Crop Insurance: Considerations in Reducing Federal Premium Subsidies
Published: 2014-08-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federally subsidized crop insurance, which farmers can buy to help manage the risk inherent in farming, has become one of the most important programs in the farm safety net. Revenue policies, which protect farmers against crop revenue loss from declines in production or price, are the most popular policy type and account for nearly 80 percent of all premium subsidies. The crop insurance program's cost has come under scrutiny while the nation's budgetary pressures have been increasing.
GAO was asked to look at the cost of the crop insurance program. This report examines (1) trends in federal crop insurance costs and farm sector income and wealth from 2003 through 2012 and (2) the potential savings to the government and impacts on farmers, if any, of reducing federal premium subsidies for revenue policies. GAO analyzed USDA crop insurance program data and farm sector income and wealth data from 2003 through 2012 (most recent year with complete crop insurance data); reviewed economic literature and documents from stakeholders including farm industry groups and researchers; and interviewed USDA officials.
section_title: What GAO Found
paragraphs: The cost of the federal crop insurance program and farm sector income and wealth grew significantly from 2003 through 2012. The cost of crop insurance averaged $3.4 billion a year from fiscal years 2003 through 2007, but it increased to $8.4 billion a year for fiscal years 2008 through 2012. According to the U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA), the agency that administers the crop insurance program, subsidies for crop insurance premiums accounted for $42.1 billion─or about 72 percent─of the $58.7 billion total program costs from 2003 through 2012. Revenue policies, the most frequently purchased crop insurance option, accounted for $30.9 billion of the total premium subsidy costs for 2003 through 2012. Crop insurance premium subsidy rates—the percentage of premiums paid by the government—are set by Congress and would require congressional action to be changed. For most policies, the rates range from 38 to 80 percent, depending on the policy type, coverage level chosen, and geographic diversity of crops insured. As premium subsidy costs increased, farm sector income and wealth indicators also increased. For example, for each year from 2003 through 2012, median farm household income exceeded median U.S. household income. Specifically, on average, median farm household income was $7,205, or 13.8 percent, greater each year than U.S. household income, in constant 2012 dollars. Farm sector income also grew from $73.8 billion in 2003 to $113.8 billion in 2012, in constant 2012 dollars. Farm real estate values, another measure of farm prosperity, increased by 72 percent from 2003 through 2012, in constant 2012 dollars, and farmers relied less on borrowed funds to finance their holdings.
Reducing premium subsidies for revenue policies could potentially result in hundreds of millions of dollars in annual budgetary savings with limited costs to individual farmers. For example, the federal government would have potentially saved more than $400 million in 2012 by reducing premium subsidies by 5 percentage points, and the savings would have been nearly $2 billion by reducing these subsidies by 20 percentage points. Although such reductions would have required farmers to pay more of their premiums, the impact on their average production costs per acre would have been limited, usually less than 2 percent, and often less than 1 percent. For example, for corn, premium subsidy reductions of 5 and 20 percentage points in 2012 would have raised average production costs per acre by about $2.80 and $11.20, respectively. These increases would have been about 0.4 percent and 1.7 percent, respectively, of the total average production cost per acre of $656 that year for corn. The ultimate impact of such limited production cost increases on farmers' income would depend on their individual profit margins. However, for the industry as a whole, the impact appears to be minimal. In 2000, when Congress enacted new premium subsidy rates, the new rates immediately became effective. In contrast, when RMA increases the premiums charged for policies, it generally phases in the increases over several years to lessen the impact on farmers. Documents from farm industry groups and some researchers note that reductions in premium subsidies could result in lower farmer participation in the program and lower insurance coverage levels. However, available economic literature indicates that farmers' response to such reductions may be small due to factors such as the attractiveness of revenue policies and increasing importance of crop insurance as other farm programs are reduced or eliminated. In addition, other stakeholders identified incentives that would help keep farmers in the program, including pressure from lenders to maintain crop insurance coverage and the importance of crop insurance to many farmers as their primary risk management tool. In the event that subsidy rates were reduced, actual information on the impact on farmer participation would be available if participation were monitored.
section_title: What GAO Recommends
paragraphs: To reduce the cost of the crop insurance program, Congress should consider reducing the level of federal premium subsidies for revenue crop insurance policies, including a phased reduction, if appropriate, and directing USDA to monitor and report on the impact, if any, of this reduction on crop insurance program participation. In written comments, USDA said it had no comments on the report's findings.

section_title: Letter
paragraphs: Federally subsidized crop insurance, which farmers can purchase to help  manage the risk inherent in farming, has become one of the most  important programs in the farm safety net, according to USDA officials  and some farm industry stakeholders. Under the federal crop insurance  program, farmers can choose various levels and types of insurance  protection. For example, they can insure against losses caused by poor  crop yields or declines in revenues for each insurable crop they produce.  In 2012, the crop insurance program provided more than $117 billion in  insurance coverage for about 283 million acres of farmland with almost  1.2 million policies. The federal government’s crop insurance costs  include subsidies to pay for (1) part of a farmer’s crop insurance  premiums, which averaged about 62 percent of total premiums in 2012,  and (2) administrative and operating expenses (administrative costs)— provided on behalf of farmers—to insurance companies to cover their  expenses for selling and servicing crop insurance policies.
