Proposals to Reduce Premium Subsidies for Federal Crop Insurance

Summary

Congressional Research Service

7-5700

www.crs.gov

R43951

Summary

Many farm policymakers generally consider the federal crop insurance program as the principal tool to help farmers cope with the variable impact of weather on crop yields. The program makes available subsidized policies that farmers may purchase each year to protect against yield and/or revenue declines during a particular growing season. Policies are available for about 130 commodities, covering crops supported by traditional farm programs (e.g., corn, wheat, and soybeans) as well as many fruits, vegetables, tree nuts, nursery crops, pastureland, and other commodities. Farmers pay a portion of the premium, unlike farm programs, which are free.

Premium subsidies for federal crop insurance have been instrumental in expanding program participation to levels acceptable to policymakers (i.e., avoiding ad hoc disaster assistance). Congress first introduced premium subsidies in 1980 and increased them in 1994 and 2000. Currently, the subsidy percentage ranges from 38% to 100% of the policy premium. The mix of policies purchased by producers (with varying coverage levels) translates into an average premium subsidy of 62%, resulting in an annual federal cost of $6.5 billion per year. The 2014 farm bill (P.L. 113-79) bolstered the program by authorizing more risk products.

Crop insurance subsidies, by design and like other purchasing-based subsidies, encourage farmers to purchase more insurance than they otherwise would because they are not paying full price. The higher coverage provides better farm financial protection (up to 85% of expected farm yields or revenue) and reduces the probability of requests for federal ad hoc assistance, but it also increases costs to taxpayers and can encourage production on environmentally sensitive land. Some question whether current subsidy levels are necessary to maintain program participation.

Given federal budget pressures, the 114th Congress might consider trimming government costs of the federal crop insurance program pending the outcome of the FY2016 budget. Several proposals have surfaced that would limit premium subsidies, including an Administration proposal and several bills introduced in the 114th Congress. The Administration’s FY2016 budget proposal would reduce premium subsidies by 10 percentage points for revenue protection policies with “harvest price coverage.” Unlike for other policies, the guarantee is revised upward when the harvest-time price is higher than the initial guarantee established prior to planting. Another proposal (S. 463/H.R. 892) would completely eliminate subsidies on those policies. A separate approach, S. 345, would establish a subsidy cap of $50,000 per person for all policies purchased.

The magnitude of any subsidy reduction would have varying impacts on the income of farmers and crop insurance companies, as well as the overall cost of the farm safety net, particularly if ad hoc assistance is enacted later as an additional backstop for farmers. A relatively small cut would most likely cause farmers to pay more for their existing coverage or to shift to less expensive policies and absorb more risk. It would also likely have minimal impacts on the size of the risk pool and therefore little effect on premiums, which could rise if farmers stop buying insurance. Crop insurance companies could see lower incomes, because their revenue depends on product sales. In contrast, a large cut would most likely result in farmers reducing levels of coverage, perhaps significantly, and overall program participation (acreage) could decline sharply.

Congress will likely continue to weigh the overall benefits of the program to the farm sector with the cost of the federal crop insurance program and other aspects of the farm safety net. The tradeoff for Congress is finding what reductions (if any) to premium subsidies can be tolerated before pressure to make ad hoc payments occurs.

