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||2017||2018||2019||2020||2021||2022||2023||2024||2025||2026||2017-2021||2017-2026|
|Change in Outlays|
|Reduce premium subsidies||0||-0.2||-2.3||-2.7||-2.8||-2.8||-2.8||-2.9||-2.9||-2.9||-8.0||-22.3|
|Limit administrative expenses and the rate of return||0||-0.1||-0.5||-0.6||-0.6||-0.6||-0.6||-0.6||-0.6||-0.6||-1.7||-4.7|
|Both alternatives above||0||-0.3||-2.8||-3.3||-3.4||-3.4||-3.4||-3.5||-3.5||-3.5||-9.7||-27.0|
This option would take effect in June 2017.
The Federal Crop Insurance Program protects farmers from losses caused by droughts, floods, pest infestations, 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. The Department of Agriculture (USDA) sets rates for federal crop insurance 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. Private insurance companies—which the federal government reimburses for their administrative costs—sell and service insurance policies purchased through the program. The federal government reinsures those private insurance companies by agreeing to cover some of the losses when total payouts exceed total premiums.
Beginning in June 2017, this option would reduce the federal government’s subsidy to 40 percent of the crop insurance premiums, on average. It also would limit the federal reimbursement to crop insurance companies for administrative expenses to 9.25 percent of estimated premiums 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 $88 billion from 2017 through 2026. Reducing the crop insurance subsidies as specified in 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 substantially affect 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 farmers who dropped out of the program would generally continue to receive significant support from other federal farm programs. However, if significantly fewer farmers participate, then some smaller crop insurance companies would probably go out of business.
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 (partly because of 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 per year, is close to average reimbursements during the years before the run-up in commodity prices in 2010. Furthermore, according to a recent USDA study, 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 cause farmers to buy less insurance. 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 subsidy. (Such ad hoc disaster assistance programs for farmers cost an average of about $700 million annually in the early 2000s.) 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.