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Friday, December 14, 2012

Federal Crop Insurance: Background

Dennis A. Shields
Specialist in Agricultural Policy

As part of the ongoing farm bill debate, Congress continues to review the effectiveness and operations of the federal crop insurance program as part of the farm safety net. This report describes the current federal crop insurance program as background for crop insurance provisions in House and Senate versions of the farm bill proposed in the 112th Congress (see CRS Report R42759, Farm Safety Net Provisions in a 2012 Farm Bill: S. 3240 and H.R. 6083). 

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 (62%, on average, in 2012). Insurance policies are sold and completely serviced through 15 approved private insurance companies. The insurance companies’ losses are reinsured by USDA, and their administrative and operating costs are reimbursed by the federal government (i.e., farmers do not pay delivery costs).

In 2012, federal crop insurance policies covered 282 million acres. Major crops are covered in most counties where they are grown. Four crops—corn, cotton, soybeans, and wheat—accounted for nearly 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. Revenuebased 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 $3.9 billion during FY2000-FY2007, costs rose to $7 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. Costs rose further to $11.3 billion in FY2011 and $14.1 billion in FY2012 when crop prices surged again and poor weather resulted in program losses.

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.

In the coming years, outlays for crop insurance are expected to exceed commodity programs, making crop insurance a potential target for deficit reduction. 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 industry and possibly jeopardize the delivery of crop insurance to farmers. A main goal is saving federal dollars without adversely affecting farmer participation, policy coverage, or industry interest in selling and servicing 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 means for helping farmers deal with business risk at a cost that is acceptable to taxpayers.

Date of Report: December 6, 2012
Number of Pages: 25
Order Number: R40532
Price: $29.95

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