De Mystifying Crop Insurance in the Farm Bill
By Brad Wilson at Jun 17, 2013
Crop Insurance has gotten a lot of attention in discussions of the farm bill in both farm and nonfarm circles, both five years ago and in the current cycle. There are major reasons for this. Adequate analysis of these reasons must deal with the fundamental facts, (many of which are usually missing,) and also with these two audiences, both of which are largely rooted in false paradigms that misrepresent the issues involved.
Fixing New Myths about Farm Bill History
Explaining the facts necessitates a history lesson, and farm bill history is a key domain that both farm and nonfarm leaders usually get wrong in current discussions. Government sources also seem to be weak on these issues, as they seem to focus on whatever the big issues are that people are generally talking about (rather than focusing on fundamental realities). Perhaps the major source of confusion lies in the presence of various forms of farm subsidies, (including insurance subsidies,) which garner the lions share of public attention, drawing it away from the real issues.
While there have been a large number of complicated technical variations in farm program history, some key general trends can and must be understood. First, the farm bills and resulting farm programs that were first developed, (as part of the New Deal in the 1930s,) primarily addressed one basic economic reality. Farm commodity crops like corn, wheat, rice and cotton “lack price responsiveness” “on both the supply and the demand sides” for the major groups of crops grown in the various regions. This means that they do not self-correct very well at all in deregulated “free” markets, under most market conditions that we’ve had over the past 150 years. Basically, the classical supply and demand curve does not apply to farm commodities. As a result, prices have usually been low, even into the 21st century. Farm revenue, therefore, has usually been low. This economic problem is the fundamental hidden context underlying all of the substantive farm bills and programs, and also under the farm subsidy programs, including, in recent years, crop insurance.
The major exception to this has been when the economic problem was fixed by farm bill farm programs, as in the New Deal. The fix of the price responsiveness issue was through Price Floors, backed up by Set Asides (supply reductions, as needed to prevent oversupply that drives down prices). From 1942 through 1952, Price Floors were set at 90% of parity, which should be understood as a “living wage” or “fair trade” price standard, not just a “minimum” price (ie. equivalent to a “living wage,” not a “minimum wage”). Under these programs and standards, when well run, no farm commodity subsidies were or are needed, including subsidized crop insurance.
The historical story is that Price Floors and Set Asides were reduced (1953-1995) and eliminated (1996-2013). This occurred under pressure from 2 kinds of corporate lobbyists, farm commodity buyers, (who have called for ever cheaper prices), and those selling inputs to farmers (who want maximum acreage to be utilized in resource intensive ways, and who have therefore opposed supply reductions). As our economic analysis would and did predict, the lowering and elimination of Price Floors led to low farm prices. It led, in fact, to the lowest in history, 1997-2005. The plan written into the 1996 Farm Bill also called for subsidies to be eliminated in 2002. Instead, due to the massive farm crisis being created, subsidies were first increased, in four emergency farm bills (1998, 1999, 2000, 2001,) and then, essentially, these emergency provisions were included as standard compensation in the 2002 farm bill, as again, no Price Floors or Set Asides were enacted.
Increasingly, then, these lobbyists won the day, even to the point of massive US export dumping. Here Congress increasingly chose for the US, (the dominant farm commodity exporter,) to lose money on farm exports. This was exactly the opposite of OPEC, in oil. OPEC balanced supply and demand and greatly raised it’s oil prices, even as the US, with even larger export clout, lowered it’s farm commodity prices, and eliminated it’s profits. It was a choice, since, economically, farm prices were known to usually be low without Price Floor programs. In this way, in a sense, Congress created a need for farm commodity subsidies, including subsidized crop insurance.
And in fact, Congress chose to create increasingly expensive programs under which the US made less and less money per unit on farm commodity exports. Specifically, after a number of years of reducing farm commodity market prices, resulting in massive criticism from farmers, Congress started to give farmers subsidies. Wheat, corn and other feedgrain subsidies were started in 1961, cotton subsidies in 1964, rice subsidies in 1977, and soybean subsidies in 1998. Over time, as Price Floors were lowered, subsidies were increased, (though never as much as the reductions for which they compensated). Subsidies did not fully compensate farmers for reductions, but rather paid farmers for a fraction of them. Compared to a standard of 1942-52 prices, or a parity standard, farmers have received in subsidies only about one eighth of the amount of the reductions. Meanwhile most farmers went out of business.
