFTXPVMEDPNFPVUBIFBEJGHJWFOB

GSFF:1QPMJDZ'PS#PPOF$PVOUZGBSNFSTBOEXIFBUGBSNFSTJO4UVUTNBO$PVOUZIPXFWFSUIFTXJUDIGSPN31UP

BGSFFQFSDFOU:1QPMJDZXPVMESFQSFTFOUBOFUSFEVDUJPOJOTVQQPSUCVUJUXPVMECFBOFUHBJOGPSUBYQBZFST

XIJMFTUJMMQSPWJEJOHBOFGGFDUJWFTBGFUZOFU*OBEEJUJPOBENJOJTUFSJOHUIJTQFSDFOU:1QSPHSBNEJSFDUMZCZ

64%"PSUISPVHIUIFQSJWBUFTFDUPSXJUIDPNQFUJUJWFCJEEJOHXPVMEHFOFSBUFTVCTUBOUJBMTBWJOHT5IFUPUBMUBYQBZFSTBWJOHTGSPNSFQMBDJOH31XJUIBGSFFQFSDFOU:1QPMJDZSBOHFTGSPNBMPXPGQFSDFOUGPSTPZCFBOT

JO4UVUTNBO$PVOUZUPBIJHIPGQFSDFOUGPSTPZCFBOTJO#PPOF$PVOUZJGVOEFSXSJUJOHHBJOTBOEMPTTFTBSF

borne directly by taxpayers and if delivery costs are competitively bid. If farmers were charged a fee sufcient to

DPWFSEFMJWFSZDPTUTUIFTBWJOHTXPVMEJODSFBTFUPBMPXPGQFSDFOUBOEBIJHIPGQFSDFOUBTTIPXOJOUIF

last row.

4UVUTNBO$PVOUZ #PPOF$PVOUZ

Wheat Soybeans $PSO Soybeans

*NQBDUPO'BSNFSTXIP#PVHIU31JO $ million

Loss of RP Premium Subsidy

7BMVFPG:11PMJDZa Net Farmer Impactb

*NQBDUPO"ENJOJTUSBUJWF$PTU

3FEVDUJPOJO"0c

Reduction in Underwriting Gainsd

$PNQFUJUJWF%FMJWFSZ$PTUTe

Net Taxpayer Savings No Admin Fee

Net Taxpayer Savings with Admin Fee

$VSSFOU5BYQBZFS$PTUf

1FSDFOU3FEVDUJPOJO1SPHSBN$PTUXJUI/P"ENJO'FF

1FSDFOU3FEVDUJPOJO1SPHSBN$PTUXJUI"ENJO'FF

Notes:a7BMVFPGQFSDFOU:1QPMJDZFRVBMTUIFBWFSBHFQFSBDSFQSFNJVNDIBSHFEJOGPSFBDIDSPQBOEDPVOUZNVMUJQMJFE

by the total number of acres insured under RP for each crop and county.b/FUGBSNFSJNQBDUFRVBMTUIFWBMVFPGUIFQFSDFOU:1QPMJDZNJOVTUIFMPTTPS31QSFNJVNTVCTJEZc"0FYQFOTFJTQFSDFOUNVMUJQMJFECZUPUBM31QSFNJVNGPSFBDIDSPQDPVOUZDPNCJOBUJPOd6OEFSXSJUJOHHBJOTTFUUPQFSDFOUPGQSFNJVNJO4UVUTNBO$PVOUZBOEQFSDFOUPGQSFNJVNJO#PPOF$PVOUZe$PNQFUJUJWFEFMJWFSZDPTUTFUUPGPVSQFSDFOUPGUPUBMWBMVFPGUIFQFSDFOU:1QPMJDZf$VSSFOUUBYQBZFSDPTUFRVBMTUIFTVNPG"0QSFNJVNTVCTJEJFTBOEVOEFSXSJUJOHHBJOT

Table 1. Cost Impacts of Replacing Subsidized RP Policies with a Free YP Policy


20/36


5IFTFDBTFTUVEJFTJOEJDBUFUIBUMJNJUJOHUIFUBYQBZFSGVOEFETBGFUZOFUUPBGSFFQFSDFOU:1QPMJDZDPVME

reduce program costs substantially, but examining only three crops in two counties gives little insight into the

DPTUJNQBDUPOBOBUJPOBMMFWFM*OBEEJUJPO5BCMFEPFTOPUBDDPVOUGPSUIFDPTUTPGQSPWJEJOHBGSFF:1QPMJD

to farmers who currently do not buy insurance at all or who buy lower levels of YP, or for the additional savings

that could arise from farmers who currently buy other types of crop insurance.

5IFOFYUTFDUJPOFTUJNBUFTUIFFTUJNBUFEDPTUJNQBDUPGBGSFFQFSDFOU:1QSPHSBNGPSBMMDSPQTGPSXIJDI

revenue protection is currently available across all acres insured with all insurance products.

National Impact of Free Insurance

5IJTBOBMZTJTVTFE3."TTVNNBSZPGCVTJOFTTEBUBGPSNPTUDSPQTUIBUBSFDVSSFOUMZFMJHJCMFGPSSFWFOVF

QSPUFDUJPODPWFSBHFUPBTTFTTUIFMJLFMZJNQBDUPGQSPWJEJOHGBSNFSTXJUIBGSFFQFSDFOUZJFMEQSPUFDUJPOQPMJDZ

BTUIFDPSFPGUIFUBYQBZFSGVOEFEGBSNTBGFUZOFU0OMZQFBOVUTBOEPBUTXFSFFYDMVEFE'PSFBDIDSPQUIF

TUBUFBDSFBHFXFJHIUFEBWFSBHFQSFNJVNGPS:1BUUIFQFSDFOUDPWFSBHFMFWFMXBTDBMDVMBUFEGPSUIPTFBDSFT

currently insured at that level. In addition, the calculations show the cost of giving this free policy to farmers who

CPVHIUBOZGPSNPGJOTVSBODFJO$PMVNOPG5BCMFBOEUIFDPTUPGQSPWJEJOHUIJTQPMJDZGPSBMMQMBOUFE

BDSFBHFPGFBDIDSPQJODMVEJOHGPSGBSNFSTXIPEJEOPUQSFWJPVTMZCVZJOTVSBODF$PMVNO(JWJOHBGSFF:1

QPMJDZBUUIFQFSDFOUDPWFSBHFMFWFMXPVMEQSPWJEFGBSNFSTXJUIDPWFSBHFUIBUXPVMEPUIFSXJTFDPTUUIFN

BCPVUCJMMJPOJGQPMJDJFTXFSFHJWFOPOMZUPGBSNFSTXIPCPVHIUJOTVSBODFJOPSCJMMJPOJOWBMVFJ

the free policies were extended to all farmers who grew these crops.