Contents

Role of Federal Crop Insurance 1

Level of Support in Question 2

Program Costs 2

Crop Insurance Policies 3

Rationale for Premium Subsidies 3

Premium Subsidy Mechanics 4

Trends in Total Premiums and Premium Subsidies 6

Subsidies by Crop and State 7

Subsidies by Farm Size 7

Proposals to Limit Premium Subsidies 8

Administration’s Proposal 8

S. 463/H.R. 892 Eliminates Subsidy for “Harvest Price Coverage” 10

S. 345 Caps Premium Subsidies 10

Potential Impacts 11

Farmers Maintain Coverage 11

Farmers Insure Fewer Acres or Reduce Coverage 11

Some Farmers Stop Buying Federal Crop Insurance 12

Additional Options for Congress 12

Conclusion 13

Figures

Figure 1. Total Premiums—Farmer-Paid Plus Subsidy, 2000-2014 6

Figure 2. Estimated Average Crop Insurance Premium Subsidy per Farm in 2013 8

Tables

Table 1. Crop Insurance Premium Subsidy Schedule 4

Table 2. Premium Subsidies in 2014 by Crop and State 7

Contacts

Author Contact Information 13

Acknowledgments 13

Given federal budget pressures and changing government priorities, the 114th Congress might consider trimming government costs of the federal crop insurance program pending the outcome of the FY2016 budget. A potential target is the policy premium subsidy, which reduces the price that farmers pay for federal crop insurance policies. The subsidy percentage ranges from 38% to 100% of the premium, depending on the policy and coverage level selected by the producer. The mix of policies purchased by producers (with varying coverage levels) translates into an average premium subsidy of 62% and an annual federal cost of about $6.5 billion per year.

When contemplating reductions to the statutory subsidy schedule, as proposed by the President’s budget and by bills introduced in the 114th Congress, a basic policy tradeoff is that a reduction in the premium subsidy could reduce the amount of insurance purchased by farmers and adversely affect participation in the program. Such an outcome could limit the effectiveness of the federal safety net for farmers and possibly create a larger federal liability for ad hoc crop disaster assistance. A reduction in premium subsidies also reduces incentives for risk-taking (e.g., expanding production on land that would otherwise not be planted). This report examines current premium subsidies, proposals to limit them, and potential options for Congress.

Role of Federal Crop Insurance

The federal crop insurance program began in 1938 when Congress authorized the Federal Crop Insurance Corporation (FCIC). The program, as administered by the U.S. Department of Agriculture’s (USDA’s) Risk Management Agency and funded by the FCIC, makes available subsidized policies that farmers may purchase each year to protect against yield and/or revenue declines during a particular season. Guarantees are established just prior to planting, based on expected market prices and historical farm yields. This compares with statutory prices used in farm commodity support programs, which provide price and income support for a much narrower list of “covered and loan commodities,” such as corn, wheat, rice, and peanuts. Also, participation in price and income support programs is generally free, whereas producers must pay a portion of any crop insurance premium in order to participate.

Insurance policies are sold and completely serviced through 18 approved private insurance companies. The insurance companies’ losses are reinsured by USDA, and their administrative and operating costs are reimbursed by the federal government (i.e., not by the producer). In 2014, federal crop insurance policies covered 294 million acres, and total liability was $110 billion. Four crops—corn, cotton, soybeans, and wheat—have accounted for more than 70% of total acres enrolled in crop insurance. Less widely planted crops and pastureland account for the remainder.

Many agricultural producers and farm policymakers generally consider the federal crop insurance program as the principal tool for coping with the variable impact of weather on crop yields and producer cash flows. Policies are available for about 130 commodities, covering crops supported by traditional commodity programs (e.g., corn, wheat, and soybeans) as well as many fruits, vegetables, tree nuts, nursery crops, pastureland, and other commodities. Yields or revenue can be insured at levels between 50% and 85% of expected value, depending on the policy purchased by the producer.

As part of the general policy emphasis in the 2014 farm bill (Agricultural Act of 2014, P.L. 113-79) to provide more risk management tools and amid widespread support among the farm community and the crop insurance industry, Congress increased expenditures on the crop insurance program by expanding commodity coverage and providing supplemental policies to further expand farmers’ set of risk management tools. With these changes and additional participation in the program, federal outlays for crop insurance is expected to average $8.8 billion per year during FY2015-FY2024, according to the Congressional Budget Office, making it the single largest cost component of the farm safety net. To help pay for crop insurance expansion and to accomplish other farm bill goals, including budget savings and greater price protection under farm commodity programs, Congress eliminated “direct” cash payments (saving $5 billion per year), which had been available to farmers and landowners of program crops since 1996.

