giving it away free
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ENVIRONMENTAL
WORKING
GROUP
GIVING IT AWAY FREE
FREE CROP INSURANCE CAN SAVE MONEYAND STRENGTHEN THE FARM SAFETY NET
A simple, freeprogram to insure farmers
against actual crop losses at full market price
would be cheaper and fairer than todays
hopelessly inefcient and costly system
by Bruce Babcock
Professor of Economics, Iowa State University
Preface by Craig Cox
Senior VP for Agriculture and Natural Resources, EWG
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///"QSJM
http://www.ewg.org
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Acknowledgments
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BOE5IF%BWJEBOE-VDJMMF1BDLBSE'PVOEBUJPOBTXFMMBT&8(TDPNNVOJUZPGPOMJOFTVQQPSUFST5IBOLTUP
&8(T 4FOJPS 7JDF 1SFTJEFOU GPS "HSJDVMUVSF BOE /BUVSBM 3FTPVSDFT $SBJH$PY BOE UP&YFDVUJWF &EJUPS /JMT
#SV[FMJVTGPSUIFJSDBSFGVMSFWJFXBOEFEJUJOHPGUIFUFYUBOEUP5BZMBOi5Zw:BMOJ[GPSIJTFYDFMMFOUEFTJHOXPSL
under extreme time pressure.
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GIVING IT AWAY FREE3
Preface
Weaving a safety net that works for famers and taxpayers
CZ$SBJH$PY
Senior VP for Agriculture and Natural Resources, EWG
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OFUGPSGBSNFSToBGSFFJOTVSBODFQPMJDZUIBUXPVMEDPWFSQFSDFOUPGBWFSBHFZJFMEBOEQFSDFOUPGUIF
market price for the lost crop. EWGs proposal grew out of a previous paper%S#BCDPDLQSFQBSFEUIBUEFUBJMFE
the
aws in the current revenue insurance programs.
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PGBMMGFEFSBMGBSNJODPNFTVQQPSUQSPHSBNT*O.BSDIUIF$POHSFTTJPOBM#VEHFU0GDF$#0QSFEJDUFEUIBU
UBYQBZFSTXJMMTQFOECJMMJPOPWFSUIFOFYUZFBSTPOUIFIJHIMZTVCTJEJ[FEJOTVSBODFQSPHSBNoGBSNPSF
UIBOUIFCJMMJPOJUQSPKFDUFEXJMMCFTQFOUPOUSBEJUJPOBMGBSNTVCTJEJFT
Now, some lawmakers are proposing to plow most of the savings from nally ending the discredited direct
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the same farm businesses that have been rewarded with direct payments for years. Sold as reform, this bait and
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$POTFSWBUJPOGPPESFTFBSDIBOEPUIFSDSJUJDBMQSPHSBNTXJMMCFDVUJOPSEFSUPNBLFSPPNGPSUIJTOFXNBOEBUF
%S#BCDPDLTSFQPSUTIPVMEHJWFQBVTFUPMBXNBLFSTCFJOHBTLFEUPTXBMMPXUIJTiSFGPSNw5IFQBQFSNBLFTB
compelling case that:
t The current crop and revenue insurance system is seriously awed and needs an overhaul, despite the chorus
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t It is very possible to construct a safety net that works for farmers, saves taxpayers billions of dollars and is
better for the environment than the current system.
http://static.ewg.org/pdf/Crop_Insurance.pdfhttp://static.ewg.org/pdf/Crop_Insurance.pdf -
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TFOEEPMMBSUPJOTVSBODFDPNQBOJFTBOEBHFOUTGPSFWFSZEPMMBSUIBUHPFTUPGBSNFST5BYQBZFSTQBZNPT
of the policy premiums and pay insurance companies to sell the policies. Highly protable insurance companies
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If this is not reason enough to make lawmakers skeptical, a report released by the Government Accountability
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.PSFTUVOOJOH("0FTUJNBUFEUIBUUBYQBZFSTTFOUUPJOTVSBODFDPNQBOJFTUPBENJOJTUFSUIF
QPMJDJFTGPSUIJTPOFMBSHFGBSNCVTJOFTTBMPOF*OQFSDFOUPGBMMHSPXFSTDPWFSFECZJOTVSBODFQPMJDJF
IBSWFTUFEQFSDFOUUIFQSFNJVNTVCTJEJFT"MJNJUPOQSFNJVNTVCTJEJFToTJNJMBSUPDBQTJOQMBDF
GPSEJSFDUQBZNFOUToXPVMEIBWFTBWFEUBYQBZFSTVQUPCJMMJPO5IFEJTUSJCVUJPOPGJOTVSBODFTVCTJEJFTJTKVT
as distorted as the distribution of the direct payments that the insurance would replace and far more expensive
to deliver.
"UBNJOJNVN$POHSFTTTIPVMEJNNFEJBUFMZSFGPSNUIFDSPQBOESFWFOVFJOTVSBODFQSPHSBNTCZ
t reducing or ending premium subsidies for revenue protection policies, particularly those that insure more
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t DBQQJOHUIFBNPVOUPGQSFNJVNTVCTJEJFTBOJOEJWJEVBMPSGBSNCVTJOFTTDBODPMMFDU
t SFRVJSJOHGBSNTUPQSPUFDUTPJMXFUMBOETBOEHSBTTMBOETJOSFUVSOGPSQSFNJVNTVCTJEJFTBOE
t making public the identities of the farm businesses participating in the insurance programs and the amount
of premium subsidies and indemnities each farm business receives.
#VU%S#BCDPDLTUIPSPVHIBOBMZTJTTIPXTUIBUJUXPVMECFFWFOCFUUFSoGBSCFUUFSoUPSFQMBDFUIFDVSSFOU
complicated system of premium subsidies and policies with a single, simple and free yield protection policy
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CBEXFBUIFSoBUQFSDFOUPGUIFDSPQTNBSLFUQSJDF'BSNFSTXPVMECFBTLFEUPQBZBTNBMMGFFUPDPWFSUIF
much lower costs of delivering this program. The private sector would be free to develop innovative insurance
products that farm operators could buy at their own expense, if they chose, to place atop the core of the safety
net provided at taxpayers expense.
http://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdfhttp://www.gao.gov/assets/590/589305.pdf -
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GIVING IT AWAY FREE5
This approach would chart a course toward a scally responsible, effective and environmentally sound safety net
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t 'JOBMMZBDIJFWFBQFSNBOFOUGBSNMFWFMEJTBTUFSQSPHSBNUIBUFMJNJOBUFTUIFOFFEGPSBEIPDEJTBTUFSSFMJFGo
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t 3FEVDFEJTUPSUJPOJOQMBOUJOHEFDJTJPOT
t &MJNJOBUFUIFOFFEGPSBOFMBCPSBUFQSFNJVNSBUJOHTUSVDUVSFBOE
t Require growers to buy a single policy that covers all of the insured crop grown in a county, rather than
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terrain.
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PWFSUIFOFYUUFOZFBSTEFQFOEJOHPOIPXNBOZGBSNFSTQBSUJDJQBUF*G$POHSFTTDPVQMFEUIFTFTBWJOHTXJUI
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could create a scally responsible and effective safety net, fully fund conservation programs, invest in programs
that increase access to healthy food and still meet or exceed decit reduction targets.
The only thing standing between taxpayers and the kind of farm bill they want is the power of the subsidy
lobby now augmented by lobbyists for the crop insurance industry. Now, more than ever, the farm bill is far too
important to be left to the agriculture committees.
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Giving It Away
Free Crop Insurance Can Save Moneyand Strengthen the
Farm Safety NetCZ#SVDF#BCDPDL
Professor of Economics, Iowa State University
Summary5IF SFDPSE IJHI JODPNF FBSOFE CZ HSPXFST JO SFDFOU ZFBST IBT DIBOHFE UIF QPMJUJDT PG TFOEJOH UBYQBZFS
TVQQPSUFEEJSFDUQBZNFOUTUPGBSNFST"HSJDVMUVSFTMFBEFSTBOEUIFJS$POHSFTTJPOBMBMMJFTDBOOPMPOHFSDMBJNDSFEJCMZ UIBU UIFSF JTBOZQVCMJDQVSQPTFUP HJWJOH GBSNFSTCJMMJPO BZFBSBUB UJNFXIFO DSPQQSJDFTBOE
JODPNFMFWFMTBSFTPIJHI#VUJOTUFBEPGTJNQMZBCPMJTIJOHUIFQSPHSBNBOEFJUIFSSFEVDJOHUIFGFEFSBMCVEHF
decit or shifting the funds to programs that truly serve public needs, such as agricultural research or reducing
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crop insurance program to support commodity growers. To make it look better to the public, its being dressed
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BOZBDUVBMOBODJBMMPTTUPDPMMFDUBMMUIBUJUUBLFTXJMMCFUIFBQQFBSBODFPGBMPTT
What is surprising is the lack of discussion of why anyQVCMJDNPOFZTIPVMECFTQFOUPOBOFXiTBGFUZOFUwXIFO
the existing federal crop insurance program already costs so much and provides farmers with such extravagant
protection. If the current system of crop insurance isnt working, why not abolish it along with direct payments
BOESFEJSFDUUIFCJMMJPOJODPNCJOFEBOOVBMTBWJOHTUPTISJOLUIFEFDJUBOEDSFBUFBUSVMZDPTUFGGFDUJWF
QSPHSBN4JODFUIFDVSSFOUDSPQJOTVSBODFQSPHSBNIBTDPTUUBYQBZFSTBCPVUCJMMJPOCVUPOMZIBMGo
CJMMJPOoIBTGPVOEJUTXBZJOUPGBSNFSTQPDLFUT5IFPUIFSCJMMJPOXPVOEVQJOUIFDPGGFSTPGDSPQJOTVSBODF
companies and in commissions paid to insurance agents. It strains credibility to claim that a program that costs
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incentives to buy more insurance, and more expensive types of insurance, than they would buy if they had to
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their crops, farmers are using the subsidies to also buy costly revenue insurance. Such policies protect them
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GIVING IT AWAY FREE7
against price uctuations that can cost farmers money when they have locked in a selling price but dont have
enough production to sell. Its no wonder that farmers buy it, because thanks to subsidies, this more expensive
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Another reason the program costs so much is that insurance companies have to be paid large subsidies to
induce them to take on a small portion of the risk of having to make large payouts. And nally, the agents who
sell these policies earn commissions far in excess of what a competitive market would pay.