In recent years, policies that protect against crop revenue loss resulting  from declines in production, price, or both—known as revenue policies— have become the most popular policy type. For example, as of 2012, the  majority of crop insurance policies—almost 70 percent—was revenue  policies, and they accounted for nearly 80 percent of all premium  subsidies. In general, these policies include a harvest price provision,  allowing farmers with this coverage whose insured crops experience a  decline in revenue below the level guaranteed in their policy to file a loss  claim based on the higher of either the preplanting price or the harvest  price of the covered crop.
The cost of the federal crop insurance program has come under scrutiny  at the same time that the nation’s budgetary pressures have been  increasing. As of March 2014, the national debt was estimated at $17.6  trillion. Furthermore, in the last 15 years, debt held by the public has  nearly doubled. As we discuss on our key issues website, the large  national debt reduces the federal government’s flexibility to respond to  new and unexpected challenges and, if interest rates rise, the payments  on the debt will use up a growing part of the federal budget. Furthermore,  increased attention to future fiscal exposures—responsibilities, programs,  and activities that legally commit or create the expectation of future  funding—that could affect the federal government’s fiscal condition is  made more important because of the nation’s longer term fiscal  challenges. In the past, we have identified numerous opportunities for the  federal government to save tax dollars and enhance revenue, including in  the federal crop insurance program.
In this context, you asked us to look at the cost of the federal crop  insurance program, specifically concerning the costs associated with  revenue insurance policies. This report examines (1) trends in federal  crop insurance costs and farm sector income and wealth from 2003  through 2012 and (2) the potential savings to the government and  impacts on farmers, if any, of reducing federal premium subsidies for  revenue policies.
To address these objectives, we interviewed officials of the U.S.  Department of Agriculture (USDA), including officials from the Economic  Research Service (ERS) and Risk Management Agency (RMA), and  reviewed documents they provided, including, for example, documents on  crop insurance program costs and outlays. We also interviewed officials  at the Congressional Budget Office (CBO). For the first objective, we  reviewed and analyzed RMA crop insurance program data for 2003  through 2012, including data on the types of crops insured, the number  of acres insured, and total program costs. In particular, we focused on  these data as they relate to revenue policies. For these analyses we only  included information on “buy-up” policies—that is, the portion of crop  insurance for which a farmer pays a premium; “buy-up” policies account  for any coverage that is purchased above the “catastrophic” level. We  also reviewed and analyzed ERS data for 2003 through 2012 on the  overall financial condition of the farm sector, including data on farm  income and farmland values. For the purposes of this report, crop  insurance costs and premium subsidies, which are budget-related data,  are reported in nominal dollars, while data on median farm household and  U.S. household income, net farm and net cash income, and farmland  values are reported in inflation adjusted dollars, using 2012 as the  reference year. In addition, as appropriate, we report these data in  calendar, fiscal, or crop years, depending on how the data were reported  in the source documents. Unless otherwise indicated, these data are in  calendar years. To address the second objective, we analyzed the  potential impacts of reducing premium subsides for revenue policies in  2012, the most recent year for which we had complete data at the time of  our analysis. Using RMA data, we estimated what the savings to the  federal government would have been if premium subsidies had been  reduced by 5, 10, 15, or 20 percentage points in 2012. We also estimated  what a reduction in premium subsidies by each amount would have  added to the production costs of farmers. Specifically, using ERS  Agricultural Resource Management Survey data, we estimated what the  additional production cost per acre, on average, would have been in 2012  for a variety of crops, including the major field crops of corn, cotton,  soybeans, and wheat that receive the majority of the revenue crop  insurance premium subsidies. We reviewed related documentation,  interviewed knowledgeable agency officials, and reviewed related internal  controls information to evaluate the reliability of the data discussed  above. In each case, we concluded that the data were sufficiently reliable  for the purposes of this report. In addition, we reviewed the agricultural  economic literature for the period 1993 through 2013, to get information  on what impact, if any, premium subsidy reductions would have on  farmers’ participation in the crop insurance program. A more detailed  discussion of our objectives, scope, and methodology is presented in  appendix I.
We conducted this performance audit from May 2013 to August 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our objectives.
subsections: section_title: Background
paragraphs: Farmers are exposed to financial losses because of production risks— droughts, floods, and other natural disasters—as well as variations in the  market price of their crops. The federal government has played an active  role in helping to mitigate the effects of these risks on farm income by  promoting the use of crop insurance. RMA has overall responsibility for  administering the federal crop insurance program, including controlling  costs and protecting against fraud, waste, and abuse. As of May 2014,  RMA partnered with 19 private insurance companies that sell and service  the program’s insurance policies and share a percentage of the risk of  loss and opportunity for gain associated with the policies (known as  “underwriting”). RMA administers the crop insurance program through a  Standard Reinsurance Agreement that establishes the terms and  conditions under which participating insurance companies sell and  service federal crop insurance policies.
Through the federal crop insurance program, farmers insure against  losses on more than 100 crops. These crops include major crops—such  as corn, cotton, soybeans, and wheat, which accounted for more than  three-quarters of the acres enrolled in the program in 2012—as well as  nursery crops and certain fruits and vegetables. More specifically,  according to RMA, federal crop insurance penetration based on planted  acres is high for the principal crops of corn, soybeans, wheat, and  cotton. For example, in 2012, about 84 percent of the planted principal  crops were insured under the federal crop insurance program. More  specifically, corn acreage was 84 percent insured, soybean acreage was  84 percent insured, wheat acreage was 83 percent insured, and cotton  acreage was 94 percent insured.
