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Proposals to Reduce Premium Subsidies for Federal Crop Insurance
Given federal budget pressures and changing government priorities, the 114th Congress
might consider trimming government costs of the federal crop insurance program pending
the outcome of the FY2016 budget. A potential target is the policy premium subsidy,
which reduces the price that farmers pay for federal crop insurance policies. The subsidy
percentage ranges from 38% to 100% of the premium, depending on the policy and coverage
level selected by the producer. The mix of policies purchased by producers (with varying
coverage levels) translates into an average premium subsidy of 62% and an annual federal cost of
about $6.5 billion per year.
When contemplating reductions to the statutory subsidy schedule, as proposed by the President's
budget and by bills introduced in the 114th Congress, a basic policy tradeoff is that a reduction in
the premium subsidy could reduce the amount of insurance purchased by farmers and adversely
affect participation in the program. Such an outcome could limit the effectiveness of the federal
safety net for farmers and possibly create a larger federal liability for ad hoc crop disaster
assistance. A reduction in premium subsidies also reduces incentives for risk-taking (e.g.,
expanding production on land that would otherwise not be planted). This report examines current
premium subsidies, proposals to limit them, and potential options for Congress.
Role of Federal Crop Insurance
The federal crop insurance program began in 1938 when Congress authorized the Federal Crop
Insurance Corporation (FCIC). The program, as administered by the U.S. Department of
Agriculture's (USDA's) Risk Management Agency and funded by the FCIC, makes available
subsidized policies that farmers may purchase each year to protect against yield and/or revenue
declines during a particular season. Guarantees are established just prior to planting, based on
expected market prices and historical farm yields. This compares with statutory prices used in
farm commodity support programs, which provide price and income support for a much narrower
list of "covered and loan commodities," such as corn, wheat, rice, and peanuts. Also, participation
in price and income support programs is generally free, whereas producers must pay a portion of
any crop insurance premium in order to participate.
Insurance policies are sold and completely serviced through 18 approved private insurance
companies. The insurance companies' losses are reinsured by USDA, and their administrative and
operating costs are reimbursed by the federal government (i.e., not by the producer). In 2014,
federal crop insurance policies covered 294 million acres, and total liability was $110 billion.
Four crops-corn, cotton, soybeans, and wheat have accounted for more than 70% of total acres
enrolled in crop insurance. Less widely planted crops and pastureland account for the remainder.
Many agricultural producers and farm policymakers generally consider the federal crop insurance
program as the principal tool for coping with the variable impact of weather on crop yields and
producer cash flows. Policies are available for about 130 commodities, covering crops supported
by traditional commodity programs (e.g., corn, wheat, and soybeans) as well as many fruits,
vegetables, tree nuts, nursery crops, pastureland, and other commodities. Yields or revenue can be
insured at levels between 50% and 85% of expected value, depending on the policy purchased by
the producer.
As part of the general policy emphasis in the 2014 farm bill (Agricultural Act of 2014, P.L. 113-
79) to provide more risk management tools and amid widespread support among the farm
community and the crop insurance industry, Congress increased expenditures on the cropCongressional Research Service
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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/m1/4/: accessed April 18, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.