As a result, crop insurance is so costly that taxpayers would be better off if the insurance were simply given away
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GBSNFSTBQFSDFOUZJFMEJOTVSBODFQPMJDZPOBMMUIFJSQMBOUFEBDSFBHFDPVMETBWFUBYQBZFSTBMNPTUCJMMJPO
PWFSZFBST5IFWBMVFUPGBSNFSTXPVMECFBCPVUCJMMJPONPSFUIBOUIFOFUCFOFUUIBUGBSNFSTPGUIFTF
ve crops get from existing crop insurance today.
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NBOBHFNFOUUPPMTUPDPNQMFNFOUUIFGSFFQFSDFOUZJFMEJOTVSBODF5IFTFQSPEVDUTXPVMEIBWFUPCFDPTU
effective, because otherwise farmers paying with their own dollars wouldnt buy them.
(SPVQTBTEJTQBSBUFBTUIF/BUJPOBM.JML1SPEVDFST'FEFSBUJPODPUUPOHSPXFSTBOEUIF"NFSJDBO'BSN#VSFBV
Federation have embraced the idea that its sound policy to deliver a more efcient and effective farm safety
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crop insurance program. The milk producers are advocating a milk margin insurance program to be delivered
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CFEFMJWFSFEEJSFDUMZCZ64%"5IF"NFSJDBO'BSN#VSFBVTDPVOUZSFWFOVFJOTVSBODFQSPHSBNJTQSPQPTFEUP
be delivered as crop insurance although with much lower delivery costs than current crop insurance products.
$MFBSMZUSBEJUJPOBMGBSNHSPVQTBSFCFHJOOJOHUPSFDPHOJ[FUIBUUIF DVSSFOUDSPQJOTVSBODFQSPHSBNJTOPUBO
efcient use of tight farm bill funds.
#ZMJNJUJOHUBYQBZFSTDPOUSJCVUJPOTUPBGBSNTBGFUZOFUUPQSPUFDUJOHBHBJOTUVOBWPJEBCMFMPTTFTJODSPQZJFMET
$POHSFTTXPVMEQSPWJEFBIFMQJOHIBOEXIFOGBSNFSTBSFTUSVDLCZEJTBTUSPVTPPETESPVHIUXJOEQFTUTPS
re even as it saves farmers and taxpayers money. And it would avoid public backlash against a wasteful system
that today makes payments to farmers even when they have no real losses.
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Introduction
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for farmers. Some commodity groups argue that the way to do this is to set higher target prices for commodity
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measures to protect farmers from revenue losses that conventional crop insurance doesnt cover because the
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they would protect farmers against small losses that are not compensated by existing crop insurance, which is
designed to cover deeper losses. However, both higher target prices and shallow loss protection would require
OFXGVOEJOHUIBUJTDVSSFOUMZVOBWBJMBCMF&WFOJG$POHSFTTFMJNJOBUFTEJSFDUQBZNFOUTDPVOUFSDZDMJDBMQBZNFOUT
BOEUIF"$3&"WFSBHF$SPQ3FWFOVF&MFDUJPOQSPHSBNJUXJMMCFEJGDVMUUPNFFUCVEHFUDVUUJOHUBSHFUTBOE
still strengthen the safety net, let alone nd funds for other farm bill programs, including conservation, research
and nutrition.
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UIBUDSPQJOTVSBODFOFFETUPCFiTUSFOHUIFOFEwSBUIFSUIBOiSBJEFEwUPIFMQQBZGPSPUIFSQSPHSBNTPSNFFU
decit reduction targets. The appeal of the crop insurance program is easy to understand. After all, who can be
against protecting farmers against the vagaries of nature?
Just like homeowners who buy insurance against damage to their homes, farmers buy crop insurance to insureBHBJOTUMPTTFTGSPNPPEESPVHIUTIBJMBOEQFTUT#VUVOMJLFIPNFPXOFSTXIPCVZJOTVSBODFGSPNDPNQBOJFT
that must charge enough in premiums to pay for damage claims plus the cost of running their businesses,
farmers pay only small portion of the true cost of their insurance. Their premium dollars pay none of the cost of
administering the program and less than half of damage claims. Taxpayers pay the rest.
5IFDPTUUPUBYQBZFSTPGUIFGFEFSBMDSPQJOTVSBODFQSPHSBNIBTTPBSFEJOSFDFOUZFBST'JHVSFGPSUXPSFBTPOT
'JSTUDPNNPEJUZQSJDFTIBWFSJTFOTIBSQMZ5IBUIBTESJWFOVQQSFNJVNTBMPOHXJUIUIFDPTUPGTVCTJEJ[JOHUIFNBOE
the claim reimbursements that the government pays to insurance companies. Secondly, the premium subsidieshave given farmers an incentive to buy the most expensive insurance available with the lowest deductibles. Unti
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EPMMBSTXPSUIPGBEEJUJPOBMDPWFSBHF6OEFSUIFUFSNTPGUIFBDUIPXFWFSGBSNFSTOPXPOMZQBZDFOUTGPSUIBU
extra dollars worth of insurance. It is no wonder that farmers have responded by purchasing more insurance.
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GIVING IT AWAY FREE9
.BOZGBSNFSTSFTQPOEFEUP JODSFBTFEQSFNJVNTVCTJEJFTCZDIPPTJOHMPXFSEFEVDUJCMFTBOE TXJUDIJOHGSPN
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coverage against crop losses, most farmers now buy insurance against both crop losses and movements in
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harvest prices to determine when a payout is due. With the exception of rice and barley, a large proportion of
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There are obvious reasons why RP is popular. It provides protection against drops in revenue caused by either
4PVSDF$BMDVMBUFEGSPN64%"3JTL.BOBHFNFOU"HFODZEBUB
Figure 1. Taxpayer Cost of the Crop Insurance Program Has Soared
$2
$4
$6
$8
$10
20112010200920082007200620052004200320022001
million
$
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QSJDFEFDMJOFTBUIBSWFTUPSCZZJFMEMPTTFT*OBEEJUJPOUIFQFSBDSFSFWFOVFHVBSBOUFFBEKVTUTVQXBSEJGDSPQ
prices rise at harvest. That means that if a farmer with an RP policy does suffer a crop loss, the added revenue
from selling the remaining crop at the higher harvest price does not reduce the insurance payout.
#VUBHPPEEFBMGPSGBSNFSTJTOPUOFDFTTBSJMZUIFNPTUFGDJFOUVTFPGUBYQBZFSNPOFZBOEJUSBJTFTJNQPSUBOU
questions:
t How much does the current subsidy structure cost taxpayers?
t 4IPVME UIF HPWFSONFOUCF JOUIF CVTJOFTTPG TVCTJEJ[JOHUIF DPTU PGNBOBHJOH QSJDFSJTLJO BEEJUJPOUP
providing protection against severe crop losses?
t $PVMETJHOJDBOUTBWJOHTCFPCUBJOFECZMJNJUJOHUBYQBZFSTDPOUSJCVUJPOUPUIFDPTUPGDSPQJOTVSBODF
t Would farmers be hurt if subsidies were limited?
Figure 2. Proportion of Insured Acres Covered by RP in 2011
0%
20%
40%
60%
80%
100%
Wheat
Sunow
ers
Soybeans
RiceGrainSorghum
Cotton
CornCanola
Barley
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GIVING IT AWAY FREE11
Getting answers to these questions is difcult, because the crop insurance program is very complex. This
complexity serves the purposes of those who want to protect the existing programs structure. It is easier to
defend a program when most critics dont quite understand its nuances.
An Alternative
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insurance program with its costly and complicated set of regulations and subsidies, why not simply give farmers
a free yield protection (YP) insurance policy?
$VSSFOUMZUIF GFEFSBMHPWFSONFOUHJWFTGBSNFSTBGSFF:1QPMJDZLOPXOBT$BUBTUSPQIJD$"5DPWFSBHF$"5
DPWFSTDSPQMPTTFTPGNPSFUIBOQFSDFOUBOEDPNQFOTBUFTGBSNFSTBUQFSDFOUPGUIFNBSLFUQSJDFPGUIFMPTUDSPQ5IFGSFFZJFMEQSPUFDUJPOQPMJDZBOBMZ[FEIFSFJTBNPSFHFOFSPVT$"5QPMJDZUIBUXPVMEDPNQFOTBUFDSPQ
MPTTFTPGNPSFUIBOQFSDFOUBUQFSDFOUPGUIFNBSLFUQSJDF5IJTGSFFQPMJDZXPVMEQSPWJEFGBSNFSTXJUIB
solid foundation on which they could add additional risk management tools through the private sector. It would
be the taxpayers contribution to a basic safety net for producers of eligible crops. It would cap the burden on
taxpayers and could produce signicant budget savings by eliminating both federally paid premium subsidies
and underwriting payouts to crop insurance companies. Simplifying administration of the system would produce
even more savings.
5IFiGSFFwJOTVSBODFDPNFTBUBDPTUPGDPVSTFCVUUIJTBOBMZTJTTIPXTUIBUJOBHHSFHBUFCPUIUBYQBZFSTBOE
farmers would be better off than under the current program, which benets the crop insurance industry as much
as farmers.
The reality that giving away free insurance would actually save money underscores how inefcient the current
system is. In addition, this alternative system would also reveal which risk management products can actually
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The Potential Savings
1SPWJEJOHGBSNFSTXJUIBGSFFZJFMEQSPUFDUJPOQPMJDZUIBUXPVMEQBZPGGPOZJFMEMPTTFTPGQFSDFOUPSNPSFB
QFSDFOUPGUIFFYQFDUFENBSLFUQSJDFXPVMEQSPEVDFTBWJOHTJOUISFFXBZT
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Lower Premium Subsidies
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QSPWJEFEGSFFUPHSPXFSTPGTPDBMMFEQSPHSBNDSPQToUIFDSPQTDVSSFOUMZCFOFUJOHGSPNEJSFDUQBZNFOUT5IF
TBWJOHTGSPNFMJNJOBUJOHUIFTFTVCTJEJFTXIJDIUPUBMFECJMMJPOJOXPVMEIFMQQBZUIFDPTUPGUIFGSFF
policies.