4VCUSBDUJOHUIFQSFNJVNTVCTJEZUIBUJOTVSFEGBSNFSTBDUVBMMZSFDFJWFEJOGPSUIFTFDSPQTGSPNUIFWBMVF

of the free yield insurance provides a measure of the net benet that farmers would receive under this proposal

"TTIPXOJOUIFUPUBMTSPXPG$PMVNOTBOEPG5BCMFUIFOFUHBJOUPGBSNFSTXPVMECFFJUIFSCJMMJPOPS

CJMMJPOEFQFOEJOHPOXIFUIFSUIFGSFFJOTVSBODFXBTQSPWJEFEPOMZUPGBSNFSTXIPCPVHIUDSPQJOTVSBODF

JOPSUPBMMGBSNFSTXIPQMBOUFEUIFTFDSPQT5IJTTIPXTUIBUUIFGSFF:1JOTVSBODFXPVMECFNPSFWBMVBCMF

UPGBSNFSTUIBOUIFCJMMJPOJOQSFNJVNTVCTJEJFTUIFZSFDFJWFEJO

5BCMFTIPXTUIBUBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZQSPWJEFTHSFBUFSOFUWBMVFUPGBSNFSTUIBOUIFDVSSFOU

TZTUFNXIJDISFRVJSFTUIFNUPQBZGPSJOTVSBODFCFGPSFUIFZDBOPCUBJOQSFNJVNTVCTJEJFT0CWJPVTMZUIJT

XPVMECFUIFDBTFGPSGBSNFSTXIPEJEOPUCVZJOTVSBODFJO3FNBSLBCMZJUJTBMTPUSVFGPSGBSNFSTXIPEJE


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/FU$PTUPG'SFF*OTVSBODF 3FEVDUJPOJO%FMJWFSZ$PTU /FU#VEHFU4BWJOHT

0OMZ"DSFT*OTVSFE

JO

"MM1MBOUFE"DSFT "0 6OEFSXSJUJOH

Gains

0OMZ"DSFT

Insured in

"MM1MBOUFE

Acres

$ million

#BSMFZ

$BOPMB

$PSO

$PUUPO

Grain Sorghum

Rice

Soybeans

Sunowers

Wheat

Total

5PUBMXJUI64%"QBZJOHBENJOGFF

5PUBMXJUIGBSNFSQBZJOHBENJOGFF

Table 3. Net Budget Savings from Free Yield Insurance

Farmer Value of Free YP /FU$IBOHFJO7BMVFUP'BSNFST

0OMZ"DSFT*OTVSFE

JO

"MM

Planted Acres

$VSSFOU

Value of

Premium

Subsidy

0OMZ"DSFT

*OTVSFEJO

"MM1MBOUFE"DSFT

$ million $ million

#BSMFZ

$BOPMB

$PSO

$PUUPO

Grain Sorghum

Rice

Soybeans

Sunowers

Wheat Total

Table 2. Impact on Farmers of a Free Yield Protection Policy


22/36


CVZJOTVSBODF$MFBSMZBQFSDFOUZJFMEJOTVSBODFQPMJDZQSPWJEFTWBMVBCMFSJTLQSPUFDUJPO

#VUUIJTJODSFBTFJOWBMVFUPGBSNFSTSFQSFTFOUTBDPTUUPUBYQBZFST)PXDBOUBYQBZFSTTBWFNPOFZJGUIFDPTUP

UIFGSFFZJFMEJOTVSBODFFYDFFETUIFDPTUPGFYJTUJOHQSFNJVNTVCTJEJFT5BCMFQSPWJEFTUIFBOTXFS

5IFDPMVNOTTIPXJOHUIFOFUDPTUPGGSFFJOTVSBODFJO5BCMFEFNPOTUSBUFUIBUUIFGBSNFSTOFUHBJOGSPN

5BCMFXPVMESFQSFTFOUBOFUDPTUUPUIFGFEFSBMCVEHFU5IFSFXPVMECFPGGTFUUJOHTBWJOHTIPXFWFSGSPN

FMJNJOBUJOHDVSSFOU"0FYQFOTFTCFDBVTFBHFOUTXPVMEOPUHFUMBSHFDPNNJTTJPOTUPTFMMGBSNFSTUIJTCBTF

level of protection. Farmers would simply sign up for it. And companies would not need large underwriting

gains because this basic yield insurance policy would be backed by the federal treasury, presumably through

UIF$PNNPEJUZ$SFEJU$PSQPSBUJPOVOEFSUIFGBSNCJMM5IFDPMVNOTTIPXJOHUIFSFEVDUJPOJOEFMJWFSZDPTUT

HJWFFTUJNBUFTPGUIFTBWJOHTJOBWFSBHFVOEFSXSJUJOHHBJOTBOEBENJOJTUSBUJWFBOEPQFSBUJOH"0FYQFOTFT

VTJOHEBUB5PUBM"0JTFTUJNBUFEBUCJMMJPOGPSUIFDSPQTBOBMZ[FEIFSF"0FYQFOTFTBSFDBQQFE

CZ64%"BUCJMMJPOGPSBMMJOTVSFEDSPQT6OEFSXSJUJOHHBJOTBSFDPOTFSWBUJWFMZFTUJNBUFEBUQFSDFOUPG

QSFNJVNGPSCBSMFZBOEDBOPMBQFSDFOUGPSDPSOTPZCFBOTBOESJDFQFSDFOUGPSDPUUPOQFSDFOUGPSHSBJO

TPSHIVNQFSDFOUGPSTVOPXFSBOEQFSDFOUGPSXIFBU

5IFUPUBMTBWJOHTPOVOEFSXSJUJOHHBJOTBOE"0POJOTVSFEBDSFTJO5BCMFXPVMECFCJMMJPOXIJDIJT

HSFBUFSUIBOUIFBEEJUJPOBMUBYQBZFSDPTUJOFYDFTTPGQSFNJVNTVCTJEJFTPGQSPWJEJOHGSFFZJFMEJOTVSBODF

If the free insurance were provided to all acres planted with these crops, the savings on underwriting gains and

