A new report by Iowa State University economist Bruce Babcock finds that the heavily subsidized crop insurance program overcompensated Corn Belt farmers by $7.8 billion during the 2012 drought.
Lessons from that experience should guide congressional efforts to forge a new farm bill, according to Babcock and the Environmental Working Group (EWG), which commissioned the report, “Cutting Waste in the Crop Insurance Program,” unveiled Thursday.
Insurance payouts of $6.2 billion would have put a solid floor under corn and soybean farmers’ revenue in 2012. But actual payouts totaled $14 billion, according to Babcock’s calculations.
The windfall occurred, he said, because the popular revenue protection option doesn’t take into account the added revenue that farmers earn when they sell their crops at drought-inflated prices.
Because of insurance payouts and higher prices for the crops they produced, most farmers who suffered a yield loss in 2012 actually ended up with more revenue than they anticipated when they planted, according to Babcock.
“Making somebody more than whole after a loss clearly fails any test of efficient use of taxpayer funds,” he said.
The report recommends cutting taxpayer subsidies – now more than 60 percent of premium payments – and resisting proposals to expand the program.
Agriculture committees in Congress are considering new crop insurance subsidies in exchange for ending direct cash payments to farmers. One proposal, the Supplemental Coverage Option, would have increased 2012 payouts by another $6.5 billion, according to Babcock’s analysis.
“Lawmakers finalizing a farm bill have a golden opportunity to cut wasteful spending while maintaining a strong safety net and erasing budget cuts that hurt hungry families and the environment,” said Craig Cox, EWG’s senior vice president for agriculture and natural resources.
Babcock and the EWG also recommended a 30 percent reduction in the $1.3 billion annual subsidy to the private insurance companies that sell and service crop insurance policies.
From 2002 to 2012, those companies realized about $10 billion in underwriting gains, according to Babcock’s analysis. In fact, he said, taxpayers paid more to insurance companies than to farmers in 6 of the past 12 years.
Without sacrificing agriculture’s safety net, Congress could cut crop insurance subsidies, reduce the deficit and free funds for nutrition and conservation programs that benefit the public, Babcock said.
Babcock and Scott Faber, EWG’s senior vice president for government affairs, expressed confidence that Congress would agree on a farm bill next month.