Underwriting Gains
$VSSFOUMZGFEFSBMMZTVCTJEJ[FEDSPQJOTVSBODFJTTPMEUISPVHIQSJWBUFDPNQBOJFTUIBUNBLFMBSHFQSPUTDBMMFE
VOEFSXSJUJOHHBJOTGPSUBLJOHPOBQPSUJPOPGUIFSJTLPGMBSHFQBZPVUT'SPNUISPVHIDSPQJOTVSBODF
4PVSDF64"3JTL.BOBHFNFOU"HFODZ
Figure 3. Net Underwriting Gains Paid to Crop Insurance Companies
-0.5
0
0.5
1.0
1.5
2.0
2.5
2011
2010
2009
2008
2007
2006
2005
20042003
2002
2001
billion
$
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GIVING IT AWAY FREE13
DPNQBOJFTFOKPZFEBUPUBMPGCJMMJPOJOOFUVOEFSXSJUJOHHBJOTGSPNTFMMJOHUBYQBZFSTVCTJEJ[FEJOTVSBODF
QPMJDJFT'JHVSF5IFSBUJPOBMFGPSUIFTFQSPUTJTUPBMMPXUIFDPNQBOJFTUPNBLFNPOFZJOZFBSTXIFOQBZPVUT
on claims are lower than premiums collected in exchange for shouldering some of the losses in years when
QBZPVUTBSFHSFBUFSUIBOQSFNJVNT*OUIFPSZUIJTSJTLTIBSJOHBSSBOHFNFOUSFEVDFTUIFHPWFSONFOUTFYQPTVSF
JOIJHIMPTTZFBSTJOFYDIBOHFGPSJODSFBTJOHUBYQBZFSDPTUTJOMPXMPTTZFBST#VU'JHVSFTIPXTUIBUUIJTJTDPTUMZ
UPUBYQBZFST&WFOJOIJHIMPTTZFBSTTVDIBTDPNQBOJFTDPMMFDUFEMBSHFVOEFSXSJUJOHHBJOT0OMZJOPOF
ZFBSEJEDPNQBOJFTIBWFBOFUVOEFSXSJUJOHMPTT5IFQSPQPTFEGSFFQFSDFOUZJFMEQSPUFDUJPOQSPHSBN
XPVMEFMJNJOBUFUIFBEEFEDPTUUPUBYQBZFSTPGVOEFSXSJUJOHHBJOTCZIBWJOH64%"T'FEFSBM$SPQ*OTVSBODF
$PSQPSBUJPOQBZBMMDMBJNTEJSFDUMZ
Reduced Delivery Costs
$SPQJOTVSBODFDPNQBOJFTBSFBMTPHFOFSPVTMZDPNQFOTBUFEGPSUIFPWFSIFBEBOEBENJOJTUSBUJWFDPTUTPGUIF
QPMJDJFT$VSSFOUMZUIFHPWFSONFOUNBLFTTPDBMMFEi"ENJOJTUSBUJWFBOE0WFSIFBEw"0QBZNFOUTUPDSPQ
insurance companies to cover the cost of administering the program and to compensate them for costs that,
in a private insurance market, would be built into the premium. These include agent commissions, the cost of
BEKVTUJOHMPTTFTBOEPGDFFYQFOTFTJODMVEJOHFNQMPZFFTBMBSJFTBOEJOGPSNBUJPOUFDIOPMPHZFYQFOTFT5IF
"0QBZNFOUTBSFTFUBTBQFSDFOUBHFPGUIFQPMJDZQSFNJVNT"T'JHVSFTIPXTXIFOQSFNJVNTJODSFBTFE
EVFUPIJHIFSDPNNPEJUZQSJDFTBOEHSFBUFSVTFPGSFWFOVFQSPUFDUJPOQPMJDJFT"0QBZNFOUTBMTPJODSFBTFE
ESBNBUJDBMMZFWFOUIPVHIUIFOVNCFSPGQPMJDJFTBENJOJTUFSFEGFMM*O64%"T3JTL.BOBHFNFOU"HFODZ
3."DBQQFEUIFSFTVMUJOHXJOEGBMMQSPUTUIBUDPNQBOJFTXFSFFOKPZJOHCZMJNJUJOH"0QBZNFOUTUP
CJMMJPOBZFBS&WFOXJUIUIJTDBQJOQMBDFBOEBEKVTUJOHGPSJOBUJPOIPXFWFSUIFJOEVTUSZJTTUJMMFOKPZJOHMBSHF
XJOEGBMMQSPUTGSPN"0SFJNCVSTFNFOUT
Delivery Costs Loom Large
It is not easy to estimate the actual cost of delivering crop insurance. Industry has every incentive to claim highe
DPTUTUPKVTUJGZMBSHFSUBYQBZFSSFJNCVSTFNFOUT0ODFBGBSNFSTJHOTVQGPSDSPQJOTVSBODFUIFQPMJDZJTTFMG
renewing, so current agent commissions are far above what a competitive market would pay.
0OFFTUJNBUFPGUIFQFSQPMJDZDPTUJTUIFBENJOJTUSBUJWFGFFPGQFSDSPQQFSDPVOUZUIBU64%"DIBSHFT
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&/7*30/.&/5"-803,*/((306114
www.ewg.org "QSJM
GPSDBUBTUSPQIJD$"5QPMJDJFT3."FTUJNBUFEUIBUGSPNUPUIFOPOBHFOUDPTUTBWFSBHFEQFS
policy. *OGPSNB&DPOPNJDTJOBSFQPSUGPSUIF/BUJPOBM"TTPDJBUJPOPG'4"$PVOUZ0GDF&NQMPZFFTXIJDI
SFQSFTFOUTDPVOUZMFWFMFNQMPZFFTPG64%"T'BSN4FSWJDF"HFODZ'4"FTUJNBUFEUIBUJUXPVMEDPTU'4"BO
BEEJUJPOBMNJMMJPOBZFBSoBCPVUQFSDFOUPGUIFUPUBMQSFNJVNWBMVFJOoUPBENJOJTUFSUIFQSPHSBN
5IJTXPSLTPVUUPBDPTUPGQFSQPMJDZ8IBUBMMUISFFFTUJNBUFTNBLFDMFBSJTUIBUUIFDPTUPGEFMJWFSJOHUIF
DPWFSBHFXPVMECFMPXFSJG64%"JNQMFNFOUFEUIFQSPHSBNJUTFMGPSDPOUSBDUFEXJUIJOTVSBODFDPNQBOJFTBUB
set price per policy, to be determined by competitive bid.
4BWJOHTJOEFMJWFSZDPTUTMPPNMBSHFJOUIJTBOBMZTJTPGNBLJOHBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZUIFCBTJD
TBGFUZOFUUIBUUBYQBZFSTQSPWJEFUPGBSNFST0WFSUIFQBTUZFBSTPGUIFDVSSFOUDSPQJOTVSBODFQSPHSBNOFU
4PVSDF64%"3JTL.BOBHFNFOU"HFODZ
Figure 4. A&O Payments to Crop Insurance Companies
0
0.5
1.0
1.5
2.0
2.5
2011
2010
2009
2008
20072006
2005
20042003
2002
2001
billion$
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GIVING IT AWAY FREE15
JOEFNOJUJFTUPGBSNFSTJOTVSBODFQBZPVUTNJOVTQSFNJVNQBZNFOUTUPUBMFECJMMJPOo UIFGBSNFSTDBTI
CFOFUGSPNUIFQSPHSBN5IFUPUBMDPTUUPUBYQBZFSTPWFSUIJTQFSJPEXBTCJMMJPOUIFTVNPGUIF
CJMMJPOOFUJOEFNOJUZQBJEUPGBSNFSTBOEUIFCJMMJPOJOVOEFSXSJUJOHHBJOTBOE"0SFJNCVSTFNFOUTQBJE
to companies).75IJTNFBOTUIBUUBYQBZFSTQBJEDFOUTJOEFMJWFSZDPTUTGPSFWFSZEPMMBSPGOFUCFOFUUIBU
farmers received.
Given the importance of increasing the efciency of all government programs in the face of the large and growing
federal debt, it is surprising that this very inefcient means of providing a farm safety net has not caught the
attention of avid budget cutters. The crop insurance program is so inefcient that both farmers and taxpayers
would be better off if the insurance were given away rather than delivered through the current system.
