ENVIRONMENTAL

WORKING
GROUP
GIVING IT AWAY FREE
FREE CROP INSURANCE CAN SAVE MONEY
AND STRENGTHEN THE FARM SAFETY NET
A simple, free program to insure farmers
against actual crop losses at full market price
would be cheaper and fairer than todays
hopelessly inefcient and costly system
by Bruce Babcock
Professor of Economics, Iowa State University
Preface by Craig Cox
Senior VP for Agriculture and Natural Resources, EWG
www.ew_.or_ 143o Srreer. NW, Suire 100 Washin_ron, DC 2000
/// April 2012
http://www.ewg.org
GIVING IT AWAY FREE
1
Table of Contents
Acknowledgments .............................................................................................................................................. 2
Preface ............................................................................................................................................................... 3
Summary ............................................................................................................................................................. 6
Introduction ........................................................................................................................................................ 8
An Alternative .................................................................................................................................................. 11
The Potential Savings ....................................................................................................................................... 11
Lower Premium Subsidies ....................................................................................................................................12
Underwriting Gains ...............................................................................................................................................12
Fecucec Delivery Cosrs ........................................................................................................................................13
Delivery Cosrs Loom Lar_e ..................................................................................................................................13
Impact of Free Yield Insurance ...................................................................................................................................15
National Impact of Free Insurance .......................................................................................................................1
Cosrs ol Free Crop nsurance Basec on CB Fro|ecrions .................................................................................23
Policy Implications
Farmers anc Taxpayers are Berrer ll .................................................................................................................2o
Frivare Secror prions lor Enhancin_ Fisk Mana_emenr ..................................................................................28
Conclusions ...................................................................................................................................................... 31
References ........................................................................................................................................................ 33
Footnotes ......................................................................................................................................................... 33
Notes ................................................................................................................................................................ 35
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Acknowledgments
This reporr was mace possiLle Ly rhe _enerosiry ol The Walron Family Founcarion, The McNi_hr Founcarion
anc The Davic anc Lucille Fackarc Founcarion, as well as EWG's communiry ol online supporrers. Thanks ro
EWG's Senior vice Fresicenr lor A_riculrure anc Narural Fesources Crai_ Cox anc ro Execurive Eciror Nils
Bruzelius lor rheir carelul review anc ecirin_ ol rhe rexr anc ro Taylan "Ty" Yalniz lor his excellenr cesi_n work
under extreme time pressure.
GIVING IT AWAY FREE
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Preface
Weaving a safety net that works for famers and taxpayers
Ly Crai_ Cox
Senior VP for Agriculture and Natural Resources, EWG
The Environmenral Workin_ Group (EWG) commissionec Dr. Bruce BaLcock ro analyze EWG's proposec salery
ner lor larmers a lree insurance policy rhar woulc cover 70 percenr ol avera_e yielc anc 100 percenr ol rhe
market price for the lost crop. EWGs proposal grew out of a previous paper Dr. BaLcock preparec rhar cerailec
the aws in the current revenue insurance programs.
Dr. BaLcock's new paper arrives ar a rime when crop anc revenue insurance have Lecome rhe mosr expensive
ol all leceral larm income supporr pro_rams. n March. rhe Con_ressional Buc_er llce (CB) precicrec rhar
raxpayers will spenc $0 Lillion over rhe nexr 10 years on rhe hi_hly suLsicizec insurance pro_ram lar more
rhan rhe $oo Lillion ir pro|ecrec will Le spenr on rracirional larm suLsicies.
Now, some lawmakers are proposing to plow most of the savings from nally ending the discredited direct
paymenrs pro_ram inro a new, unprececenrec enrirlemenr ro _uaranree up ro 5 percenr ol Lusiness income lor
the same farm businesses that have been rewarded with direct payments for years. Sold as reform, this bait and
swirch will likely acc ar leasr $30 Lillion ro rhe $0 Lillion raxpayers are alreacy spencin_ ro insure larm income.
Conservarion, looc, research anc orher crirical pro_rams will Le cur in orcer ro make room lor rhis new mancare.
Dr. BaLcock's reporr shoulc _ive pause ro lawmakers Lein_ askec ro swallow rhis "relorm." The paper makes a
compelling case that:
The current crop and revenue insurance system is seriously awed and needs an overhaul, despite the chorus
ol voices resisrin_ even rhe minor relorms proposec Ly rhe Lama Acminisrrarion.
It is very possible to construct a safety net that works for farmers, saves taxpayers billions of dollars and is
better for the environment than the current system.
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www.ewg.org /// April 2012
The mosr srunnin_ evicence ol rhe neec ro overhaul rhe currenr sysrem is Dr. BaLcock's esrimare rhar raxpayers
senc $1 collar ro insurance companies anc a_enrs lor every $1 collar rhar _oes ro larmers. Taxpayers pay mosr
of the policy premiums and pay insurance companies to sell the policies. Highly protable insurance companies
rhar harvesr _enerous uncerwririn_ _ains are rhe Li__esr Lenelciaries ol rhis heavily suLsicizec pro_ram.
If this is not reason enough to make lawmakers skeptical, a report released by the Government Accountability
llce on April 12 shoulc. GA lounc rhar one larm Lusiness rhar hac insurec irs corron, romaroes anc whear
across rwo counries receivec $1.8 million in premium suLsicies in 2010, while rhe avera_e larmer receivec only
$5,33. More srunnin_, GA esrimarec rhar raxpayers senr $30,000 ro insurance companies ro acminisrer rhe
policies lor rhis one lar_e larm Lusiness alone. n 2011, 3. percenr ol all _rowers coverec Ly insurance policies
harvesrec 32.o percenr rhe premium suLsicies. A $40,000 limir on premium suLsicies similar ro caps in place
lor cirecr paymenrs woulc have savec raxpayers up ro $1 Lillion. The cisrriLurion ol insurance suLsicies is |usr
as distorted as the distribution of the direct payments that the insurance would replace and far more expensive
to deliver.
Ar a minimum, Con_ress shoulc immeciarely relorm rhe crop anc revenue insurance pro_rams Ly:
reducing or ending premium subsidies for revenue protection policies, particularly those that insure more
rhan 70 percenr ol Lusiness income,
cappin_ rhe amounr ol premium suLsicies an incivicual or larm Lusiness can collecr,
requirin_ larms ro prorecr soil, werlancs anc _rasslancs in rerurn lor premium suLsicies, anc
making public the identities of the farm businesses participating in the insurance programs and the amount
of premium subsidies and indemnities each farm business receives.
Bur Dr. BaLcock's rhorou_h analysis shows rhar ir woulc Le even Lerrer lar Lerrer ro replace rhe currenr,
complicated system of premium subsidies and policies with a single, simple and free yield protection policy
coverin_ 70 percenr ol avera_e crop yielc. The policy woulc compensare procucers lor a lnancial loss causec Ly
Lac wearher ar 100 percenr ol rhe crop's marker price. Farmers woulc Le askec ro pay a small lee ro cover rhe
much lower costs of delivering this program. The private sector would be free to develop innovative insurance
products that farm operators could buy at their own expense, if they chose, to place atop the core of the safety
net provided at taxpayers expense.
GIVING IT AWAY FREE
5
This approach would chart a course toward a scally responsible, effective and environmentally sound safety net.
As Dr. BaLcock poinrs our, _errin_ Lack ro a Lasic raxpayerluncec salery ner woulc:
Finally achieve a permanenr, larmlevel cisasrer pro_ram rhar eliminares rhe neec lor ac hoc cisasrer reliel
Lerrer prorecrion rhan many larmers now en|oy,
Fecuce cisrorrion in planrin_ cecisions,
Eliminare rhe neec lor an elaLorare premium rarin_ srrucrure, anc
Require growers to buy a single policy that covers all of the insured crop grown in a county, rather than
insurin_ rhe crop lelcLylelc, in orcer ro recuce rhe incenrives ro larm hi_hrisk, environmenrally sensirive
terrain.
Frovicin_ rhis lnancial salery ner ro larmers lor lree woulc acrually save raxpayers Lerween $5.7 anc $18.5 Lillion
over rhe nexr ren years, cepencin_ on how many larmers parricipare. l Con_ress couplec rhese savin_s wirh