Most crop insurance policies are either production-based or revenue  policies. For production-based policies, a farmer can receive a payment if  there is a production loss relative to the farmer’s historical production per  acre. Revenue policies protect against crop revenue loss resulting from  declines in production, price, or both. The federal government  encourages farmers’ participation in the federal crop insurance program  by subsidizing the insurance premiums and acting as the primary  reinsurer for the private insurance companies that take on the risk of  covering, or underwriting, losses of participating farmers.
The federal government’s premium subsidies for crop insurance policies  are not payments to farmers, but they can be considered a financial  benefit to farmers. Without a premium subsidy, a participating farmer  would have to pay the full amount of the policy premium. Congress sets  premium subsidy rates, meaning the percentage of the premium paid by  the government. Premium subsidy rates vary by the level of insurance  coverage that the farmer chooses and the geographic diversity of crops  insured. For most policies, the statutory premium subsidy rates range  from 38 percent to 80 percent. Premium subsidy rates increased, as a  percentage of total premiums, from an average of 37 percent in 2000 to  an average of 63 percent in 2012. In addition, premium subsidies rose as  crop prices increased because higher prices meant the insured value of  the crop increased, and premiums are based on the value of what is  insured.
In addition, the federal government pays administrative and operating  expense subsidies to insurance companies as an allowance that is  intended to cover their expenses for selling and servicing crop insurance  policies. In turn, insurance companies use these subsidies to cover their  overhead expenses, such as payroll and rent, and to pay commissions to  insurance agencies and their agents. Insurance companies also incur  expenses associated with verifying—also called adjusting—the amount of  loss claimed. These expenses include, for example, loss adjusters’  compensation and travel expenses of adjusters to farmers’ fields. The  administrative expense subsidies also can be considered a subsidy to  farmers; with these subsidies, crop insurance premiums are lower than  they would otherwise be if the program followed commercial insurance  practices. In private insurance, such as automobile insurance, these  administrative expenses typically are captured through the premiums paid  by all policyholders.
The federal government provides crop insurance premium subsidies in  part to achieve high crop insurance participation and coverage levels.  Higher participation and coverage levels may reduce or eliminate the  need for disaster assistance payments from congressionally authorized  ad hoc disaster programs to help farmers recover from natural disasters,  which can be costly. For example, under three separate congressionally  authorized ad hoc disaster programs, USDA provided $7 billion in  payments to farmers whose crops were damaged or destroyed by natural  disasters from 2001 to 2007. Farmers’ participation in the federal crop  insurance program and spending on ad hoc disaster assistance have been policy issues for more than 30 years. A 2005 USDA publicationasserts that Congress passed the Federal Crop Insurance Act of 1980  and subsequent related legislation to strengthen participation in the crop  insurance program with the goal of replacing costly disaster assistance  programs. According to this publication, the government has historically  attempted to increase participation in the federal crop insurance program  by subsidizing premiums, including increasing the level of these subsidies  over time.
The 2014 farm bill introduced several changes to the crop insurance  program. Regarding revenue policies specifically, the legislation added  peanuts to the list of crops eligible for this policy type. The legislation also  made “enterprise units” a permanent option for revenue and other policy  types. An enterprise unit consists of all insurable acreage of the same  insured crop in the county in which the farmer has a share on the date  coverage begins for the crop year. In addition, separate insurable  enterprise units for both irrigated and nonirrigated crops will be available.  Separating the acreage can increase risk protection for farmers because  losses on dryland crops would no longer be offset by higher yields on  irrigated acreage when the two are combined.
The 2014 farm bill also added two new policy options to the crop  insurance program—the Supplemental Coverage Option and the Stacked  Income Protection Plan for upland cotton. The Supplemental Coverage  Option is based on expected county yields or revenue, to cover part of the  deductible under the farmer’s underlying policy (referred to as a farmer’s  out-of-pocket loss or “shallow loss”). The federal subsidy as a share of  the policy premium is set at 65 percent. The Stacked Income Protection  Plan insures against losses in county revenue of 10 to 30 percent of  expected county revenue based on the deductible level selected by the  farmer for the underlying individual policy. The federal subsidy as a share  of the policy premium is set at 80 percent. As of June 2014, USDA was  developing implementing guidance for these new policies that it expects  to issue before the start of the 2015 crop year. For now, it is uncertain  how farmers will utilize these new policies and how their use will impact  federal crop insurance premium costs, including for revenue policy  premium subsides.
section_title: Federal Crop Insurance Costs and Farm Sector Income and Wealth Grew Significantly from 2003 through 2012
paragraphs: Federal crop insurance program costs and farm sector income and wealth  grew significantly during the period 2003 through 2012. Costs of federal  crop insurance are growing due to an increase in premium subsidies,  particularly for revenue policies. Farmers are increasingly purchasing  revenue policies and are choosing higher coverage levels for these  policies. Meanwhile, indicators of farm business economic well-being— such as farm income and real estate and asset values—all increased  from 2003 through 2012.
subsections: section_title: Costs of Federal Corp Insurance Are Growing, Primarily Due to an Increase in Premium Subsidies for Revenue Policies
paragraphs: The cost of the federal crop insurance program grew significantly from  2003 through 2012, according to our analysis of RMA data. For fiscal  years 2003 through 2007, federal crop insurance costs averaged $3.4  billion a year, but for fiscal years 2008 through 2012, the crop insurance  program cost an average of $8.4 billion a year. There were significant  drought and crop losses in crop year 2012 that contributed to the spike in  government costs to $14.1 billion. These trends are shown in figure 1.  According to an April 2014 CBO estimate, for fiscal years 2014 through  2023, program costs are expected to average $8.9 billion annually.