"MPPLBUUIFDPTUTPGDSPQJOTVSBODFGPSDPSOTPZCFBOTBOEXIFBUJO#PPOF$PVOUZ*PXBBOE4UVUTNBO$PVOUZ
/PSUI%BLPUBCFBSTPVUUIJTDPODMVTJPO
Impact of Free Yield Insurance
4UVUTNBO$PVOUZJTJO8FTU$FOUSBM/PSUI%BLPUBXIFSFZJFMETBSFMPXFSBOESJTLJTNVDIIJHIFSUIBOJO*PXB
#PPOF$PVOUZ#PPOF$PVOUZJOSVSBM$FOUSBM*PXBXJUITPNFPGUIFNPTUQSPEVDUJWFGBSNMBOEJOUIFDPVOUSZJT
POFPGUIFMFBTUSJTLZQMBDFTUPHSPXDPSOBOETPZCFBOT%FTQJUFUIFEJGGFSFODFTJOZJFMEMFWFMTBOESJTLBMNPTU
BMMBDSFBHFJOCPUIDPVOUJFTJTJOTVSFE64%"T3JTL.BOBHFNFOU"HFODZ3."SFQPSUTUIBUBDSFTP
TPZCFBOTBOEBDSFTPGXIFBUXFSFJOTVSFEJO4UVUTNBO$PVOUZ#PPOF$PVOUZGBSNFSTQMBOUFE
BDSFTPGDPSOBOEBDSFTPGTPZCFBOTJOBOEBMNPTUBMMUIFBDSFTXFSFJOTVSFEQFSDFOUPGDPSO
BDSFTBOEQFSDFOUPGTPZCFBOBDSFT
'BSNFSTJOCPUIDPVOUJFTBSFCJHCVZFSTPGSFWFOVFQSPUFDUJPO31JOTVSBODF*UDPWFSTNPSFUIBOQFSDFOUP
JOTVSFEBDSFTJO#PPOF$PVOUZBOEQFSDFOUPGTPZCFBOBOEQFSDFOUPGXIFBUBDSFTJO4UVUTNBO$PVOUZ
5IFNPTUQPQVMBSDPWFSBHFMFWFMJO#PPOF$PVOUZJTQFSDFOUGPSCPUIDPSOBOETPZCFBOTBOEJO4UVUTNBO
UIFNPTUQPQVMBSMFWFMJTQFSDFOUGPSCPUITPZCFBOTBOEXIFBU:JFMEJOTVSBODF:1JTBMTPBWBJMBCMFJOCPUIDPVOUJFTCVUDPWFSTPOMZQFSDFOUPGJOTVSFEBDSFTJO#PPOF$PVOUZBOEQFSDFOUJO4UVUTNBO$PVOUZ
0OFSFBTPOTPGFXGBSNFSTJOUIFTFUXPDPVOUJFTCPVHIU:1XBTUIBUUIFQFSBDSFTVCTJEZJTTPNVDIMPXFSUIBO
GPS31'JHVSFTIPXTUIBUUIFBWFSBHFQFSBDSFTVCTJEZGPSGBSNFSTXIPCPVHIU31JO#PPOF$PVOUZJO
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&/7*30/.&/5"-803,*/((306116
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XBTEPVCMFUIBUSFDFJWFECZGBSNFSTXIPCPVHIU:1'JHVSFTIPXTUIBU31TVCTJEJFTGPS4UVUTNBO$PVOUZJO
XFSFBMTPNVDIMBSHFSUIBO:1TVCTJEJFT*GQSFNJVNTSFFDUXIBUDSPQJOTVSBODFDPNQBOJFTXJMMQBZPVU
for these policies over the long run, farmers who select RP will get up to double the net indemnities that farmers
who choose YP get. RP provides more coverage and a much greater return on their premium dollars. The more
generous net indemnities and the large subsidies the industry gets to administer RP are the reason for the
explosive increase in the cost to taxpayers.
5BCMFCFMPXTIPXTXIBUUIFJNQBDUXPVMECFPOGBSNFSTUBYQBZFSTBOEUIFJOEVTUSZPGBQSPHSBNUIBUHBWFB
GSFFQFSDFOUZJFMEQSPUFDUJPOQPMJDZUPBMMGBSNFSTXIPQVSDIBTFESFWFOVFQSPUFDUJPO31GPSDPSOTPZCFBO
BOEXIFBUJO#PPOFBOE4UVUTNBO$PVOUJFT.PSFXJMMCFTBJEMBUFSBCPVUXIBUPQUJPOTUIFTFGBSNFSTNJHIU
Figure 5. Average Per-Acre Subsidies for Boone County, 2011
$
peracre
0
5
10
15
20
25
30
35
Soybean-RP
Soybean-YP
Corn-RP
Corn-YP
85807570658580757065
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GIVING IT AWAY FREE17
have if they wanted additional risk protection, but for now this analysis assumes no other taxpayer support fo
the farm safety net.)
"T5BCMFJMMVTUSBUFTUIFJNQBDUXPVMEWBSZTJHOJDBOUMZBDSPTTDSPQTBOESFHJPOTCVUUIFUBYQBZFSTBWJOHTXPVME
CFMBSHF#FDBVTFZJFMESJTLJTTPNVDIIJHIFSJO4UVUTNBOUIBOJO#PPOF$PVOUZBQFSDFOU:1QPMJDZXPVME
CFNPSFWBMVBCMFUPGBSNFSTJO4UVUTNBOUIBOUPUIPTFJO#PPOF$PVOUZPOBEPMMBSQFSBDSFCBTJT5IFGSFF
percent YP policy would also be a better value for farmers than a current RP policy because yield risk in Stutsman
$PVOUZJTBHSFBUFSQSPQPSUJPOPGUPUBMSFWFOVFSJTLUIBOJO#PPOF$PVOUZ*O#PPOF$PVOUZCZDPOUSBTU31
provides relatively more price protection, so replacing RP with YP represents a drop in value for those farmers.
Figure 6. Average Per-Acre Subsidies for Stutsman County, 2011
$
peracre
0
10
20
30
40
50
Wheat-YP
Wheat-RP
Soy-YP
Soy-RP
85807570658580757065
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5IFEJGGFSFODFTBSFTIPXOJO5BCMFJOUIFSPXUJUMFEi/FU'BSNFS*NQBDUw5IFBWFSBHFWBMVFPGBQFSDFOU
:1QPMJDZJTHSFBUFSUIBOUIFBWFSBHFWBMVFPG31QSFNJVNTVCTJEJFTGPS4UVUTNBO$PVOUZTPZCFBOGBSNFST#Z
UIJTNFBTVSF4UVUTNBO$PVOUZTPZCFBOGBSNFSTXIPDVSSFOUMZCVZ31QPMJDJFTXPVMEDPNFPVUBIFBEJGHJWFOB
GSFF:1QPMJDZ'PS#PPOF$PVOUZGBSNFSTBOEXIFBUGBSNFSTJO4UVUTNBO$PVOUZIPXFWFSUIFTXJUDIGSPN31UP
BGSFFQFSDFOU:1QPMJDZXPVMESFQSFTFOUBOFUSFEVDUJPOJOTVQQPSUCVUJUXPVMECFBOFUHBJOGPSUBYQBZFST
XIJMFTUJMMQSPWJEJOHBOFGGFDUJWFTBGFUZOFU*OBEEJUJPOBENJOJTUFSJOHUIJTQFSDFOU:1QSPHSBNEJSFDUMZCZ
64%"PSUISPVHIUIFQSJWBUFTFDUPSXJUIDPNQFUJUJWFCJEEJOHXPVMEHFOFSBUFTVCTUBOUJBMTBWJOHT5IFUPUBMUBYQBZFSTBWJOHTGSPNSFQMBDJOH31XJUIBGSFFQFSDFOU:1QPMJDZSBOHFTGSPNBMPXPGQFSDFOUGPSTPZCFBOT
JO4UVUTNBO$PVOUZUPBIJHIPGQFSDFOUGPSTPZCFBOTJO#PPOF$PVOUZJGVOEFSXSJUJOHHBJOTBOEMPTTFTBSF
borne directly by taxpayers and if delivery costs are competitively bid. If farmers were charged a fee sufcient to
DPWFSEFMJWFSZDPTUTUIFTBWJOHTXPVMEJODSFBTFUPBMPXPGQFSDFOUBOEBIJHIPGQFSDFOUBTTIPXOJOUIF
last row.
4UVUTNBO$PVOUZ #PPOF$PVOUZ
Wheat Soybeans $PSO Soybeans
*NQBDUPO'BSNFSTXIP#PVHIU31JO $ million
Loss of RP Premium Subsidy
7BMVFPG:11PMJDZa Net Farmer Impactb
*NQBDUPO"ENJOJTUSBUJWF$PTU
3FEVDUJPOJO"0c
Reduction in Underwriting Gainsd
$PNQFUJUJWF%FMJWFSZ$PTUTe
Net Taxpayer Savings No Admin Fee
Net Taxpayer Savings with Admin Fee
$VSSFOU5BYQBZFS$PTUf
1FSDFOU3FEVDUJPOJO1SPHSBN$PTUXJUI/P"ENJO'FF
1FSDFOU3FEVDUJPOJO1SPHSBN$PTUXJUI"ENJO'FF
Notes:a7BMVFPGQFSDFOU:1QPMJDZFRVBMTUIFBWFSBHFQFSBDSFQSFNJVNDIBSHFEJOGPSFBDIDSPQBOEDPVOUZNVMUJQMJFE
by the total number of acres insured under RP for each crop and county.b/FUGBSNFSJNQBDUFRVBMTUIFWBMVFPGUIFQFSDFOU:1QPMJDZNJOVTUIFMPTTPS31QSFNJVNTVCTJEZc"0FYQFOTFJTQFSDFOUNVMUJQMJFECZUPUBM31QSFNJVNGPSFBDIDSPQDPVOUZDPNCJOBUJPOd6OEFSXSJUJOHHBJOTTFUUPQFSDFOUPGQSFNJVNJO4UVUTNBO$PVOUZBOEQFSDFOUPGQSFNJVNJO#PPOF$PVOUZe$PNQFUJUJWFEFMJWFSZDPTUTFUUPGPVSQFSDFOUPGUPUBMWBMVFPGUIFQFSDFOU:1QPMJDZf$VSSFOUUBYQBZFSDPTUFRVBMTUIFTVNPG"0QSFNJVNTVCTJEJFTBOEVOEFSXSJUJOHHBJOT
Table 1. Cost Impacts of Replacing Subsidized RP Policies with a Free YP Policy
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GIVING IT AWAY FREE19
5IFTFDBTFTUVEJFTJOEJDBUFUIBUMJNJUJOHUIFUBYQBZFSGVOEFETBGFUZOFUUPBGSFFQFSDFOU:1QPMJDZDPVME
reduce program costs substantially, but examining only three crops in two counties gives little insight into the
DPTUJNQBDUPOBOBUJPOBMMFWFM*OBEEJUJPO5BCMFEPFTOPUBDDPVOUGPSUIFDPTUTPGQSPWJEJOHBGSFF:1QPMJD
to farmers who currently do not buy insurance at all or who buy lower levels of YP, or for the additional savings
that could arise from farmers who currently buy other types of crop insurance.
5IFOFYUTFDUJPOFTUJNBUFTUIFFTUJNBUFEDPTUJNQBDUPGBGSFFQFSDFOU:1QSPHSBNGPSBMMDSPQTGPSXIJDI
revenue protection is currently available across all acres insured with all insurance products.