$50 Lillion in savin_s lrom encin_ cirecr paymenrs anc rhe Avera_e Crop Fevenue Elecrion (ACFE) pro_ram, ir
could create a scally responsible and effective safety net, fully fund conservation programs, invest in programs
that increase access to healthy food and still meet or exceed decit reduction targets.
The only thing standing between taxpayers and the kind of farm bill they want is the power of the subsidy
lobby now augmented by lobbyists for the crop insurance industry. Now, more than ever, the farm bill is far too
important to be left to the agriculture committees.
ENvFNMENTAL WFKNG GFF
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www.ewg.org /// April 2012
Giving It Away
Free Crop Insurance Can Save Moneyand Strengthen the
Farm Safety Net
Ly Bruce BaLcock
Professor of Economics, Iowa State University
Summary
The recorc hi_h income earnec Ly _rowers in recenr years has chan_ec rhe polirics ol sencin_ raxpayer
supporrec cirecr paymenrs ro larmers. A_riculrure's leacers anc rheir Con_ressional allies can no lon_er claim
creciLly rhar rhere is any puLlic purpose ro _ivin_ larmers $5 Lillion a year ar a rime when crop prices anc
income levels are so hi_h. Bur insreac ol simply aLolishin_ rhe pro_ram anc eirher recucin_ rhe leceral Luc_er
decit or shifting the funds to programs that truly serve public needs, such as agricultural research or reducing
larmin_'s environmenral cama_e, Con_ress seems poisec ro use a lar_e porrion ol rhe money ro creare a new
crop insurance program to support commodity growers. To make it look better to the public, its being dressed
up as a "salery ner" rhar will pay larmers when a "loss" occurs. Bur as proposec, a larm woulcn'r neec ro suller
any acrual lnancial loss ro collecr, all rhar ir rakes will Le rhe appearance ol a loss.
What is surprising is the lack of discussion of why any puLlic money shoulc Le spenr on a new "salery ner" when
the existing federal crop insurance program already costs so much and provides farmers with such extravagant
protection. If the current system of crop insurance isnt working, why not abolish it along with direct payments
anc recirecr rhe $13 Lillion in comLinec annual savin_s ro shrink rhe celcir anc creare a rruly cosrellecrive
pro_ram? Since 2001, rhe currenr crop insurance pro_ram has cosr raxpayers aLour $50 Lillion, Lur only hall $25
Lillion has lounc irs way inro larmers' pockers. The orher $25 Lillion wounc up in rhe collers ol crop insurance
companies and in commissions paid to insurance agents. It strains credibility to claim that a program that costs
$2 ro celiver $1 ol Lenelrs is a wise use ol raxpayer luncs.
ne reason rhe pro_ram cosrs so much is rhar ir incluces premium suLsicies rhar _ive larmers irresisriLle
incentives to buy more insurance, and more expensive types of insurance, than they would buy if they had to
spenc rheir own money. Farher rhan |usr seekin_ prorecrion a_ainsr unprecicraLle evenrs rhar mi_hr cesrroy
their crops, farmers are using the subsidies to also buy costly revenue insurance. Such policies protect them
GIVING IT AWAY FREE
7
against price uctuations that can cost farmers money when they have locked in a selling price but dont have
enough production to sell. Its no wonder that farmers buy it, because thanks to subsidies, this more expensive
prorecrion cosrs rhem lar less ourolpocker rhan whar ir cosrs ro celiver.
Another reason the program costs so much is that insurance companies have to be paid large subsidies to
induce them to take on a small portion of the risk of having to make large payouts. And nally, the agents who
sell these policies earn commissions far in excess of what a competitive market would pay.
As a result, crop insurance is so costly that taxpayers would be better off if the insurance were simply given away
ro larmers. Borh larmers anc raxpayers woulc Lenelr. n lacr, _ivin_ all corn, soyLean, whear, corron anc rice
larmers a 70 percenr yielc insurance policy on all rheir planrec acrea_e coulc save raxpayers almosr $o Lillion
over 10 years. The value ro larmers woulc Le aLour $5.o Lillion more rhan rhe ner Lenelr rhar larmers ol rhese
ve crops get from existing crop insurance today.
ncer rhis lree pro_ram, crop insurance companies anc orhers woulc Le lree ro cesi_n cosrellecrive risk
mana_emenr rools ro complemenr rhe lree 70 percenr yielc insurance. These procucrs woulc have ro Le cosr
effective, because otherwise farmers paying with their own dollars wouldnt buy them.
Groups as cisparare as rhe Narional Milk Frocucers Fecerarion, corron _rowers anc rhe American Farm Bureau
Federation have embraced the idea that its sound policy to deliver a more efcient and effective farm safety
ner cirecrly in rhe larm Lill as a commociry pro_ram rarher rhan incirecrly rhrou_h rhe expensive, suLsicizec
crop insurance program. The milk producers are advocating a milk margin insurance program to be delivered
cirecrly Ly SDA, while corron _rowers have proposec a new counryLasec revenue insurance pro_ram also ro
Le celiverec cirecrly Ly SDA. The American Farm Bureau's counry revenue insurance pro_ram is proposec ro
be delivered as crop insurance although with much lower delivery costs than current crop insurance products.
Clearly, rracirional larm _roups are Le_innin_ ro reco_nize rhar rhe currenr crop insurance pro_ram is nor an
efcient use of tight farm bill funds.
By limirin_ raxpayers' conrriLurions ro a larm salery ner ro prorecrin_ a_ainsr unavoicaLle losses in crop yielcs,
Con_ress woulc provice a helpin_ hanc when larmers are srruck Ly cisasrrous loocs, crou_hr, winc, pesrs or
re even as it saves farmers and taxpayers money. And it would avoid public backlash against a wasteful system
that today makes payments to farmers even when they have no real losses.
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Introduction
Leacers ol rhe A_riculrure Commirrees in Con_ress say rhey wanr rhe 2012 larm Lill ro srren_rhen rhe salery ner
for farmers. Some commodity groups argue that the way to do this is to set higher target prices for commodity
crops ro prorecr larmers a_ainsr rhe risk rhar prices will lall lrom rheir currenr hi_h levels. rhers have proposec
measures to protect farmers from revenue losses that conventional crop insurance doesnt cover because the
losses con'r exceec srancarc cecucriLles. The revenue loss proposals are callec "shallow loss" pro_rams Lecause
they would protect farmers against small losses that are not compensated by existing crop insurance, which is
designed to cover deeper losses.
1
However, both higher target prices and shallow loss protection would require
new luncin_ rhar is currenrly unavailaLle. Even il Con_ress eliminares cirecr paymenrs, counrercyclical paymenrs
anc rhe ACFE (Avera_e Crop Fevenue Elecrion) pro_ram, ir will Le cillculr ro meer Luc_ercurrin_ rar_ers anc
still strengthen the safety net, let alone nd funds for other farm bill programs, including conservation, research
and nutrition.
ne source ol luncs rhar many seem loarh ro rap is rhe crop insurance pro_ram. nceec, many in Con_ress ar_ue
rhar crop insurance neecs ro Le "srren_rhenec" rarher rhan "raicec" ro help pay lor orher pro_rams or meer
decit reduction targets. The appeal of the crop insurance program is easy to understand. After all, who can be
against protecting farmers against the vagaries of nature?
Just like homeowners who buy insurance against damage to their homes, farmers buy crop insurance to insure
a_ainsr losses lrom looc, crou_hrs, hail anc pesrs. Bur unlike homeowners, who Luy insurance lrom companies
that must charge enough in premiums to pay for damage claims plus the cost of running their businesses,
farmers pay only small portion of the true cost of their insurance. Their premium dollars pay none of the cost of
administering the program and less than half of damage claims. Taxpayers pay the rest.
The cosr ro raxpayers ol rhe leceral crop insurance pro_ram has soarec in recenr years (Fi_ure 1), lor rwo reasons.
Firsr, commociry prices have risen sharply. Thar has criven up premiums alon_ wirh rhe cosr ol suLsicizin_ rhem anc
the claim reimbursements that the government pays to insurance companies. Secondly, the premium subsidies
have given farmers an incentive to buy the most expensive insurance available with the lowest deductibles. Until
rhe A_riculrural Fisk Frorecrion Acr ol 2000, a larmer who wanrec ro Luy more insurance hac ro pay a collar lor a
collar's worrh ol accirional covera_e. ncer rhe rerms ol rhe acr, however, larmers now only pay 50 cenrs lor rhar
extra dollars worth of insurance.
2
It is no wonder that farmers have responded by purchasing more insurance.
GIVING IT AWAY FREE
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Many larmers responcec ro increasec premium suLsicies Ly choosin_ lower cecucriLles anc swirchin_ lrom
policies rhar prorecrec a_ainsr losr yielc ro policies rhar prorecrec a_ainsr losr revenue. Farher rhan |usr Luyin_
coverage against crop losses, most farmers now buy insurance against both crop losses and movements in
marker prices. The mosr popular rype is callec Fevenue Frorecrion (FF), which is availaLle lor crops wirh well
luncrionin_ lurures markers. The markers are usec ro ser pro|ecrec prices when a larmer Luys a policy anc acrual
harvest prices to determine when a payout is due. With the exception of rice and barley, a large proportion of
larmers ol eli_iLle crops have chosen FF (Fi_ure 2).
There are obvious reasons why RP is popular. It provides protection against drops in revenue caused by either
Source: Calcularec lrom SDA Fisk Mana_emenr A_ency cara
Figure 1. Taxpayer Cost of the Crop Insurance Program Has Soared
$2
$4
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2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