In fiscal years 2003 through 2012, according to our analysis of RMA data,  premium subsidies comprised approximately $42.1 billion of $58.7 billion  in total government costs for federal crop insurance, or almost 72 percent  of total program costs. Revenue policy premium subsidies specifically  accounted for $30.9 billion of the premium subsidy costs over that period.  RMA offered 17 different crop insurance policies in crop year 2012, but  revenue policies were the most frequently purchased and accounted for  the majority of all premium subsidies. For example, for crop year 2012,  revenue policy premium subsidies cost $5.5 billion that year, which  accounted for 82 percent of the $6.7 billion in total premium subsidy costs  to the government. Figure 2 shows the breakdown of costs for the overall  crop insurance program into premium subsidies; administrative and  operating expense subsidies; and other costs, such as the salaries of  RMA staff, research and development initiatives for new crop insurance  products, and the net underwriting loss for the period, for fiscal years  2003 through 2012.
section_title: Farmers Are Increasingly Purchasing Revenue Policies and Choosing Higher Insurance Coverage Levels
paragraphs: As shown in figure 3, overall crop insurance premium subsidies more  than tripled from $1.8 billion to $6.7 billion from crop years 2003 through  2012. The revenue policy premium subsidies increased from $1.1 billion  in crop year 2003 to $5.5 billion in crop year 2012, a nearly 5-fold  increase.
The total acreage covered by federal crop insurance also continued to  increase from crop year 2003 through crop year 2012, from around 183.7  million acres in 2003 to 265.2 million acres in 2012. As shown in figure 4,  the amount of that acreage covered by revenue policies also increased,  from about 112.2 million acres in 2003 to 180.9 million acres in 2012. In  2012, revenue policies were purchased for about 68 percent of the acres  covered by federal crop insurance.
Farmers have also increased their purchases of higher coverage levels of  crop insurance—that is, the percentage of their normal annual revenue  that they want to insure—for their revenue policies. These higher  coverage levels equate to greater potential liability for the government  and insurers in the case of loss and higher premium levels for the  policies, both of which contribute to higher program costs. According to  our analysis of RMA data, the percentage of acres insured at higher  coverage levels has increased in recent years, as shown in figure 5. For  example, in crop year 2003, 14.7 percent of all acres were insured under  revenue policies at a coverage level of 80 percent or greater. By crop  year 2012, that figure had nearly doubled, to 27.6 percent.
Our analysis of RMA data showed that farmers in 10 states accounted for  the majority of revenue policies purchased and, as a result, a majority of  the premium subsidies in crop year 2012. As shown in figure 6, these 10  states in descending order of subsidy amounts received were Texas,  North Dakota, Iowa, Minnesota, Kansas, South Dakota, Illinois, Nebraska,  Missouri, and Indiana. Combined, they received almost $4.1 billion in  revenue premium subsidies in crop year 2012, which was approximately  73.5 percent of the total amount of federal premium subsidies for revenue  policies for that year. In crop year 2012, Texas led all states in premium  subsidies, with farmers receiving more than $523.8 million in revenue  premium subsidies for the approximately 11 million acres covered by  revenue policies; over 60 percent of these premium subsidies and almost  half of the acres covered were for cotton.
The list of crops eligible for revenue policy insurance coverage has  continued to grow. Table 1 shows which crops were eligible to receive  revenue policy premium subsidies from crop year 2003 through crop year  2012. In crop year 2013, dry beans and dry peas also became eligible for   According to RMA documents, the estimated  revenue policy insurance.cost of these two additional crops was $28.3 million in revenue premium  subsidies for crop year 2013. Further, as discussed, peanuts will be  eligible for revenue policy coverage starting in crop year 2015.
section_title: Farm Income, Real Estate, and Asset Values Increased from 2003 through 2012
paragraphs: The farm economy improved from 2003 through 2012, and 2012 was a  record year for farm income, due in part to high crop prices. For example,  median farm household income rose from 2003 to 2012 and was higher  than the median income for all U.S. households every year during this   More specifically, on average, median  period, according to ERS data.farm household income was $7,205, or 13.8 percent, more than median  U.S. household income annually during this time period (in constant 2012  dollars that reflect adjustments for inflation). Median farm household  income was 33.9 percent higher than median income for all U.S.  households in 2012—$68,298 compared with $51,017. Households  associated with farms specializing in cash grains such as corn or  soybeans had a median household income of about $82,300 in 2012, and  median household income was even higher for those farms specializing in  rice, tobacco, cotton, or peanuts, at about $101,400 in 2012. Figure 7  shows the median income for farm households and for U.S. households  from 2003 through 2012, in constant 2012 dollars that reflect adjustments  for inflation.
Farm sector income also grew from $73.8 billion in 2003 to $113.8 billion  in 2012. Net farm and net cash income for U.S. farms from 2003 through  2012 (in constant 2012 dollars that reflect adjustments for inflation) are  shown in figure 8. Net farm income is the value of the agricultural goods  produced by farm operators less the costs of inputs and services. Net  cash income is the cash earned from the sale of these agricultural goods  and the conversion of farm assets into cash.
According to ERS data, however, net farm and net cash income are  forecast to decrease in 2014, due principally to falling crop prices as  compared with prior years. Net farm income is forecast to go up to $130.5  billion in 2013, and then decline to $95.8 billion, or by about 26.6 percent  in 2014. The 2014 forecast would be the lowest since 2010, but it would  still be $8 billion above the average of years 2004 to 2013. After adjusting  for inflation, 2013’s net farm income would be the highest since 1973, and  the 2014 net farm income forecast would be the seventh highest. Net  cash income is forecast at $101.9 billion for 2014, down almost 22  percent from the 2013 forecast of $130.1.