"0XPVMEGBMMTIPSUPGUIFDPTUPGGSFFJOTVSBODFCZNJMMJPOBZFBS*GPOFUIFOBEETJOBUBYQBZFSQBJE

QFSDFOUBENJOJTUSBUJWFGFFUIFOBMFTUJNBUFPGTBWJOHTPOBDSFTJOTVSFEJOJTNJMMJPOBZFBS*OTVSJOH

BMMQMBOUFEBDSFTXPVMEDPTUNJMMJPOBZFBS

5BCMFT BOE TIPXUIBUCPUIUBYQBZFST BOE GBSNFSTXPVME CFCFUUFSPGG JGUIF DVSSFOUTZTUFN PGQSFNJVN

TVCTJEJFTSFJOTVSBODFBHSFFNFOUTBOE"0FYQFOTFSFJNCVSTFNFOUXFSFTDSBQQFEBOESFQMBDFEXJUIBTJNQMF

GBSNTBGFUZOFUQSPHSBNUIBUQSPWJEFEGBSNFSTXJUIBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZBENJOJTUFSFEEJSFDUMZ

CZ64%"*GUIFGSFFJOTVSBODFXFSFFYUFOEFEUPBMMGBSNFSTBOEBNPEFTUGFFXFSFDIBSHFEUIJTQSPHSBNDPVME

be run at a modest net cost to taxpayers.

That taxpayers could come out ahead or at least break even when crop insurance is given away for free shows

IPX NVDI EFMJWFSZDPTUT BEE UPUIF FYQFOTF PGUIF DVSSFOU DSPQJOTVSBODF TZTUFN 'JHVSF BMMPDBUFT DSPQ


23/36

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JOTVSBODFQSPHSBNDPTUT JOUP UIPTF UIBU BDDSVF XIFOJOTVSBODFQBZPVUT FYDFFE GBSNFSQBJE QSFNJVNT OF

farmer indemnities) and the subsidies paid to the crop insurance industry to deliver the program. In ve of the

MBTUZFBSTUIFDPTUPGEFMJWFSJOHDSPQJOTVSBODFFYDFFEFEOFUGBSNFSJOEFNOJUJFT0WFSUIFFOUJSFZFBST

OFUJOEFNOJUJFTQBJEUPGBSNFSTUPUBMFECJMMJPO5IF DPTUPGEFMJWFSJOHUIFTFJOEFNOJUJFTUPUBMFE

CJMMJPONFBOJOHUIBUJUDPTUBCPVUBEPMMBSUPEFMJWFSFBDIEPMMBSPGOFUQBZPVUTUPGBSNFST#FDBVTFPGUIFTFIJHI

delivery costs, the proposed alternative system of giving away insurance makes nancial sense.

"DUVBMDSPQJOTVSBODFEBUBXFSFVTFEIFSFUPFTUJNBUFUIFDPTUTPGNPWJOHUPBGSFFZJFMEJOTVSBODFQSPHSBN

BTUIFDPSFPGUIFUBYQBZFSGVOEFETBGFUZOFU#VUTJODFPOMZB TNBMMQSPQPSUJPOPGGBSNFSTDVSSFOUMZCVZZJFME

JOTVSBODFMBSHFTBNQMFTFMFDUJPOQSPCMFNTDPVMEBSJTFJG GBSNFSTXIPCPVHIU:1BU UIFQFSDFOUDPWFSBHF

Figure 7. Allocation of Crop Insurance Program Costs

billion

$

0

1.0

2.0

3.0

4.0

5.0

6.0

2011

2010

2009

20082007

2006

2005

2004

2003

2002

2001

Subsidies to Industry

Net Indemnity Paid to Farmers


24/36


MFWFMJOIBWFEJGGFSFOUSJTLQSPMFTUIBOUIPTFXIPCPVHIU31$POHSFTTDBMDVMBUFTUIFDPTUPGQSPHSBN

VTJOH$POHSFTTJPOBM#VEHFU0GDF$#0CBTFMJOFCVEHFUQSPKFDUJPOTXIJDIBSFCBTFEPOZFBSQSFEJDUJPOT

PGDPNNPEJUZQSJDFTBOEQMBOUFEBDSFBHF$BMDVMBUJOHUIFDPTUTPG31VTJOHUIFTFQSPKFDUJPOTQSPEVDFTWFSZ

EJGGFSFOUOVNCFSTUIBOUIFBDUVBMDPTUTPG31JOCFDBVTFQMBOUFEBDSFBHFOVNCFSTBOEQSJDFMFWFMTXJMMCF

EJGGFSFOU5IFOFYUTFDUJPOVTFT$#0CBTFMJOFEBUBUPFTUJNBUFUIFDPTUTPGGSFFDSPQJOTVSBODFQSPHSBNJO

in order to make those estimates more comparable to competing farm bill proposals.

Costs of Free Crop Insurance Based on CBO Projections

5IFNPEFMVTFEUPQSPKFDUDPTUTPGGSFFDSPQJOTVSBODFJTCBTFEPODVSSFOU3."QSFNJVNSBUFTGPSZJFMEQSPUFDUJPO

YP premiums also serve as the foundation for RP premium rates. The model simulates farm yield variability by

using the fact that yield can be dened as average yield in that county in a given year, plus a deviation. The

National Agricultural Statistics Service (NASS) collects long histories of county yields that provide a measure o

DPVOUZZJFMEWBSJBCJMJUZ5IFNPEFMTPMWFTGPSUIFFYUSBBNPVOUPGGBSNMFWFMWBSJBCJMJUZOFFEFEUPCFDPOTJTUFOU

XJUIUIFBNPVOUPGUPUBMZJFMEWBSJBCJMJUZJNQMJFECZ3."QSFNJVNSBUFT5IJTQSPDFEVSFXBTEPOFGPSFBDIDSPQ

county combination. The extra amount of variability is calculated for every county that: has adequate amounts o

/"44ZJFMEIJTUPSZIBESFQPSUFEQMBOUFEBDSFBHFJOBOEIBEBDSPQJOTVSBODFSBUFSFQPSUFECZ3."5IF

BNPVOUPGQMBOUFEBDSFBHFJOGPSUIFDPVOUJFTJOUIFNPEFMJTHSFBUFSUIBOQFSDFOUGPSJODMVEFEDSPQT

oDPSOTPZCFBOTDPUUPOSJDFBOEXIFBU5IFTFDSPQTBDDPVOUGPSNPSFUIBOQFSDFOUPGQMBOUFEBOEJOTVSFE

BDSFBHFPGUIFFJHIUDSPQTBOBMZ[FEJOUIFQSFWJPVTTFDUJPO

The model simulates price variability using techniques that are similar to those used to calculate premiums for