National Impact of Free Insurance
5IJTBOBMZTJTVTFE3."TTVNNBSZPGCVTJOFTTEBUBGPSNPTUDSPQTUIBUBSFDVSSFOUMZFMJHJCMFGPSSFWFOVF
QSPUFDUJPODPWFSBHFUPBTTFTTUIFMJLFMZJNQBDUPGQSPWJEJOHGBSNFSTXJUIBGSFFQFSDFOUZJFMEQSPUFDUJPOQPMJDZ
BTUIFDPSFPGUIFUBYQBZFSGVOEFEGBSNTBGFUZOFU0OMZQFBOVUTBOEPBUTXFSFFYDMVEFE'PSFBDIDSPQUIF
TUBUFBDSFBHFXFJHIUFEBWFSBHFQSFNJVNGPS:1BUUIFQFSDFOUDPWFSBHFMFWFMXBTDBMDVMBUFEGPSUIPTFBDSFT
currently insured at that level. In addition, the calculations show the cost of giving this free policy to farmers who
CPVHIUBOZGPSNPGJOTVSBODFJO$PMVNOPG5BCMFBOEUIFDPTUPGQSPWJEJOHUIJTQPMJDZGPSBMMQMBOUFE
BDSFBHFPGFBDIDSPQJODMVEJOHGPSGBSNFSTXIPEJEOPUQSFWJPVTMZCVZJOTVSBODF$PMVNO(JWJOHBGSFF:1
QPMJDZBUUIFQFSDFOUDPWFSBHFMFWFMXPVMEQSPWJEFGBSNFSTXJUIDPWFSBHFUIBUXPVMEPUIFSXJTFDPTUUIFN
BCPVUCJMMJPOJGQPMJDJFTXFSFHJWFOPOMZUPGBSNFSTXIPCPVHIUJOTVSBODFJOPSCJMMJPOJOWBMVFJ
the free policies were extended to all farmers who grew these crops.
4VCUSBDUJOHUIFQSFNJVNTVCTJEZUIBUJOTVSFEGBSNFSTBDUVBMMZSFDFJWFEJOGPSUIFTFDSPQTGSPNUIFWBMVF
of the free yield insurance provides a measure of the net benet that farmers would receive under this proposal
"TTIPXOJOUIFUPUBMTSPXPG$PMVNOTBOEPG5BCMFUIFOFUHBJOUPGBSNFSTXPVMECFFJUIFSCJMMJPOPS
CJMMJPOEFQFOEJOHPOXIFUIFSUIFGSFFJOTVSBODFXBTQSPWJEFEPOMZUPGBSNFSTXIPCPVHIUDSPQJOTVSBODF
JOPSUPBMMGBSNFSTXIPQMBOUFEUIFTFDSPQT5IJTTIPXTUIBUUIFGSFF:1JOTVSBODFXPVMECFNPSFWBMVBCMF
UPGBSNFSTUIBOUIFCJMMJPOJOQSFNJVNTVCTJEJFTUIFZSFDFJWFEJO
5BCMFTIPXTUIBUBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZQSPWJEFTHSFBUFSOFUWBMVFUPGBSNFSTUIBOUIFDVSSFOU
TZTUFNXIJDISFRVJSFTUIFNUPQBZGPSJOTVSBODFCFGPSFUIFZDBOPCUBJOQSFNJVNTVCTJEJFT0CWJPVTMZUIJT
XPVMECFUIFDBTFGPSGBSNFSTXIPEJEOPUCVZJOTVSBODFJO3FNBSLBCMZJUJTBMTPUSVFGPSGBSNFSTXIPEJE
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&/7*30/.&/5"-803,*/((306120
www.ewg.org "QSJM
/FU$PTUPG'SFF*OTVSBODF 3FEVDUJPOJO%FMJWFSZ$PTU /FU#VEHFU4BWJOHT
0OMZ"DSFT*OTVSFE
JO
"MM1MBOUFE"DSFT "0 6OEFSXSJUJOH
Gains
0OMZ"DSFT
Insured in
"MM1MBOUFE
Acres
$ million
#BSMFZ
$BOPMB
$PSO
$PUUPO
Grain Sorghum
Rice
Soybeans
Sunowers
Wheat
Total
5PUBMXJUI64%"QBZJOHBENJOGFF
5PUBMXJUIGBSNFSQBZJOHBENJOGFF
Table 3. Net Budget Savings from Free Yield Insurance
Farmer Value of Free YP /FU$IBOHFJO7BMVFUP'BSNFST
0OMZ"DSFT*OTVSFE
JO
"MM
Planted Acres
$VSSFOU
Value of
Premium
Subsidy
0OMZ"DSFT
*OTVSFEJO
"MM1MBOUFE"DSFT
$ million $ million
#BSMFZ
$BOPMB
$PSO
$PUUPO
Grain Sorghum
Rice
Soybeans
Sunowers
Wheat Total
Table 2. Impact on Farmers of a Free Yield Protection Policy
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GIVING IT AWAY FREE21
CVZJOTVSBODF$MFBSMZBQFSDFOUZJFMEJOTVSBODFQPMJDZQSPWJEFTWBMVBCMFSJTLQSPUFDUJPO
#VUUIJTJODSFBTFJOWBMVFUPGBSNFSTSFQSFTFOUTBDPTUUPUBYQBZFST)PXDBOUBYQBZFSTTBWFNPOFZJGUIFDPTUP
UIFGSFFZJFMEJOTVSBODFFYDFFETUIFDPTUPGFYJTUJOHQSFNJVNTVCTJEJFT5BCMFQSPWJEFTUIFBOTXFS
5IFDPMVNOTTIPXJOHUIFOFUDPTUPGGSFFJOTVSBODFJO5BCMFEFNPOTUSBUFUIBUUIFGBSNFSTOFUHBJOGSPN
5BCMFXPVMESFQSFTFOUBOFUDPTUUPUIFGFEFSBMCVEHFU5IFSFXPVMECFPGGTFUUJOHTBWJOHTIPXFWFSGSPN
FMJNJOBUJOHDVSSFOU"0FYQFOTFTCFDBVTFBHFOUTXPVMEOPUHFUMBSHFDPNNJTTJPOTUPTFMMGBSNFSTUIJTCBTF
level of protection. Farmers would simply sign up for it. And companies would not need large underwriting
gains because this basic yield insurance policy would be backed by the federal treasury, presumably through
UIF$PNNPEJUZ$SFEJU$PSQPSBUJPOVOEFSUIFGBSNCJMM5IFDPMVNOTTIPXJOHUIFSFEVDUJPOJOEFMJWFSZDPTUT
HJWFFTUJNBUFTPGUIFTBWJOHTJOBWFSBHFVOEFSXSJUJOHHBJOTBOEBENJOJTUSBUJWFBOEPQFSBUJOH"0FYQFOTFT
VTJOHEBUB5PUBM"0JTFTUJNBUFEBUCJMMJPOGPSUIFDSPQTBOBMZ[FEIFSF"0FYQFOTFTBSFDBQQFE
CZ64%"BUCJMMJPOGPSBMMJOTVSFEDSPQT6OEFSXSJUJOHHBJOTBSFDPOTFSWBUJWFMZFTUJNBUFEBUQFSDFOUPG
QSFNJVNGPSCBSMFZBOEDBOPMBQFSDFOUGPSDPSOTPZCFBOTBOESJDFQFSDFOUGPSDPUUPOQFSDFOUGPSHSBJO
TPSHIVNQFSDFOUGPSTVOPXFSBOEQFSDFOUGPSXIFBU
5IFUPUBMTBWJOHTPOVOEFSXSJUJOHHBJOTBOE"0POJOTVSFEBDSFTJO5BCMFXPVMECFCJMMJPOXIJDIJT
HSFBUFSUIBOUIFBEEJUJPOBMUBYQBZFSDPTUJOFYDFTTPGQSFNJVNTVCTJEJFTPGQSPWJEJOHGSFFZJFMEJOTVSBODF
If the free insurance were provided to all acres planted with these crops, the savings on underwriting gains and
"0XPVMEGBMMTIPSUPGUIFDPTUPGGSFFJOTVSBODFCZNJMMJPOBZFBS*GPOFUIFOBEETJOBUBYQBZFSQBJE
QFSDFOUBENJOJTUSBUJWFGFFUIFOBMFTUJNBUFPGTBWJOHTPOBDSFTJOTVSFEJOJTNJMMJPOBZFBS*OTVSJOH
BMMQMBOUFEBDSFTXPVMEDPTUNJMMJPOBZFBS
5BCMFT BOE TIPXUIBUCPUIUBYQBZFST BOE GBSNFSTXPVME CFCFUUFSPGG JGUIF DVSSFOUTZTUFN PGQSFNJVN
TVCTJEJFTSFJOTVSBODFBHSFFNFOUTBOE"0FYQFOTFSFJNCVSTFNFOUXFSFTDSBQQFEBOESFQMBDFEXJUIBTJNQMF
GBSNTBGFUZOFUQSPHSBNUIBUQSPWJEFEGBSNFSTXJUIBGSFFQFSDFOUZJFMEJOTVSBODFQPMJDZBENJOJTUFSFEEJSFDUMZ
CZ64%"*GUIFGSFFJOTVSBODFXFSFFYUFOEFEUPBMMGBSNFSTBOEBNPEFTUGFFXFSFDIBSHFEUIJTQSPHSBNDPVME
be run at a modest net cost to taxpayers.
