ISU professor says subsidies make farmers buy more expensive crop insurance
May 2nd, 2013 by Ric Hanson
A report by Iowa State University economics professor, Bruce Babcock, finds government incentives to help farmers pay for crop insurance push them toward the more expensive insurance and increase the costs to taxpayers. Babcock studied the crop insurance payouts for corn and soybeans related to the 2012 drought. “The premium subsidies incentivize farmers to buy Cadillac coverage,” Babcock says. “The Cadillac coverage increases the indemnities paid out. Taxpayers are paying three-quarters of those indemnities, so the subsidies have a direct impact on taxpayer costs because taxpayers are paying for part of that premium — but they inflate the overall indemnities and taxpayers pay the lion share of those in high-loss years.”
Babcock found the payouts for the top insurance coverage, known as revenue protection, were over 12-BILLION dollars in 2012. “What I wanted to know was, well what if the subsidies hadn’t created such and incentive to drive farmers to the Cadillac insurance product and instead they got a bare bones..or a regular revenue insurance protection. Or what if they just bought regular yield insurance?,” Babcock asked. He says the answer to the question was the cost of the insurance was much lower. “And it turns out that if farmers had replaced revenue protection with a product called ‘Revenue Protection H-P-E’ –which is pure revenue insurance — the amount of loss would have been decreased from more than 12-BILLION dollars to about six-BILLION dollars. That is, the subsidies had basically increased the indemnities paid to farmers, it more than doubled them,” according the Babcock.
Babcock says he is not being critical of the crop insurance program itself as a security net for farmers. “I’m a critic of the subsidies, and those two are two separate items,” Babcock says. “And I just think that you could cut the subsidies a tremendous amount — or restructure them — save tens of BILLIONs of dollars over 10 years and still provide a high-quality assurance safety net. If that’s what Congress wants, you could do it at a far lower cost.” He says if farmers want the protection of the higher end insurance program, then they should have to pay for it and not have the taxpayers picking up 75-percent of the bill. Babcock talked about his findings with reporters in a conference called set up by the Environmental Working Group.