ANOTHER LOOK AT CROP INSURANCE

ANOTHER LOOK AT CROP INSURANCE

Although 1995 is a farm bill year, neither the Clinton administration nor Congress has been willing to spend much time seriously examining federal disaster relief programs, a major component of federal aid to agriculture.

This lassitude is surprising, considering that disaster relief programs cost an estimated $2 billion of the farm program's $12 billion budget. In a year of poor crops, federal spending on disaster relief and crop insurance programs can amount to more than double the projections.In addition to their expense, the programs are controversial on environmental grounds. Without providing much empirical support, several major environmental groups say the government's agricultural insurance and disaster relief programs encourage planting on marginal and environmentally fragile lands.

If the federal disaster relief programs are costly and perceived to be environmentally harmful, they should be targets for radical reform. Yet even Republicans looking for regulatory retrenchment and budget cutbacks have been

indifferent.

These programs were the subject of major congressional debate in 1994. The result of that debate was the Crop Insurance Reform Act, which consolidates payments made under ad hoc congressional disaster relief measures into the federal crop insurance program.

This consolidation was accomplished by requiring all farmers who receive benefits from federal farm programs to carry heavily subsidized catastrophic coverage on all major crops. In addition, the law directs the Federal Crop Insurance Corp. to reduce its loss ratios on crop insurance programs.

Most interested congressmen believe this law addressed many problems associated with disaster relief. They are mistaken.

On the plus side, the new law forced the Federal Crop Insurance Corp. to make important changes in its management procedures. These include higher premiums, reduced incentives for taking risks and more aggressive management of farms with histories of large losses.

But those adjustments were all made at the margin. The new law does not address the fundamental question of whether crop insurance and other disaster relief programs are justified in the first place.

"Multiple-peril," or all-risk, crop insurance has never been offered successfully by private insurers. Several companies offered all-risk insurance contracts in the late 19th century, but in all cases they discontinued the coverage after one or two growing seasons.

Some analysts argue this is evidence of market failure due to excessive risk in the farm sector. Several studies, however, suggest otherwise. They indicate that farmers simply do not value the income protection gained from all-risk insurance.

Indeed, all-risk insurance makes little sense when farmers can find cheaper ways of managing yield risk by, for example, rotating or diversifying crops or setting aside money in a self-insurance fund.

The truth is, farmers are not averse to buying insurance when it is worth something to them. Private insurance companies have done a healthy business in sales of specific-peril insurance contracts, which provide farmers with short- term protection against crop loss through hail or fire. The market for specific-peril crop insurance has survived with no help from federal subsidies.

All-risk crop insurance, however, has languished in the private sector not

because of market failure but because the product, as a method of handling risk, is not attractive.

Federal subsidies for all-risk crop insurance cannot, then, be justified on the grounds of a market failure. Nor can they be justified by their redistributive effects. Crop insurance subsidies are not allocated on the basis of economic need, at least as most of us understand need. In any given region, the largest subsidies go to the biggest farms because farmers can insure all of their production. Federal subsidies make the wealthiest farmers wealthier, while poor farmers receive commensurately lower payments.

Finally, the benefits of all-risk insurance are misleading. Because they provide farmers with payments only when yields are poor, all-risk insurance programs appear to aid only those farmers experiencing hardship. Most farmers, however, are able to self-insure in bad years by carrying low levels of debt. Yet they still receive large subsidies through all-risk insurance programs.

With little or no logical or ethical basis for all-risk insurance programs, Washington should end them outright. At the least, the administration and Congress should seriously examine their underlying purpose.