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When somebody else pays for their drinks, most partygoers find they want and need more than a modest amount to drink because at an open bar, the cost of a drink is the time spent waiting in line for service. At a cash bar, lines are shorter because most people find they just donít need that much to drink when they have to pay for it.
What holds for drinks also holds for crop insurance. Since 2001, taxpayers have paid more than two-thirds of the tab for farmersí crop insurance purchases. Almost all of this federal largess goes to producers of corn, soybeans, wheat and cotton, with the largest subsidies filling the pockets of the largest and wealthiest farmers. Advocates for continuing these subsidies claim that the fact that farmers buy large amounts of the most expensive and heavily subsidized crop insurance product is proof of the importance of the program. But using farmersí current crop insurance decisions to measure how much they value insurance is as valid as measuring the value of drinks by how much alcohol is consumed at an open bar.
Crop insurance subsidies were dramatically increased in 2000. Since then, farmers have increased the amount of insurance they buy and have overwhelmingly chosen to insure their crops with Revenue Protection. This is the champagne of crop insurance products. It protects against revenue shortfalls when crop prices decline and against yield shortfalls when crop prices increase. Revenue Protection can cost up to 80 percent more than regular revenue insurance that only protects against revenue shortfalls. Most of this 80 percent extra cost is paid for by the taxpayer. The record $12.7 billion insurance payout to corn and soybean farmers in 2012 was more than twice what they would have been had subsidies not induced farmers to buy Revenue Protection rather than regular revenue insurance.
Sen. Jeff Flake, R-Ariz., and Rep. John J. Duncan Jr., R-Tenn., recently introduced legislation that would sharply reduce the powerful incentive farmers have to increase their consumption of crop insurance. The extent to which farmersí purchases of insurance would change under the Flake-Duncan proposal is reflected by the $40 billion in tax dollars that the Congressional Budget Office estimates would be saved over 10 years. Tellingly, the bill would not restrict farmer choice over the type of crop insurance they could buy or eliminate subsidies. It would only reduce the taxpayer portion of the tab.
Just as charging for drinks dramatically reduces alcohol consumption, increasing the farmersí share of the cost of managing their risk would dramatically reduce their use of insurance. This policy change would dramatically lower taxpayer costs while simultaneously improving agricultural efficiency. Rather than taxpayers taking the risk out of crop production, which in fact encourages farmers to adopt more risky business and production strategies, changing the program would allow those farmers who can best manage their production and price risk to reap the highest rewards. Returns would flow more to good farmers rather than just to any farmer who uses taxpayer dollars to buy the most insurance.