Level of Support in Question

While political support for federal crop insurance has been generally strong for decades, the absolute level of support has become a policy question. Press reports have noted growing political pressure on reducing premium subsidies for federal crop insurance. In early February 2015, as part of the FY2016 budget proposal to Congress, the Administration recommended that Congress reduce premium subsidies for farmers in order to fund other priorities and offset higher than anticipated costs of farm commodity programs. USDA has also commented that lower subsidies would make it easier to defend the program to non-farmers.

Groups concerned with federal outlays and/or farming on environmental-sensitive land have advocated strongly in recent years for reducing expenditures on federal crop insurance. During the debate prior to enactment of the 2014 farm bill, critics of federal crop insurance led unsuccessful efforts to reduce federal expenditures of the program. Importantly, some critics do not necessarily call for elimination of the crop insurance program. Rather, they prefer crop insurance over the traditional price and income support programs, which use statutorily fixed prices and are considered more market-distorting than crop insurance. Others argue that, while large premium subsidies were necessary to encourage farmer adoption of crop insurance, most producers now recognize the value of crop insurance and would be willing to pay a “fairer” share of the premium.

Many supporters do not want to see premium subsidies or other aspects of the federal crop insurance program altered because of its importance to farmers, input suppliers, and the rural economy in general. Moreover, crop insurance is considered less susceptible than traditional price support programs to challenges under World Trade Organization rules because the guarantee is based on market prices, and participants absorb a loss before receiving an indemnity. Supporters also point out that financial assistance to the farm sector is not unlike benefits Congress bestows on other sectors such as energy (via tax credits) and housing (tax deductions).

Program Costs

The total federal cost of the federal crop insurance program averaged $8.7 billion annually during FY2010-FY2014. The largest portion has been the premium subsidy, which is approximately $6.5 billion annually. Farmers also benefit from free program delivery through the federal reimbursement of private crop insurance companies for their costs of selling and servicing the policies. These “administrative and operating (A&O) expenses” are about $1.4 billion per year.

Another federal cost component is underwriting. Program losses and gains are shared between the federal government and private crop insurance companies, with the government absorbing excess losses in years with poor crop yields. In contrast, overall federal costs are reduced in years when there are underwriting gains for the program (resulting from above-average yields), which occurred in six out of 10 years between 2005 and 2014.

Together, the premium subsidies, A&O expenses, and underwriting losses/gains are considered mandatory spending in the federal budget (i.e., receiving such sums as necessary rather than a fixed appropriation) which varies year to year depending upon producer participation, crop yields, market prices, and other factors. The final cost component is discretionary spending for USDA/RMA’s administrative costs, which are about $70 million annually.

Crop Insurance Policies

When purchasing a policy, a farmer selects the type of guarantee, generally one based either on (1) historical farm yields or (2) revenue using historical yields and current-year market prices. Other policy types are also available. The participating farmer specifies the coverage level, which establishes the guarantee as a portion of the expected crop value. Catastrophic policies have a deductible of 50% (the farmer absorbs the first 50% of loss), and the premium is covered completely by the federal government (100% subsidy). More expensive policies with “buy-up” coverage reduce the out-of-pocket loss (deductible) when the insured files a claim. For crop insurance purposes, a deductible of 25%, for example, is referred to as a “75% coverage level.” As coverage levels rise, the premium subsidy percentage declines (see “Premium Subsidy Mechanics” below).

For selected crops, farmers may purchase an additional policy called Supplemental Coverage Option (SCO), authorized by the 2014 farm bill and subsidized at 65%, to cover part of the out-of-pocket loss (deductible) on the producer’s underlying policy (the “shallow loss”). Indemnities are triggered by county losses greater than 14%, and policy coverage cannot exceed the difference between 86% and the coverage level selected by the producer for the underlying policy.

Besides the premium subsidy (62% of the premium, on average) and the availability of a financial backstop, another major benefit for producers is the timely payment for crop losses, generally about 30 days after the farmer signs the claim form.

