While the new Congress and the new administration are working on several urgent and priority policy issues for 2017, they are also looking ahead at some of the future policy issues on the horizon, such as the next farm bill due in late 2018. The Senate Agriculture Committee was the first out of the gate, with an initial field hearing scheduled for late February in Kansas, home of Senate Agriculture Committee Chairman Pat Roberts.

With the growing attention on the next farm bill, it is a good time to explore some of the significant policy issues and questions ahead. As mentioned in a previous overview of the ag policy and farm bill outlook, there are a number of issues on the agenda for the next farm bill, including the spending on farm vs. food programs, as well as numerous program priorities and proposed reforms. One of those programs that will certainly be an area of focus is crop insurance.

Federal crop insurance is a critical part of the farm safety net and helps producers manage production (and price) risk in their operations. While crop insurance actually dates to some of the earliest federal farm programs of the 1930s, it was a relatively small and limited program until key developments in the last 40 years. The Federal Crop Insurance Act of 1980 greatly expanded crop insurance coverage and availability and privatized delivery of what previously had been a fully federally administered program. Further legislation in 1994 and 2000 enhanced the program and increased premium support or subsidy levels. The increased federal support and the increased development of innovative products like Revenue Protection over the past 25 years has led to substantial increases in participation, with more than 80% of U.S. crop acreage insured annually under the federal program.

Federal support for crop insurance is substantial and is actually the biggest part of what may be called the federal farm income safety net — commodity programs, crop and livestock insurance, and disaster assistance. While commodity programs that provided crop supports and direct payments to producers historically were the biggest part of federal support for agriculture, crop insurance has grown to be the biggest component of the safety net. Current projections from the Congressional Budget Office estimate federal outlays for crop insurance at $7.9 billion per year over the next 10 federal fiscal years (FY 2018-27) as compared to $6.4 billion per year for commodity programs and disaster assistance combined.

This federal support for crop insurance comes primarily through premium supports or subsidies. Under current provisions, producers are projected to pay about 44 cents of every $1 of total premium, with the federal government paying the other 56 cents. The federal government also supports crop insurance industry delivery costs through payments for companies' administrative and operating costs, given that total premiums are supposed to be set equal to total indemnities (losses) over time, leaving no expected underwriting gains to pay for company expenses. Finally, the federal government also serves as a reinsurer, providing insurance to the insurance companies to offset some of their risk exposure of writing policies for farmers.

This three-part federal support for crop insurance has been championed by producers and industry groups alike, and actually operates under permanent legislative authority, subject only to any changes in legislation over time. While crop insurance may have permanent authority separate from the farm bill, the inclusion and expansion of crop insurance provisions in the 2014 Farm Bill has largely tied crop insurance and farm bill legislation and support levels together for future debate. And as crop insurance has become the largest component of the safety net and the largest budget item behind nutrition or the Supplemental Nutrition Assistance Program (SNAP) in the overall farm bill, it is also a large target for spending cuts and program reforms in the next farm bill.

There have been numerous proposed changes to crop insurance in previous farm bill and other policy debates, so many of the changes pushed for in the 2018 Farm Bill could look like past proposals. Efforts to reduce total program costs have generally focused on cutting total spending for premium subsidies, reducing support for certain insurance components and cutting support for the crop insurance industry, among other ideas.

Some have proposed reducing overall crop insurance spending by reducing the overall subsidy rate from the current 56% average or capping premium subsidies or eligibility to producers at some total subsidy or income level. Determining the appropriate subsidy rate, limit or eligibility is both an economic and political decision. The subsidy levels affect overall participation levels, which could affect actuarial performance, and in turn, premium rates for producers who purchase crop insurance. Analyzing any change in subsidies for impacts on participation, performance and premium costs will be an important component of considering any proposed changes. Some studies suggest premium subsidy rates could be lowered substantially before producers left the program in large numbers, but the exact level may be difficult to establish.

Another proposed change has been to reduce or eliminate the premium subsidy attributed to the harvest price component of Revenue Protection. The argument has been that subsidizing harvest price coverage is akin to subsidizing price risk management, which could be managed through private markets and tools instead. A shortcoming of this argument, however, is that Revenue Protection, properly used, provides replacement coverage for lost bushels when widespread yield losses contribute to higher prices. It is this replacement coverage that actually provides producers the ability to confidently hedge their production in the market with futures, options or cash contracts, knowing that they will have the crop insurance indemnity to cover their losses if they do not harvest enough grain to deliver on a contract. Not all producers combine crop insurance and marketing strategies as effectively as they can or should, but when properly used, the harvest price component of Revenue Protection can actually complement price risk management decisions as opposed to substitute for them.

Proposals to reduce or renegotiate the support for the crop insurance industry will also surface, as seems to happen on an almost annual basis. One proposal that will likely not be revisited is the renewed linkage between conservation compliance and eligibility for crop insurance supports. This linkage, which was implemented in the 2014 Farm Bill, is not popular in all agricultural circles. But recognizing the general support for conservation and the political difficulty of any proposal to de-link the two suggests it will not be revisited in the coming farm bill debate.

Crop insurance is an important risk management tool for producers. It is also an important issue to understand as part of the farm bill debate. Crop insurance has grown to be the largest budget component of the farm income safety net and, as a result, is one of the largest targets in the farm bill debate as well. Understanding the programs, keeping abreast of the issues and engaging in the policy process will be important for producers and for ag policy stakeholders in the months ahead.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.