Proposals to Reduce Premium Subsidies for Federal Crop Insurance Page: 2 of 17
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Proposals to Reduce Premium Subsidies for Federal Crop Insurance
Summary
Many farm policymakers generally consider the federal crop insurance program as the principal
tool to help farmers cope with the variable impact of weather on crop yields. The program makes
available subsidized policies that farmers may purchase each year to protect against yield and/or
revenue declines during a particular growing season. Policies are available for about 130
commodities, covering crops supported by traditional farm programs (e.g., corn, wheat, and
soybeans) as well as many fruits, vegetables, tree nuts, nursery crops, pastureland, and other
commodities. Farmers pay a portion of the premium, unlike farm programs, which are free.
Premium subsidies for federal crop insurance have been instrumental in expanding program
participation to levels acceptable to policymakers (i.e., avoiding ad hoc disaster assistance).
Congress first introduced premium subsidies in 1980 and increased them in 1994 and 2000.
Currently, the subsidy percentage ranges from 38% to 100% of the policy premium. The mix of
policies purchased by producers (with varying coverage levels) translates into an average
premium subsidy of 62%, resulting in an annual federal cost of $6.5 billion per year. The 2014
farm bill (PL. 113-79) bolstered the program by authorizing more risk products.
Crop insurance subsidies, by design and like other purchasing-based subsidies, encourage farmers
to purchase more insurance than they otherwise would because they are not paying full price. The
higher coverage provides better farm financial protection (up to 85% of expected farm yields or
revenue) and reduces the probability of requests for federal ad hoc assistance, but it also increases
costs to taxpayers and can encourage production on environmentally sensitive land. Some
question whether current subsidy levels are necessary to maintain program participation.
Given federal budget pressures, the 114th Congress might consider trimming government costs of
the federal crop insurance program pending the outcome of the FY2016 budget. Several proposals
have surfaced that would limit premium subsidies, including an Administration proposal and
several bills introduced in the 114' Congress. The Administration's FY2016 budget proposal
would reduce premium subsidies by 10 percentage points for revenue protection policies with
"harvest price coverage." Unlike for other policies, the guarantee is revised upward when the
harvest-time price is higher than the initial guarantee established prior to planting. Another
proposal (S. 463/H.R. 892) would completely eliminate subsidies on those policies. A separate
approach, S. 345, would establish a subsidy cap of $50,000 per person for all policies purchased.
The magnitude of any subsidy reduction would have varying impacts on the income of farmers
and crop insurance companies, as well as the overall cost of the farm safety net, particularly if ad
hoc assistance is enacted later as an additional backstop for farmers. A relatively small cut would
most likely cause farmers to pay more for their existing coverage or to shift to less expensive
policies and absorb more risk. It would also likely have minimal impacts on the size of the risk
pool and therefore little effect on premiums, which could rise if farmers stop buying insurance.
Crop insurance companies could see lower incomes, because their revenue depends on product
sales. In contrast, a large cut would most likely result in farmers reducing levels of coverage,
perhaps significantly, and overall program participation (acreage) could decline sharply.
Congress will likely continue to weigh the overall benefits of the program to the farm sector with
the cost of the federal crop insurance program and other aspects of the farm safety net. The
tradeoff for Congress is finding what reductions (if any) to premium subsidies can be tolerated
before pressure to make ad hoc payments occurs.Congressional Research Service
c11173008
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Proposals to Reduce Premium Subsidies for Federal Crop Insurance, report, March 20, 2015; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc821809/m1/2/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.