Contacts:
Bruce Babcock; babcock@iastate.edu
Sandy Clarke; sclarke@iastate.edu

May 4, 2007

U.S. crop insurance has failed to prevent costly ad hoc disaster assistance for farmers, even though its cost to taxpayers doubled with Congress's 2000 reform of the program.

Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University and professor of economics, testified before the House Oversight and Government Reform Committee on May 3 about why the program has not eliminated disaster assistance and how policy could be reformed to make both farmers and taxpayers better off.

He told the Committee that "too much crop insurance money is spent on program administration and not enough is spent on supporting financially stressed farmers." Babcock told Chairman Henry Waxman and Committee members that "every dollar in net payments provided to farmers through crop insurance costs taxpayers that dollar plus another 78 cents to deliver."

Much of the reason for this inefficiency, he explained, comes from the way Congress subsidizes the program to keep costs low for farmers. "This premium subsidy is now so large that the average farmer in the program can expect a rate of return on producer-paid premium of 143 percent," he said.

However, when there are systemic events, such as drought, these losses still trigger disaster assistance packages such as the one funded in the Iraq funding bill. Babcock recommended to the Committee that crop insurance be integrated with farm bill programs so that the two can work in tandem.

He said that replacing current farm programs with a crop insurance program based on either county yield or county revenue would "directly transfer risk from the crop insurance program to the federal government, thereby reducing excessive underwriting gains paid to companies."

Babcock's full statement to the Committee is available on the CARD Web site at www.card.iastate.edu/products/presentations/.