Critics have long contended that crop insurance is so vital to farmers that changes in premium rates will have no impact on participation.
Such claims may be convenient for special interests hoping to weaken farmers’ most important risk management tool by making it more expensive, but the claims are also incorrect, according to a new peer-reviewed study.
Crop insurance “would likely respond fairly abruptly to large cuts,” explained Dr. Josh Woodard, an associate professor at Cornell University, whose work was recently published in the Journal of Risk and Insurance.
Woodard observed that crop insurance demand is clearly responsive to price, as proven by the uptick in participation following Congressional actions over the years to provide premium support instead of ad hoc disaster payments. A similar decrease in participation would naturally occur if coverage costs more, he explained.
Results from Woodard’s analysis of the demand for crop insurance on Illinois corn found that participants would purchase lower levels of insurance coverage as premium prices rise. Some participants may drop out of buy-up coverage altogether, Woodard noted.
“Crop insurance is already expensive for farmers but is necessary to obtain loans to invest in new technologies and conservation activities,” he wrote. “Significantly cutting this support will not only hinder farmers’ ability to invest in sustainable farm operations, but may push many farmers out insurance and eventually out of business.”
The findings are groundbreaking as past analysis of crop insurance assumed demand to be unresponsive to price, due to a shortcoming in the way past researcher’s estimated demand. Woodard’s methodology corrects for that limitation, which should improve the reliability of future research in the field.
Though the paper does not advocate for or against crop insurance, it notes, “Policy makers should be properly informed by the most applicable and relevant research when seeking to estimate the impacts of policy changes on demand. This is particularly true in light of consideration of prospective rate-making changes in the program.”
The study was published shortly after the House and Senate concluded debate on the 2018 Farm Bill. Both chambers passed bills that kept crop insurance strong and rebuffed efforts to make the program more expensive by cutting funding, capping benefits, and limiting participation using an arbitrary income means test.
“A lot of farmers simply would not be able to afford their insurance coverage any longer if Congress were to substantially increase premium rates,” Woodard concluded. “The long run costs of that should be factored into any policy decisions. I think lawmakers, correctly, understand this reality.”
Lawmakers’ support for crop insurance, which has become a cornerstone of U.S. farm policy, is not surprising. Prior to crop insurance’s rise to prominence, taxpayers were called upon to fully fund ad hoc aid after disasters. That was both expensive and inefficient.
With crop insurance, farmers pay for a portion of their safety net – collectively between $3.5 billion and $4 billion a year – so taxpayers don’t shoulder all the risk. And aid arrives in weeks, not months or years, because private-sector insurers process claims instead of the government.
The program’s popularity has steadily increased as Congress has made investments to make crop insurance more affordable and available for farmers. In 2017, it protected more than $100 billion worth of agricultural goods on a record 311 million acres of land.
Source: National Crop Insurance Services