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price ceclines ar harvesr or Ly yielc losses. n accirion, rhe peracre revenue _uaranree ac|usrs upwarc il crop
prices rise at harvest. That means that if a farmer with an RP policy does suffer a crop loss, the added revenue
from selling the remaining crop at the higher harvest price does not reduce the insurance payout.
3

Bur a _ooc ceal lor larmers is nor necessarily rhe mosr ellcienr use ol raxpayer money, anc ir raises imporranr
questions:
How much does the current subsidy structure cost taxpayers?
Shoulc rhe _overnmenr Le in rhe Lusiness ol suLsicizin_ rhe cosr ol mana_in_ price risk in accirion ro
providing protection against severe crop losses?
Coulc si_nilcanr savin_s Le oLrainec Ly limirin_ raxpayers' conrriLurion ro rhe cosr ol crop insurance?
Would farmers be hurt if subsidies were limited?
Figure 2. Proportion of Insured Acres Covered by RP in 2011
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GIVING IT AWAY FREE
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Getting answers to these questions is difcult, because the crop insurance program is very complex. This
complexity serves the purposes of those who want to protect the existing programs structure. It is easier to
defend a program when most critics dont quite understand its nuances.
An Alternative
To provice insi_hr inro rhese quesrions, rhis paper analyzes a simple proposal: nsreac ol rhe currenr larm
insurance program with its costly and complicated set of regulations and subsidies, why not simply give farmers
a free yield protection (YP) insurance policy?
Currenrly, rhe leceral _overnmenr _ives larmers a lree YF policy known as Carasrrophic (CAT) covera_e. CAT
covers crop losses ol more rhan 50 percenr anc compensares larmers ar 55 percenr ol rhe marker price ol rhe losr
crop. The lree yielc prorecrion policy analyzec here is a more _enerous CAT policy rhar woulc compensare crop
losses ol more rhan 30 percenr ar 100 percenr ol rhe marker price. This lree policy woulc provice larmers wirh a
solid foundation on which they could add additional risk management tools through the private sector. It would
be the taxpayers contribution to a basic safety net for producers of eligible crops. It would cap the burden on
taxpayers and could produce signicant budget savings by eliminating both federally paid premium subsidies
and underwriting payouts to crop insurance companies. Simplifying administration of the system would produce
even more savings.
The "lree" insurance comes ar a cosr, ol course, Lur rhis analysis shows rhar, in a__re_are, Lorh raxpayers anc
farmers would be better off than under the current program, which benets the crop insurance industry as much
as farmers.
The reality that giving away free insurance would actually save money underscores how inefcient the current
system is. In addition, this alternative system would also reveal which risk management products can actually
prosper in an open marker, since larmers woulc have ro Luy accon procucrs wirh rheir own money.
4

The Potential Savings
Frovicin_ larmers wirh a lree yielc prorecrion policy rhar woulc pay oll on yielc losses ol 30 percenr or more ar
100 percenr ol rhe expecrec marker price woulc procuce savin_s in rhree ways:
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www.ewg.org /// April 2012
Lower Premium Subsidies
This proposal woulc eliminare premium suLsicies lor covera_e aLove rhe Lasic 70 percenr yielc prorecrion
provicec lree ro _rowers ol socallec pro_ram crops rhe crops currenrly Lenelrin_ lrom cirecr paymenrs. The
savin_s lrom eliminarin_ rhese suLsicies, which roralec $o.8 Lillion in 2011, woulc help pay rhe cosr ol rhe lree
policies.
Underwriting Gains
Currenrly, lecerally suLsicizec crop insurance is solc rhrou_h privare companies rhar make lar_e prolrs, callec
uncerwririn_ _ains, lor rakin_ on a porrion ol rhe risk ol lar_e payours. From 2001 rhrou_h 2011, crop insurance
Source: SA Fisk Mana_emenr A_ency
Figure 3. Net Underwriting Gains Paid to Crop Insurance Companies
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GIVING IT AWAY FREE
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companies en|oyec a roral ol $11.77 Lillion in ner uncerwririn_ _ains lrom sellin_ raxpayersuLsicizec insurance
policies (Fi_ure 3). The rarionale lor rhese prolrs is ro allow rhe companies ro make money in years when payours
on claims are lower than premiums collected in exchange for shouldering some of the losses in years when
payours are _rearer rhan premiums. n rheory, rhis risksharin_ arran_emenr recuces rhe _overnmenr's exposure
in hi_hloss years in exchan_e lor increasin_ raxpayer cosrs in lowloss years. Bur Fi_ure 3 shows rhar rhis is cosrly
ro raxpayers. Even in hi_hloss years such as 2011, companies collecrec lar_e uncerwririn_ _ains. nly in one
year, 2002, cic companies have a ner uncerwririn_ loss. The proposec lree 70 percenr yielc prorecrion pro_ram
woulc eliminare rhe accec cosr ro raxpayers ol uncerwririn_ _ains Ly havin_ SDA's Feceral Crop nsurance
Corporarion pay all claims cirecrly.
5
Reduced Delivery Costs
Crop insurance companies are also _enerously compensarec lor rhe overheac anc acminisrrarive cosrs ol rhe
policies. Currenrly, rhe _overnmenr makes socallec "Acminisrrarive anc verheac" (A&) paymenrs ro crop
insurance companies to cover the cost of administering the program and to compensate them for costs that,
in a private insurance market, would be built into the premium. These include agent commissions, the cost of
ac|usrin_ losses anc ollce expenses, inclucin_ employee salaries anc inlormarion rechnolo_y expenses. The
A& paymenrs are ser as a percenra_e ol rhe policy premiums. As Fi_ure 4 shows, when premiums increasec
cue ro hi_her commociry prices anc _rearer use ol revenue prorecrion policies, A& paymenrs also increasec
cramarically, even rhou_h rhe numLer ol policies acminisrerec lell. n 2011, SDA's Fisk Mana_emenr A_ency
(FMA) cappec rhe resulrin_ winclall prolrs rhar companies were en|oyin_ Ly limirin_ A& paymenrs ro $1.3
Lillion a year. Even wirh rhis cap in place anc ac|usrin_ lor inlarion, however, rhe incusrry is srill en|oyin_ lar_e
winclall prolrs lrom A& reimLursemenrs.
Delivery Costs Loom Large
It is not easy to estimate the actual cost of delivering crop insurance. Industry has every incentive to claim higher
cosrs ro |usrily lar_er raxpayer reimLursemenrs. nce a larmer si_ns up lor crop insurance, rhe policy is sell
renewing, so current agent commissions are far above what a competitive market would pay.
ne esrimare ol rhe perpolicy cosr is rhe acminisrrarive lee ol $300 per crop per counry rhar SDA char_es
ENvFNMENTAL WFKNG GFF
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www.ewg.org /// April 2012
lor carasrrophic (CAT) policies. FMA esrimarec rhar lrom 2005 ro 2008 rhe nona_enr cosrs avera_ec $377 per
policy.
o
nlorma Economics, in a reporr lor rhe Narional Associarion ol FSA Counry llce Employees, which
represenrs counrylevel employees ol SDA's Farm Service A_ency (FSA), esrimarec rhar ir woulc cosr FSA an
accirional $4o7 million a year aLour 4 percenr ol rhe roral premium value in 2011 ro acminisrer rhe pro_ram.
This works our ro a cosr ol $40o per policy. Whar all rhree esrimares make clear is rhar rhe cosr ol celiverin_ rhe
covera_e woulc Le lower il SDA implemenrec rhe pro_ram irsell or conrracrec wirh insurance companies ar a
set price per policy, to be determined by competitive bid.
Savin_s in celivery cosrs loom lar_e in rhis analysis ol makin_ a lree 70 percenr yielc insurance policy rhe Lasic
salery ner rhar raxpayers provice ro larmers. ver rhe pasr 11 years ol rhe currenr crop insurance pro_ram, ner
Source: SDA Fisk Mana_emenr A_ency
Figure 4. A&O Payments to Crop Insurance Companies
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GIVING IT AWAY FREE
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incemniries ro larmers (insurance payours minus premium paymenrs) roralec $24.7 Lillion rhe larmers' cash
Lenelr lrom rhe pro_ram. The roral cosr ro raxpayers over rhis perioc was $4.1 Lillion (rhe sum ol rhe $24.7
Lillion ner incemniry paic ro larmers anc rhe $24.4 Lillion in uncerwririn_ _ains anc A& reimLursemenrs paic
to companies).
7
This means rhar raxpayers paic cenrs in celivery cosrs lor every collar ol ner Lenelr rhar
farmers received.
Given the importance of increasing the efciency of all government programs in the face of the large and growing
federal debt, it is surprising that this very inefcient means of providing a farm safety net has not caught the
attention of avid budget cutters. The crop insurance program is so inefcient that both farmers and taxpayers
would be better off if the insurance were given away rather than delivered through the current system.
A look ar rhe cosrs ol crop insurance lor corn, soyLeans anc whear in Boone Counry, owa anc Srursman Counry,
Norrh Dakora Lears our rhis conclusion.
Impact of Free Yield Insurance
Srursman Counry is in Wesr Cenrral Norrh Dakora, where yielcs are lower anc risk is much hi_her rhan in owa's
Boone Counry. Boone Counry in rural Cenrral owa, wirh some ol rhe mosr procucrive larmlanc in rhe counrry, is
one ol rhe leasr risky places ro _row corn anc soyLeans. Despire rhe cillerences in yielc levels anc risk, almosr
all acrea_e in Lorh counries is insurec. SDA's Fisk Mana_emenr A_ency (FMA) reporrs rhar 35,000 acres ol
soyLeans anc 155,000 acres ol whear were insurec in Srursman Counry. Boone Counry larmers planrec 1o,500
acres ol corn anc 101,000 acres ol soyLeans in 2011 anc almosr all rhe acres were insurec: 2 percenr ol corn
acres anc 5 percenr ol soyLean acres.
Farmers in Lorh counries are Li_ Luyers ol revenue prorecrion (FF) insurance. r covers more rhan 0 percenr ol
insurec acres in Boone Counry anc 8 percenr ol soyLean anc 7 percenr ol whear acres in Srursman Counry.
The mosr popular covera_e level in Boone Counry is 80 percenr lor Lorh corn anc soyLeans, anc in Srursman
rhe mosr popular level is 75 percenr lor Lorh soyLeans anc whear. Yielc insurance (YF) is also availaLle in Lorh
counries Lur covers only o.7 percenr ol insurec acres in Boone Counry anc 1.7 percenr in Srursman Counry.
ne reason so lew larmers in rhese rwo counries Lou_hr YF was rhar rhe peracre suLsicy is so much lower rhan
lor FF. Fi_ure 5 shows rhar rhe avera_e peracre suLsicy lor larmers who Lou_hr FF in Boone Counry in 2011
ENvFNMENTAL WFKNG GFF
16
www.ewg.org /// April 2012
was couLle rhar receivec Ly larmers who Lou_hr YF. Fi_ure o shows rhar FF suLsicies lor Srursman Counry in
2011 were also much lar_er rhan YF suLsicies. l premiums relecr whar crop insurance companies will pay our
for these policies over the long run, farmers who select RP will get up to double the net indemnities that farmers
who choose YP get. RP provides more coverage and a much greater return on their premium dollars. The more
generous net indemnities and the large subsidies the industry gets to administer RP are the reason for the
explosive increase in the cost to taxpayers.
TaLle 1 Lelow shows whar rhe impacr woulc Le on larmers, raxpayers anc rhe incusrry ol a pro_ram rhar _ave a
lree 70 percenr yielc prorecrion policy ro all larmers who purchasec revenue prorecrion (FF) lor corn, soyLeans
anc whear in Boone anc Srursman Counries. (More will Le saic larer aLour whar oprions rhese larmers mi_hr
Figure 5. Average Per-Acre Subsidies for Boone County, 2011
$

