Budget Options
December 22, 2017

Mandatory Spending

Function 350 - Agriculture

Restrict the Ways in Which Producers’ Losses are Calculated 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.

Policies offered through the federal crop insurance program allow for flexibility in how losses are calculated. Limiting that flexibility would achieve budgetary savings.

Currently, most producers purchase policies that value losses on the basis of whichever is greater: the projected price of crops at the time a policy is purchased or the price of crops at harvest. Declines in production and other events can elevate the harvest price above the projected price. When that happens, these policies value losses at a higher price than anticipated when the policies were purchased.

One option would prevent such outcomes by disallowing the use of harvest prices to measure losses. CBO estimates that under this option, because crop insurance policies that simply value losses relative to projected prices are backed by less expensive subsidies, federal spending on the crop insurance program from 2018 through 2027 would decrease by about 25 percent, or $19.2 billion. Moreover, CBO anticipates that producers would insure 2.5 million fewer acres (out of a total of 300 million acres) and lower their level of coverage on 20 million acres.

Another option would reduce producers’ ability to adjust their actual production history (APH), which is used to calculate expected crop yields against which losses are measured. In its simplest form, APH is an average of a producer’s annual crop yields over the past 4 to 10 years, depending on the number of years the producer has cultivated the crop. This option would make three changes to the APH calculation. First, it would allow producers to exclude no more than 3 years from their APH on the basis of their county’s average yield. Second, instead of being excluded from the APH calculation, any year in which a producer was prevented from planting a crop would be assigned a yield equal to 50 percent of the county’s average yield for the crop. Third, this option would eliminate the trend adjustment factor, which revises yields in the APH calculation upward to account for improvements in crop genetics and agricultural practices over time.

If lawmakers elected to make those changes, the benchmarks against which losses are measured would generally be lower. Consequently, CBO estimates that federal spending from 2018 through 2027 would decrease by $2.0 billion.