311SPKFDUFEQSJDFTGPSFBDIDSPQBSFTFUFRVBMUP$#0T.BSDICBTFMJOFQSPKFDUJPOTPGBWFSBHFQSJDF1SJDF

WPMBUJMJUZJTTFUBUMFWFMTVTFEUPTFUQSFNJVNSBUFTGPS31JO1MBOUFEBDSFBHFJTTFUVTJOH$#0CBTFMJOF

QSPKFDUJPOT5BCMF

5BCMFTIPXTUIFNPEFMTFTUJNBUFPGXIBUGSFFZJFMEJOTVSBODFBUUIFQFSDFOUDPWFSBHFMFWFMXPVMEDPTUJGJ

XFSFQSPWJEFEPOMZUPBDSFTUIBUXFSFJOTVSFEJODPMVNOPSQSPWJEFEUPFWFSZQMBOUFEBDSFDPMVNO

5IFTFDPTUFTUJNBUFTBSFTJHOJDBOUMZMPXFSUIBOUIPTFTIPXOJO5BCMFCFDBVTFUIFQSJDFTVTFECZ$#0

BSFTJHOJDBOUMZMPXFSUIBOUIFQSJDFTVTFEUPTFUDSPQJOTVSBODFHVBSBOUFFTJO5IF5BCMFDPTUTBSF

based on the assumption that the free insurance would be given to farmers on an optional unit basis, which

NFBOTUIBUGBSNFSTFMETXPVMECFJOTVSFEFMECZFME


25/36

&/7*30/.&/5"-803,*/((306124

www.ewg.org "QSJM

If instead, the free insurance were provided on an enterprise unit basis, in which all of a farmers elds of the

same crop in a given county were pooled together as a single insurance unit, costs would be lower, because a

QPPMFEFOUFSQSJTFVOJUJTMFTTDPTUMZUPJOTVSFUIBOJOEJWJEVBMFMET$BMDVMBUJOHUIFDPTUSFEVDUJPOGPSFOUFSQSJTF

unit coverage rather than optional unit coverage would require data on the geographical distribution of farms

NBOBHFECZJOEJWJEVBMPQFSBUPST0QFSBUJPOTUIBUXFSFRVJUFEJTQFSTFEXPVMECFMFTTDPTUMZUPJOTVSFUIBOUIPTF

UIBUXFSFDPODFOUSBUFEJOBTNBMMFSBSFB4VDIEBUBEPOPUMJLFMZFYJTUFYDFQUQFSIBQTJO'4"BOE3."EBUBCBTFT

UIBUBSFOPUBDDFTTJCMF*OTUFBE3."TFOUFSQSJTFVOJUQSFNJVNEJTDPVOUTBSFVTFE3FQSFTFOUBUJWFEJTDPVOUTBSF

TIPXOJO5BCMFGPSTQFDJDMPDBUJPOT

#FDBVTF MBSHFGBSNT BSF MJLFMZ UPCF NPSFEJTQFSTFEUIBOTNBMM GBSNT BOE B MBSHFQSPQPSUJPO PGBDSFBHFJT

located on large farms, it is likely that a fairly high percentage of acreage would qualify for an enterprise unit

EJTDPVOU5PCFDPOTFSWBUJWFPOMZQFSDFOUPGBDSFBHFJTBTTVNFEUPCFMPXFSSJTLUIBOUIBUBTTVNFEJOUIF

5BCMFDPTUFTUJNBUFT5IFFTUJNBUFEDPTUTPGUIFGSFF:1QPMJDZBUUIFFOUFSQSJTFVOJUBSFTIPXOJO5BCMF

Providing the free YP policy at the enterprise rather than the optional unit level would result in important

environmental benets as well as cost savings. Insuring acreage with optional units allows farmers with

environmentally sensitive land that is susceptible to crop losses to transfer yield histories from their more

productive land to the higher risk land, thus giving the marginal land a high insurance guarantee that makes

the land protable to cultivate. If farmers were forced to insure this marginal land together with their more

productive land, they would base cultivation decisions on the inherent productivity of the land rather than on the

ability to collect a crop insurance indemnity.

1SPKFDUFE1SJDF Price Volatility .JMMJPOTPG1MBOUFE"DSFT

$PSO CV

$PUUPO MC

Rice MC

Soybeans CV

Wheat CV

Table 4. Data Used in Model Simulations


26/36


$#0QSPKFDUTUIBUUIFDVSSFOUDSPQJOTVSBODFQSPHSBNJOJUTFOUJSFUZDPTUTBCPVUCJMMJPOBZFBS5IFDPT

FTUJNBUFTQSPWJEFEJO5BCMFTBOEBSFOPUEJSFDUMZDPNQBSBCMFUPUIJTCJMMJPOQSPKFDUJPOIPXFWFSCFDBVTF

only ve crops are accounted for and the costs of administering a free crop insurance program are not included

5BCMFBMMPXTB NPSFEJSFDUDPNQBSJTPOPG$#0QSPKFDUJPOTBOEUIJTTUVEZTTBWJOHTFTUJNBUFTGPSWFNBKP

DSPQT1SFNJVNTVCTJEJFTXPVMECFSFEVDFECZCJMMJPO"0FYQFOTFTXPVMECFSFEVDFECZCJMMJPO

BOE VOEFSXSJUJOH HBJOTXPVME CFSFEVDFECZ CJMMJPOGPS B UPUBMTBWJOHTPG CJMMJPO 5IFTFSFTVMU

TVHHFTUUIBUUIFTFWFDSPQTBDDPVOUGPSQFSDFOUPGUIF$#0QSPKFDUJPOPGUIFUPUBMDPTUPGUIFDSPQJOTVSBODF

program. This likely underestimates the savings that would accrue from a free YP program, because these