Rationale for Premium Subsidies

In the absence of premium subsidies and free delivery, it is generally agreed that farmer participation in the crop insurance program and/or purchased coverage levels would be lower and that paying the full premium would be cost-prohibitive for many farmers. Crop insurance premiums were not explicitly subsidized until Congress enacted the Federal Crop Insurance Act of 1980. The legislation included a 30% premium subsidy and other provisions to increase program participation in an attempt to shift away from costly disaster payments that compensated producers following weather-related losses. Participation in the federal crop insurance program grew in the 1980s, but it was not enough to avoid congressional ad hoc disaster assistance later in the decade, including more than $3 billion in direct disaster payments for 1988 crop losses. As a result, to encourage participation of new farmers and expand coverage levels purchased by existing participants, Congress enhanced the program with greater premium subsidies and other changes in two pieces of legislation: the Federal Crop Insurance Reform Act of 1994 (P.L. 103-354) and the Agricultural Risk Protection Act of 2000 (P.L. 106-224).

These and other laws enacted since 1980 have resulted in widespread use of federal crop insurance. Policies now cover nearly 300 million acres, and approximately 83% of U.S. crop acreage is insured. For major crops, a large share of plantings is covered. In 2014, the portion of total corn acreage covered by federal crop insurance was 87%; cotton, 96%; soybeans, 88%; and wheat, 84%. Most policies are “buy-up” at 70% coverage levels or higher (a deductible of 30% or less). A number of fruit and vegetable crops have acreage participation rates that exceed 75%.

While not an explicit goal of the crop insurance program, the premium subsidy transfers money from taxpayers to the farm sector because, over the long term and in the aggregate, indemnities received by producers exceed the value of farmer-paid premiums. For example, a revenue protection policy in McLean County, IL, pays an insured farmer about $9.77 per acre, on average, more than the policy premium cost over the long run. Nevertheless, the subsidy is a not a cash payment. It appears on the producer’s bill from the insurance company as a “risk subsidy” provided by FCIC.

Premium Subsidy Mechanics

The premium subsidy for federal crop insurance is set in statute as a percentage of the total premium (7 U.S.C. §1508(e)). The percentage depends on the type of policy, coverage level selected by the producer, and the type of “unit” insured (e.g., individual fields or countywide). See Table 1. The premium schedule is “crop neutral,” meaning it applies uniformly across all commodities. The only exception is the 80% subsidy for the Stacked Income Protection Plan (STAX), which is available only for upland cotton.

Table 1. Crop Insurance Premium Subsidy Schedule

(government-paid portion of premium as a percent of total premium)

Coverage Level (%)

Type of policy

CAT

50

55

60

65

70

75

80

85

90

Premium subsidy (%)

Policies with basic or optional units

100

67

64

64

59

59

55

48

38

n/a

Policies with enterprise units

n/a

80

80

80

80

80

77

68

53

n/a

Area yield plans

n/a

n/a

n/a

n/a

n/a

59

59

55

55

51

Area revenue plans

n/a

n/a

n/a

n/a

n/a

59

55

55

49

44

Whole farm (one commodity)

n/a

67

64

64

59

59

55

n/a

n/a

n/a

(two commodities)

n/a

80

80

80

80

80

80

n/a

n/a

n/a

(three commodities)

n/a

80

80

80

80

80

80

71

56

n/a

Supplem. Coverage Option (SCO)

65a

Stacked Income Protection Plan (STAX) for upland cotton

n/a

n/a

n/a

n/a

n/a

80

80

80

80

80

Source: 7 U.S.C. §1508(e); and 7 U.S.C. §1508b(d) for STAX.

Notes: n/a = not applicable. Coverage level = 100% minus deductible percentage. A basic unit covers land in one county with the same tenant/landlord. An optional unit is a basic unit divided into smaller units by township section. An enterprise unit covers all land of a single crop in a county for a producer, regardless of tenant/landlord structure. For catastrophic (CAT) policies, a loss beyond 50% is indemnified at 55% of the expected price. For 50% coverage level, a loss beyond that percentage is indemnified at a higher percentage of price (selected by the purchaser) within a minimum and maximum range set by RMA.