p
e
r

a
c
r
e
0
5
10
15
20
25
30
35
Soybean-RP
Soybean-YP
Corn-RP
Corn-YP
85 80 75 70 65 85 80 75 70 65
GIVING IT AWAY FREE
17
have if they wanted additional risk protection, but for now this analysis assumes no other taxpayer support for
the farm safety net.)
As TaLle 1 illusrrares, rhe impacr woulc vary si_nilcanrly across crops anc re_ions, Lur rhe raxpayer savin_s woulc
Le lar_e. Because yielc risk is so much hi_her in Srursman rhan in Boone Counry, a 70 percenr YF policy woulc
Le more valuaLle ro larmers in Srursman rhan ro rhose in Boone Counry on a collarperacre Lasis. The lree 70
percent YP policy would also be a better value for farmers than a current RP policy because yield risk in Stutsman
Counry is a _rearer proporrion ol roral revenue risk rhan in Boone Counry. n Boone Counry, Ly conrrasr, FF
provides relatively more price protection, so replacing RP with YP represents a drop in value for those farmers.
Figure 6. Average Per-Acre Subsidies for Stutsman County, 2011
$

p
e
r

a
c
r
e
0
10
20
30
40
50
Wheat-YP
Wheat-RP
Soy-YP
Soy-RP
85 80 75 70 65 85 80 75 70 65
ENvFNMENTAL WFKNG GFF
18
www.ewg.org /// April 2012
The cillerences are shown in TaLle 1 in rhe row rirlec "Ner Farmer mpacr." The avera_e value ol a 70 percenr
YF policy is _rearer rhan rhe avera_e value ol FF premium suLsicies lor Srursman Counry soyLean larmers. By
rhis measure, Srursman Counry soyLean larmers who currenrly Luy FF policies woulc come our aheac il _iven a
lree YF policy. For Boone Counry larmers anc whear larmers in Srursman Counry, however, rhe swirch lrom FF ro
a lree 70 percenr YF policy woulc represenr a ner recucrion in supporr, Lur ir woulc Le a ner _ain lor raxpayers
while srill provicin_ an ellecrive salery ner. n accirion, acminisrerin_ rhis 70 percenr YF pro_ram cirecrly Ly
SDA or rhrou_h rhe privare secror wirh comperirive Liccin_ woulc _enerare suLsranrial savin_s. The roral
raxpayer savin_s lrom replacin_ FF wirh a lree 70 percenr YF policy ran_es lrom a low ol 2 percenr lor soyLeans
in Srursman Counry ro a hi_h ol 78 percenr lor soyLeans in Boone Counry il uncerwririn_ _ains anc losses are
borne directly by taxpayers and if delivery costs are competitively bid. If farmers were charged a fee sufcient to
cover celivery cosrs, rhe savin_s woulc increase ro a low ol 32 percenr anc a hi_h ol 81 percenr, as shown in rhe
last row.
8
Srursman Counry Boone Counry
Wheat Soybeans Corn Soybeans
mpacr on Farmers who Bou_hr FF in 2011 $ million
Loss of RP Premium Subsidy 5.0 10.14 4.00 2.58
value ol 70% YF Folicy
a
3.o1 10.2 2.27 0.8
Net Farmer Impact
b
(1.48) 0.78 (1.73) (1.o)
mpacr on Acminisrrarive Cosr
Fecucrion in A&
c
1.40 2. 1.2o 0.4o
Reduction in Underwriting Gains
d
0.78 1.oo 1.40 0.50
Comperirive Delivery Cosrs
e
0.14 0.44 0.28 0.10
Net Taxpayer Savings No Admin Fee 3.80 4.30 4.o7 2.75
Net Taxpayer Savings with Admin Fee 3.4 4.74 4.5 2.85
Currenr Taxpayer Cosr
f
7.27 14.78 o.oo 3.54
Fercenr Fecucrion in Fro_ram Cosr wirh No Acmin Fee 52% 2% 70% 78%
Fercenr Fecucrion in Fro_ram Cosr wirh Acmin Fee 54% 32% 74% 80%
Notes:
a
value ol 70 percenr YF policy equals rhe avera_e peracre premium char_ec in 2011 lor each crop anc counry mulripliec
by the total number of acres insured under RP for each crop and county.
b
Ner larmer impacr equals rhe value ol rhe 70 percenr YF policy minus rhe loss or FF premium suLsicy.
c
A& expense is 18 percenr mulripliec Ly roral FF premium lor each crop counry comLinarion.
d
ncerwririn_ _ains ser ro 10 percenr ol premium in Srursman Counry anc 20 percenr ol premium in Boone Counry.
e
Comperirive celivery cosr ser ro lour percenr ol roral value ol rhe 70 percenr YF policy.
f
Currenr raxpayer cosr equals rhe sum ol A&, premium suLsicies anc uncerwririn_ _ains.
Table 1. Cost Impacts of Replacing Subsidized RP Policies with a Free YP Policy
GIVING IT AWAY FREE
19
These case srucies incicare rhar limirin_ rhe raxpayerluncec salery ner ro a lree 70 percenr YF policy coulc
reduce program costs substantially, but examining only three crops in two counties gives little insight into the
cosr impacr on a narional level. n accirion, TaLle 1 coes nor accounr lor rhe cosrs ol provicin_ a lree YF policy
to farmers who currently do not buy insurance at all or who buy lower levels of YP, or for the additional savings
that could arise from farmers who currently buy other types of crop insurance.
The nexr secrion esrimares rhe esrimarec cosr impacr ol a lree 70 percenr YF pro_ram lor all crops lor which
revenue protection is currently available across all acres insured with all insurance products.
National Impact of Free Insurance
This analysis usec FMA's summary ol 2011 Lusiness cara lor mosr crops rhar are currenrly eli_iLle lor revenue
prorecrion covera_e ro assess rhe likely impacr ol provicin_ larmers wirh a lree 70 percenr yielc prorecrion policy
as rhe core ol rhe raxpayerluncec larm salery ner. nly peanurs anc oars were exclucec. For each crop, rhe
srare acrea_ewei_hrec avera_e premium lor YF ar rhe 70 percenr covera_e level was calcularec lor rhose acres
currently insured at that level. In addition, the calculations show the cost of giving this free policy to farmers who
Lou_hr any lorm ol insurance in 2011 (Column 2 ol TaLle 2) anc rhe cosr ol provicin_ rhis policy lor all planrec
acrea_e ol each crop, inclucin_ lor larmers who cic nor previously Luy insurance (Column 3). Givin_ a lree YF
policy ar rhe 70 percenr covera_e level woulc provice larmers wirh covera_e rhar woulc orherwise cosr rhem
aLour $8.o Lillion il policies were _iven only ro larmers who Lou_hr insurance in 2011, or $.7 Lillion in value il
the free policies were extended to all farmers who grew these crops.

