Ten Considerations: The Role of Crop Insurance in the Farm Safety Net

More than a half-century ago, acclaimed historian Murray Benedict noted, “There are indications … that crop insurance is gradually emerging as one of the more settled features of American farm policy.” That prediction, perhaps a bit premature at the time, has certainly been borne out, as over the last decade crop insurance has grown from a little-known and underused program into the primary risk management tool for farmers and ranchers that protected 90 percent of planted cropland in 2013.

A newly released article in the third-quarter issue of Choices magazine offers a “within the industry perspective” on the status of crop insurance and key issues it faces as farmers’ quintessential risk management tool. Authors Tom Zacharias, National Crop Insurance Services president, and Keith Collins, former USDA chief economist note, “U.S. farm policy appears to be transitioning from direct income support to a risk-management-based system depending upon both public and private sector participation.” This rise, however, has triggered “significant criticism for its level of subsidization and other aspects,” they point out. “Such a tension, especially during the development of a new farm bill, seems natural and appropriate.”

Pointing out that there are many “key issues that remain in play,” the authors offer 10 considerations that the public and policy makers should be aware of when assessing the efficacy and future path of the crop insurance system. These considerations are intended to highlight and address the primary considerations from both the public and private sector in terms of the program’s current status, future regulation and information needs. These considerations are:

1. Is there a public interest in a resilient, financially sustainable and competitive industry that produces the nation’s food and is subject to natural disasters and other shocks?

2. Should there be taxpayer (government) support for a farm safety net?

3. What is the willingness and ability to spend on the farm safety net?

4. Should the safety net be ex ante or ex post?

5. Is the safety net income support or risk management?

6. Is current risk sharing optimal?

7. What is the role of area versus individual plans?

8. Should the safety net be incentivized?

9. Can the current incentive structure be improved?

10. Is crop insurance distortionary?

“It will be interesting to observe and participate in the direction of agricultural policy in light of the expected increasing prominence of crop insurance,” noted Zacharias and Collins, adding that the sway of the political pendulum will determine short-run directional shifts in policy. “Yet, as we outlined above, key issues remain in play, and particularly the level and use of taxpayer funds in determining a proper balance between the roles of the public and private sector in agricultural risk management,” they concluded.