How the Food Movement Unknowingly Supports Agribusiness Exploiters
Since Price Floor programs were ended in 1996, they’ve been largely forgotten in analyses of farm programs, along with the economic reason for both nonsubsidy Price Floors and for subsidies. That has worked out well for the corporate lobbyists, who have, in this way, become forgotten and unopposed by most subsidy critics. In 2009, $60 million out of $100 million in lobby money came from just 20 corporations, ($45 million from commodity buyers, $15 million from input sellers,) all of whom oppose Price Floor programs. Meanwhile, critics of farm subsidies, 90% of the time, did not oppose these corporate lobbyists, and in fact, did not even know in any specific policy way that such opposition was possible.
Instead of opposing agribusiness, Farm Bill criticism has has been directed towards it’s victims. It’s been targeted against subsidy compensations for these victims, including, more recently, subsidized crop insurance. One newer kind of subsidy, Direct Payments, were invented to comply with WTO, and was spun as the good subsidy, based upon the mistaken belief that subsidies cause low market prices. They are given without regard to farm price levels, and are said not to distort markets. In fact, however subsidies of all kinds do not cause export dumping in any practically significant way, any more than food stamps cause low wages at Walmart. Ending compensations to farmer victims does not at all make Cargill, ADM, Kelloggs, General Mills, Ralston Purina, Tyson, Smithfield, Dean Foods, Kraft, etc. pay more money to farmers.
Direct Payments are given whether farmers need them or not, while CounterCyclical Payments (or any countercyclical type of subsidy)) are only given when needed. The absurdity of Direct Payments was initially concealed behind the fact that they would have been needed virtually every year 1981-2006 (and on to 2012 for wheat, cotton, sorghum, barley, and oats; see USDA-ERS “Commodity Costs and Returns,”)
What happened, however, is that, unexpectedly, from 2007 to 2011 and beyond, corn, soybean and rice prices have been much higher than they were 1981-2006, and farmers had returns above zero (vs full costs). This helped fuel massive criticism of Direct Payments by nonfarmers. Farm activists who represent authentic “farm” interests, such as fair prices and keeping farms in business, have always strongly rejected Direct Payments and all subsidies. These are what I call “farm justice” farmers, and have been known historically as the Family Farm Movement.
Subsidized Crop Insurance, as we see it in the Farm Bill and in recent Farm Bill proposals, (with Revenue Insurance added in on top of traditional crop and disaster insurance components,) is a response to the new criticism of Direct Payments. Like Direct Payments, Crop Revenue Insurance (insuring against bad farm bills combined with bad market conditions,) is de-coupled, following markets rather than being countercyclical to market conditions, so it’s given when not needed, but also not given when needed. While critics like the Environmental Working Group have quickly criticized Crop Insurance, their analysis has failed to take into account either the lack of “price responsivensss,” (the reason for Farm Bills in the first place, which they get wrong, with false histories of the farm bill,) or of the history of how farm bills have increasingly hurt farmers. These criticisms also unknowingly support the worst kind of farm bills, with zero Price Floor programs, for the cheapest possible cheap corn, sugar, cotton, milk, etc.
One More Time: Crop Insurance Explained More Clearly
Originally, crop insurance was insurance for damage from hail. More recently, under record low farm commodity price levels and ongoing emergency farm bills, crop insurance was changed into a substitute for more kinds of disasters, such as low yields from drought and floods. Unlike hail damage, drought, for example, can be widespread, and can last for several years. Low yields from drought, therefore represent a very different kind of insurance statistic. On the other side, Congress, in seeking to balance out budgets and prepare against the politically embarrassing budget volatility that is caused by crop disasters, has developed insurance programs to compensate farmers for low crop yields caused by these larger disasters (larger than hail almost always is).
An even bigger new category for insurance is that of the low market prices and farm incomes that result economically from the lack of price responsiveness, and politically from the absence of Price Floor programs. In this category are programs and proposals for Revenue Insurance and Margin Insurance (ie. dairy margin insurance). In fact, there are stand alone Revenue Insurance programs, and revenue losses are ALSO covered under the banner of Crop Insurance.