SuLrracrin_ rhe premium suLsicy rhar insurec larmers acrually receivec in 2011 lor rhese crops lrom rhe value
of the free yield insurance provides a measure of the net benet that farmers would receive under this proposal.
As shown in rhe rorals row ol Columns 4 anc 5 ol TaLle 2, rhe ner _ain ro larmers woulc Le eirher $1.85 Lillion or
$3.2 Lillion, cepencin_ on wherher rhe lree insurance was provicec only ro larmers who Lou_hr crop insurance
in 2011 or ro all larmers who planrec rhese crops. This shows rhar rhe lree YF insurance woulc Le more valuaLle
ro larmers rhan rhe $o.7o Lillion in premium suLsicies rhey receivec in 2011.
TaLle 2 shows rhar a lree 70 percenr yielc insurance policy provices _rearer ner value ro larmers rhan rhe currenr
sysrem, which requires rhem ro pay lor insurance Lelore rhey can oLrain premium suLsicies. Lviously, rhis
woulc Le rhe case lor larmers who cic nor Luy insurance in 2011. FemarkaLly, ir is also rrue lor larmers who cic
ENvFNMENTAL WFKNG GFF
20
www.ewg.org /// April 2012
Ner Cosr ol Free nsurance Fecucrion in Delivery Cosr Ner Buc_er Savin_s
nly Acres nsurec
in 2011
All 2011 Flanrec Acres A& ncerwririn_
Gains
nly Acres
Insured in
2011
All 2011 Flanrec
Acres
$ million
Barley 2 47 10 12 7 25
Canola 1 2 10 12 23 24
Corn o2 1,254 51 85o 1,178 553
Corron 182 242 0 21o 34 2o
Grain Sorghum 5 111 10 37 12 o4
Rice 2 43 11 23
Soybeans 5o5 55 522 4o 42o 3o
Sunowers 8 10 10 18 21 1
Wheat 345 555 180 323 15 52
Total 1,84o 3,215 1,702 1,100 5o 413
Toral wirh SDA payin_ 4% acmin lee o12 812
Toral wirh larmer payin_ 4% acmin lee 5o 413
Table 3. Net Budget Savings from Free Yield Insurance
Farmer Value of Free YP Ner Chan_e in value ro Farmers
nly Acres nsurec
in 2011
All 2011
Planted Acres
Currenr
Value of
Premium
Subsidy
nly Acres
nsurec in 2011
All 2011 Flanrec Acres
$ million $ million
Barley o 88 40 2 47
Canola 38 37 3 1 2
Corn 3,540 4,1o5 2,11 o2 1,254
Corron 87 1,047 805 182 242
Grain Sorghum 18 241 130 5 111
Rice 74 88 45 2 43
Soybeans 2,1o 2,558 1,o03 5o5 55
Sunowers 74 7o oo 8 10
Wheat 1,4o0 1,o70 1,115 345 555
Total 8,o01 ,70 o,755 1,84o 3,215
Table 2. Impact on Farmers of a Free Yield Protection Policy
GIVING IT AWAY FREE
21
Luy insurance. Clearly, a 70 percenr yielc insurance policy provices valuaLle risk prorecrion.
Bur rhis increase in value ro larmers represenrs a cosr ro raxpayers. How can raxpayers save money il rhe cosr ol
rhe lree yielc insurance exceecs rhe cosr ol exisrin_ premium suLsicies? TaLle 3 provices rhe answer.
The columns showin_ rhe ner cosr ol lree insurance in TaLle 3 cemonsrrare rhar rhe larmers' ner _ain lrom
TaLle 2 woulc represenr a ner cosr ro rhe leceral Luc_er. There woulc Le ollserrin_ savin_s, however, lrom
eliminarin_ currenr A& expenses, Lecause a_enrs woulc nor _er lar_e commissions ro sell larmers rhis Lase
level of protection. Farmers would simply sign up for it. And companies would not need large underwriting
gains because this basic yield insurance policy would be backed by the federal treasury, presumably through
rhe Commociry Crecir Corporarion uncer rhe larm Lill. The columns showin_ rhe recucrion in celivery cosrs
_ive esrimares ol rhe savin_s in avera_e uncerwririn_ _ains anc acminisrrarive anc operarin_ (A&) expenses
usin_ 2011 cara. Toral A& is esrimarec ar $1.1 Lillion lor rhe crops analyzec here. (A& expenses are cappec
Ly SDA ar $1.3 Lillion lor all insurec crops.) ncerwririn_ _ains are conservarively esrimarec ar 15 percenr ol
premium lor Larley anc canola, 20 percenr lor corn, soyLeans anc rice, 0 percenr lor corron, 5 percenr lor _rain
sor_hum, 15 percenr lor sunlower anc 10 percenr lor whear.
The roral savin_s on uncerwririn_ _ains anc A& on 2011 insurec acres in TaLle 2 woulc Le $2.8 Lillion, which is
_rearer rhan rhe accirional raxpayer cosr (in excess ol 2011 premium suLsicies) ol provicin_ lree yielc insurance.
If the free insurance were provided to all acres planted with these crops, the savings on underwriting gains and
A& woulc lall shorr ol rhe cosr ol lree insurance Ly $400 million a year. l one rhen accs in a raxpayerpaic 4
percenr acminisrrarive lee, rhe lnal esrimare ol savin_s on acres insurec in 2011 is $o12 million a year. nsurin_
all planrec acres woulc cosr $812 million a year.
TaLles 2 anc 3 show rhar Lorh raxpayers anc larmers woulc Le Lerrer oll il rhe currenr sysrem ol premium
suLsicies, reinsurance a_reemenrs anc A& expense reimLursemenr were scrappec anc replacec wirh a simple
larm salery ner pro_ram rhar provicec larmers wirh a lree 70 percenr yielc insurance policy acminisrerec cirecrly
Ly SDA. l rhe lree insurance were exrencec ro all larmers anc a mocesr lee were char_ec, rhis pro_ram coulc
be run at a modest net cost to taxpayers.
That taxpayers could come out ahead or at least break even when crop insurance is given away for free shows
how much celivery cosrs acc ro rhe expense ol rhe currenr crop insurance sysrem. Fi_ure 3 allocares crop
ENvFNMENTAL WFKNG GFF
22
www.ewg.org /// April 2012
insurance pro_ram cosrs inro rhose rhar accrue when insurance payours exceec larmerpaic premiums (ner
farmer indemnities) and the subsidies paid to the crop insurance industry to deliver the program. In ve of the
lasr 11 years, rhe cosr ol celiverin_ crop insurance exceecec ner larmer incemniries. ver rhe enrire 11 years,
ner incemniries paic ro larmers roralec $24.72 Lillion. The cosr ol celiverin_ rhese incemniries roralec $24.4
Lillion, meanin_ rhar ir cosr aLour a collar ro celiver each collar ol ner payours ro larmers. Because ol rhese hi_h
delivery costs, the proposed alternative system of giving away insurance makes nancial sense.

Acrual 2011 crop insurance cara were usec here ro esrimare rhe cosrs ol movin_ ro a lree yielc insurance pro_ram
as rhe core ol rhe raxpayerluncec salery ner. Bur since only a small proporrion ol larmers currenrly Luy yielc
insurance, lar_e sample selecrion proLlems coulc arise il larmers who Lou_hr YF ar rhe 70 percenr covera_e
Figure 7. Allocation of Crop Insurance Program Costs
b
i
l
l
i
o
n


$
0
1.0
2.0
3.0
4.0
5.0
6.0
2
0
1
1
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
2
0
0
1
Subsidies to Industry
Net Indemnity Paid to Farmers
GIVING IT AWAY FREE
23
level in 2011 have cillerenr risk prolles rhan rhose who Lou_hr FF. Con_ress calculares rhe cosr ol pro_rams
usin_ Con_ressional Buc_er llce (CB) Laseline Luc_er pro|ecrions, which are Lasec on 10year precicrions
ol commociry prices anc planrec acrea_e. Calcularin_ rhe cosrs ol FF usin_ rhese pro|ecrions procuces very
cillerenr numLers rhan rhe acrual cosrs ol FF in 2011 Lecause planrec acrea_e numLers anc price levels will Le
cillerenr. The nexr secrion uses CB Laseline cara ro esrimare rhe cosrs ol lree crop insurance pro_ram in 2013
in order to make those estimates more comparable to competing farm bill proposals.
Costs of Free Crop Insurance Based on CBO Projections
The mocel usec ro pro|ecr cosrs ol lree crop insurance is Lasec on currenr FMA premium rares lor yielc prorecrion.
YP premiums also serve as the foundation for RP premium rates. The model simulates farm yield variability by
using the fact that yield can be dened as average yield in that county in a given year, plus a deviation. The
National Agricultural Statistics Service (NASS) collects long histories of county yields that provide a measure of
counry yielc variaLiliry. The mocel solves lor rhe exrra amounr ol larmlevel variaLiliry neecec ro Le consisrenr
wirh rhe amounr ol roral yielc variaLiliry impliec Ly FMA premium rares. This procecure was cone lor each crop/
county combination. The extra amount of variability is calculated for every county that: has adequate amounts of
NASS yielc hisrory, hac reporrec planrec acrea_e in 2010, anc hac a crop insurance rare reporrec Ly FMA. The
amounr ol planrec acrea_e in 2010 lor rhe counries in rhe mocel is _rearer rhan 0 percenr lor inclucec crops
corn, soyLeans, corron, rice anc whear. These crops accounr lor more rhan 5 percenr ol planrec anc insurec
acrea_e ol rhe ei_hr crops analyzec in rhe previous secrion.
The model simulates price variability using techniques that are similar to those used to calculate premiums for
FF. Fro|ecrec prices lor each crop are ser equal ro CB's March 2012 Laseline pro|ecrions ol avera_e price. Frice
volariliry is ser ar levels usec ro ser premium rares lor FF in 2012. Flanrec acrea_e is ser usin_ CB Laseline
pro|ecrions (TaLle 4).
TaLle 5 shows rhe mocel's esrimare ol whar lree yielc insurance ar rhe 70 percenr covera_e level woulc cosr il ir
were provicec only ro acres rhar were insurec in 2011 (column 2) or provicec ro every planrec acre (column 3).
These cosr esrimares are si_nilcanrly lower rhan rhose shown in TaLle 2 Lecause rhe 2013 prices usec Ly CB
are si_nilcanrly lower rhan rhe 2011 prices usec ro ser crop insurance _uaranrees in 2011. The TaLle 5 cosrs are
based on the assumption that the free insurance would be given to farmers on an optional unit basis, which
means rhar larmers' lelcs woulc Le insurec lelcLylelc.
10