That taxpayers could come out ahead or at least break even when crop insurance is given away for free shows
IPX NVDI EFMJWFSZDPTUT BEE UPUIF FYQFOTF PGUIF DVSSFOU DSPQJOTVSBODF TZTUFN 'JHVSF BMMPDBUFT DSPQ
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JOTVSBODFQSPHSBNDPTUT JOUP UIPTF UIBU BDDSVF XIFOJOTVSBODFQBZPVUT FYDFFE GBSNFSQBJE QSFNJVNT OF
farmer indemnities) and the subsidies paid to the crop insurance industry to deliver the program. In ve of the
MBTUZFBSTUIFDPTUPGEFMJWFSJOHDSPQJOTVSBODFFYDFFEFEOFUGBSNFSJOEFNOJUJFT0WFSUIFFOUJSFZFBST
OFUJOEFNOJUJFTQBJEUPGBSNFSTUPUBMFECJMMJPO5IF DPTUPGEFMJWFSJOHUIFTFJOEFNOJUJFTUPUBMFE
CJMMJPONFBOJOHUIBUJUDPTUBCPVUBEPMMBSUPEFMJWFSFBDIEPMMBSPGOFUQBZPVUTUPGBSNFST#FDBVTFPGUIFTFIJHI
delivery costs, the proposed alternative system of giving away insurance makes nancial sense.
"DUVBMDSPQJOTVSBODFEBUBXFSFVTFEIFSFUPFTUJNBUFUIFDPTUTPGNPWJOHUPBGSFFZJFMEJOTVSBODFQSPHSBN
BTUIFDPSFPGUIFUBYQBZFSGVOEFETBGFUZOFU#VUTJODFPOMZB TNBMMQSPQPSUJPOPGGBSNFSTDVSSFOUMZCVZZJFME
JOTVSBODFMBSHFTBNQMFTFMFDUJPOQSPCMFNTDPVMEBSJTFJG GBSNFSTXIPCPVHIU:1BU UIFQFSDFOUDPWFSBHF
Figure 7. Allocation of Crop Insurance Program Costs
billion
$
0
1.0
2.0
3.0
4.0
5.0
6.0
2011
2010
2009
20082007
2006
2005
2004
2003
2002
2001
Subsidies to Industry
Net Indemnity Paid to Farmers
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MFWFMJOIBWFEJGGFSFOUSJTLQSPMFTUIBOUIPTFXIPCPVHIU31$POHSFTTDBMDVMBUFTUIFDPTUPGQSPHSBN
VTJOH$POHSFTTJPOBM#VEHFU0GDF$#0CBTFMJOFCVEHFUQSPKFDUJPOTXIJDIBSFCBTFEPOZFBSQSFEJDUJPOT
PGDPNNPEJUZQSJDFTBOEQMBOUFEBDSFBHF$BMDVMBUJOHUIFDPTUTPG31VTJOHUIFTFQSPKFDUJPOTQSPEVDFTWFSZ
EJGGFSFOUOVNCFSTUIBOUIFBDUVBMDPTUTPG31JOCFDBVTFQMBOUFEBDSFBHFOVNCFSTBOEQSJDFMFWFMTXJMMCF
EJGGFSFOU5IFOFYUTFDUJPOVTFT$#0CBTFMJOFEBUBUPFTUJNBUFUIFDPTUTPGGSFFDSPQJOTVSBODFQSPHSBNJO
in order to make those estimates more comparable to competing farm bill proposals.
Costs of Free Crop Insurance Based on CBO Projections
5IFNPEFMVTFEUPQSPKFDUDPTUTPGGSFFDSPQJOTVSBODFJTCBTFEPODVSSFOU3."QSFNJVNSBUFTGPSZJFMEQSPUFDUJPO
YP premiums also serve as the foundation for RP premium rates. The model simulates farm yield variability by
using the fact that yield can be dened as average yield in that county in a given year, plus a deviation. The
National Agricultural Statistics Service (NASS) collects long histories of county yields that provide a measure o
DPVOUZZJFMEWBSJBCJMJUZ5IFNPEFMTPMWFTGPSUIFFYUSBBNPVOUPGGBSNMFWFMWBSJBCJMJUZOFFEFEUPCFDPOTJTUFOU
XJUIUIFBNPVOUPGUPUBMZJFMEWBSJBCJMJUZJNQMJFECZ3."QSFNJVNSBUFT5IJTQSPDFEVSFXBTEPOFGPSFBDIDSPQ
county combination. The extra amount of variability is calculated for every county that: has adequate amounts o
/"44ZJFMEIJTUPSZIBESFQPSUFEQMBOUFEBDSFBHFJOBOEIBEBDSPQJOTVSBODFSBUFSFQPSUFECZ3."5IF
BNPVOUPGQMBOUFEBDSFBHFJOGPSUIFDPVOUJFTJOUIFNPEFMJTHSFBUFSUIBOQFSDFOUGPSJODMVEFEDSPQT
oDPSOTPZCFBOTDPUUPOSJDFBOEXIFBU5IFTFDSPQTBDDPVOUGPSNPSFUIBOQFSDFOUPGQMBOUFEBOEJOTVSFE
BDSFBHFPGUIFFJHIUDSPQTBOBMZ[FEJOUIFQSFWJPVTTFDUJPO
The model simulates price variability using techniques that are similar to those used to calculate premiums for
311SPKFDUFEQSJDFTGPSFBDIDSPQBSFTFUFRVBMUP$#0T.BSDICBTFMJOFQSPKFDUJPOTPGBWFSBHFQSJDF1SJDF
WPMBUJMJUZJTTFUBUMFWFMTVTFEUPTFUQSFNJVNSBUFTGPS31JO1MBOUFEBDSFBHFJTTFUVTJOH$#0CBTFMJOF
QSPKFDUJPOT5BCMF
5BCMFTIPXTUIFNPEFMTFTUJNBUFPGXIBUGSFFZJFMEJOTVSBODFBUUIFQFSDFOUDPWFSBHFMFWFMXPVMEDPTUJGJ
XFSFQSPWJEFEPOMZUPBDSFTUIBUXFSFJOTVSFEJODPMVNOPSQSPWJEFEUPFWFSZQMBOUFEBDSFDPMVNO
5IFTFDPTUFTUJNBUFTBSFTJHOJDBOUMZMPXFSUIBOUIPTFTIPXOJO5BCMFCFDBVTFUIFQSJDFTVTFECZ$#0
BSFTJHOJDBOUMZMPXFSUIBOUIFQSJDFTVTFEUPTFUDSPQJOTVSBODFHVBSBOUFFTJO5IF5BCMFDPTUTBSF
based on the assumption that the free insurance would be given to farmers on an optional unit basis, which
NFBOTUIBUGBSNFSTFMETXPVMECFJOTVSFEFMECZFME
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If instead, the free insurance were provided on an enterprise unit basis, in which all of a farmers elds of the
same crop in a given county were pooled together as a single insurance unit, costs would be lower, because a
QPPMFEFOUFSQSJTFVOJUJTMFTTDPTUMZUPJOTVSFUIBOJOEJWJEVBMFMET$BMDVMBUJOHUIFDPTUSFEVDUJPOGPSFOUFSQSJTF
unit coverage rather than optional unit coverage would require data on the geographical distribution of farms
NBOBHFECZJOEJWJEVBMPQFSBUPST0QFSBUJPOTUIBUXFSFRVJUFEJTQFSTFEXPVMECFMFTTDPTUMZUPJOTVSFUIBOUIPTF
UIBUXFSFDPODFOUSBUFEJOBTNBMMFSBSFB4VDIEBUBEPOPUMJLFMZFYJTUFYDFQUQFSIBQTJO'4"BOE3."EBUBCBTFT
UIBUBSFOPUBDDFTTJCMF*OTUFBE3."TFOUFSQSJTFVOJUQSFNJVNEJTDPVOUTBSFVTFE3FQSFTFOUBUJWFEJTDPVOUTBSF
TIPXOJO5BCMFGPSTQFDJDMPDBUJPOT
#FDBVTF MBSHFGBSNT BSF MJLFMZ UPCF NPSFEJTQFSTFEUIBOTNBMM GBSNT BOE B MBSHFQSPQPSUJPO PGBDSFBHFJT
located on large farms, it is likely that a fairly high percentage of acreage would qualify for an enterprise unit
EJTDPVOU5PCFDPOTFSWBUJWFPOMZQFSDFOUPGBDSFBHFJTBTTVNFEUPCFMPXFSSJTLUIBOUIBUBTTVNFEJOUIF
5BCMFDPTUFTUJNBUFT5IFFTUJNBUFEDPTUTPGUIFGSFF:1QPMJDZBUUIFFOUFSQSJTFVOJUBSFTIPXOJO5BCMF
Providing the free YP policy at the enterprise rather than the optional unit level would result in important
environmental benets as well as cost savings. Insuring acreage with optional units allows farmers with
environmentally sensitive land that is susceptible to crop losses to transfer yield histories from their more
productive land to the higher risk land, thus giving the marginal land a high insurance guarantee that makes
the land protable to cultivate. If farmers were forced to insure this marginal land together with their more
productive land, they would base cultivation decisions on the inherent productivity of the land rather than on the
ability to collect a crop insurance indemnity.