Farm real estate—a measurement of the value of all land and buildings  on farms—accounted for 82 percent of the total value of U.S. farm assets  in 2012. Because farm real estate comprises such a significant portion of  the farm’s balance sheet, a change in the value of farm real estate is a  strong indicator of the farm sector’s financial performance. U.S. farm real  estate values increased by 72 percent from 2003 through 2012 due to  high farm income and low interest rates, according to USDA data. Farm  real estate value averaged $2,650 per acre for 2012, and the highest farm  real estate values were in the Corn Belt region at $5,560 per acre.  According to USDA data, this increase in national farm real estate values  is forecast to continue, with an estimated average value of $2,900 per  acre in 2013, up 9.4 percent from 2012 values. National farm real estate  values for 2003 through 2012 (in constant 2012 dollars that reflect  adjustments for inflation) are shown in figure 9.
According to ERS documents, a farm’s debt-to-equity ratio and the debt- to-asset ratio are also major indicators of the financial well-being of the  farm sector. The debt-to-equity ratio measures the relative proportion of  funds invested by creditors (debt) and owners (equity). The debt-to-asset  ratio measures the proportion of farm business assets that are financed  through debt. Lower ratios signify that farmers are relying less on  borrowed funds to finance their asset holdings. Farmers’ debt-to-equity  ratio fell from 15.7 percent in 2003 to 12.0 percent in 2012, and their debt- to-asset ratio fell from 13.6 percent in 2003 to 10.7 percent in 2012. The  farm sector’s debt-to-equity and debt-to-asset ratios are forecast to  continue a pattern of decline, falling to an estimated 11.8 and 10.5  percent in 2014, respectively. According to ERS documents, these  decreases would result in the lowest ratios for both measurements since  1954. The historically low levels of farm debt, relative to equity and  assets, attest to the sector’s strong financial position. ERS documents  state that this also means the sector is better insulated from risks such as  adverse weather, changing macroeconomic conditions in the United  States and abroad, or fluctuations in farm asset values that may occur  due to changing demand for agricultural assets. The steady decline in  both ratios since the mid-1980s is due to relatively large growth in the  value of farm assets, driven principally, according to ERS documents, by  the increases in farm real estate values. Figure 10 shows these farm  sector debt ratios from 2003 through 2012.
section_title: Reducing Federal Premium Subsidies for Revenue Policies Would Potentially Save Millions of Dollars with Limited Costs to Individual Farmers
paragraphs: According to our analysis of RMA data, the federal government would  have potentially saved more than $400 million in 2012 by reducing  premium subsidies on federal crop insurance revenue policies by 5  percentage points, and the savings would have been nearly $2 billion with  a 20 percentage point premium subsidy reduction. Premium subsidy  reductions of 5 to 20 percentage points would have in turn raised farmers’  average production costs per acre from about $1.90 to about $16.90 for  crops such as corn, soybeans, and cotton. As a percentage of the total  production cost per acre, these increases would usually have been less  than 2 percent and often less than 1 percent. Because farmers would be  required to pay more for their crop insurance, reduced federal premium  subsidies for revenue policies could affect the participation rate in the  crop insurance program. However, the magnitude of the impact on  farmers’ participation as a result of lower federal premium subsidies for  revenue policies may be minimal.
subsections: section_title: A 5 Percentage Point Reduction in Federal Premium Subsidies for Revenue Policies Would Potentially Save Millions, and Larger Reductions Would Save More
paragraphs: Reducing premium subsidies for revenue policies would potentially result  in significant savings to the federal government, according to our analysis  of RMA data. For example, if the premium subsidies paid in 2012 had  been reduced by 5, 10, 15, or 20 percentage points that year, the  potential savings for corn would have been about $197 million, $394  million, $592 million, or $789 million, respectively. Moreover, for the 10  crops—barley, canola, corn, cotton, grain sorghum, popcorn, rice,  soybeans, sunflowers, and wheat—that accounted for virtually 100  percent of the premium subsidies paid for revenue policies in 2012, the  potential savings with those levels of premium subsidy reductions would  have been about $439 million, $878 million, $1.3 billion, and $1.8 billion,  respectively. In 2000, when Congress enacted legislation to increase crop  insurance premium subsidy rates, the new rates immediately became  effective (i.e., upon enactment of the legislation). In contrast, according  to RMA officials, when the agency increases the premiums charged for  crop insurance policies based on new actuarial data, as it did in 2012, it  generally phases in the increases over several years so the impact on  farmers is less dramatic. Table 2 provides more information on the  amount of potential savings that corresponds to the various levels of  reduction in revenue policy premium subsidies, by crop.
These levels of potential savings are based on the assumption that  farmers would not make any changes to their policies. For example,  according to this assumption, farmers would not change from a revenue  policy to a less expensive yield policy or leave the crop insurance  program altogether. In addition, they are based on the assumption that  farmers would keep their existing coverage levels. To the extent that  farmers purchased less expensive policies, left the program, or  purchased lower coverage levels, the potential savings would be greater  because the total amount of federal premium subsidies required would  decrease. In addition, the potential savings would decline if crop prices  declined. This would occur because premiums are affected by crop  prices—as crop prices decrease so does the value of the crops being  insured, which results in lower crop insurance premiums. Since premium  subsidies are a set percentage of the premiums, these subsidy amounts  would decrease as premium amounts decreased.