ENvFNMENTAL WFKNG GFF
24
www.ewg.org /// April 2012
If instead, the free insurance were provided on an enterprise unit basis, in which all of a farmers elds of the
same crop in a given county were pooled together as a single insurance unit, costs would be lower, because a
poolec enrerprise unir is less cosrly ro insure rhan incivicual lelcs. Calcularin_ rhe cosr recucrion lor enrerprise
unit coverage rather than optional unit coverage would require data on the geographical distribution of farms
mana_ec Ly incivicual operarors. perarions rhar were quire cispersec woulc Le less cosrly ro insure rhan rhose
rhar were concenrrarec in a smaller area. Such cara co nor likely exisr excepr perhaps in FSA anc FMA caraLases
rhar are nor accessiLle. nsreac, FMA's enrerprise unir premium ciscounrs are usec. Fepresenrarive ciscounrs are
shown in TaLle o lor specilc locarions.
11

Because lar_e larms are likely ro Le more cispersec rhan small larms, anc a lar_e proporrion ol acrea_e is
located on large farms, it is likely that a fairly high percentage of acreage would qualify for an enterprise unit
ciscounr. To Le conservarive, only 50 percenr ol acrea_e is assumec ro Le lower risk rhan rhar assumec in rhe
TaLle 5 cosr esrimares. The esrimarec cosrs ol rhe lree YF policy ar rhe enrerprise unir are shown in TaLle 7.
Providing the free YP policy at the enterprise rather than the optional unit level would result in important
environmental benets as well as cost savings. Insuring acreage with optional units allows farmers with
environmentally sensitive land that is susceptible to crop losses to transfer yield histories from their more
productive land to the higher risk land, thus giving the marginal land a high insurance guarantee that makes
the land protable to cultivate. If farmers were forced to insure this marginal land together with their more
productive land, they would base cultivation decisions on the inherent productivity of the land rather than on the
ability to collect a crop insurance indemnity.
Fro|ecrec Frice Price Volatility Millions ol Flanrec Acres
Corn $4.54/Lu 22% 8.0
Corron $0.70/lL 1% 11.25
Rice $0.128/lL 14% 2.7
Soybeans $10.47/Lu 18% 7o.42
Wheat $5.o3/Lu 1% 54.50
Table 4. Data Used in Model Simulations
GIVING IT AWAY FREE
25
CB pro|ecrs rhar rhe currenr crop insurance pro_ram in irs enrirery cosrs aLour $8.5 Lillion a year. The cosr
esrimares provicec in TaLles 5 anc 7 are nor cirecrly comparaLle ro rhis $8.5 Lillion pro|ecrion, however, Lecause
only ve crops are accounted for and the costs of administering a free crop insurance program are not included.
TaLle 8 allows a more cirecr comparison ol CB pro|ecrions anc rhis srucy's savin_s esrimares lor lve ma|or
crops. Fremium suLsicies woulc Le recucec Ly $4.2 Lillion, A& expenses woulc Le recucec Ly $1.1 Lillion,
anc uncerwririn_ _ains woulc Le recucec Ly $1.4 Lillion, lor a roral savin_s ol $o.o85 Lillion. These resulrs
su__esr rhar rhese lve crops accounr lor 7 percenr ol rhe CB pro|ecrion ol rhe roral cosr ol rhe crop insurance
program. This likely underestimates the savings that would accrue from a free YP program, because these ve
crops acrually accounrec lor 88 percenr ($10.42 Lillion) ol rhe roral premiums collecrec in 2011. l rhe cosr ol
SDA implemenrarion is close ro rhe $4o7 million esrimarec in rhe FSAcommissionec srucy, rhe roral savin_s
nly 2011 nsurec Acres All Planted Acres
billion $
Corn $2,3 $2.7
Corron $0.8 $0.8
Rice $0.0o $0.07
Soybeans $1.7 $2.0
Wheat $1.0 $1.2
Total $5.8 $o.8
Nore: nsurec acres lor each crop/srare comLinarion was ser equal ro rhe share ol 2011 planrec acres lor each crop rhar
was insurec lor each srare mulripliec Ly 2013 srare acres. 2013 srare acres lor each crop was ser equal ro 2013 CB acrea_e
lrom TaLle 3 mulripliec Ly rhe srare share ol narional acrea_e lor each crop in 2011.
Table 5. Cost Estimates of Free YP Coverage in 2013 for Optional Units
Crop Location Fremium Discounr
Corn Boone Counry, owa 0.400
Corron LuLLock Counry, Texas 0.14
Rice Arkansas Counry, Arkansas 0.154
Soybeans Champai_n Counry, llinois 0.371
Wheat Burler Counry, Kansas 0.2o8
Wheat Cass Counry, Norrh Dakora 0.207
Source: FMA premium calcularor.
Table 6. Enterprise Premium Discounts for Select Locations
ENvFNMENTAL WFKNG GFF
26
www.ewg.org /// April 2012
come ro $o.2 Lillion. l larmers are char_ec a nominal lee ro cover rhese cosrs, rhe roral savin_s come ro $o.7
billion a year.
Givin_ away lree insurance anc movin_ pro_ram acminisrrarion ro SDA woulc _enerare suLsranrial savin_s
unless oprional unir covera_e was exrencec ro all planrec acres. TaLle summarizes rhe savin_s rhar woulc
Le achievec Ly ollerin_ a lree, enrerpriseunir YF policy ro larmers. The 10year savin_s woulc roral $5.7 Lillion
il enrerprise unir covera_e were exrencec ro all planrec acres lor rhese crops. The savin_s woulc equal $13.8
Lillion il rhe lree enrerprise unir policy only coverec acres rhar were insurec in 2011. Char_in_ larmers a nominal
lee ro cover celivery cosrs woulc increase rhe savin_s shown in TaLle ro Lerween $10.4 anc $18.5 Lillion,
depending on how many acres were covered by the free policy.
Policy Implications
Farmers and Taxpayers are Better Off
The idea that both farmers and taxpayers could be better off under a free crop insurance program rather than
provicin_ insurance prorecrion rhrou_h rhe currenr sysrem is nor new. Faulson anc BaLcock (2010) showec
that a permanent disaster program based on a county revenue insurance program would cost about the same
as was Lein_ spenr (on a perinsurecacre Lasis) on Group Fisk ncome Frorecrion. The icea rhar commociry
pro_rams acminisrerec cirecrly Ly SDA coulc Le Lasec on insurance principles is also nor new. The American
Farm Bureau Fecerarion proposec a counryLasec revenue insurance pro_ram as a larm Lill oprion in 2011.
The Avera_e Crop Fevenue Elecrion (ACFE) pro_ram esraLlishec in rhe 2008 larm Lill is a srarelevel revenue
nly 2011 nsurec Acres All Planted Acres
billion $
Corn $1.8 $2.2
Corron $0.7 $0.7
Rice $0.05 $0.0o
Soybeans $1.4 $1.7
Wheat $0. $1.1
Total $4.8 $5.o
Table 7. Cost Estimates of Free Enterprise Unit YP Coverage in 2013
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insurance pro_ram. Currenrly, corron procucers are proposin_ a counryLasec revenue insurance pro_ram
callec STAX lor rhe 2012 larm Lill. The Narional Milk Frocucers Fecerarion is proposin_ a milk mar_in insurance
program that would be administered through FSA. And, nally, the Supplemental Revenue Assistance Payments
Fro_ram (SFE) was inclucec in rhe 2008 larm Lill as a permanenr cisasrer assisrance pro_ram Lasec on whole
farm insurance principles.
Premium Subsidies A& Underwriting Gains Total
billion $
Corn $1.8 $0.5 $0.o $3.0
Corron $0.4 $0.0 $0.1 $0.o
Rice $0.03 $0.00o $0.008 $0.04
Soybeans $1.2 $0.3 $0.4 $2.0
Wheat $0.7 $0.2 $0.2 $1.0
Total $4.2 $1.1 $1.4 $o.7
Toral wirh cap on A& $o.7
Toral wirh SDA payin_ acminisrrarive cosrs $o.2
Total with farmer paying administrative costs $o.7
Table 8. Projected Budget Savings in 2013 from Moving to Free Yield Insurance
Farmers Pay No Fee Farmers Pay a Nominal Fee
billion $
Annual Net Savings
nly Currenrly nsurec Acres $1.4 $1.8
All Planted Acres $0.o $1.0
10 year Savings
nly Currenrly nsurec Acres $13.8 $18.5
All Planted Acres $5.7 $10.4
Nore: 10 years savin_s approximarec Ly mulriplyin_ rhe annual savin_s lor 2013 Ly 10.
Table 9. Net Budget Savings from Free Crop Insurance Program
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28
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Whar SFE, ACFE, STAX anc rhe proposals ol rhe American Farm Bureau Fecerarion anc rhe milk procucers all
have in common is that they leave the current crop insurance program in place. The problem with this approach
is that it becomes difcult to nd the savings needed to meet decit reduction targets or to pass any new safety
net program. In addition, it would be a mistake to conclude that the lack of proposals to replace the current
system with a new approach shows that the industry is efciently delivering a farm safety net. After all, a system
that costs a dollar to deliver a dollar of benets is hardly efcient. The reality is that it is the lobbying power of
the crop insurance industry that stands in the way of reform proposals. If the insurance were simply given away
as part of farm bill reform, the crop insurance industry would have to reinvent itself, cutting costs and becoming
more crearive ro survive in an unsuLsicizec worlc. No incusrry rhar is currenrly makin_ so much money will
willingly accept such change, and it will lobby with all its might to prevent this from happening.
The lacr remains rhar a simple proposal ro _ive larmers a 70 percenr YF policy as rhe raxpayerluncec porrion ol
rhe salery ner woulc accomplish a numLer ol policy oL|ecrives:
r woulc provice a permanenr larmlevel cisasrer pro_ram rhar woulc cover 100 percenr ol planrec acrea_e
anc 100 percenr ol yielc losses in excess ol 30 percenr. This is Lerrer prorecrion rhan many larmers now have.
r woulc nor si_nilcanrly cisrorr planrin_ cecisions Lecause ol rhe 30 percenr cecucriLle anc rhe lack ol a
price trigger.
r woulc eliminare rhe neec lor an elaLorare premium rarin_ srrucrure anc shorrcircuir ar_umenrs aLour
whether crop insurance rates are too high or too low, because there would be no premiums to pay.
Enrerprise unir covera_e woulc lower rhe incenrive ro larm hi_hrisk, environmenrally sensirive lanc Lecause
such land would have to be pooled with more productive farmland.
It would contribute towards decit reduction.
Private Sector Options to Enhance Risk Management
Some will uncouLrecly ar_ue rhar 70 percenr yielc insurance provices an inacequare salery ner lor larmers.
As evidence, they will point to the popularity of RP and higher levels of coverage that many farmers currently
purchase. Farm _roups have also criricizec proposals lor relormin_ crop insurance suLsicies Ly ar_uin_ rhar rhey
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would not be able to afford high levels of coverage without taxpayer help.
However, the current popularity of RP and high coverage levels is not credible evidence that farmers need more
risk protection, because farmers are buying much of this additional coverage with taxpayer dollars, not their
own. It is fundamental tenet in economics that people have an insatiable appetite for products they can buy
with someone elses money. When the subsidies are eliminated, what once was considered a necessity no longer
seems so imporranr, anc cemanc shrinks suLsranrially. Many larmers woulc lnc rhar rhey coulc _er Ly on much
less insurance if they knew that they had to pay the full price themselves. There is no credible evidence in the
academic literature that high levels of coverage are necessary for individual farmers and the agricultural sector
as a whole to thrive. What the research does show is that the demand for high insurance coverage is more about
the pursuit of subsidies than protection against risk.
12

