Mandatory Spending

Function 350 - Agriculture

Reduce Subsidies in the Crop Insurance Program

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays                        
  Reduce premium subsidies 0 -2.3 -2.3 -2.3 -2.4 -2.5 -2.5 -2.6 -2.6 -2.6 -9.3 -22.1
  Limit administrative expenses and the rate of return 0 -0.6 -0.6 -0.6 -0.6 -0.6 -0.6 -0.5 -0.5 -0.5 -2.5 -5.2
  Both of the above policies 0 -2.9 -2.9 -2.9 -3.0 -3.0 -3.1 -3.1 -3.1 -3.2 -11.8 -27.3

Note: This option would take effect in June 2014.

The Federal Crop Insurance Program protects farmers from losses caused by drought, floods, pest infestation, other natural disasters, and low market prices. Farmers can choose various amounts and types of insurance protection—for example, they can insure against losses caused by poor crop yields, low crop prices, or both. Premium rates for federal crop insurance are set by the Department of Agriculture (USDA) so that the premiums equal the expected payments to farmers for crop losses. Of total premiums, the federal government pays about 60 percent, on average, and farmers pay about 40 percent. Insurance policies purchased through the program are sold and serviced by private insurance companies, which are reimbursed by the federal government for their administrative costs. The federal government reinsures those private insurance companies by agreeing to cover some of the losses when total payouts exceed total premiums.

This option would reduce the federal government’s subsidy to 40 percent of the crop insurance premiums, on average. In addition, it would limit the federal reimbursement to crop insurance companies for administrative expenses to 9.25 percent of estimated premiums (or to an average of $915 million each year from 2015 through 2023) and limit the rate of return on investment for those companies to 12 percent each year. Under current law, by the Congressional Budget Office’s estimates, federal spending for crop insurance will total $78 billion from 2015 through 2023. Reducing the crop insurance subsidies as specified by this option would save $27 billion over that period, CBO estimates.

An argument in favor of this option is that cutting the federal subsidies for premiums would probably not have a substantial effect on participation in the program. Private lenders increasingly view crop insurance as an important way to ensure that farmers can repay their loans, which encourages participation. In addition, the producers who dropped out of the program would generally continue to receive significant support from other federal farm programs.

Current reimbursements to crop insurance companies for administrative expenses (around $1.3 billion per year) were established in 2010, when premiums were relatively high. Recent reductions in the value of the crops insured (due, in part, to lower average commodity prices) have resulted in lower average premiums for crop insurance. However, administrative expenses have not shown a commensurate reduction. A cap of 9.25 percent, or about $915 million, is close to average reimbursements during the years prior to the run-up in commodity prices in 2010. Furthermore, a recent USDA study found that the current rate of return on investment for crop insurance companies, 14 percent, was higher than that of other private companies, on average.

An argument against this option is that cutting the federal subsidies for premiums would probably reduce the amount of insurance that farmers purchase. If the amount of insurance declined significantly, lawmakers might be more likely to enact special relief programs when farmers encountered significant difficulties, which would offset some of the savings from cutting the premium subsidies. (Such ad hoc disaster assistance programs for farmers have cost an average of about $700 million annually over the past five years.) In addition, limiting reimbursements to companies for administrative expenses and reducing the targeted rate of return to companies could add to the financial stress of companies in years with significant payouts for covered losses.