1SPKFDUFE1SJDF Price Volatility .JMMJPOTPG1MBOUFE"DSFT
$PSO CV
$PUUPO MC
Rice MC
Soybeans CV
Wheat CV
Table 4. Data Used in Model Simulations
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GIVING IT AWAY FREE25
$#0QSPKFDUTUIBUUIFDVSSFOUDSPQJOTVSBODFQSPHSBNJOJUTFOUJSFUZDPTUTBCPVUCJMMJPOBZFBS5IFDPT
FTUJNBUFTQSPWJEFEJO5BCMFTBOEBSFOPUEJSFDUMZDPNQBSBCMFUPUIJTCJMMJPOQSPKFDUJPOIPXFWFSCFDBVTF
only ve crops are accounted for and the costs of administering a free crop insurance program are not included
5BCMFBMMPXTB NPSFEJSFDUDPNQBSJTPOPG$#0QSPKFDUJPOTBOEUIJTTUVEZTTBWJOHTFTUJNBUFTGPSWFNBKP
DSPQT1SFNJVNTVCTJEJFTXPVMECFSFEVDFECZCJMMJPO"0FYQFOTFTXPVMECFSFEVDFECZCJMMJPO
BOE VOEFSXSJUJOH HBJOTXPVME CFSFEVDFECZ CJMMJPOGPS B UPUBMTBWJOHTPG CJMMJPO 5IFTFSFTVMU
TVHHFTUUIBUUIFTFWFDSPQTBDDPVOUGPSQFSDFOUPGUIF$#0QSPKFDUJPOPGUIFUPUBMDPTUPGUIFDSPQJOTVSBODF
program. This likely underestimates the savings that would accrue from a free YP program, because these
veDSPQTBDUVBMMZBDDPVOUFEGPSQFSDFOUCJMMJPOPGUIFUPUBMQSFNJVNTDPMMFDUFEJO*GUIFDPTUP
64%"JNQMFNFOUBUJPOJTDMPTFUPUIFNJMMJPOFTUJNBUFEJOUIF'4"DPNNJTTJPOFETUVEZUIFUPUBMTBWJOHT
0OMZ*OTVSFE"DSFT All Planted Acres
billion $
$PSO
$PUUPO
Rice Soybeans
Wheat
Total
/PUF*OTVSFEBDSFTGPSFBDIDSPQTUBUFDPNCJOBUJPOXBTTFUFRVBMUPUIFTIBSFPGQMBOUFEBDSFTGPSFBDIDSPQUIBU
XBTJOTVSFEGPSFBDITUBUFNVMUJQMJFECZTUBUFBDSFTTUBUFBDSFTGPSFBDIDSPQXBTTFUFRVBMUP$#0BDSFBHF
GSPN5BCMFNVMUJQMJFECZUIFTUBUFTIBSFPGOBUJPOBMBDSFBHFGPSFBDIDSPQJO
Table 5. Cost Estimates of Free YP Coverage in 2013 for Optional Units
$SPQ Location 1SFNJVN%JTDPVOU
$PSO #PPOF$PVOUZ*PXB
$PUUPO -VCCPDL$PVOUZ5FYBT
Rice "SLBOTBT$PVOUZ"SLBOTBT
Soybeans $IBNQBJHO$PVOUZ*MMJOPJT
Wheat #VUMFS$PVOUZ,BOTBT
Wheat $BTT$PVOUZ/PSUI%BLPUB
4PVSDF3."QSFNJVNDBMDVMBUPS
Table 6. Enterprise Premium Discounts for Select Locations
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DPNFUPCJMMJPO*GGBSNFSTBSFDIBSHFEBOPNJOBMGFFUPDPWFSUIFTFDPTUTUIFUPUBMTBWJOHTDPNFUP
billion a year.
(JWJOHBXBZGSFFJOTVSBODFBOENPWJOHQSPHSBNBENJOJTUSBUJPOUP64%"XPVMEHFOFSBUFTVCTUBOUJBMTBWJOHT
VOMFTTPQUJPOBMVOJUDPWFSBHFXBTFYUFOEFEUPBMMQMBOUFEBDSFT5BCMFTVNNBSJ[FTUIFTBWJOHTUIBUXPVME
CFBDIJFWFECZPGGFSJOHBGSFFFOUFSQSJTFVOJU:1QPMJDZUPGBSNFST5IFZFBSTBWJOHTXPVMEUPUBMCJMMJPO
JGFOUFSQSJTFVOJUDPWFSBHFXFSFFYUFOEFEUPBMMQMBOUFEBDSFTGPSUIFTFDSPQT5IFTBWJOHTXPVMEFRVBM
CJMMJPOJGUIFGSFFFOUFSQSJTFVOJUQPMJDZPOMZDPWFSFEBDSFTUIBUXFSFJOTVSFEJO$IBSHJOHGBSNFSTBOPNJOB
GFFUPDPWFSEFMJWFSZDPTUTXPVMEJODSFBTFUIFTBWJOHTTIPXOJO5BCMFUPCFUXFFOBOECJMMJPO
depending on how many acres were covered by the free policy.
Policy Implications
Farmers and Taxpayers are Better Off
The idea that both farmers and taxpayers could be better off under a free crop insurance program rather than
QSPWJEJOHJOTVSBODFQSPUFDUJPOUISPVHIUIFDVSSFOUTZTUFNJTOPUOFX1BVMTPOBOE#BCDPDLTIPXFE
that a permanent disaster program based on a county revenue insurance program would cost about the same
BTXBTCFJOHTQFOUPOBQFSJOTVSFEBDSFCBTJTPO (SPVQ3JTL*ODPNF1SPUFDUJPO5IFJEFBUIBUDPNNPEJUZ
QSPHSBNTBENJOJTUFSFEEJSFDUMZCZ64%"DPVMECFCBTFEPOJOTVSBODFQSJODJQMFTJTBMTPOPUOFX5IF"NFSJDBO
'BSN#VSFBV'FEFSBUJPOQSPQPTFEBDPVOUZCBTFESFWFOVFJOTVSBODFQSPHSBNBTBGBSNCJMMPQUJPOJO
5IF"WFSBHF$SPQ3FWFOVF&MFDUJPO"$3&QSPHSBNFTUBCMJTIFEJOUIFGBSNCJMMJTBTUBUFMFWFMSFWFOVF
0OMZ*OTVSFE"DSFT All Planted Acres
billion $
$PSO
$PUUPO
Rice Soybeans
Wheat
Total
Table 7. Cost Estimates of Free Enterprise Unit YP Coverage in 2013
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GIVING IT AWAY FREE27
JOTVSBODF QSPHSBN $VSSFOUMZ DPUUPO QSPEVDFST BSF QSPQPTJOH B DPVOUZCBTFE SFWFOVF JOTVSBODF QSPHSBN
DBMMFE45"9GPSUIFGBSNCJMM5IF/BUJPOBM.JML1SPEVDFST'FEFSBUJPOJTQSPQPTJOHBNJMLNBSHJOJOTVSBODF
program that would be administered through FSA. And, nally, the Supplemental Revenue Assistance Payments
1SPHSBN463&XBTJODMVEFEJOUIFGBSNCJMMBTBQFSNBOFOUEJTBTUFSBTTJTUBODFQSPHSBNCBTFEPOXIPMF
farm insurance principles.
Premium Subsidies "0 Underwriting Gains Total
billion $
$PSO
$PUUPO
Rice
Soybeans
Wheat
Total
5PUBMXJUIDBQPO"0
5PUBMXJUI64%"QBZJOHBENJOJTUSBUJWFDPTUT
Total with farmer paying administrative costs
Table 8. Projected Budget Savings in 2013 from Moving to Free Yield Insurance
Farmers Pay No Fee Farmers Pay a Nominal Fee
billion $
Annual Net Savings
0OMZ$VSSFOUMZ*OTVSFE"DSFT
All Planted Acres
10 year Savings
0OMZ$VSSFOUMZ*OTVSFE"DSFT
All Planted Acres
/PUFZFBSTTBWJOHTBQQSPYJNBUFECZNVMUJQMZJOHUIFBOOVBMTBWJOHTGPSCZ
Table 9. Net Budget Savings from Free Crop Insurance Program
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8IBU463&"$3&45"9BOEUIFQSPQPTBMTPGUIF"NFSJDBO'BSN#VSFBV'FEFSBUJPOBOEUIFNJMLQSPEVDFSTBM
have in common is that they leave the current crop insurance program in place. The problem with this approach
is that it becomes difcult to nd the savings needed to meet decit reduction targets or to pass any new safety
net program. In addition, it would be a mistake to conclude that the lack of proposals to replace the current
system with a new approach shows that the industry is efciently delivering a farm safety net. After all, a system
that costs a dollar to deliver a dollar of benets is hardly efcient. The reality is that it is the lobbying power of
the crop insurance industry that stands in the way of reform proposals. If the insurance were simply given away
as part of farm bill reform, the crop insurance industry would have to reinvent itself, cutting costs and becoming
NPSFDSFBUJWFUPTVSWJWFJOBOVOTVCTJEJ[FEXPSME/PJOEVTUSZUIBUJTDVSSFOUMZNBLJOHTPNVDINPOFZXJMM
willingly accept such change, and it will lobby with all its might to prevent this from happening.
5IFGBDUSFNBJOTUIBUBTJNQMFQSPQPTBMUPHJWFGBSNFSTBQFSDFOU:1QPMJDZBTUIFUBYQBZFSGVOEFEQPSUJPOPG
UIFTBGFUZOFUXPVMEBDDPNQMJTIBOVNCFSPGQPMJDZPCKFDUJWFT
t *UXPVMEQSPWJEFBQFSNBOFOUGBSNMFWFMEJTBTUFSQSPHSBNUIBUXPVMEDPWFSQFSDFOUPGQMBOUFEBDSFBHF
BOEQFSDFOUPGZJFMEMPTTFTJOFYDFTTPGQFSDFOU5IJTJTCFUUFSQSPUFDUJPOUIBONBOZGBSNFSTOPXIBWF
t *UXPVMEOPUTJHOJDBOUMZEJTUPSUQMBOUJOHEFDJTJPOTCFDBVTFPGUIFQFSDFOUEFEVDUJCMFBOEUIFMBDLPGB
price trigger.
t *UXPVMEFMJNJOBUFUIFOFFEGPS BOFMBCPSBUFQSFNJVNSBUJOHTUSVDUVSFBOETIPSUDJSDVJUBSHVNFOUTBCPV
whether crop insurance rates are too high or too low, because there would be no premiums to pay.
t &OUFSQSJTFVOJUDPWFSBHFXPVMEMPXFSUIFJODFOUJWFUPGBSNIJHISJTLFOWJSPONFOUBMMZTFOTJUJWFMBOECFDBVTF
such land would have to be pooled with more productive farmland.
t It would contribute towards decit reduction.
Private Sector Options to Enhance Risk Management
4PNFXJMMVOEPVCUFEMZBSHVFUIBUQFSDFOUZJFMEJOTVSBODFQSPWJEFTBOJOBEFRVBUFTBGFUZOFUGPSGBSNFST
As evidence, they will point to the popularity of RP and higher levels of coverage that many farmers currently
QVSDIBTF'BSNHSPVQTIBWFBMTPDSJUJDJ[FEQSPQPTBMTGPSSFGPSNJOHDSPQJOTVSBODFTVCTJEJFTCZBSHVJOHUIBUUIFZ
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GIVING IT AWAY FREE29
would not be able to afford high levels of coverage without taxpayer help.