Why shoulc ir Le raxpayers' responsiLiliry ro suLsicize _enerous insurance covera_e? Farmers who rruly value
more rhan 70 percenr yielc covera_e shoulc rurn ro rhe privare secror anc pay wirh rheir own money. Frovicin_
suLsicies lor hi_h covera_e implies rhar Con_ress knows Lerrer rhan larmers how much risk prorecrion rhey
really neec. ncer rhe proposec lree insurance proposal, privare companies woulc Le lree ro oller "accon"
policies that provide higher coverage or effective revenue protection, and growers would be free to decide if
they were worth the cost.
Revenue protection policies are especially popular because they increase the amount of guaranteed revenue
il rhe price ar harvesr is hi_her rhan rhe pro|ecrec price ar rhe rime larmers si_nec up lor rhe insurance Lelore
planting. This increased protection increases farmers insurance payouts if a farmer has a yield loss. This additional
prorecrion is similar ro a call oprion on a lurures conrracr. Call oprions _ive a larmer rhe ri_hr ro Luy a lurures
contract. If a farmer buys a call option in the springtime and prices later rise, then the holder of the call option
has the right to buy futures contract at the lower springtime price. Thus call options protect a farmer who does
not have enough crop to meet the obligations of the futures contract. Without the call option, the farmer would
have ro Luy accirional Lushels ar rhe hi_h harvesr price ro lullll rhe lurures conrracr. Call oprions seem expensive
ro many larmers, Lur ir is nor a srrerch ro ima_ine rhe cevelopmenr ol a privare accon procucr rhar pays oll on
the call option only there is a yield loss. This would lower the cost of the option signicantly.
Farmers who Luy FF policies also en|oy prorecrion a_ainsr price crops. Bur a larmer is alreacy prorecrec a_ainsr
price crops once he or she enrers inro a lorwarc or lurures conrracr. Alrer all, only larmers who lorwarcconrracr
ENvFNMENTAL WFKNG GFF
30
www.ewg.org /// April 2012
their crop obtain risk management benets (as opposed to prot increases) from the extra risk protection offered
Ly FF. Farmers who co nor lorwarcconrracr can prorecr a_ainsr price crops Ly Luyin_ pur oprions. A pur oprion
gives the holder the right to sell a futures contract. If the harvest price drops and farmer bought a put option in
the springtime, he can sell at the higher springtime price, thus protecting against the price drop.
Some ol rhese privaresecror alrernarives exisr now, anc many more woulc presumaLly Le cevelopec il rhe
privare secror cic nor have ro compere a_ainsr heavily suLsicizec crop insurance procucrs. Bur as wirh all privare
secror rransacrions, rhe Luyer woulc have ro pay rhe lull cosr ol rhe procucr. To esrimare rhe likely cosr ol accon
policies, TaLle 10 shows whar a larmer woulc pay lor 75, 80, anc 85 percenr covera_e ol FF anc YF on rop ol rhe
lree 70 percenr YF covera_e, inclucin_ a 25 percenr markup ro cover acminisrrarive cosrs anc prolr. Sprin_rime
prices levels are Lasec on rhe 2013 CB levels. For comparison, rhe pro|ecrec 2013 cosr ol Luyin_ each level ol
coverage under the current system of premium subsidies is also shown.
The rows laLelec "Frivare Accon" show rhe privaresecror cosrs lor accirional covera_e lor each crop. This is
the incremental cost of providing the indicated type of coverage (RP or YP) at that coverage level. In the Iowa
corn example, yielc covera_e ar 10 percenra_e poinrs aLove rhe lree 70 percenr YF policy (equivalenr ro aLour
1o Lushels ol exrra covera_e) woulc cosr $20 per acre. FFrype covera_e ar rhis 80 percenr covera_e level woulc
cosr $41 per acre alrer crecir lor rhe 70 percenr YF covera_e. The rows laLelec "Currenr" show rhe esrimarec
2013 cosrs ol each covera_e oprion uncer rhe currenr premium suLsicy srrucrure. The owa corn larmer woulc
pay $2o per acre (ar 2013 price levels) lor 80 percenr FF covera_e. This is $15 per acre less rhan rhe privare secror
$41 per acre accon cosr lor similar prorecrion.
TaLle 10 shows rhar lor rhe lowerrisk crops corn, soyLeans anc rice Luyin_ FFrype covera_e on rop ol a
70 percenr YF policy woulc Le more expensive rhan whar rhey currenrly pay. n conrrasr, rhe cosr ol FFrype
covera_e lor whear anc corron woulc Le much lower. The cillerence relecrs rhe value ol 70 percenr yielc
prorecrion. n lowrisk counries, rhe value ol a 70 percenr YF policy is much lower rhan in hi_hrisk counries. This
lower value translates into a lower credit that is used to offset the cost of additional protection.
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Conclusions
The likelihooc ol wholesale relorm ol rhe crop insurance pro_ram curin_ rhe 2012 larm Lill reaurhorizarion
alon_ rhe lines su__esrec in rhis srucy may seem remore. Bi_ chan_es co nor come succenly ro a_riculrural
programs. A signicant amount of money has been invested in crop insurance companies in anticipation of
continued public subsidies, and crop insurance agents, whose income has risen sharply in the last ve years,
now have suLsranrially _rearer polirical anc loLLyin_ power. Bur evenrually rhe aLsurciry ol rhe currenr sysrem,
which suLsicizes larmers ro Luy much more insurance rhan rhey woulc il rhey paic lor ir wirh rheir own money,
and which costs a dollar to deliver each dollar of benets, will eventually result in change, particularly in the face
Yield Protection Revenue Protection
75% 80% 85%

