NCPA - National Center for Policy Analysis

Crop Insurance Proposal Could Cost U.S. Billions

June 14, 2012

At the same time that high crop prices are prompting farmers to expand into millions of acres of land once considered unsuitable for farming, Congress is considering expanding a federal insurance program that reimburses farmers for most losses or drops in prices.  The combination could cost the government billions of dollars if the newly farmed land does not yield enough crops and especially if crop prices fall, says the New York Times.

Advocates, including farm interest lobbyists and lawmakers with a long history of creating and protecting benefits, argue that the new program would save Washington money by replacing a longstanding one costing $5 billion a year, known as direct payments, that pays owners of farmland a set amount regardless of whether they have planted crops.

However, the subsidization of crop insurance has a significant perverse incentive, in that it encourages farmers to exploit land with exceptional risk, overextending their operations.

  • The sharp rise in the price of corn, wheat, soybeans and other crops has already caused farmers to plant land long prone to erosion and flooding.
  • Farmers are somewhat tempered in this expansion effort by potential losses at these locations where, for example, a flood may wipe out a large crop yield.
  • The new farm bill, however, would further exacerbate this problem: it would further subsidize the premiums paid by farmers for crop insurance and would also cover much (if not all) of their deductibles for the same.
  • The end result of these policies, it seems, is that farmers will be incentivized to engage in extraordinarily risky operations -- after all, they'll be paid anyway.

Additionally, environmentalists are clamoring about the effects that this rapid agricultural expansion will have on once-wild lands.

  • Today, the government pays about $50 an acre for farmers to keep their lands in conservation -- a program stemming from the 1985 Conservation Reserve Program.
  • However, with crop prices soaring today, most farmers cannot resist the allure of planting on all land available to them.
  • As a result, since 2007, South Dakota has lost nearly 500,000 acres of grassland to farming.
  • In North Dakota, more than 1 million acres have become farmland over the same time period.

Source: Ron Nixon, "Crop Insurance Proposal Could Cost U.S. Billions," New York Times, June 6, 2012.

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