Considerable debate surrounds the U.S. crop insurance program, including its cost, role in farm conservation and impact on farm management and farmland values. The objective of this article is to examine the broader considerations that underpin these specific debates. Unless these broader considerations are addressed, crop insurance will likely remain a topic of debate well beyond the next farm bill. Cost to the U.S. government of its crop insurance program has increased from $3.3 billion in 2000-04 to $8.6 billion in 2010-14. Costs include the subsidy of insurance premiums, reimbursement of Administrative and Operation (A&O) costs incurred by private companies in delivering the insurance program, and government’s share of participating in underwriting gains and losses. Any large expenditure program growing fast will attract attention. Moreover, the growth in crop insurance cost occurred during a period of generally low financial stress among crop farms. This feature runs opposite to the counter-cyclical nature of most farm safety net programs since these programs began during the 1930s. The increase in costs occurred even though the reimbursement rate for A&O was reduced and the reinsurance agreement, which affects the government’s underwriting losses and gains, was renegotiated. Share of total costs accounted for by these two cost components has declined since 2000. In contrast, the share of expenditures accounted for by the premium subsidy increased from 56 percent in 2000-04 to 87 percent in 2010-14. Federal subsidies for crop insurance premiums did not consistently exceed $1 billion per year until 2000. They then increased by around 150 percent, both before and during the period of farm prosperity. Because the per-acre value of a crop is a key determinant of premium subsidies, premium subsidies will likely decline if prices continue to stay low. Premium subsidies and program performance A rationale consistently given for enhancing participation in crop insurance was to reduce ad hoc crop disaster assistance. Ad hoc crop disaster assistance began in the mid-1970s after target price programs replaced price floor programs, and was enacted for almost every crop year through 2008 in which a non-trivial area of the U.S. experienced low yields. The 2008 farm bill authorized a so-called permanent crop disaster program, known by its acronym SURE. No ad hoc crop disaster program was enacted for the 2012 drought even though SURE had ended, and SURE was not authorized in the 2014 farm bill. Over the 1990-2008 period, spending on crop insurance premium subsidies averaged 1.3 percent of the value of U.S. crop receipts, while spending on ad hoc crop disaster assistance averaged 0.9 percent. During the 2014 and 2015 fiscal years, nothing was spent on ad hoc crop disaster assistance while premium subsidies averaged 3.1 percent of the value of crop receipts. Comparing the two periods, spending on ad hoc crop disaster assistance declined 0.9 percentage point but spending on premium subsidies increased 1.8 percentage points, or twice as much. It should be noted potential cost savings was only part of the argument for replacing ad hoc crop disaster assistance with crop insurance. Other key parts of the argument were the need for legislation on an on-going basis and the often difficult legislative negotiations about which geographic areas and crops should receive payments and how much payment they should receive. Concluding observations Crop insurance has emerged as a continuing policy issue on the American agenda. The program continues to successfully ward off attempts to cut spending, but each confrontation spends political capital and likely increases the ranks of critics. Discussions will continue until the reasons underlying the discussions are addressed. Crop insurance’s emergence as a policy issue reflects in part a large expenditure program whose spending has grown fast even during a time of crop farm prosperity. Premium subsidies account, by far, for the largest share of spending on crop insurance. Moreover, premium subsidy per dollar of insured liability has also increased. If society wants to reduce spending on crop insurance, it will eventually have to address premium subsidies. Federal spending on insurance premiums has evolved from a small to large expenditure item. Large expenditure items face different questions than small expenditure items. Simply put, for large expenditure items, benefit-cost assessment centers on society at large as much as program beneficiaries. “Whether money is better spent on another program society desires?” becomes a central question for no other reason than a large sum of money is involved. The implication is that supporters need to justify the program, not in terms of what it can do for program beneficiaries, but what the program can do for society. Prior to the late 1990s, crop insurance could succinctly be described as a government policy to assist farmers in times of stress resulting from yield shortfalls, usually from weather over which the farmer had little control. The non-agriculture public could easily understand and clearly relate to this story. However, yield insurance has morphed into revenue insurance which may now be morphing into margin insurance on the difference between gross revenue and some measure of cost. These changes have value to farmers and insurance companies and agents, but the story about what risk is being covered and how much farmers may or may not have control over these risks has become muddied and complex at best. Crop insurance supporters continue to create new products and add-ons rather than speak to the relevancy issues being raised by critics. From the political process perspective, the importance to a program of having a simple story to which the general public can relate cannot be emphasized enough. Crop insurance has another fundamental dilemma: There is no objective rationale for the current matrix of premium subsidy rates, either in total or by product and coverage level. The matrix of subsidy rates is a political equilibrium based on what society will pay. Lack of an objective basis for the rate of a subsidy is not an issue until a program becomes an issue. Failure to satisfactorily address the objective measurement question will ultimately lead to cuts and potential elimination of a program. Source - http://www.iowafarmertoday.com