For SCO, coverage equals 86 percent minus the selected coverage level of the underlying policy.

In general, the subsidy percentage declines as the coverage increases (i.e., the deductible declines). However, the dollar amount of subsidy rises with higher levels of coverage (because the premiums rise with higher coverage levels). The maximum subsidy is 100%, which applies to catastrophic (CAT) policies where the deductible equals 50%. In this case, the producer absorbs the initial loss up to 50% of the guarantee, and the policy covers any additional losses. While the premium is fully subsidized, producers must pay a $300 administrative fee for each crop insured in each county. For “buy-up” coverage (i.e., above CAT), the premium subsidy ranges from 38% to 80% of the policy premium, depending on the coverage level selected by the producer. In recent years, the average subsidy rate across all policies purchased has been 62%. The average subsidy percentage has been at or near 60% since the current subsidy schedule was put in place by the Agricultural Risk Protection Act of 2000.

Higher subsidy levels are available for beginning farmers or ranchers with less than five years of experience. For these farmers, the $300 fee for purchasing CAT coverage is waived, and the premium subsidy for additional coverage is increased by 10 percentage points.

Unlike farm commodity programs, the federal crop insurance program does not have per-person premium subsidy limits or an income limit test for program eligibility, although the topic was widely discussed in Congress during the farm bill debate, particularly in 2012 and 2013. In fact, a controversial item not included in the 2014 farm bill (P.L. 113-79) was the reduction of premium subsidies for high-income farmers, a provision that was included in the Senate bill but not the House bill. Previously, in the 2012 farm bill passed by the Senate in the 112th Congress, an amendment was adopted during floor debate to reduce crop insurance premium subsidies by 15 percentage points for producers with average adjusted gross incomes greater than $750,000. In 2013, the Senate Agriculture Committee–reported version of S. 954 did not include the provision, but an amendment to S. 954 requiring the subsidy reduction was adopted on the Senate floor in June 2013 by a vote of 59-33. A House amendment to limit crop insurance premium subsidies failed during floor debate in June 2013.

While no limits to subsidies were included in the enacted 2014 farm bill, a few conservation-related restrictions were enacted. Producers are not eligible for premium subsidies if they are not in compliance with conservation requirements for wetlands and/or highly erodible land. Also, crop insurance subsidies are reduced for plantings on native sod acreage in certain states.

Trends in Total Premiums and Premium Subsidies

During the last decade, increases in insured acreage and higher crop prices have increased gross liability, which translated into higher total premiums (Figure 1). During the five-year period from 2010-2014, total premiums averaged $10.5 billion, up from $5.0 billion during 2000-2009. For the 2010-2014 period, the farmer-paid share of the total was $4 billion, on average, and the government-paid share (premium subsidy) was $6.5 billion, on average.

Figure 1. Total Premiums—Farmer-Paid Plus Subsidy, 2000-2014

Source: CRS, using data from USDA, Risk Management Agency, http://www.rma.usda.gov/data/sob.html.

Notes: Crop year data. Total premiums advanced beginning 2007 following a significant rise in crop prices, which increased total liability and premiums. A decline in premiums generally reflects lower crop prices.

Crop prices during the next five years are expected to be lower than during the 2010-2014 period, which would reduce total premiums (and crop insurance premium subsidies). According to the Congressional Budget Office, the total premium value during 2015-2019 is projected to average $9 billion per year, with producers paying $3.4 billion, on average, and the government paying $5.6 billion, on average. Of course, any projection of the future is subject to changing market conditions.

Subsidies by Crop and State

Premium subsidies in 2014 totaled $6.2 billion. Reflecting sizeable planted area, four crops—corn, soybeans, wheat, and cotton—accounted for 80% of the total, or $5 billion. Farm states with large acreages of one or more of these crops received the largest amounts of premium subsidies, including Texas ($640 million), North Dakota ($598 million), South Dakota ($491 million), Kansas ($403 million), and Minnesota ($392 million). A summary of top states and crops is displayed in Table 2. The top seven states account for just over one-half of the total premium subsidy in 2014.