We and other federal agencies have previously analyzed the potential  savings to the federal government from reductions in premium subsidies  to all or selected crop insurance policies. In our March 2012 report, based  on an analysis of RMA data, we found that if the premium subsidy rates of  all participating farmers in 2010 and 2011 had been reduced by 10  percentage points—from 62 percent to 52 percent—the annual cost  savings for those years would have been about $759 million and $1.2  billion, respectively.
The president’s 2013 budget, which included a proposal to reduce  premium subsidies, asserts that deep premium subsidies are no longer  needed with the current high farmer participation rates in the crop  insurance program. Further, in his 2014 budget, the president included  two legislative proposals to reduce the premium subsidies to farmers.  One proposal was to reduce the premium subsidies by 3 percentage  points for all yield and revenue policies that had premium subsidy rates  above 50 percent. According to the RMA’s analysis for this proposal, the  premium subsidy reduction would save the federal government about  $4.2 billion over 10 years. The second proposal was to reduce premium   RMA estimated  subsidies for revenue policies by 2 percentage points. that this reduction in premium subsidies would save the government  about $3.2 billion over a 10-year time frame. The president made a  similar proposal in his 2015 budget but increased the subsidy rate  reduction for revenue policies to 4 percent. RMA estimated the total  expected savings over 10 years from that proposal would be $6.3 billion.  However, any change in the premium subsidies would require action by  Congress.
Specifically, the second proposal applied to revenue policies that include the harvest  price provision. Such policies accounted for about 98 percent of the premium subsidies for  all revenue policies in 2012.
CBO, Options for Reducing the Deficit: 2014 to 2023 (Washington, D.C.: November  2013). were implemented, CBO estimated the federal government would save  $22.1 billion over a 10-year period from 2014 through 2023.
section_title: Reducing Federal Premium Subsidies Would Increase Individual Farmers’ Average Costs per Acre, but the Increase Would Be Limited
paragraphs: Reductions to revenue policy premium subsidies of 5, 10, 15, and 20  percentage points would result in increases in farmers’ production costs  as the share of the premium that they pay would increase. However, our  analysis of 2012 RMA crop insurance data indicates that changes in  average production costs would be limited. For example, individual corn  farmers would have experienced average premium cost increases per  acre for their crop insurance policies of $2.81, $5.62, $8.43, or $11.24  with premium subsidy reductions of 5, 10, 15, or 20 percentage points,  respectively, in 2012. Those premium cost increases represent a limited  increase in the average production costs per acre for corn farmers,  usually less than 2 percent and often less than 1 percent. For example,  the average production costs for corn farmers were about $656 per acre  that year; with the premium cost increases, their production costs would  have increased an average of 0.4 percent, 0.9 percent, 1.3 percent, and  1.7 percent with premium subsidy reductions of 5, 10, 15, or 20  percentage points, respectively. Table 3 provides information on the  additional average per-acre premium costs per farmer and as a  percentage of the average per-acre costs of production with premium  subsidy reductions of 5 and 10 percentage points, and table 4 reflects  those calculations with premium subsidy reductions of 15 and 20  percentage points. Both tables are for 2012.
We note that the ultimate impact of such limited production cost increases  on farmers’ income would depend on their individual profit margins.  However, for the industry as a whole, the impact on farmers’ income  appears to be minimal. For example, as noted in table 2, for a 5 to 20  percentage point reduction in subsidies, total farm costs in 2012 would  have increased from about $0.4 billion to $1.8 billion. Further, as  discussed, farm sector income in 2012 was about $114 billion. Thus,  these increased costs, as a percentage of farm sector income, would  have been about 0.4 to 1.6 percent.
section_title: Impact to Farmers’ Participation in the Crop Insurance Program Resulting from Premium Subsidy Reductions May Be Minimal
paragraphs: Information on the impact to farmer participation from reductions in  federal crop insurance premium subsidies is limited, but the economic  literature and government information that is available suggest the impact  may be minimal. Farm industry groups and some researchers have stated  that changes to crop insurance premium subsidies could result in  reductions in farmer participation and insurance coverage levels.  However, available economic literature on the impact on farmer  participation due to premium subsidy reductions indicates that farmers’  response to changes in premium subsidies may be small due to factors  such as their heavy reliance on crop insurance, the attractiveness of  revenue policies, and the increasing importance of crop insurance as  other farm programs are reduced or eliminated.
Government studies of this issue have reached similar conclusions. A  limited RMA analysis in support of the president’s 2014 budget proposal  determined that a 5 percentage point premium subsidy reduction for yield  and revenue policies would result in a limited number of farmers leaving  the crop insurance program; that analysis determined that it was more  likely that some farmers would purchase lower levels of policy coverage.  According to RMA’s Chief Actuary, it is difficult to determine the effect of a  premium subsidy change in part because of the lack of data. The task of  determining the effect of a change is easier if there has been a major  change in premium subsidy rates, and the impact can be assessed, this  official said. A major change in premium subsidy rates creates a “natural  experiment” in which to better analyze the impact to farmer participation  from a change in subsidy rates. According to the Chief Actuary, this  “natural experiment” last occurred with the passage of the Agricultural  Risk Protection Act in 2000 that significantly raised premium subsidy  rates. This in turn led to an increase in farmer participation in the crop  insurance program. However, there has been no “natural experiment” to  analyze how reduced premium subsidy rates impact farmer participation  because, since 2000, premium subsidy rates generally have not been  reduced. In the event that premium subsidy rates were reduced, actual  information on the impact on farmer participation would be available.  According to an RMA official, it would be a good idea to monitor the  impact on farmer participation if Congress reduced premium subsidy  rates.
