TOPIC | FARM POLICY


Crop Insurance: From Little Known Law to Cornerstone of Farm Policy

April 2014

Although federal crop insurance has been around since 1938, for more than half a century it was largely unknown and underused. Because of this, natural disaster management was mostly done after the fact, in the form of large, costly disasters bills. These bills were not only slow in delivering much needed help to farmers, but also fell full on the laps of taxpayers to fund.

Repeated weather disasters in the 1980s, accompanied by an equally painful farm debt crisis, was causing hardship in rural America and anxiety in Congress about how these expenses would be covered and who would foot the bill.

Concerned that the federal government’s responses to natural disasters had typically been “generally reactive and ad hoc,” House Agriculture Committee Chairman E. “Kika” de la Garza asked the General Accounting Office (GAO) for guidance on how to better manage expensive, recurring disasters.

The resulting 1989 GAO examination and report would help pave the way for a new approach to agricultural policy – one that would ultimately protect 90 percent of planted cropland in 2013 and would help farmers manage back-to-back years of natural disasters in 2011 and 2012.

Specifically, the GAO studied USDA’s three main disaster programs – ad hoc direct disaster payments, disaster emergency loans and crop insurance – and compared their effectiveness using eight different criteria. And while none of the programs satisfied all the criteria laid out, the GAO report pointed out “crop insurance is a more equitable and efficient way to provide disaster assistance” than both direct disaster payments and emergency loans.

The report noted “crop insurance treats disaster victims more equitably” and also “provides farmers disaster assistance more efficiently because farmers generally have more incentive to reduce risk under the program than they do under loan and direct payment programs.”

And so, crop insurance began its journey of improving and evolving as the centerpiece for U.S. farm policy. That included more private-sector involvement, making the program actuarially sound, and encouraging participation.

Even as late as the early 1990s, crop insurance participation rates hovered in the 30 percent range and Congress was often spending considerably more each year in disaster relief expenditures than it was on crop insurance.

The Federal Crop Insurance Reform Act of 1994 restructured things to boost farmer participation, increase the private sector’s role and create the USDA’s Risk Management Agency (RMA). Other important reforms to crop insurance can also be found in the “Blueprint for Financial Soundness,” published in the Federal Register in 1994. Many of these recommendations have been implemented since its publication.

They include:

• Determination of more accurate yields;

• Better tracking of ineligible producers;

• Premium rate adjustments;

• Improved underwriting;

• Better program compliance;

• Introduction of new products to improve participation;

• Increased risk bearing by AIPs;

• Management actions to correct if changes not working.

By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988. But coverage levels on a per acre basis were still low, such that Congress had not been able to break the habit of yearly ad hoc disaster bills.

Then, in May of 2000, Congress approved the breakthrough piece of legislation: the Agricultural Risk Protection Act (ARPA). The provisions of ARPA made it easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields.

By the summer of 2012, more than 280 million acres were enrolled in crop insurance – just in time for historic drought that would have otherwise crippled rural America.

As a result of these continuous improvements to modern-day insurance program, there have been no calls for ad hoc disaster bailouts – even after the widespread floods of 2011 and Dust Bowl-like conditions of 2012.

In 2013, nearly 296 million acres were protected by federal crop insurance, which represented nearly $124 billion in liabilities, and offered policies covering 128 different crops. Farmers have shown their support for crop insurance with their pocketbooks, spending more than $38 billion out of their own back pockets purchasing premiums since 2000.

Just days after the 2014 Farm Bill was signed into law by President Obama, RMA Administrator Brandon Willis commented about the evolution of crop insurance and why it has become the centerpiece of risk management in farm policy. “There is one simple reason why crop insurance has lasted for over 75 years while other programs have come and gone. It’s because it makes sense … for consumers, for taxpayers and for farmers,” he said.