Safety Nets or Trampolines? Federal Crop Insurance, Disaster Assistance, and the Farm Bill

Article excerpt

We review the implications of the 2007 Farm Bill for the risk management dimensions of U.S. agriculture and policy. Legislative proposals suggest significant changes in risk management policy, including the introduction of state or national revenue insurance. We also pursue an empirical analysis of the interrelationships of crop insurance, disaster relief, and farm profitability. We find an inverse relationship between disaster assistance and insurance purchases. Our analysis also suggests that farmers that buy insurance and that receive disaster payments tend to have higher returns to farming.

Key Words: crop insurance, disaster payments, Farm Bill

JEL Classifications: Q18

The 2007 calendar year drew to a close without resolution on a new Farm Bill. Competing versions of the new legislation existed in the House and Senate. The House version of the Farm Bill passed on July 27, 2007, by a relatively wide margin, with a vote of 231-191. On December 14, 2007, a very similar version passed in the Senate by a vote of 79-14. Modest differences between the two versions of the legislation are yet to be resolved in conference. However, it is clear that a generous package of support, scored at about $285 billion over the next 10 years, will be forthcoming.

Critics of U.S. farm programs have raised a number of objections about the evolution of policy (and the concomitant lack of perceived progress toward reform) over the last 10 years. The sheer magnitude of the financial support ($190 billion under the 2002 Farm Bill and the aforementioned $285 billion estimated for the proposed 2007 legislation) raises many questions regarding the intent of such support and the possible implications for U.S. and international agricultural markets. One complaint that is often raised about U.S. farm support pertains to its significant concentration among a relatively small number of producers. The Environmental Working Group (EWG) reports that, between 2003 and 2005, the top 1% of U.S. farmers received 17% of all farm subsidies while the top 10% received 66% of subsidies. Within the top 1%, the average annual payment was nearly $126,000.1 Other concerns involve the potential for various programs to work at cross-purposes. Programs that are directly tied to support ("coupled" programs) encourage more production by bringing more land into production. Other programs, such as the Conservation Reserve Program (CRP), serve to remove environmentally sensitive land from production by paying subsidies to farmers that agree to place their land in reserve for a 10- or 15-year period.

Perhaps one of the most obvious examples of agricultural policies that may not be entirely consistent with one another lies in the role of subsidized risk management and disaster relief. Throughout various legislative actions since 1980, the U.S. Congress has signaled its intentions that the primary instrument for managing agricultural risks and disasters should be through subsidized federal crop insurance. In recent years, legislative changes through the 1994 Federal Crop Insurance Reform Act and the 2000 Agricultural Risk Protection Act (ARPA) have significantly expanded the depth, scope, and range of U.S. crop insurance programs. The 1994 legislation made participation in the federal crop insurance program a mandatory requirement for eligibility for other farm program benefits. This requirement proved unpopular with producers and thus was repealed after the 1995 crop year. Significant premium subsidies have been used to encourage participation and by 2006, 55 million acres were insured with a total liability of over $67 billion.2

Despite political rhetoric to the contrary, the U.S. Congress has repeatedly used ad hoc disaster payments as a means of addressing yield and price shortfalls. Between 1975 and 1981, Commodity Credit Corporation outlays for disaster assistance exceeded $3.57 billion.3 Since 1985, the U.S. Congress has approved nearly $30 billion in emergency agricultural disaster aid to more than two million farm and ranch operations (EWG). …