The crises of low market prices diverges even farther from traditional insurance categories and statistics, as they can affect all farmers of multiple crops at the same time. That’s radically different from hail insurance, as hail is very scattered in impact. Only very rarely so we see hail affecting an area in the corn belt as large as an Iowa county, for example.
The result of these changes is that insurance companies must be significantly subsidized or they won’t at all insure these larger disasters, and/or farmers’ insurance premiums must be significantly subsidized, in order for them to be able to afford the coverage. So it would be a de facto elimination of subsidies to remove the massive subsidization of insurance companies and premiums. Either way it adds up to a very large amount of money for taxpayers, even as farmers pay for part of it.
Meanwhile, Revenue Insurance in Crop Insurance is risk base, according to insurance industry calculations. So it varies from year to year, and it’s common and expected for insurance companies to have negative returns on some years. For the government to subsidize them against the kinds of low market prices that we had for 25 our of 26 years, 1981-2006, (for a sum of 8 crops, and 4 of 5 years for 5 of these crops for 2007-2012,) requires a massive subsidy, as they wouldn’t want to handle 25-30 years of losses all on their own. Again, that’s not remotely similar to hail insurance. It’s a huge shoving of square (market price) pegs into round (like hail insurance) holes.
In political spin, however, hiding Revenue Insurance inside of Crop Insurance can conveniently be labeled as “risk management,” as a standard business practice, and framing things in “business” terms has long been the key to agribusiness spin in the farm bill. While at root, this is massively invalid, on face value, it has often worked. This spin is not working nearly as well today, except that the main new critics, like the Environmental Working Group, are even more out of touch with farm market and farm program realities, while at the same time, unknowingly siding hugely with agribusiness against family farmers (who, in turn, are falsely labeled as big agribusiness, and as benefiting from the various farm bill proposals).
(Authors note: I’ve been working on a much longer, footnoted piece explaining this, but it’s a big job, and there have been many other challenges, with a series of severe farmer-bashing, pro=agribusiness myths going viral across the cybersphere, across mainstream media, the food movement and conservative arenas. I’ll get it written eventually.)
There are Only Two Proposals for Farm and Food Justice
The biggest solutions needed to all of this is to eliminate the need for farm commodity subsidies by making agribusines pay fair prices instead of letting farmers subsidize consumers while taxpayers very partially compensate farmer-victims. There are only 2 current major proposals that do this, plus one dairy proposal. These proposals are almost wholly unknown to most farm bill advocates. I haven't seen them mentioned in any mainstream media editorials or articles on farm subsidies, crop insurance, etc., for more than 20 years.
One is the Food from Family Farms Act of the National Family Farm Coalition. This is the latest version of the original New Deal nonsubsidy farm bill program, and of the Harkin-Gephardt proposal that was voted on in the House and Senate in 1985. It's been well researched by econometric studies, which found that it would result in huge savings, would give farmers commodity prices that are much more fair, would export dumping and prevent extreme price spikes (ie. would fix volatility), and would increase US income from farm commodity exports. The most recent econometric study is that of the Agricultural Policy Analysis Center (APAC) at the University of Tennessee. With this proposal there is no need for any Revenue Insurance or any other farm commodity subsidies.
This bill has also had a dairy component, and that has been updated in recent years as the Federal Milk Marketing Improvement Act, which ends dairy subsidies and helps farmers get fair prices from agribusiness buyers.
A new, alternative proposal was developed by the National Farmers Organization and APAC, the Market Driven Inventory System. It presents Congress with a new question, a new kind of program, and has been examined in two APAC econometric studies.
These proposals accomplish Family Farm (Farm Justice) Movement and Food (Hunger, Environmental, Public Health, etc.) Movement goals related to farm commodities far better than any other proposal. (See source below, which has a wide variety of references on these proposals.)
See key links to these issues in my blog:
Brad Wilson, “Primer: Revenue Insurance for the 2012 Farm Bill,” ZSpace, 5/11/12,
I’m planning a major reworking of that piece, where I re-categorize it and annotate it with enough details to help people better utilize it to learn about specific topics. For now, just look at the titles of the various articles listed there for guidance/
Brad Wilson, "Primer: Farm Justice Proposals for the 2012 Farm Bill," ZSpace, 6/11/12,