Table 2. Premium Subsidies in 2014 by Crop and State

(millions of dollars)

State

Corn

Soybeans

Wheat

Cotton

Fruit, veg., tree nut & nursery

Other

Total

1. Texas

52

4

112

329

13

129

640

2. North Dakota

163

147

168

0

11

108

598

3. South Dakota

264

127

56

0

<1

45

491

4. Kansas

103

70

161

1

1

67

403

5. Minnesota

203

134

23

0

7

25

392

6. Iowa

260

120

<1

0

<1

4

384

7. Illinois

243

112

12

0

2

4

373

8. Nebraska

194

79

23

0

2

20

318

9. Missouri

116

102

14

3

1

7

243

10. California

2

0

5

16

191

27

242

11. Indiana

120

75

5

0

1

4

205

12. Wisconsin

106

35

3

0

8

9

161

13. Ohio

78

73

6

0

2

1

160

14. Oklahoma

8

8

82

11

1

17

127

15. Michigan

44

33

7

0

22

11

117

Other states

229

270

240

129

140

341

1,347

Total U.S.

2,185

1,389

917

489

402

819

6,201

Source: USDA Risk Management Agency, http://www3.rma.usda.gov/apps/sob/.

Notes: Totals may not add due to rounding.

Subsidies by Farm Size

Producer subsidies for crop insurance are proportional to the value of the premiums and underlying liability of the policies. Compared with small farms, larger operations have greater crop liability, which increases the total costs of insurance and value of the government-paid portion of the total premium.

Based on federal crop insurance expenditures data from USDA’s Agricultural Resource Management Survey (ARMS) and the average subsidy percentage (62%) from RMA, CRS estimates that the producer subsidy in 2013 averaged about $19,000 per farm for farms purchasing crop insurance. By farm size, the calculated average ranged from $2,300 per farm for operations with less than $10,000 in sales to $115,000 for farms with at least $5 million in sales (Figure 2).

As stated earlier, unlike farm commodity subsidies, crop insurance premium subsidies are not capped and are not subject to a gross income eligibility limit. The next section (“Proposals to Limit Premium Subsidies”) reviews proposals that would limit premium subsidies.

Figure 2. Estimated Average Crop Insurance Premium Subsidy per Farm in 2013

Source: CRS Report R40532, Federal Crop Insurance: Background, using average premium subsidy of 62% from USDA’s Risk Management Agency (RMA) and total federal crop insurance expenditures by farm sales class from USDA’s Agricultural Resource Management Survey, provided by USDA’s Economic Research Service.

Notes: The calculated average was $18,900 per farm. (Calculation includes only farms that pay federal crop insurance premiums.) Total premium subsidy reported by RMA was $7.3 billion for crop year 2013.

Proposals to Limit Premium Subsidies

Several proposals have been introduced in 2015 to limit premium subsidies. The Administration’s FY2016 budget proposal and bills introduced in the 114th Congress would affect the premium subsidy schedule or the total amount of subsidy an individual farm could receive.

Administration’s Proposal

To reduce program costs, the Administration’s FY2016 budget proposal included two legislative recommendations for the federal crop insurance program. Together they would reduce outlays by a combined $16 billion over 10 years. Legislation would be required to accomplish either of these recommendations.

The first would reduce premium subsidies by 10 percentage points for revenue protection policies with “harvest price coverage.” Unlike for other policies, the guarantee for these policies is revised upward when the harvest-time price is higher than the initial guarantee established prior to planting. This feature is available on policies for crops—such as wheat, corn, and soybeans—that employ a guarantee based on the futures market. Nearly all “revenue protection” policies, representing about three-fourths of all crop insurance policies, are sold with harvest price coverage because the policy can generate a larger indemnity to help cover the cost of purchasing “replacement bushels” at higher market prices if the farmer had previously signed a forward contract and cannot deliver the crop on it due to weather-related losses. The estimated savings of this recommendation is $14.6 billion over 10 years, according to the Administration. The Administration and others argue that such “up-side” price protection does not need to be subsidized by the government. USDA says producers would pay an out-of-pocket premium that more closely matches the market price of the purchased coverage, shifting more of the cost from the taxpayer to the producer. Producers could also switch to less expensive policies and consequently absorb more risk.

