A recent report 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 recent EWG report prepared by Bruce Babcock is highly critical of the crop insurance program. Once again, the public is being led to believe by the EWG that farmers are somehow profiting from the drought of 2012 and crop insurance indemnities. This is simply not true. In 2012, indemnities paid to farmers for losses will total approximately $17 billion.
The report states that crop insurance has ‘turned more into a farm income support program than a crop insurance program…’ Unfortunately, EWG fails 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 out 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.”
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 are able to plant their crops for 2013 and stay in business. Contrast this to the experience of victims of Hurricane Sandy who struggled to get relief and then have waited for its distribution.
This report also ignores the fact that crop insurance companies will suffer losses due to the 2012 drought, and that the federal government made nearly $4 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 the crop insurance.
The report ignores the fact that farmers may pay premiums for many years and suffer no losses, or losses within their deductibles, in order to have sufficient protection for the years like 2012. The report ignores the substantial funding reductions in the safety net for farmers that will be part of the new farm bill.
The report is also highly critical of a type of insurance that farmers can purchase known as the Harvest Price Option. Without the harvest price option, the producer’s 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 farmers 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 producer loses the crop, the producer is still obligated to deliver under the forward contract. But since the producer has lost the crop, the producer 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 producer with sufficient funds to settle the forward contract.
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 disaster from taxpayers and takes the politics out of natural disasters.