National Sustainable Agriculture Coalition Issues Report Entitled 'Economic Analysis of Payment Caps on Crop Insurance Subsidies'

WASHINGTON, July 22 (TNSrep) -- The National Sustainable Agriculture Coalition issued the following 11-page report in July 2022 entitled "NSAC Issue Brief: An Economic Analysis of Payment Caps on Crop Insurance Subsidies."

The report was written by Eric J. Belasco.

Here are excerpts:

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INTRODUCTION

With the expiration of the 2018 farm bill quickly approaching in 2023, there is much discussion on a range of federal agricultural support programs and how they might change with the next farm bill. After accounting for expenditures under the Nutrition title of the farm bill, the largest federal expenditures are devoted to the federal crop insurance program. While a suite of new disaster aid and other support programs have been introduced in recent years, the crop insurance program has consistently remained intact.

One of the program's central features is that farmers and ranchers receive a roughly 60 percent subsidy premium discount on their insurance policies. The primary purpose of the subsidy is to encourage higher levels of participation to avoid adverse selection and potentially reduce pressures from the farm sector for congress to provide ad hoc disaster aid payments (Goodwin and Smith 1995). In 2021, federal crop insurance programs included 2.2 million policies sold that covered over 300 million acres with a total liability of $136.6 billion, while farmers received $8.6 billion in subsidy discounts (RMA 2022).

Advocates have argued that crop insurance is an essential element of the federal safety net program as it is needed to stabilize the food production system and provides farmers with "skin in the game" in reducing variations in farm revenues. However, there has long been concern about the concentration in subsidy benefits across farms. For example, Bonnen (1968) estimated that in the mid-1960s the largest 20% of farms received over 50% of federal farm program benefits. Nearly twenty years later, Johnson and Short (1983) estimated that the largest 1% of farms received approximately 17% of net agricultural program benefits.

A more recent study by Bekkerman, Belasco, and Smith (2019) found that the largest 10% of farms received over 60% of all subsidy benefits. While consolidation in federal agricultural subsidy programs has long been a concern, the concentration of payments on a small number of farms has almost surely increased as the average size of commercial farms has increased through farm consolidation (MacDonald, Korb, and Hoppe 2013).

Implementing caps to crop insurance subsidy benefits has been proposed as a way to limit excessively large payments being made to the largest farms, while still preserving some assurances to small and medium sized farm operations. Another argument in favor of such caps is that they can be an effective way to save a substantial amount of taxpayer expenditures, which may allow for reallocating resources to other priority areas such as agricultural research, conservation, beginning farmer and rancher programs, or deficit reduction, while affecting a relatively small number of farms (Bekkerman, Belasco, and Smith 2019).

In this study, five possible caps are evaluated, to help inform the tradeoffs to be considered in such policies. The obvious trade-off between higher or lower subsidy caps involves the percentage of farms that receive fewer subsidies under each cap, which are then offset by savings in expenditures that can either be utilized for other federal agricultural programs or returned to taxpayers. To that end, for each cap scenario I focus on the percentage of farms that will receive fewer government payments and the total cost savings. The following five cap scenarios are examined:

Scenario 1: $50,000 cap on crop insurance subsidies per farm.

Scenario 2: Eliminate premium subsidies for farmers with an Adjusted Gross Income (AGI) over $250,000 /$500,000 / $750,000 / $900,000.

Scenario 3: Reduce premium subsidies by 15% for farmers with an AGI over $250,000 / $500,000 / $750,000/$900,000.

Scenario 4: Reduce premium subsidies by 50% for farmers with an AGI over $250,000 / $500,000 / $750,000 / $900,000.

Scenario 5: Phase out premium subsidies starting at a 50 percent reduction on production exceeding $1 million and reaching 100 percent on production exceeding $2.5 million.

The remainder of this report is organized as follows. First, the data and methods used to estimate the impact and cost of each cap scenario are described. Then, the results and are documented and discussed. Finally, the implications of these results are discussed, along with appropriate caveats regarding the findings.

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CONCLUSIONS

The analysis in this report provides a range of subsidy caps that can be applied to meet different policy objectives and focuses on the trade-offs that exist when implementing these caps. The strictest cap that is evaluated requires the complete elimination of insurance subsidies for any farm with an AGI over $250,000, which would amount to total savings of $20.2 billion and would impact 10.66% of all farms. All of the other caps would provide some amount of savings on subsidy payments and reduce the extent to which subsidy payments are concentrated on a few farms, but to a lesser extent. Such savings in federal expenditures could be reallocated to other higher priority programs (e.g., agricultural research, conservation, beginning farmer and rancher programs, etc.), reduce tax burdens on taxpayers, or reduce the federal budget deficit.

There are several caveats to this study. First, the estimations of impacts and cost savings provided in this report vary significantly in response to changes in CBO projections. This sensitivity of results can be seen comparing tables 4 and 5, which contain the projected impacts of each cap scenario under two CBO projections (CBO 2021; CBO 2022) that deviate by around 20%. As shown in the results, changes in actual crop insurance subsidies can drive the actual savings from the proposed caps.

Second, the assumption of binding caps is only as effective as the actual policy that is drafted. Currently, farms are able to avoid such caps through redefining farm ownership among family members and other non-farm business partners. The creation of "paper farms" and other legal maneuvers to avoid these caps would drastically limit the impact of such a policy. As such, attention should be paid to establishing these policies so that they have the intended impacts and don't allow for a mitigated impact through legal loopholes.

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REFERENCES

Bekkerman A, EJ Belasco, and VH Smith. 2019. "Does Farm Size Matter? Distribution of Crop Insurance Subsidies and Government Program Payments across U.S. Farms," Applied Economic Perspectives and Policy, Vol. 41, No. 3, pp. 498518.

Belasco EJ and VH Smith. 2022. "The Impact of Policy Design on Payment Concentration in Ad-hoc Disaster Relief: Lessons from the Market Facilitation Program and Coronavirus Food Assistance Programs." Food Policy, Vol. 106.

Bonnen, JT. 1968. The Distribution of Benefits from Selected U.S. Farm Programs. In Rural Poverty in the United States, A report by the President's National Advisory Commission on Rural Poverty, Washington DC, 461-505.

Congressional Budget Office. 2021. "CBO's July 2021 Baseline for Farm Programs." Congress of the United States, Washington.

Goodwin BK and VH Smith. 1995. The Economics of Crop Insurance and Disaster Aid. The AEI Press, Washington DC.

Johnson JD and SD Short. 1983. Commodity Programs: Who Has Received the Benefits? American Journal of Agricultural Economics 65 (5): 912-21.

MacDonald JM, P Korb, and RA Hoppe. 2013. Farm size and the Organization of U.S. Crop Farming. Washington DC: U.S. Department of Agriculture, Economic Research Service, ERR-152.

Williamson JM, and SG Bawa. "Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households", ERR252, U.S. Department of Agriculture, Economic Research Service, June 2018.

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The report is posted at: https://sustainableagriculture.net/wp-content/uploads/2022/07/Payment-Limit-Report-FINAL.pdf

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