The U.S. Department of Agriculture runs dozens of farm subsidy programs, which cost taxpayers more than $30 billion a year. The largest program is crop insurance, which costs about $10 billion a year. The program displaces private methods of managing risk and gives subsidies to farm businesses that do not need them.
Federal crop insurance for revenue and yield shortfalls is available for more than 100 crops, but corn, soybeans, wheat, and cotton are the main ones. The policies are provided through 14 private insurance companies.
The USDA subsidizes insurance premiums, which costs taxpayers about $8 billion a year. The subsidies cover an average 62 percent of premiums, which results in most farmers making money on this so‐called insurance. The Congressional Budget Office found that farmers received $65 billion more in claims than they paid in premiums between 2000 and 2016.
The USDA also pays about $2 billion a year to farm insurance companies to cover their administrative costs. With these subsidies and the inflated demand for policies, the 14 insurance companies appear to make above‐normal profits, as suggested by the Government Accountability Office and other experts.
Here are some features of the USDA’s crop insurance program.
- Expansion in Scope. Federal crop insurance keeps growing in size and scope. The USDA reports that the number of crops insured has risen from 112 in 2000 to 134 today, while the number of insurance plans has risen from 20 in 2012 to 36 today. Expanding the scope of farm subsidies buttresses support for the logroll in Congress.
- No Income Limits. There are no income limits for the crop insurance program, with the result that subsidies are tilted upwards. An AEI study found that “farms in the top 10 percent of the crop sales distribution received approximately 68 percent of all crop insurance premium subsidies.” The Government Accountability Office reported that some billionaires receive crop insurance subsidies. It is often claimed that subsidies are needed to support family farms, but most farm subsidies go to the largest producers.
- No Transparency. The recipients of crop insurance subsidies are a government secret. Billions of dollars in taxpayer‐funded aid is laundered through private insurance companies to help hide the identities of the millionaire and billionaire recipients. Congress is spending our money, but we’re not allowed to know who gets it.
- Crowding Out. Instead of government subsidies, the USDA itself identified market‐based ways for farmers to manage risks, including diversifying crops, building savings, using forward contracts, using specialized equipment, and diversifying income sources. Farmers can also diversify planting locations and keep a low debt load in case emergency borrowing is needed. Federal subsidies displace or crowd out private risk management solutions, including new solutions that would arise if subsidies were repealed.
- Disaster Aid. Crop insurance subsidies have been expanded over the years under the premise that they would reduce pressure for Congress to pass emergency aid packages after disasters. But farmers have enjoyed huge emergency aid packages in recent years on top of all the regular aid. Since 2017, Congress has passed “an astounding $60 billion in ad‐hoc disaster assistance” in a series of bills.
- Environmental Effects. Economists Vincent Smith and Barry Goodwin argue, “There is an extensive body of research overwhelmingly reporting that subsidized crop insurance has encouraged farmers to shift production onto more fragile lands, thereby increasing soil erosion and, by implication, agriculture’s carbon footprint.”
- Climate Change. The Environmental Working Group says that the federal crop insurance program “doesn’t encourage or require farmers to adapt to or mitigate climate change because it often pays farmers for the same type of loss year after year, like multiple years of payments due to drought.” That is a fascinating point—that subsidies undermine market adaptations to changing environmental conditions. The same is true, by the way, with federal flood insurance subsidies.
The best reform would be for Congress to repeal crop insurance subsidies, which would save taxpayers about $100 billion over the next decade. A more limited reform would be to impose an income limit for subsidy recipients, as economist Eric Belasco examines here. There is no reason why farm businesses cannot plan ahead by themselves to mitigate fluctuations in their earnings from drought and other contingencies.