veDSPQTBDUVBMMZBDDPVOUFEGPSQFSDFOUCJMMJPOPGUIFUPUBMQSFNJVNTDPMMFDUFEJO*GUIFDPTUP

64%"JNQMFNFOUBUJPOJTDMPTFUPUIFNJMMJPOFTUJNBUFEJOUIF'4"DPNNJTTJPOFETUVEZUIFUPUBMTBWJOHT

0OMZ*OTVSFE"DSFT All Planted Acres

billion $

$PSO

$PUUPO

Rice Soybeans

Wheat

Total

/PUF*OTVSFEBDSFTGPSFBDIDSPQTUBUFDPNCJOBUJPOXBTTFUFRVBMUPUIFTIBSFPGQMBOUFEBDSFTGPSFBDIDSPQUIBU

XBTJOTVSFEGPSFBDITUBUFNVMUJQMJFECZTUBUFBDSFTTUBUFBDSFTGPSFBDIDSPQXBTTFUFRVBMUP$#0BDSFBHF

GSPN5BCMFNVMUJQMJFECZUIFTUBUFTIBSFPGOBUJPOBMBDSFBHFGPSFBDIDSPQJO

Table 5. Cost Estimates of Free YP Coverage in 2013 for Optional Units

$SPQ Location 1SFNJVN%JTDPVOU

$PSO #PPOF$PVOUZ*PXB

$PUUPO -VCCPDL$PVOUZ5FYBT

Rice "SLBOTBT$PVOUZ"SLBOTBT

Soybeans $IBNQBJHO$PVOUZ*MMJOPJT

Wheat #VUMFS$PVOUZ,BOTBT

Wheat $BTT$PVOUZ/PSUI%BLPUB

4PVSDF3."QSFNJVNDBMDVMBUPS

Table 6. Enterprise Premium Discounts for Select Locations


27/36

&/7*30/.&/5"-803,*/((306126

www.ewg.org "QSJM

DPNFUPCJMMJPO*GGBSNFSTBSFDIBSHFEBOPNJOBMGFFUPDPWFSUIFTFDPTUTUIFUPUBMTBWJOHTDPNFUP

billion a year.

(JWJOHBXBZGSFFJOTVSBODFBOENPWJOHQSPHSBNBENJOJTUSBUJPOUP64%"XPVMEHFOFSBUFTVCTUBOUJBMTBWJOHT

VOMFTTPQUJPOBMVOJUDPWFSBHFXBTFYUFOEFEUPBMMQMBOUFEBDSFT5BCMFTVNNBSJ[FTUIFTBWJOHTUIBUXPVME

CFBDIJFWFECZPGGFSJOHBGSFFFOUFSQSJTFVOJU:1QPMJDZUPGBSNFST5IFZFBSTBWJOHTXPVMEUPUBMCJMMJPO

JGFOUFSQSJTFVOJUDPWFSBHFXFSFFYUFOEFEUPBMMQMBOUFEBDSFTGPSUIFTFDSPQT5IFTBWJOHTXPVMEFRVBM

CJMMJPOJGUIFGSFFFOUFSQSJTFVOJUQPMJDZPOMZDPWFSFEBDSFTUIBUXFSFJOTVSFEJO$IBSHJOHGBSNFSTBOPNJOB

GFFUPDPWFSEFMJWFSZDPTUTXPVMEJODSFBTFUIFTBWJOHTTIPXOJO5BCMFUPCFUXFFOBOECJMMJPO

depending on how many acres were covered by the free policy.

Policy Implications

Farmers and Taxpayers are Better Off

The idea that both farmers and taxpayers could be better off under a free crop insurance program rather than

QSPWJEJOHJOTVSBODFQSPUFDUJPOUISPVHIUIFDVSSFOUTZTUFNJTOPUOFX1BVMTPOBOE#BCDPDLTIPXFE

that a permanent disaster program based on a county revenue insurance program would cost about the same

BTXBTCFJOHTQFOUPOBQFSJOTVSFEBDSFCBTJTPO (SPVQ3JTL*ODPNF1SPUFDUJPO5IFJEFBUIBUDPNNPEJUZ

QSPHSBNTBENJOJTUFSFEEJSFDUMZCZ64%"DPVMECFCBTFEPOJOTVSBODFQSJODJQMFTJTBMTPOPUOFX5IF"NFSJDBO

'BSN#VSFBV'FEFSBUJPOQSPQPTFEBDPVOUZCBTFESFWFOVFJOTVSBODFQSPHSBNBTBGBSNCJMMPQUJPOJO

5IF"WFSBHF$SPQ3FWFOVF&MFDUJPO"$3&QSPHSBNFTUBCMJTIFEJOUIFGBSNCJMMJTBTUBUFMFWFMSFWFOVF

0OMZ*OTVSFE"DSFT All Planted Acres

billion $

$PSO

$PUUPO

Rice Soybeans

Wheat

Total

Table 7. Cost Estimates of Free Enterprise Unit YP Coverage in 2013


28/36


JOTVSBODF QSPHSBN $VSSFOUMZ DPUUPO QSPEVDFST BSF QSPQPTJOH B DPVOUZCBTFE SFWFOVF JOTVSBODF QSPHSBN

DBMMFE45"9GPSUIFGBSNCJMM5IF/BUJPOBM.JML1SPEVDFST'FEFSBUJPOJTQSPQPTJOHBNJMLNBSHJOJOTVSBODF

program that would be administered through FSA. And, nally, the Supplemental Revenue Assistance Payments

1SPHSBN463&XBTJODMVEFEJOUIFGBSNCJMMBTBQFSNBOFOUEJTBTUFSBTTJTUBODFQSPHSBNCBTFEPOXIPMF

farm insurance principles.

Premium Subsidies "0 Underwriting Gains Total

billion $

$PSO

$PUUPO

Rice

Soybeans

Wheat

Total

5PUBMXJUIDBQPO"0

5PUBMXJUI64%"QBZJOHBENJOJTUSBUJWFDPTUT

Total with farmer paying administrative costs

Table 8. Projected Budget Savings in 2013 from Moving to Free Yield Insurance

Farmers Pay No Fee Farmers Pay a Nominal Fee

billion $

Annual Net Savings

0OMZ$VSSFOUMZ*OTVSFE"DSFT

All Planted Acres

10 year Savings

0OMZ$VSSFOUMZ*OTVSFE"DSFT

All Planted Acres

/PUFZFBSTTBWJOHTBQQSPYJNBUFECZNVMUJQMZJOHUIFBOOVBMTBWJOHTGPSCZ

Table 9. Net Budget Savings from Free Crop Insurance Program


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&/7*30/.&/5"-803,*/((306128

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8IBU463&"$3&45"9BOEUIFQSPQPTBMTPGUIF"NFSJDBO'BSN#VSFBV'FEFSBUJPOBOEUIFNJMLQSPEVDFSTBM

have in common is that they leave the current crop insurance program in place. The problem with this approach

is that it becomes difcult to nd the savings needed to meet decit reduction targets or to pass any new safety

net program. In addition, it would be a mistake to conclude that the lack of proposals to replace the current

system with a new approach shows that the industry is efciently delivering a farm safety net. After all, a system

that costs a dollar to deliver a dollar of benets is hardly efcient. The reality is that it is the lobbying power of

the crop insurance industry that stands in the way of reform proposals. If the insurance were simply given away

as part of farm bill reform, the crop insurance industry would have to reinvent itself, cutting costs and becoming

NPSFDSFBUJWFUPTVSWJWFJOBOVOTVCTJEJ[FEXPSME/PJOEVTUSZUIBUJTDVSSFOUMZNBLJOHTPNVDINPOFZXJMM

willingly accept such change, and it will lobby with all its might to prevent this from happening.