o5 70% 75% 80% 85%
$ per acre
owa Corn
Frivare Accon 20 35 2 12 25 41 o2
Currenr 10 15 24 8 11 17 2o 42
Texas Corron
Frivare Accon 13 28 43 0 15 30 47 o5
Currenr 45 54 o 40 45 55 71 3
Illinois Soybeans
Frivare Accon o 13 22 1 7 15 2o 3
Currenr o 15 4 o 10 1o 2o
Norrh Dakora Whear
Frivare Accon 5 10 1o 1 o 12 1 27
Currenr 8 10 14 o 8 11 1o 22
Kansas Whear
Frivare Accon 14 18 23 11 15 1 24 2
Currenr 11 13 17 10 11 14 18 24
Arkansas Rice
Frivare Accon 20 3o 1 21 37 58
Currenr 14 23 o 14 23 38
a
Frivare accon cosrs are calcularec Ly simularin_ rhe roral cosr ol rhe covera_e, suLrracrin_ rhe value ol rhe lree 70
percenr yielc insurance anc rhen markin_ up rhe resulr Ly 25 percenr. Currenr cosrs equal rhe simularec roral cosr ol rhe
product minus the current amount of premium subsidy available.
Table 10. Cost of Alternative Amounts of Risk Protection
a
ENvFNMENTAL WFKNG GFF
32
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of mounting demands for decit reduction.
The need to nd funds to pay for new commodity programs and the other farm bill titles is one reason to
hope that crop insurance reform may be at hand. Although proposals for new revenue insurance programs in
rhe 2012 larm Lill woulc acc ro currenr crop insurance pro_rams, nor replace rhem, rhey coulc cerrainly Le
revised to provide a direct substitute. For example, the STAX program for cotton could be altered to provide
0 ro 0 percenr counrylevel revenue insurance covera_e. Eliminarin_ currenr premium suLsicies lor corron
insurance policies coulc cover rhe cosr. Sen. Kenr Conrac's new shallowloss revenue insurance proposal coulc
Le alrerec ro provice yielc covera_e lrom 0ro70 percenr, rarher rhan revenue covera_e lrom 75ro88 percenr.
As demonstrated here, its cost could also covered by eliminating crop insurance premium subsidies.
r makes no lscal or economic sense lor Con_ress ro Le consicerin_ new insurancerype commociry pro_rams
ro place on rop ol rhe currenr, exrremely cosrly crop insurance pro_ram. l Con_ress rruly wanrs ro pur a srron_
farm safety net in place and make prudent scal choices, it should scrap the current system of premium subsidies,
celiver a Lasic level ol risk prorecrion cirecrly rhrou_h SDA anc ler rhe privare secror co whar rhe privare secror
does best: deliver products that generate enough value to induce customers to buy them.
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REFERENCES
BaLcock, B.A. "The Folirics anc Economics ol rhe .S. Crop nsurance Fro_ram." Fa_es 83112 in Zivin, J., anc J.M. Ferloll, The
nrencec anc ninrencec Consequences ol .S. A_riculrural anc Biorechnolo_y Folicy. anc Folirical. Narional Bureau ol Eco
nomics Fesearch, niversiry ol Chica_o Fress. 2012.
Goocwin, B.K.. "An Empirical Analysis ol rhe Demanc lor Mulriple Feril Crop nsurance. American Journal ol A_riculrural Eco
nomics 75(13), 423434.
Jusr, F.E., Calvin, L. anc ui__in, J. "Acverse Selecrion in Crop nsurance: Acruarial anc Asymmerric nlormarion ncenrives."
American Journal ol A_riculrural Economics 81(1):8344.
Faulson, N.D. anc BaLcock, B.A. 2008. "Ger a GFF: Shoulc Area Fevenue Covera_e Be llerec Throu_h rhe Farm Bill or as a
Crop nsurance Fro_ram?" Journal ol A_riculrural anc Fesource Economics, 33(2): 137153.
FOOTNOTES
1. A recenr proposal Ly Sen. Kenr Conrac (DN.D.), callec Fevenue Loss Assisrance Fro_ram (FLAF), woulc co Lorh: prorecrin_
a_ainsr a mulripleyear cecline in prices anc coverin_ a porrion ol rhe crop insurance cecucriLle.
2. ne reason lor rhis chan_e in law was rhar many larmers only Lou_hr a 35 percenr cecucriLle policy (which is rhe same rhin_
as Luyin_ o5 percenr covera_e). Many in Con_ress anc perhaps rhe crop insurance companies wanrec larmers ro Luy hi_her
covera_e levels (lower cecucriLle policies). n rheir 200o paper, BaLcock, Hayes, anc Harr showec rhar rhe reason many larmers
chose o5 percenr covera_e is rhar ir maximizec rheir premium suLsicies anc rhar SDA char_ec mosr larmers much more rhan a
collar lor a collar's worrh ol insurance lor hi_her covera_e. BaLcock (2012) showec rhar rhe chan_e in premium suLsicy srrucrure
helpec compensare lor rhis overchar_in_, leacin_ many more larmers ro Luy hi_her covera_e. The irony is rhar Con_ress has
nor rescincec rhe new premium suLsicy srrucrure even rhou_h SDA chan_ec rhe way ir calculares premium rares in rhe mic
2000s, so rhar now premiums ar hi_her covera_e levels more accurarely relecr rhe cosr ol rhe hi_her covera_e.
3. The reason lor rhis learure ol FF is rhar ir prorecrs larmers who lorwarc conrracr a porrion ol rheir crop. The risk ol a lorwarc
contract is that the farmer does not produce enough to deliver against the contract. If harvest prices are higher than the forward
price, rhe larmer musr "Luy" more expensive Lushels ol procucrion ro make up rhe shorrlall. There is no requiremenr rhar a
farmer must enter into a forward contract for farmers to obtain this extra coverage.
4. The lree insurance proposal consicerec here is one lorm ol a lxec voucher pro_ram rhar _ives a ser amounr ol luncs ro each
farmer for risk management purposes and allows farmers to spend more to buy additional coverage using their own money.
Senaror Ficharc Lu_ar lrsr proposec such a voucher sysrem lor crop insurance more rhan 10 years a_o. Belore 1, premium
suLsicies were cappec Ly rhe amounr ol suLsicies rhar a larmer coulc receive lor a o5 percenr yielc insurance policy. This policy
was effectively a voucher program because higher levels of insurance could be purchased but the incremental costs were paid
ENvFNMENTAL WFKNG GFF
34
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for by farmers.
5. Frececenr lor SDA payin_ our insurancelike claims cirecrly are rhe paymenrs rhar have Leen mace uncer larm Lill pro_rams
such as ACFE anc SFE, which are paic our uncer rhe aurhoriry ol rhe Commociry Crecir Corporarion.
o. See TaLle 1 in hrrp://www.rma.usca._ov/news/2010/0o/o10laqs.pcl
7. Nor accounrec lor in rhis roral is rhe cosr ol rhe SDA Fisk Mana_emenr A_ency anc rhe Feceral Crop nsurance Corp.
8. Because rhis lree yielc insurance woulc Le enrirlemenr ro all larmers, rhere woulc Le no neec ro pay an insurance a_enr
ro "sell" rhe procucr. Farmers woulc |usr si_n up lor rhe insurance ar rheir FSA ollce when rhey suLmir rheir planrec acrea_e
report after planting. Thus there would be no need to pay agent commissions on this base policy.
. The larmer value ol rhe lree insurance policy is ser equal ro rhe avera_e unsuLsicizec premium lor 70 percenr YF lor each
crop and state. Actual outlays from any crop insurance program can vary dramatically from year to year. Here the premium rep
resenrs rhe avera_e ourlay across many years is raken as rhe larmer value. This is consisrenr wirh rhe way rhar rhe Con_ressional
Buc_er llce calculares lurure pro_ram cosrs.
10. n conrrasr, rhe TaLle 2 cara relecr rhe acrual unir srrucrure rhar larmers selecrec in 2011.
11. ceally, FMA's enrerprise unir ciscounrs lor each crop/counry comLinarion woulc Le usec ro calculare narional cosrs Lur
these discounts were not readily available.
12. Jusr, ui__in anc Calvin (13) anc Goocwin (17) cemonsrrare rhar rhose larmers who Lou_hr hi_h covera_e levels were
likely ro Le uncerrarec ar rhe hi_her covera_e levels. BaLcock (2012) showec rhar rhe value ol risk prorecrion morivares a rela
tively low proportion of farmers to buy high levels of insurance.
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Notes: