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. In March 2012, GAO recognized the federal crop insurance programs important role in mitigating farmers losses caused by natural disasters. The 2012 drought is an example of such a natural disaster. Looking to the future, however, GAO also recognizes that the program must be as cost-effective as possible, particularly in view of the nations long-term fiscal challenges.
In 2012, the federal crop insurance program provided about $116 billion in insurance coverage for 281 million acres of farmland. The federal governments crop insurance costs have increased in recent yearsrising from an average of $3.1 billion per year from fiscal years 2000 through 2006 to an average of $7.6 billion per year from fiscal years 2007 through 2012and are expected to increase further. The Congressional Budget Office estimates that, for fiscal years 2013 through 2022, federal crop insurance costs will average $8.9 billion per year. The cost of the federal crop insurance program has come under increased scrutiny because of the nations budgetary pressures, particularly when farm income is at record high levels. The U.S. Department of Agriculture (USDA) projects 2012 net farm income to be $112.8 billion, down 4.3 percent from an all-time high in 2011. The top 6 years for net farm income during the past three decades have occurred since 2004, attesting to the recent profitability of farming.
Under the federal program, farmers can choose various levels and types of insurance protectionfor example, they can insure against losses caused by poor crop yields, declines in crop prices, or both, for each insurable crop they produce. USDAs Risk Management Agency (RMA) has overall responsibility for administering the federal crop insurance program, including controlling costs and protecting against fraud, waste, and abuse. RMA partners with 15 private insurance companies that sell and service the federal insurance policies and share a percentage of the risk of loss and opportunity for gain associated with each policy.
The federal governments crop insurance costs include subsidies to pay for part of a farmers crop insurance premiums. The Agricultural Risk Protection Act of 2000 and the Food, Conservation, and Energy Act of 2008 (the 2008 farm bill) set premium subsidy rates, that is, 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 the crops insured. For most policies, the statutory subsidy rates range from 38 percent to 80 percent of the premium.
The average of premium subsidies for all policiespremium subsidies as a percentage of total premiumsincreased from 37 percent in 2000 to 60 percent in 2001, when the Agricultural Risk Protection Acts premium subsidy rates became effective. In 2012, the average of premium subsidies for all policies was more than 62 percent. In addition, the cost of premium subsidies rose as crop prices increased because as crop prices increase, the value of the crops being insured increases, which results in higher crop insurance premiums and premium subsidies. Premium subsidies increased from about $1 billion in 2000 to about $7 billion in 2012.
Unlike the crop insurance program, many farm programs, including disaster assistance programs, have statutory income and payment limits that apply to individual farmers and legal entities, including corporations. For example, USDA provides about $5 billion in fixed annual paymentscalled direct paymentsto farmers based on a farms crop production history. However, a person or legal entity with an average adjusted gross farm income (over the preceding 3 tax years) exceeding $750,000 is generally ineligible for direct payments. In addition, for direct payments, the annual payment limit in the 2008 farm bill is generally $40,000 per person or legal entity. For a 2008 farm bill disaster assistance program, the annual payment limit is $100,000 per person or legal entity.
USDAs Farm Service Agency is responsible for ensuring that only eligible individuals receive farm program payments, either directly or as a member of an entity, and do not receive payments that exceed the established limits.
A husband and wife can each receive a payment, which enables them collectively to receive up to $80,000 in direct payments annually.
As GAO reported in March 2012, applying limits on premium subsidies to individual farmers participating in the federal crop insurance program, similar to the payment limits for other farm programs, could save billions of federal dollars over 5 years. The amount of these savings would depend on whether, and the extent to which, farmers and legal entities reorganized their businesses to avoid or lessen the effect of limits on premium subsidies. Without limits on the premium subsidies in the crop insurance program, the nearly 900,000 participating farmers received subsidies of $7.4 billion in 2011. However, if a limit of $40,000 per participating farmer for premium subsidies had been applied to the crop insurance program for 2011the annual payment limit specified in the 2008 farm bill for another USDA farm program subsidy (direct payments)GAO estimated that up to 33,690 farmers (3.9 percent of all farmers participating in the federal crop insurance program) would have received lower subsidies, for an annual savings of up to $1 billion to the federal government. If the limit on premium subsidies had been set at the higher level of $100,000, up to 4,202 farmers would have received lower subsidies in 2011, for an annual savings of up to $232 million.
At the highest end of the distribution in 2011, 53 participating farmers each received more than $500,000 in premium subsidies. The participant receiving the largest amount was a corporation that had crop insurance coverage for nursery crops and received about $2.2 million in premium subsidies. Another participant insured canola, corn, dry beans, potatoes, soybeans, sugar beets, and wheat and received about $1.3 million in premium subsidies.
In addition to limiting premium subsidies to individual participants, Congress could reduce crop insurance costs by reducing premium subsidy rates for all crop insurance participants. For example, if the premium subsidy rate for 2011 had been reduced from an average of 62 percent to 52 percent for all crop insurance participants, GAO estimated that the cost savings would have been about $1.2 billion. Recent studies, such as Restoring Americas Future, by the Bipartisan Policy Centers Debt Reduction Task Force, have had similar findings.
The above methodslimits on premium subsidies and reduced rates for premium subsidiescould be used in various combinations to achieve cost savings. In addition, Congress could incorporate income limits into these methods. For example, participants whose income exceeds a threshold could receive premium subsidies at a reduced rate. A variation on this limitation would be for Congress to apply it on a sliding scale in which premium subsidy rates declined as income increased.
Premium subsidy limits or reduced premium subsidy rates have the potential to lead to lower participation in the federal crop insurance program and requests for higher disaster assistance payments to farmers. In the past, Congress has authorized ad hoc disaster assistance payments to help farmers whose crops were damaged or destroyed by natural disasters. However, in view of the nations budgetary pressures, Congress may be less willing to approve such payments than it has been in the past.
Limits on premium subsidies to individual farmers would primarily affect farmers who have large farms, but these farms are better positioned than smaller farms to pay a higher share of their premiums, according to GAOs review of USDA data for 2008 and 2009, the most recent years for which data were available. In addition, if the large farmers affected by a limit on premium subsidies were to reduce their coverage, they might be able to self-insure through a variety of risk management methods, such as crop and other types of diversification.
In 2012, participating farmers received premium subsidies of $6.9 billion.
GAO selected $40,000 as an example of a potential premium subsidy limit because it is the payment limit for direct payments, which cost about $5 billion per year and are one of the largest components of the farm safety net. A higher or lower premium subsidy limit would affect cost savings accordingly.
Recognizing current budget constraints, several options exist to reduce the cost of subsidies for crop insurance premiums. To save federal dollars in the crop insurance program, GAO suggested in March 2012 that Congress may wish to consider the following action:
If a limit of $40,000 per individual farmer for premium subsidies had been applied for 2011, the estimated cost savings in that year would have been up to $1 billion. If a limit of $100,000 per individual farmer for premium subsidies had been applied for 2011, the estimated cost savings would have been up to $232 million. The amount of these savings would have depended on whether, and to what extent, farmers and legal entities reorganized their businesses to avoid or lessen the effect of limits on premium subsidies. If the premium subsidy rate had been reduced from an average of 62 percent to 52 percent for all crop insurance participants for 2011, the estimated cost savings would have been about $1.2 billion.
The information contained in this analysis is based on findings from the products in the related GAO products section. For the March 2012 report, GAO analyzed USDA data for 2010 and 2011, reviewed economic studies, and interviewed USDA officials. For the October 2008 and April 2004 reports, GAO analyzed USDA data on farm program payments and interviewed USDA officials. Table 16 in appendix IV lists the program GAO identified that might have opportunities for cost savings or revenue enhancement.
In commenting on the March 2012 report on which this analysis is based, USDA stated it was ill advised for GAO to suggest that Congress consider limiting or reducing premium subsides without further study. USDA stated that in recommending a limit on premium subsidies, the report does not fully account for all potentially negative impacts and costs resulting from such a change. However, GAOs report recognizes that setting a subsidy limit may have impacts and discusses some of these potential impacts. For example, as noted above, premium subsidy limits or reduced premium subsidy rates have the potential to lead to lower participation in the crop insurance program. Moreover, at a time when the agriculture sector is enjoying record farm income and the nation is facing severe deficit and long-term fiscal challenges, GAO believes that crop insurance premium subsidiesthe single largest component of farm program costsare a potential area for federal cost savings that should be considered. Furthermore, the administration, in its budget for fiscal year 2013, and the Congressional Budget Office each proposed a reduction in premium subsidies.
GAO provided a draft of this report section to USDA for review and comment. In an e-mail received on January 30, 2013, USDA reaffirmed its comments on the March 2012 report.
For additional information about this area, contact Anne-Marie Fennell at (202) 512-3841 or email@example.com.