The Argument for Replacing Crop Insurance with Index Insurance

• The federally subsidized crop insurance program guarantees that farmers will receive close to their expected revenues every year while relying on a costly delivery system operated by private insurance companies.
• The Pasture, Rangeland, Forage insurance program, which uses existing data from the National Oceanic and Atmospheric Administration to calculate payouts based on weather in a 12-by-12-mile grid system, provides a template for a more efficient alternative to crop insurance.
• Such a program would protect farmers from systemic risk without sending billions of federal dollars to private insurance companies while serving a broader portfolio of crops.

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Introduction

Several Monthly Harvest reports have focused on the waste, adverse production and input use impacts, envi­ronmental concerns, and other negative effects asso­ciated with the current heavily subsidized federal crop insurance program.¹ These well-established concerns are founded in a substantial body of research. However, in the short term, from a political perspective, ending the current program is infeasible. Thus, it is import­ant to consider how improvements to the federal crop insurance program would look.

In this report, we argue that replacing the current crop insurance program with a weather-based area index program would overcome many of the issues associated with the current crop insurance program. A weather-based program would not only substantially reduce administrative costs, focusing insurance on major disasters rather than paying farms for small decreases in expected revenues, but also mitigate discrepancies across commodities. A recent estimate demonstrated that if such a weather-based program were to replace the current crop insurance system, program costs could be reduced by around 30 percent, with few impacts on the average subsidies paid to farmers.²

In what follows, we go through each reason replacing crop insurance with an index insurance program would deliver a consistent safety net to farmers and ranchers while eliminating much of the waste involved in cur­rent programs. Much of what is discussed is based on previous work by Eric J. Belasco, Joseph Cooper, and Vincent H. Smith, who use weather data to predict crop yields that can be used to trigger payments when droughts occur.³

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Notes

1. See Vincent H. Smith and Barry K. Goodwin, “What Harm Is Done by the Federal Crop Insurance Program Today?,” American Enterprise Institute, April 3, 2023, https://www.aei.org/research-products/report/what-harm-is-done-by-the-federal-crop-insurance-program-today; and Joseph W. Glauber, “The Growth of the Federal Crop Insurance Program, 2010–22,” Amer­ican Enterprise Institute, February 1, 2023, https://www.aei.org/research-products/report/the-growth-of-the-federal-crop-insurance-program-2010-22.

2. Eric J. Belasco, Joseph Cooper, and Vincent H. Smith, “The Development of a Weather-Based Crop Disaster Program,” American Journal of Agricultural Economics 102, no. 1 (2020): 240–58.

3. Belasco, Cooper, and Smith, “The Development of a Weather-Based Crop Disaster Program.”