5IFGBDUSFNBJOTUIBUBTJNQMFQSPQPTBMUPHJWFGBSNFSTBQFSDFOU:1QPMJDZBTUIFUBYQBZFSGVOEFEQPSUJPOPG

UIFTBGFUZOFUXPVMEBDDPNQMJTIBOVNCFSPGQPMJDZPCKFDUJWFT

t *UXPVMEQSPWJEFBQFSNBOFOUGBSNMFWFMEJTBTUFSQSPHSBNUIBUXPVMEDPWFSQFSDFOUPGQMBOUFEBDSFBHF

BOEQFSDFOUPGZJFMEMPTTFTJOFYDFTTPGQFSDFOU5IJTJTCFUUFSQSPUFDUJPOUIBONBOZGBSNFSTOPXIBWF

t *UXPVMEOPUTJHOJDBOUMZEJTUPSUQMBOUJOHEFDJTJPOTCFDBVTFPGUIFQFSDFOUEFEVDUJCMFBOEUIFMBDLPGB

price trigger.

t *UXPVMEFMJNJOBUFUIFOFFEGPS BOFMBCPSBUFQSFNJVNSBUJOHTUSVDUVSFBOETIPSUDJSDVJUBSHVNFOUTBCPV

whether crop insurance rates are too high or too low, because there would be no premiums to pay.

t &OUFSQSJTFVOJUDPWFSBHFXPVMEMPXFSUIFJODFOUJWFUPGBSNIJHISJTLFOWJSPONFOUBMMZTFOTJUJWFMBOECFDBVTF

such land would have to be pooled with more productive farmland.

t It would contribute towards decit reduction.

Private Sector Options to Enhance Risk Management

4PNFXJMMVOEPVCUFEMZBSHVFUIBUQFSDFOUZJFMEJOTVSBODFQSPWJEFTBOJOBEFRVBUFTBGFUZOFUGPSGBSNFST

As evidence, they will point to the popularity of RP and higher levels of coverage that many farmers currently

QVSDIBTF'BSNHSPVQTIBWFBMTPDSJUJDJ[FEQSPQPTBMTGPSSFGPSNJOHDSPQJOTVSBODFTVCTJEJFTCZBSHVJOHUIBUUIFZ


30/36


would not be able to afford high levels of coverage without taxpayer help.

However, the current popularity of RP and high coverage levels is not credible evidence that farmers need more

risk protection, because farmers are buying much of this additional coverage with taxpayer dollars, not their

own. It is fundamental tenet in economics that people have an insatiable appetite for products they can buy

with someone elses money. When the subsidies are eliminated, what once was considered a necessity no longe

TFFNTTPJNQPSUBOUBOEEFNBOETISJOLTTVCTUBOUJBMMZ.BOZGBSNFSTXPVMEOEUIBUUIFZDPVMEHFUCZPONVDI

less insurance if they knew that they had to pay the full price themselves. There is no credible evidence in the

academic literature that high levels of coverage are necessary for individual farmers and the agricultural secto

as a whole to thrive. What the research does show is that the demand for high insurance coverage is more about

the pursuit of subsidies than protection against risk.

8IZTIPVMEJUCFUBYQBZFSTSFTQPOTJCJMJUZUPTVCTJEJ[FHFOFSPVTJOTVSBODFDPWFSBHF'BSNFSTXIPUSVMZWBMVF

NPSFUIBOQFSDFOUZJFMEDPWFSBHFTIPVMEUVSOUPUIFQSJWBUFTFDUPSBOEQBZXJUIUIFJSPXONPOFZ1SPWJEJOH

TVCTJEJFTGPSIJHIDPWFSBHFJNQMJFTUIBU$POHSFTTLOPXTCFUUFSUIBOGBSNFSTIPXNVDISJTLQSPUFDUJPOUIFZ

SFBMMZOFFE6OEFSUIFQSPQPTFEGSFFJOTVSBODFQSPQPTBMQSJWBUFDPNQBOJFTXPVMECFGSFFUPPGGFSiBEEPOw

policies that provide higher coverage or effective revenue protection, and growers would be free to decide if

they were worth the cost.

Revenue protection policies are especially popular because they increase the amount of guaranteed revenue

JGUIFQSJDFBUIBSWFTUJTIJHIFSUIBOUIFQSPKFDUFEQSJDFBUUIFUJNFGBSNFSTTJHOFEVQGPSUIFJOTVSBODFCFGPSF

planting. This increased protection increases farmers insurance payouts if a farmer has a yield loss. This additiona

QSPUFDUJPOJTTJNJMBSUPBDBMMPQUJPOPOBGVUVSFTDPOUSBDU$BMMPQUJPOTHJWFBGBSNFSUIFSJHIUUPCVZBGVUVSFT

contract. If a farmer buys a call option in the springtime and prices later rise, then the holder of the call option

has the right to buy futures contract at the lower springtime price. Thus call options protect a farmer who does

not have enough crop to meet the obligations of the futures contract. Without the call option, the farmer would

IBWFUPCVZBEEJUJPOBMCVTIFMTBUUIFIJHIIBSWFTUQSJDFUPGVMMMUIFGVUVSFTDPOUSBDU$BMMPQUJPOTTFFNFYQFOTJWF

UPNBOZGBSNFSTCVUJUJTOPUBTUSFUDIUPJNBHJOFUIFEFWFMPQNFOUPGBQSJWBUFBEEPOQSPEVDUUIBUQBZTPGGPO

the call option only there is a yield loss. This would lower the cost of the option signicantly.