CBO, Options for Reducing the Deficit: 2014 to 2023 (Washington, D.C.: November  2013).
4 percent of their acres.farmers rely heavily on crop insurance, these results could overestimate  the potential impact to farmer participation and the overall number of  farmers leaving the crop insurance program could be smaller.
However, the study further noted that, because  Stakeholder and government officials we interviewed, as well as  documents and data we reviewed, have identified several different  incentives that could lessen the likelihood of significant changes in farmer  participation in the crop insurance program even if premium subsidies are  reduced. First, even with the premium subsidy reduction, farmers would  receive substantial premium subsidies for revenue policies. For example,  with a premium subsidy reduction of 20 percentage points for revenue  policies, farmers would receive an average premium subsidy rate of about  40 percent for their premium cost, based on our analysis of 2012 RMA  data. Second, crop insurance is important to lenders that provide loans to  farmers to help finance their operations. According to lending  associations that represent agriculture credit providers, crop insurance  provides lenders with greater certainty that loans made to farmers will be  repaid. In addition, according to an economic paper published by two  ERS economists and a professor from the University of Illinois,participation in crop insurance lowers revenue risk and might allow  lenders to accept loan applications with lower collateral or applications for  farm operations that are more leveraged. Third, farmers may not be  inclined to exit the crop insurance program since it has emerged as the  main safety net for farmers. According to some farm industry  stakeholders, many farmers have made crop insurance their primary risk  management tool. Finally, another incentive for farmer participation may  be growing concerns among farmers about the frequency and severity of  adverse weather events, such as floods, droughts, heat waves, and  strong storms. According to the Secretary of Agriculture, other USDA  officials, and some state extension officials and academic researchers,  farmers are increasingly concerned about such weather events and their  impact on agricultural production, including crop losses.
section_title: Conclusions
paragraphs: Federal crop insurance plays an important role in protecting farmers from  losses caused by natural disasters and price declines, and it has become  one of the most important programs in the farm safety net for farmers,  according to USDA officials and some farm industry stakeholders.  However, with increasing budgetary pressures, it is critical that federal  resources are targeted as effectively as possible. With record farm  income in recent years, the subsidies, including premium subsidies,  provided for federal crop insurance have come under increasing scrutiny.  Reductions in premium subsidies for farmers who purchase revenue  policies, the most common and expensive crop insurance policy type,  present an opportunity to potentially save hundreds of millions of dollars  per year for taxpayers with limited increases in individual farmer’s  production costs. The president has included proposals for premium  subsidy reductions in his fiscal year 2013, 2014, and 2015 budgets. Such  a change would require congressional action and could either be  implemented immediately, as in 2000, when Congress enacted legislation  to increase premium subsidy rates, or phased in, as when RMA increases  the premiums charged for crop insurance policies based on new actuarial  data.
One point of discussion in the debate over premium subsidy reductions is  the possible impact on farmer participation in the program. The crop  insurance industry and some researchers suggest that even a modest  premium subsidy reduction would result in some farmers lowering their  coverage levels or dropping coverage altogether. However, the  administration, CBO, and other researchers say that a modest reduction  in premium subsidies would have little impact on program participation,  and that incentives, such as the continued high level of premium  subsidies, would likely keep farmers in the program. Although the impact  of such a reduction is unknown, in the event that Congress reduced the  crop insurance premium subsidy rates, actual information on the impact  on farmer participation would be available if participation were monitored.
section_title: Matter for Congressional Consideration
paragraphs: To reduce the cost of the crop insurance program and achieve budgetary  savings for deficit reduction or other purposes, Congress should consider  reducing the level of federal premium subsidies for revenue crop  insurance policies. In doing so, Congress should consider whether to  make the full amount of this reduction in an initial year, or to phase in the  full amount of this reduction over several years. In addition, Congress  should consider directing the Secretary of Agriculture to monitor and  report on the impact, if any, of the reduction on farmer participation in the  crop insurance program.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided the Secretary of Agriculture with a draft of this report for  review and comment. In its written comments, which are reproduced in  appendix II, USDA said it had no comment with the report’s findings. In  addition, USDA provided technical comments, which we incorporated as  appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees; the Secretary of Agriculture; the  Director, Office of Management and Budget; and other interested parties.  In addition, this report will be available at no charge on the GAO website  at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or fennella@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) trends in federal crop insurance costs  and farm sector income and wealth from 2003 through 2012 and (2) the  potential savings to the government and impacts to farmers, if any, of  reducing federal premium subsidies for revenue insurance policies.
To address these objectives, we interviewed officials of the U.S.  Department of Agriculture (USDA), including officials from the Economic  Research Service (ERS) and Risk Management Agency (RMA), and  reviewed documents they provided such as, for example, crop insurance  program costs and outlays documents. We also spoke with officials at the  Congressional Budget Office (CBO).
