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Friday, December 17, 2010

Federal Crop Insurance: Background and Issues

Dennis A. Shields
Specialist in Agricultural Policy

In preparation for the next farm bill, the 112th Congress will likely continue reviewing the effectiveness and operations of the federal crop insurance program as part of the farm safety net. In 2010, the House Committee on Agriculture sought input from farmers and others on the program, and the U.S. Department of Agriculture (USDA) revised its agreement with the crop insurance industry to deliver crop insurance to farmers following a rapid rise in government costs of the program. This report provides a primer on the federal crop insurance program.

The federal crop insurance program began in 1938 when Congress authorized the Federal Crop Insurance Corporation. The current program, which is administered by the U.S. Department of Agriculture’s Risk Management Agency (RMA), provides producers with risk management tools to address crop yield and/or revenue losses on their farms. In purchasing a policy, a producer growing an insurable crop selects a level of coverage and pays a portion of the premium—or none of it in the case of catastrophic coverage—which increases as the level of coverage rises. The federal government pays the rest of the premium (averaging about 60% of the total). Insurance policies are sold and completely serviced through 16 approved private insurance companies. The insurance companies’ losses are reinsured by USDA, and their administrative and operating costs are reimbursed by the federal government.

In 2010, federal crop insurance policies covered 255 million acres. Major crops are covered in most counties where they are grown. Four crops—corn, cotton, soybeans, and wheat—accounted for three-quarters of total acres enrolled in crop insurance. Most crop insurance policies are either yield-based or revenue-based. For yield-based policies, a producer can receive an indemnity if there is a yield loss relative to the farmer’s “normal” (historical) yield. Revenue-based policies protect against crop revenue loss resulting from declines in yield, price, or both. Other insurance products protect against losses in whole farm revenue (rather than just for an individual crop) or gross margins for livestock enterprises.

Government costs for crop insurance have increased substantially in recent years. After ranging between $2.1 and $3.6 billion during FY2000-FY2006, costs rose to $7.3 billion in FY2009 as higher policy premiums from rising crop prices drove up premium subsidies to farmers and expense reimbursements (which are based on total premiums) to private insurance companies. In FY2010, total costs declined to $3.7 billion following a decline in crop prices. Reimbursements and risk-sharing between USDA and private insurance companies are spelled out in a Standard Reinsurance Agreement (SRA), which plays a large role in determining program costs. In 2010, USDA renegotiated the SRA for the 2011 reinsurance year (which began July 1, 2010) to save money and make adjustments to improve program delivery.

Over the next 10 years, federal spending on crop insurance is projected to outpace spending on traditional commodity programs by about one-third, which might capture the attention of budget cutters looking for potential sources of savings. Insurance companies, farm groups, and some Members of Congress are concerned that additional reductions in federal support will negatively impact the financial health of the crop insurance industry and possibly jeopardize the delivery of crop insurance. A main concern for most is saving federal dollars without adversely affecting farmer participation, policy coverage, or industry interest in selling and servicing crop insurance products to farmers. From a farm policy standpoint, policymakers and observers alike remain concerned about how the crop insurance program interacts with farm commodity programs and whether together they provide a cost-effective means for helping farmers deal with business risk.

Date of Report: December 13, 2010
Number of Pages: 24
Order Number: R40532
Price: $29.95

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