'BSNFSTXIPCVZ31QPMJDJFTBMTPFOKPZQSPUFDUJPOBHBJOTUQSJDFESPQT#VUBGBSNFSJTBMSFBEZQSPUFDUFEBHBJOTU

QSJDFESPQTPODFIFPSTIFFOUFSTJOUPBGPSXBSEPSGVUVSFTDPOUSBDU"GUFSBMMPOMZGBSNFSTXIPGPSXBSEDPOUSBD


31/36

&/7*30/.&/5"-803,*/((306130

www.ewg.org "QSJM

their crop obtain risk management benets (as opposed to prot increases) from the extra risk protection offered

CZ31'BSNFSTXIPEPOPUGPSXBSEDPOUSBDUDBOQSPUFDUBHBJOTUQSJDFESPQTCZCVZJOHQVUPQUJPOT"QVUPQUJPO

gives the holder the right to sell a futures contract. If the harvest price drops and farmer bought a put option in

the springtime, he can sell at the higher springtime price, thus protecting against the price drop.

4PNFPGUIFTFQSJWBUFTFDUPSBMUFSOBUJWFTFYJTUOPXBOENBOZNPSFXPVMEQSFTVNBCMZCFEFWFMPQFEJGUIF

QSJWBUFTFDUPSEJEOPUIBWFUPDPNQFUFBHBJOTUIFBWJMZTVCTJEJ[FEDSPQJOTVSBODFQSPEVDUT#VUBTXJUIBMMQSJWBUF

TFDUPSUSBOTBDUJPOTUIFCVZFSXPVMEIBWFUPQBZUIFGVMMDPTUPGUIFQSPEVDU5PFTUJNBUFUIFMJLFMZDPTUPGBEEPO

QPMJDJFT5BCMFTIPXTXIBUBGBSNFSXPVMEQBZGPSBOEQFSDFOUDPWFSBHFPG31BOE:1POUPQPGUIF

GSFFQFSDFOU:1DPWFSBHFJODMVEJOHBQFSDFOUNBSLVQUPDPWFSBENJOJTUSBUJWFDPTUTBOEQSPU4QSJOHUJNF

QSJDFTMFWFMTBSFCBTFEPOUIF$#0MFWFMT'PSDPNQBSJTPOUIFQSPKFDUFEDPTUPGCVZJOHFBDIMFWFMP

coverage under the current system of premium subsidies is also shown.

5IFSPXTMBCFMFEi1SJWBUF"EEPOwTIPXUIFQSJWBUFTFDUPSDPTUTGPSBEEJUJPOBMDPWFSBHFGPSFBDIDSPQ5IJTJT

the incremental cost of providing the indicated type of coverage (RP or YP) at that coverage level. In the Iowa

DPSOFYBNQMFZJFMEDPWFSBHFBUQFSDFOUBHFQPJOUTBCPWFUIFGSFFQFSDFOU:1QPMJDZFRVJWBMFOUUPBCPV

CVTIFMTPGFYUSBDPWFSBHFXPVMEDPTUQFSBDSF31UZQFDPWFSBHFBUUIJTQFSDFOUDPWFSBHFMFWFMXPVME

DPTUQFSBDSFBGUFSDSFEJUGPSUIFQFSDFOU:1DPWFSBHF5IFSPXTMBCFMFEi$VSSFOUwTIPXUIFFTUJNBUFE

DPTUTPGFBDIDPWFSBHFPQUJPOVOEFSUIFDVSSFOUQSFNJVNTVCTJEZTUSVDUVSF5IF*PXBDPSOGBSNFSXPVME

QBZQFSBDSFBUQSJDFMFWFMTGPSQFSDFOU31DPWFSBHF5IJTJTQFSBDSFMFTTUIBOUIFQSJWBUFTFDUPS

QFSBDSFBEEPODPTUGPSTJNJMBSQSPUFDUJPO

5BCMFTIPXTUIBUGPSUIFMPXFSSJTLDSPQToDPSOTPZCFBOTBOESJDFo CVZJOH31UZQFDPWFSBHFPOUPQPGB

QFSDFOU:1QPMJDZXPVMECFNPSFFYQFOTJWFUIBOXIBUUIFZDVSSFOUMZQBZ*ODPOUSBTUUIFDPTUPG31UZQF

DPWFSBHF GPS XIFBU BOE DPUUPO XPVME CFNVDI MPXFS 5IF EJGGFSFODF SFFDUT UIF WBMVF PG QFSDFOU ZJFME

QSPUFDUJPO*OMPXSJTLDPVOUJFTUIFWBMVFPGBQFSDFOU:1QPMJDZJTNVDIMPXFSUIBOJOIJHISJTLDPVOUJFT5IJT

lower value translates into a lower credit that is used to offset the cost of additional protection.


32/36


Conclusions

5IFMJLFMJIPPEPGXIPMFTBMFSFGPSNPGUIFDSPQJOTVSBODFQSPHSBNEVSJOHUIFGBSNCJMMSFBVUIPSJ[BUJPO

BMPOHUIF MJOFTTVHHFTUFEJOUIJTTUVEZNBZTFFNSFNPUF#JHDIBOHFTEPOPUDPNFTVEEFOMZUPBHSJDVMUVSB

programs. A signi

cant amount of money has been invested in crop insurance companies in anticipation ocontinued public subsidies, and crop insurance agents, whose income has risen sharply in the last ve years

OPXIBWFTVCTUBOUJBMMZHSFBUFSQPMJUJDBMBOEMPCCZJOHQPXFS#VUFWFOUVBMMZUIFBCTVSEJUZPGUIFDVSSFOUTZTUFN

XIJDITVCTJEJ[FTGBSNFSTUPCVZNVDINPSFJOTVSBODFUIBOUIFZXPVMEJGUIFZQBJEGPSJUXJUIUIFJSPXONPOFZ

and which costs a dollar to deliver each dollar of benets, will eventually result in change, particularly in the face

Yield Protection Revenue Protection

$ per acre

*PXB$PSO1SJWBUF"EEPO

$VSSFOU

5FYBT$PUUPO

1SJWBUF"EEPO

$VSSFOU

Illinois Soybeans

1SJWBUF"EEPO 7

$VSSFOU

/PSUI%BLPUB8IFBU

1SJWBUF"EEPO $VSSFOU

,BOTBT8IFBU

1SJWBUF"EEPO

$VSSFOU

Arkansas Rice

1SJWBUF"EEPO

$VSSFOU

a1SJWBUFBEEPODPTUTBSFDBMDVMBUFECZTJNVMBUJOHUIFUPUBMDPTUPGUIFDPWFSBHFTVCUSBDUJOHUIFWBMVFPGUIFGSFF

QFSDFOUZJFMEJOTVSBODFBOEUIFONBSLJOHVQUIFSFTVMUCZQFSDFOU$VSSFOUDPTUTFRVBMUIFTJNVMBUFEUPUBMDPTUPGUIF

product minus the current amount of premium subsidy available.

