Crop Insurance Why Not A Direct Payment
October 3rd, 2007 by David Graves
If farmers need help, why not simply have the government write them a check and eliminate the cost of subsidizing the crop insurance program?
Additional direct government subsidies would not support the financial infrastructure of American agriculture as crop insurance does. Just as homeowners would not have the capital to afford housing without insurance, capital would not be available to finance American agriculture without crop insurance.
Crop insurance is a multiple farmer benefit program. The fundamental reason for the crop insurance program is to serve as protection against weather and market disasters. Farmers need protection from these commodity production and marketing risks because generally they cannot afford the associated potential loss of revenue and capital.
However, the benefit of crop insurance is greater than the potential for indemnities, just as home insurance is more important than the amount of indemnities that are paid. Benefits beyond indemnities are identified and summarized by the following three factors:
Credit and the Banker Factor: Just as the overwhelming majority of home owners need a mortgage to buy a home, nearly every farmer borrows money on an annual basis to operate their farm. Bankers and farmers have come to rely on crop insurance to help mitigate the risk of their production loans.
Landlord Factor: The president of the American Sesame Growers Association, Steve Chapman, recently testified before Congress that Sesame growers needed an insurance policy not because of the risk of growing sesame but because landlords demanded it.
Forward Marketing Factor: One of the primary reasons farmers buy revenue insurance is to use the insurance policy as security when they forward market a portion of their crop. Both RA and CRC allow farmers to forward market with less risk. This enables farmers to realize a much greater average return on their crops.