To address our first objective, we reviewed and analyzed RMA data on  the government’s cost for the federal crop insurance program for the  period 2003 through 2012. We are reporting federal crop insurance  program costs, not outlays, because the cost numbers more accurately  reflect the true costs for a given year. For example, much of the actual  costs for 2012 were not determined until the following year after the  claims adjustments were completed and the underwriting gains and  losses determined. In contrast, outlays for 2012 do not include many of  the costs actually incurred that year, but they do include many costs  incurred the prior year (i.e., 2011) because of the lag time in completing  the claims adjustments for that year. Finally, in reporting costs, not  outlays, we are being consistent with how the program reports its costs,  including in the audited financial statements of the Federal Crop  Insurance Corporation. We analyzed RMA crop insurance program data  including data on the level of premium subsidies for revenue policies, the  top 10 states that received revenue policy premium subsidies, the  insurance coverage levels chosen by farmers with revenue policies, and  the crops that received the most revenue policy premium subsidies. For  overall program costs, we analyzed fiscal year data presented in RMA’s  cost and outlay tables. RMA data contain more detailed crop insurance  information by crop year, which is what we used for our revenue policy  analyses. For these analyses, we only included information on “buy-up”  policies—that is, the portion of crop insurance for which a farmer pays a  premium. Any coverage that is purchased above the “catastrophic” level  is considered “buy-up” coverage; this type of coverage represented 99.9  percent of the revenue policy premium subsidies for the 2003 through  2012 period. In addition, we only included information for individual  revenue policies and excluded group revenue policies because these  latter policies made up only a small portion (less than 2 percent) of the  total premium subsidies associated with revenue policies. We selected  the time period of 2003 through 2012 to get a representation of the trend  in program costs, usage of revenue policies, and financial condition of the  farm sector. At the time of our analysis, USDA officials said that 2012  would be the most recent year with complete and stable crop insurance  program data. To get an understanding of trends in farm sector income  and wealth, we reviewed and analyzed ERS data and reports on the  overall financial condition of the farm sector, including information on net  farm and cash income, production costs, and farm debt ratios from 2003  through 2012, as well as information from USDA’s National Agricultural  Statistics Service on farmland values for these years. We also reviewed  and analyzed ERS information on forecasts for these elements of the  farm economy, including net cash income and net farm income for 2013  and 2014. For the purposes of this report, crop insurance costs and  premium subsidies, which are budget-related data, are reported in  nominal dollars, while data on median farm household and U.S.  household income, net farm and net cash income, and farmland values  are reported in inflation adjusted dollars, using 2012 as the reference  year. In addition, as appropriate, we report these data in calendar, fiscal,  or crop years, depending on how the data were reported in the source  documents. Unless otherwise indicated, these data are in calendar years.
To address our second objective, we analyzed RMA revenue policy crop  insurance program data for 2012 to estimate the savings to the federal  government from reductions in premium subsidies of 5, 10, 15, and 20  percentage points. We selected these percentages because they were in  line with previous reductions proposed by the president’s 2014 budget  proposal, a 2013 CBO report, estimated the additional production cost per acre, on average, and by  crop type, to individual farmers as a result of these premium subsidy  reductions. Furthermore, we compared these additional production costs  with the total cost of production, on average, and by crop, to determine  the percentage increase represented by these additional production  costs. We used ERS Agricultural Resource Management Survey data for   and a 2012 GAO report.
CBO, Options for Reducing the Deficit: 2014 to 2023 (Washington, D.C.: November  2013).
2012, where available, to determine the average production costs, per  acre, for barley, canola, corn, cotton, grain sorghum, popcorn, rice,  soybeans, sunflowers, and wheat. These were the crops eligible to  receive revenue policy premium subsidies during the period covered by  our review. We also reviewed the available agricultural economic  literature, and studies by CBO, ERS, and RMA, and we spoke with  officials from those agencies to determine any potential savings from  reductions in crop insurance premium subsidies and the impact, if any, on  farmers’ participation in the crop insurance program as a result of  premium subsidy reductions. Finally, we reviewed documents from farm  industry stakeholders on the crop insurance program.
For the various data used in our analyses, as discussed, we generally  reviewed related documentation, interviewed knowledgeable officials, and  reviewed related internal controls information to evaluate the reliability of  these data. In each case, we concluded that the data were sufficiently  reliable for the purposes of this report.
We conducted this performance audit from May 2013 to August 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our objectives.
section_title: Appendix II: Comments from the U.S. Department of Agriculture
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, James R. Jones, Jr., Assistant  Director; Kevin S. Bray; Michael Kendix; David Moreno; Sophia Payind;  Kelly Rubin; and Jerry Sandau made key contributions to this report. In  addition, Cheryl Arvidson, Gary T. Brown, and Thomas M. Cook made  important contributions to this report.
section_title: Related GAO Products
paragraphs: Extreme Weather Events: Limiting Federal Fiscal Exposure and  Increasing the Nation’s Resilience. GAO-14-364T. Washington, D.C.:  February 12, 2014.
Fiscal Exposures: Improving Cost Recognition in the Federal Budget.  GAO-14-28. Washington, D.C.: October 29, 2013.  2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap,  and Duplication and Achieve Other Financial Benefits. GAO-13-279SP.  Washington, D.C.: April 9, 2013.
High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February  14, 2013.
Crop Insurance: Savings Would Result from Program Changes and  Greater Use of Data Mining. GAO-12-256. Washington, D.C.: March 13,  2012.
Crop Insurance: Opportunities Exist to Reduce the Costs of Administering  the Program. GAO-09-445. Washington, D.C.: April 29, 2009.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-944T.  Washington, D.C.: June 7, 2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-819T.  Washington, D.C.: May 3, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in  Coming Decades Are Potentially Significant. GAO-07-760T. Washington,  D.C.: April 19, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in  Coming Decades Are Potentially Significant. GAO-07-285. Washington,  D.C.: March 16, 2007.
Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.  Washington, D.C.: November 17, 2006.