Table 10. Cost of Alternative Amounts of Risk Protectiona


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of mounting demands for decit reduction.

The need to nd funds to pay for new commodity programs and the other farm bill titles is one reason to

hope that crop insurance reform may be at hand. Although proposals for new revenue insurance programs in

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revised to provide a direct substitute. For example, the STAX program for cotton could be altered to provide

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As demonstrated here, its cost could also covered by eliminating crop insurance premium subsidies.

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farm safety net in place and make prudent scal choices, it should scrap the current system of premium subsidies

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does best: deliver products that generate enough value to induce customers to buy them.


34/36


REFERENCES

#BCDPDL#"i5IF1PMJUJDTBOE&DPOPNJDTPGUIF64$SPQ*OTVSBODF1SPHSBNw1BHFTJO;JWJO+BOE+.1FSMPGG5IF

*OUFOEFEBOE6OJOUFOEFE$POTFRVFODFTPG64"HSJDVMUVSBMBOE#JPUFDIOPMPHZ1PMJDZBOE1PMJUJDBM/BUJPOBM#VSFBVPG&DP

OPNJDT3FTFBSDI6OJWFSTJUZPG$IJDBHP1SFTT

(PPEXJO#,i"O&NQJSJDBM"OBMZTJTPGUIF%FNBOEGPS.VMUJQMF1FSJM$SPQ*OTVSBODF"NFSJDBO+PVSOBMPG"HSJDVMUVSBM&DP

OPNJDT

+VTU3&$BMWJO-BOE2VJHHJO+i"EWFSTF4FMFDUJPOJO$SPQ*OTVSBODF"DUVBSJBMBOE"TZNNFUSJD*OGPSNBUJPO*ODFOUJWFTw

"NFSJDBO+PVSOBMPG"HSJDVMUVSBM&DPOPNJDT

1BVMTPO/%BOE#BCDPDL#"i(FUB(3*14IPVME"SFB3FWFOVF$PWFSBHF#F0GGFSFE5ISPVHIUIF'BSN#JMMPSBTB

$SPQ*OTVSBODF1SPHSBNw+PVSOBMPG"HSJDVMUVSBMBOE3FTPVSDF&DPOPNJDT

FOOTNOTES

"SFDFOUQSPQPTBMCZ4FO,FOU$POSBE%/%DBMMFE3FWFOVF-PTT"TTJTUBODF1SPHSBN3-"1XPVMEEPCPUIQSPUFDUJOH

BHBJOTUBNVMUJQMFZFBSEFDMJOFJOQSJDFTBOEDPWFSJOHBQPSUJPOPGUIFDSPQJOTVSBODFEFEVDUJCMF

0OFSFBTPOGPSUIJTDIBOHFJOMBXXBTUIBUNBOZGBSNFSTPOMZCPVHIUBQFSDFOUEFEVDUJCMFQPMJDZXIJDIJTUIFTBNFUIJOH

BTCVZJOHQFSDFOUDPWFSBHF.BOZJO$POHSFTTBOEQFSIBQTUIFDSPQJOTVSBODFDPNQBOJFTXBOUFEGBSNFSTUPCVZIJHIFS

DPWFSBHFMFWFMTMPXFSEFEVDUJCMFQPMJDJFT*OUIFJSQBQFS#BCDPDL)BZFTBOE)BSUTIPXFEUIBUUIFSFBTPONBOZGBSNFST

DIPTFQFSDFOUDPWFSBHFJTUIBUJUNBYJNJ[FEUIFJSQSFNJVNTVCTJEJFTBOEUIBU64%"DIBSHFENPTUGBSNFSTNVDINPSFUIBOBEPMMBSGPSBEPMMBSTXPSUIPGJOTVSBODFGPSIJHIFSDPWFSBHF#BCDPDLTIPXFEUIBUUIFDIBOHFJOQSFNJVNTVCTJEZTUSVDUVSF

IFMQFEDPNQFOTBUFGPSUIJTPWFSDIBSHJOHMFBEJOHNBOZNPSFGBSNFSTUPCVZIJHIFSDPWFSBHF5IFJSPOZJTUIBU$POHSFTTIBT

OPUSFTDJOEFEUIFOFXQSFNJVNTVCTJEZTUSVDUVSFFWFOUIPVHI64%"DIBOHFEUIFXBZJUDBMDVMBUFTQSFNJVNSBUFTJOUIFNJE

TTPUIBUOPXQSFNJVNTBUIJHIFSDPWFSBHFMFWFMTNPSFBDDVSBUFMZSFFDUUIFDPTUPGUIFIJHIFSDPWFSBHF

5IFSFBTPOGPSUIJTGFBUVSFPG31JTUIBUJUQSPUFDUTGBSNFSTXIPGPSXBSEDPOUSBDUBQPSUJPOPGUIFJSDSPQ5IFSJTLPGBGPSXBSE

contract is that the farmer does not produce enough to deliver against the contract. If harvest prices are higher than the forward

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farmer must enter into a forward contract for farmers to obtain this extra coverage.

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farmer for risk management purposes and allows farmers to spend more to buy additional coverage using their own money.

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was effectively a voucher program because higher levels of insurance could be purchased but the incremental costs were paid


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&/7*30/.&/5"-803,*/((306134

www.ewg.org "QSJM

for by farmers.

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#FDBVTFUIJTGSFFZJFMEJOTVSBODFXPVMECFFOUJUMFNFOUUPBMMGBSNFSTUIFSFXPVMECFOPOFFEUPQBZBOJOTVSBODFBHFOU

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report after planting. Thus there would be no need to pay agent commissions on this base policy.

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crop and state. Actual outlays from any crop insurance program can vary dramatically from year to year. Here the premium rep

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these discounts were not readily available.

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tively low proportion of farmers to buy high levels of insurance.


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Notes:

Documents

Giving It Away Free