“The federal crop insurance program is a failure…” claims Heritage Foundation’s Blueprint for Agriculture. Heritage believes the crop insurance program is off mission and is not about protecting farmers from disasters. It believes the crop insurance program is about protecting farmers from any type of risk.

Heritage claims, “Billions of dollars every year are being taken from taxpayers and provided directly or indirectly to wealthy agricultural producers…”

Heritage says a massive wealth transfer is taking place from the taxpayers who cannot afford it and giving money to those who do not need it. It says this is a “moral hazard” problem and the crop insurance program is now in competition with private risk management companies.

Heritage declares that USDA is running a private cartel. It explains that USDA controls the private crop insurance market and works with 17 crop insurance companies who receive reimbursements from USDA to cover administrative and operating expenses.

Moreover, it claims USDA limits competition between insurers because there cannot be competition among companies on premium rates. Apparently USDA’s Risk Management Agency has full power to determine what products can be subsidized. Heritage believes this cartel approach generates less innovation and fewer choices for farmers. Competition thereby is squashed by USDA and gives an example. In 2002, where one company offered a 10% discount on their premiums, and Congress, according the Heritage quashed the idea.

Related:Heritage claims agricultural subsidies are harmful

Closer look at crop insurance program
The Congressional Research Service (CRS) asserts “…83% of U.S. crop acreage is insured under the federal crop insurance program. Four crops- corn, cotton, soybeans, and wheat – typically account for more than 70% of total enrolled acres.”

Heritage uses 2014 numbers which reflect that 87% of corn acreage, 96% of cotton acres, 88% of soybean acres and 84% of wheat acres were covered by federal crop insurance.

There is no limit on total indemnities that farmers can receive. This aspect of crop insurance angers Heritage, and it claims “Taxpayers are forced to subsidize the federal crop insurance program with no limits in place on the total benefits that can be received by participating farmers.”

Heritage’s main argument is that crop insurance is about providing subsidies to farmers - not insurance. Heritage believes crop insurance is not related to private insurance which farmers buy just like life insurance, crop hail insurance or other insurance for disasters.

Heritage then has a section on crop insurance coverage when there is no disaster and goes on to discuss yield–based and revenue-based policies. Heritage argues that the crop insurance program is not focused on catastrophic losses but protects a producer from yield or revenue loss.

Heritage includes a useful history on crop insurance starting with the first act in 1973 and a later act for rice in 1975. It was determined by USDA these program costs were too high and again the programs created “moral hazard” problems.

A way to eliminate disaster payments
Congress passed the Federal Crop Insurance Act of 1980 as a way to eliminate disaster payments. It too subsidized premiums for farmers but the program had low participation even though 30% of the premiums were paid by USDA.

During the 1980s and 1990s, following droughts, Congress enacted ad hoc disaster assistance programs. In 1990 the Bush administration proposed eliminating the crop insurance program. In 1994 Congress passed the Federal Crop Insurance Reform Act. More farmers participated in this program but not a large number.

The 1994 law still had farmers paying only 38% of the premium with taxpayers bearing the remaining 62%.

Heritage declares “Forcing taxpayers to pay an increasing amount of subsidies to get farmers to participate in a program that they would not pay for if they were charged the full costs does not constitute success.”

With these arguments, Heritage claims “…crop insurance is a failure.” These are powerful arguments.

The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.