Source: USDA ECONOMIC RESEARCH SERVICE, 10/20/14


Highlights:
• Given the increased reliance on and producers’ adoption of FCI, crop insurance subsidies have outpaced ad hoc disaster assistance payments since 2003.
• ERS research suggests that the increased premium subsidies introduced through the 2000 Agricultural Risk Protection Act did not appear to draw new acreage into the FCI program, but did appear to induce farmers to select higher levels of coverage.
• Results suggest that subsidy increases would likely encourage greater use of the FCI program, but at a relatively high cost since premium subsidy changes would affect the price of crop insurance for all producers, including those already enrolled. For example, for producers in Linn County, IA, a 5-percent rate increase would cause a 10-percent increase in demand but a 21-percent increase in program costs.

Enrollment in Crop Insurance Grows as Premium Subsidies Increase
Federal Crop Insurance (FCI) began with the Federal Crop Insurance Act of 1938 and was passed when producers faced low farm income due to both the Great Depression and the Dust Bowl. However, enrollment and use of crop insurance remained low as producers used other tools to manage risk. It was not until 1980, when the Government re-appraised its involvement with crop insurance, that adoption of FCI policies began to grow—this growth has generally been attributed to the increase in premium subsidies. 

In 1980, the Government expanded FCI to include coverage for more crops and areas and introduced premium subsidies. However, despite these efforts, fewer than 100 million acres were enrolled in the program by 1994, even though farmers sustained large losses during this time. Consequently, Congress passed the Federal Crop Insurance Reform Act (FCIRA) in 1994, which increased premium subsidies and required producers to obtain coverage in order to receive support from other Government programs.

When FCIRA went into effect, participation in FCI immediately jumped—enrolled acres doubled from roughly 100 million acres in 1994 to more than 220 million acres in 1995. Producers enrolled the majority of these new acres under a fully subsidized new policy called Catastrophic Risk Protection Endorsement (CAT) which provides low level coverage. In 1995, fewer than 48 percent of all acres were enrolled in buy-up policies (those policies that are not fully subsidized by the Government because they have coverage levels above CAT).

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