WASHINGTON, May 2, 2013- A report commissioned by the Environmental Working Group (EWG) concluded that record crop insurance payouts are a result of a flawed federal crop insurance structure rather than solely the conditions of the 2012 drought.
The study, by agricultural economist Bruce Babcock of Iowa State University, concluded that during last year’s drought, crop insurance payouts will exceed $16 billion, almost 50 percent more than 2011. He called the current program, "a bloated, taxpayer-funded income support program that in many cases allows growers, particularly the industrial-scale operations that have been enjoying record profits, to make more money from insurance payouts than they would from a healthy harvest."
With program structure changes, Babcock said corn and soybean farmers could have been compensated for their actual economic losses at a cost of around $6 billion instead of $12.7 billion.
“The point is not to argue that the drought did not seriously affect crop yields,” Babcock wrote. “Clearly it did. But given the high cost of the crop insurance program, it is reasonable to ask whether it makes any sense to entice farmers to buy Cadillac coverage with taxpayer dollars when a basic revenue guarantee is possible at much lower cost.”
Babcock further noted that the premiums paid by farmers for crop insurance cover 40 percent of the anticipated payouts, while taxpayers pay for the other 60 percent. In the report, he makes the case for reforming the program so that farmers pay a larger share of the cost.
Specifically, he said “it is a stretch to argue that every dollar currently being used to encourage farmers to buy RP [Revenue Protection] and high coverage levels is needed, when the only possible risk management benefit is to reduce some farmers’ hedging risks.”
“If farmers had to pay the full incremental costs of RP, only those who highly value the additional hedging risk protection would buy it,” he concluded. “The rest would opt for RP-HPE [Revenue Protection-Harvest Price Exclusion] or YP [Yield Protection]. This would dramatically lower the cost of the crop insurance program while still providing a generous safety net.”
Craig Cox, EWG’s senior vice president for agriculture and natural resources, said lawmakers should consider reforms to the crop insurance program in their efforts to reduce spending. View the report here.
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