Congressional leaders passed a federal budget proposal this week that still needs to be approved by the Senate and the House. The budget plan includes $3 billion in cuts over the next 10 years to crop insurance programs. Joshua Woodard is assistant professor of agricultural business and finance at Cornell's Dyson School of Applied Economics and Management. If adopted, Prof. Woodard says the proposed cuts will increase premiums, lead to lower uptake by farmers, and further discourage providers from participating in Federal Crop Insurance.
Woodard says, "With the Agricultural Act of 2014, our policy-makers clearly established crop insurance as the primary and preferred tool for dealing with yield and revenue risks inherent to crop-based agriculture. The government relies on the private sector for delivery of the Federal Crop Insurance Program, and these companies also share in the risk.
"Some of our recent research on crop insurance participation patterns has revealed that demand can be quite responsive to subsidization. A look back to the last 40 years shows that farmers do not tend to use crop insurance unless premiums are subsidized.
"Among the policies offered, revenue coverage with harvest price protection is by far the most popular product by volume. The recent draft budget proposes reducing premium subsidies on this product specifically.
"Reducing the subsidy on these revenue insurance products from the current level of approximately 60 percent to 50 percent would mean an increase in farmer paid premiums on those products by about 25 percent, and probably similar reductions in farmer buy-up.
"There has been a plethora of changes in the Federal Crop Insurance Program in the last few years which have made it far less profitable for private insurers. Further reductions in farmer participation on top of that, coupled with a capping of company returns as in the proposal, could very well lead to more companies exiting the market.
"Many of the larger agribusiness players are already in the process of exiting the market, perhaps because it has become far less attractive from an underwriting perspective. Just this year, John Deere completed the sale of its crop insurance business. Monsanto's crop insurance arm - Climate Corporation - recently left the Federal Crop Insurance market as well, and Wells Fargo has put their crop insurance business up for sale."