Buy Crop Insurance, Double Your Money
Deep in the heart of the arcane laws that give farmers a helping hand, there's something called "crop insurance." It's a huge program, costing taxpayers anywhere from $5 billion to $10 billion each year.
It's called an insurance program, and it looks like insurance. Farmers buy policies from private companies and pay premiums (which are cheap because of government subsidies) to insure themselves against crop failures and falling prices. It's mainly used by corn, soybean, cotton and wheat farmers. Defenders of the program call it a safety net.
But according to Bruce Babcock, an economist at Iowa State University who's also a long-time critic of this program, it's far more generous than a safety net — and really, it's not insurance at all. Normal insurance is something that you buy while hoping that you'll never use it. Crop "insurance," Babcock says, is really a lottery: You play because you hope to win.
Farmers do win. A lot, in fact. And in this casino game, the house — meaning you, the taxpayer — loses every year.
Here are the numbers, which Babcock just released in a new report for the Environmental Working Group. For every $1 that farmers spent on crop insurance premiums over the past 15 years, they got more than twice that much back in payouts.
Even more startling is the disparity across different regions of the country. In the Corn Belt states of Indiana and Illinois, the program was not nearly as profitable for farmers. Soybean farmers in Illinois, for instance, got only 12 percent more money back than they paid into the program. But in the South and the Great Plains, it was a different story. Cotton farmers in Texas, and corn farmers in Arkansas, got more than $3 back for every $1 that they paid into the program from 2000 to 2014.
Perhaps, Babcock says, the U.S. Department of Agriculture is setting insurance premiums too high in the Corn Belt and far too low in places where risks are actually higher, like the Great Plains.
Babcock, whose academic specialty is risk management in agriculture, actually likes true insurance policies. In fact, he designed many of the insurance policies that farmers now purchase. His problem is with the generous subsidies that the government gives farmers to make these purchases, which he says are a waste of the public's money.
He's been pushing an alternative. Under the Babcock plan, the government would give each farmer a grant that he or she could use to buy insurance. That grant would be enough to pay for catastrophic coverage on crops: It would pay farmers if their revenues were less than, say, 65 percent of an average year. But farmers would have to buy private insurance, with no government subsidy, for anything beyond that.
Right now, the government pays part of the insurance premium for policies that cover up to 85 percent of a farm's expected revenue. The insurance covers not just crop losses, due to things like bad weather, but also losses due to falling corn or soybean prices.
Babcock thinks this plan would cost taxpayers less than half what they currently are paying — perhaps $3 billion each year. But it would be a true safety net, not a lottery that farmers expect to win.
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