A study prepared by Bruce Babcock and funded by the Environmental Working Group calls crop insurance “a bloated, taxpayer-funded income support program” and that farmers are profiting from the 2012 drought because of crop insurance. Is this true?

Absolutely not. It should come as no great surprise that the EWG report prepared by Bruce Babcock was highly critical of the crop insurance program. Once again, the public was being led to believe by the EWG that farmers somehow profited from the drought of 2012 and crop insurance indemnities. This is simply not true.

The report states that crop insurance “turned more into a farm income support program than a crop insurance program.” In 2012, indemnities paid to farmers for losses totaled approximately $17 billion. Unfortunately, EWG failed to acknowledge that, before farmers received a single dime in crop insurance indemnity payments, they shouldered $12.7 billion in losses as part of their crop insurance policy deductibles, and an additional $4.1 billion was paid by farmers to purchase their policies. Thus, farmers absorbed approximately $17 billion in uninsured losses and premium expenditures out of their own pockets before insurance paid anything.

Compared to ad hoc disaster relief, the private sector delivery system allows for indemnity payments to be made on a timely basis. With crop insurance, farmers were able to bounce back and plant their crops in 2013 and stay in business. Contrast this to the experience of victims of Hurricane Sandy who struggled to get relief and then waited for its distribution.

This EWG report also ignored the fact that crop insurance companies suffered losses due to the 2012 drought, and that the Federal government made $3.99 billion in underwriting gains from 2001-2010. The report focuses primarily on the unusual, 1-in-25-year drought of 2012, and not the long-term performance and improvements that have been made to crop insurance.

Additionally, the report ignored the fact that farmers may pay premiums for many years and suffer no losses, or absorb losses within their deductibles, in order to have sufficient protection for the years like 2012. The report also ignored the substantial funding reductions in the safety net for farmers that, at the time, were being directed by Congress to be included in the 2014 Farm Bill and are now law.

The report was also highly critical of a component of the revenue insurance policy known as the Harvest Price Option. Farmers pay additional premium for this coverage, and without it the loss would be indemnified at the lower price projected at the start of the season. Unfortunately, such an indemnity would place many farmers in financial jeopardy. Many enter a forward contract to sell a portion of their production before harvest. Usually these contracts pay the producer for the production they deliver after harvest, based on harvest prices.

If the farmer loses the crop, he is still obligated to deliver under the forward contract. But since the crop is lost, the farmer would have to buy the commodity at the harvest price and deliver that or financially settle the buyer’s contract at the harvest price. The purpose of the Harvest Price Option is to provide the farmer with sufficient funds to settle the forward contract. In addition, many producers of milk, cattle, hogs, poultry and other animals grow their own crops to feed their animals. When their feed supplies are wiped out by weather, the Harvest Price Option pays an indemnity that enables these livestock producers to replace their lost feed at the going market price and maintain their livestock.

Farmers utilize crop insurance because it enables them to manage their own risk, be it weather or market related. Congress supports crop insurance because it shifts the risk of natural disasters from taxpayers and takes the politics out of natural disasters.