The second proposal (Administration-estimated savings of $1.4 billion over 10 years) would change “prevented planting coverage,” which indemnifies producers when crops cannot be planted for weather reasons. The changes include adjusted payment rates and lower yield guarantees.

Supporters of the measure include Taxpayers for Common Sense, which commented that the proposals to cut crop insurance could go further. The Environmental Working Group (EWG) said the proposals would cut “overly generous premium subsidies ... save taxpayers billions of dollars” and “shield land and water from further abuse.” A previous report issued by EWG concluded that the crop insurance industry would bear most of the cost of farmers switching to less-expensive policies that are less profitable to sell and service.

In early February 2015, leaders of the House and Senate Agriculture Committees heavily criticized the Administration’s proposal. House Agriculture Committee Chairman Mike Conaway said the cuts “would jeopardize the ability of producers to insure their crops in a climate of collapsing crop prices, major crop losses, and falling farm income.” Senate Agriculture Committee Chairman Pat Roberts said the proposal “ignores the concerns of the nation’s farmers and ranchers.” Later in February, nearly 400 organizations representing a broad coalition of farm conservation, nutrition, rural development, and other interests wrote a letter to congressional leaders of the House and Senate Budget Committees asking them to reject any cuts to programs under the jurisdiction of House and Senate Agriculture Committees, including crop insurance. They argued that the 2014 farm bill has already generated significant savings and that no additional cuts should be made until the new policies have been implemented and thoroughly evaluated.

S. 463/H.R. 892 Eliminates Subsidy for “Harvest Price Coverage”

Rather than reduce subsidies for harvest price coverage, two bills (S. 463 and H.R. 892) would completely eliminate subsidies on those policies. The Congressional Budget Office estimates a reduction in outlays of $16.8 billion over 10 years. Sponsors are Senators Jeff Flake and Jeanne Shaheen and Representative John J. Duncan Jr.

Supporters expect that producers would remain covered by crop insurance but would shift to less-expensive policies, such as Revenue Protection with Harvest Price Exclusion (HPE), which has a price guarantee that does not rise if the harvest-time price is above the initial guarantee set prior to planting. Some producers already purchase this product because of its lower cost. Other interested producers might be those who do not typically hedge much grain prior to harvest or are willing to accept “drought risk” that can drive up overall crop prices. Critics say that not providing this option to producers makes crop marketing more risky because they would no longer have a low-cost way to comfortably sell crops in advance (forward contract). Purchasing options on futures contracts is an alternative, but it is generally more expensive than using the insurance product and may not be viable for producers with small acreages.

S. 345 Caps Premium Subsidies

Rather than altering the premium subsidy schedule as in the proposals above, S. 345 establishes a subsidy cap of $50,000 per person or entity for all policies purchased. The Congressional Budget Office estimates a savings of $2.2 billion over 10 years. The bill sponsors are Senators Jeanne Shaheen and Pat Toomey.

Supporters argue that the current uncapped program is expensive for taxpayers and results in excessive benefits to individuals and large agribusiness firms. A report by the Government Accountability Office in 2012 found that 53 farmers each received more than $500,000 in premium subsidies. Critics counter that capping premium subsidies would reduce the pool of insured producers, resulting in higher premium rates if large farmers who leave the program were generating underwriting gains.

Potential Impacts

All of the legislative proposals described above would save federal dollars. They also raise questions about how farmers would respond to the subsidy reductions. If faced with reduced crop insurance premium subsidies, would farmers (1) maintain coverage levels (and absorb the higher co