However, the current popularity of RP and high coverage levels is not credible evidence that farmers need more
risk protection, because farmers are buying much of this additional coverage with taxpayer dollars, not their
own. It is fundamental tenet in economics that people have an insatiable appetite for products they can buy
with someone elses money. When the subsidies are eliminated, what once was considered a necessity no longe
TFFNTTPJNQPSUBOUBOEEFNBOETISJOLTTVCTUBOUJBMMZ.BOZGBSNFSTXPVMEOEUIBUUIFZDPVMEHFUCZPONVDI
less insurance if they knew that they had to pay the full price themselves. There is no credible evidence in the
academic literature that high levels of coverage are necessary for individual farmers and the agricultural secto
as a whole to thrive. What the research does show is that the demand for high insurance coverage is more about
the pursuit of subsidies than protection against risk.
8IZTIPVMEJUCFUBYQBZFSTSFTQPOTJCJMJUZUPTVCTJEJ[FHFOFSPVTJOTVSBODFDPWFSBHF'BSNFSTXIPUSVMZWBMVF
NPSFUIBOQFSDFOUZJFMEDPWFSBHFTIPVMEUVSOUPUIFQSJWBUFTFDUPSBOEQBZXJUIUIFJSPXONPOFZ1SPWJEJOH
TVCTJEJFTGPSIJHIDPWFSBHFJNQMJFTUIBU$POHSFTTLOPXTCFUUFSUIBOGBSNFSTIPXNVDISJTLQSPUFDUJPOUIFZ
SFBMMZOFFE6OEFSUIFQSPQPTFEGSFFJOTVSBODFQSPQPTBMQSJWBUFDPNQBOJFTXPVMECFGSFFUPPGGFSiBEEPOw
policies that provide higher coverage or effective revenue protection, and growers would be free to decide if
they were worth the cost.
Revenue protection policies are especially popular because they increase the amount of guaranteed revenue
JGUIFQSJDFBUIBSWFTUJTIJHIFSUIBOUIFQSPKFDUFEQSJDFBUUIFUJNFGBSNFSTTJHOFEVQGPSUIFJOTVSBODFCFGPSF
planting. This increased protection increases farmers insurance payouts if a farmer has a yield loss. This additiona
QSPUFDUJPOJTTJNJMBSUPBDBMMPQUJPOPOBGVUVSFTDPOUSBDU$BMMPQUJPOTHJWFBGBSNFSUIFSJHIUUPCVZBGVUVSFT
contract. If a farmer buys a call option in the springtime and prices later rise, then the holder of the call option
has the right to buy futures contract at the lower springtime price. Thus call options protect a farmer who does
not have enough crop to meet the obligations of the futures contract. Without the call option, the farmer would
IBWFUPCVZBEEJUJPOBMCVTIFMTBUUIFIJHIIBSWFTUQSJDFUPGVMMMUIFGVUVSFTDPOUSBDU$BMMPQUJPOTTFFNFYQFOTJWF
UPNBOZGBSNFSTCVUJUJTOPUBTUSFUDIUPJNBHJOFUIFEFWFMPQNFOUPGBQSJWBUFBEEPOQSPEVDUUIBUQBZTPGGPO
the call option only there is a yield loss. This would lower the cost of the option signicantly.
'BSNFSTXIPCVZ31QPMJDJFTBMTPFOKPZQSPUFDUJPOBHBJOTUQSJDFESPQT#VUBGBSNFSJTBMSFBEZQSPUFDUFEBHBJOTU
QSJDFESPQTPODFIFPSTIFFOUFSTJOUPBGPSXBSEPSGVUVSFTDPOUSBDU"GUFSBMMPOMZGBSNFSTXIPGPSXBSEDPOUSBD
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their crop obtain risk management benets (as opposed to prot increases) from the extra risk protection offered
CZ31'BSNFSTXIPEPOPUGPSXBSEDPOUSBDUDBOQSPUFDUBHBJOTUQSJDFESPQTCZCVZJOHQVUPQUJPOT"QVUPQUJPO
gives the holder the right to sell a futures contract. If the harvest price drops and farmer bought a put option in
the springtime, he can sell at the higher springtime price, thus protecting against the price drop.
4PNFPGUIFTFQSJWBUFTFDUPSBMUFSOBUJWFTFYJTUOPXBOENBOZNPSFXPVMEQSFTVNBCMZCFEFWFMPQFEJGUIF
QSJWBUFTFDUPSEJEOPUIBWFUPDPNQFUFBHBJOTUIFBWJMZTVCTJEJ[FEDSPQJOTVSBODFQSPEVDUT#VUBTXJUIBMMQSJWBUF
TFDUPSUSBOTBDUJPOTUIFCVZFSXPVMEIBWFUPQBZUIFGVMMDPTUPGUIFQSPEVDU5PFTUJNBUFUIFMJLFMZDPTUPGBEEPO
QPMJDJFT5BCMFTIPXTXIBUBGBSNFSXPVMEQBZGPSBOEQFSDFOUDPWFSBHFPG31BOE:1POUPQPGUIF
GSFFQFSDFOU:1DPWFSBHFJODMVEJOHBQFSDFOUNBSLVQUPDPWFSBENJOJTUSBUJWFDPTUTBOEQSPU4QSJOHUJNF
QSJDFTMFWFMTBSFCBTFEPOUIF$#0MFWFMT'PSDPNQBSJTPOUIFQSPKFDUFEDPTUPGCVZJOHFBDIMFWFMP
coverage under the current system of premium subsidies is also shown.
5IFSPXTMBCFMFEi1SJWBUF"EEPOwTIPXUIFQSJWBUFTFDUPSDPTUTGPSBEEJUJPOBMDPWFSBHFGPSFBDIDSPQ5IJTJT
the incremental cost of providing the indicated type of coverage (RP or YP) at that coverage level. In the Iowa
DPSOFYBNQMFZJFMEDPWFSBHFBUQFSDFOUBHFQPJOUTBCPWFUIFGSFFQFSDFOU:1QPMJDZFRVJWBMFOUUPBCPV
CVTIFMTPGFYUSBDPWFSBHFXPVMEDPTUQFSBDSF31UZQFDPWFSBHFBUUIJTQFSDFOUDPWFSBHFMFWFMXPVME
DPTUQFSBDSFBGUFSDSFEJUGPSUIFQFSDFOU:1DPWFSBHF5IFSPXTMBCFMFEi$VSSFOUwTIPXUIFFTUJNBUFE
DPTUTPGFBDIDPWFSBHFPQUJPOVOEFSUIFDVSSFOUQSFNJVNTVCTJEZTUSVDUVSF5IF*PXBDPSOGBSNFSXPVME
QBZQFSBDSFBUQSJDFMFWFMTGPSQFSDFOU31DPWFSBHF5IJTJTQFSBDSFMFTTUIBOUIFQSJWBUFTFDUPS
QFSBDSFBEEPODPTUGPSTJNJMBSQSPUFDUJPO
5BCMFTIPXTUIBUGPSUIFMPXFSSJTLDSPQToDPSOTPZCFBOTBOESJDFo CVZJOH31UZQFDPWFSBHFPOUPQPGB
QFSDFOU:1QPMJDZXPVMECFNPSFFYQFOTJWFUIBOXIBUUIFZDVSSFOUMZQBZ*ODPOUSBTUUIFDPTUPG31UZQF
DPWFSBHF GPS XIFBU BOE DPUUPO XPVME CFNVDI MPXFS 5IF EJGGFSFODF SFFDUT UIF WBMVF PG QFSDFOU ZJFME
QSPUFDUJPO*OMPXSJTLDPVOUJFTUIFWBMVFPGBQFSDFOU:1QPMJDZJTNVDIMPXFSUIBOJOIJHISJTLDPVOUJFT5IJT
lower value translates into a lower credit that is used to offset the cost of additional protection.
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GIVING IT AWAY FREE31
Conclusions
5IFMJLFMJIPPEPGXIPMFTBMFSFGPSNPGUIFDSPQJOTVSBODFQSPHSBNEVSJOHUIFGBSNCJMMSFBVUIPSJ[BUJPO
BMPOHUIF MJOFTTVHHFTUFEJOUIJTTUVEZNBZTFFNSFNPUF#JHDIBOHFTEPOPUDPNFTVEEFOMZUPBHSJDVMUVSB
programs. A signi
cant amount of money has been invested in crop insurance companies in anticipation ocontinued public subsidies, and crop insurance agents, whose income has risen sharply in the last ve years
OPXIBWFTVCTUBOUJBMMZHSFBUFSQPMJUJDBMBOEMPCCZJOHQPXFS#VUFWFOUVBMMZUIFBCTVSEJUZPGUIFDVSSFOUTZTUFN
XIJDITVCTJEJ[FTGBSNFSTUPCVZNVDINPSFJOTVSBODFUIBOUIFZXPVMEJGUIFZQBJEGPSJUXJUIUIFJSPXONPOFZ
and which costs a dollar to deliver each dollar of benets, will eventually result in change, particularly in the face
Yield Protection Revenue Protection
$ per acre
*PXB$PSO1SJWBUF"EEPO
$VSSFOU
5FYBT$PUUPO
1SJWBUF"EEPO
$VSSFOU
Illinois Soybeans
1SJWBUF"EEPO 7
$VSSFOU
/PSUI%BLPUB8IFBU
1SJWBUF"EEPO $VSSFOU
,BOTBT8IFBU
1SJWBUF"EEPO
$VSSFOU
Arkansas Rice
1SJWBUF"EEPO
$VSSFOU
a1SJWBUFBEEPODPTUTBSFDBMDVMBUFECZTJNVMBUJOHUIFUPUBMDPTUPGUIFDPWFSBHFTVCUSBDUJOHUIFWBMVFPGUIFGSFF
QFSDFOUZJFMEJOTVSBODFBOEUIFONBSLJOHVQUIFSFTVMUCZQFSDFOU$VSSFOUDPTUTFRVBMUIFTJNVMBUFEUPUBMDPTUPGUIF
product minus the current amount of premium subsidy available.
Table 10. Cost of Alternative Amounts of Risk Protectiona
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&/7*30/.&/5"-803,*/((306132
www.ewg.org "QSJM
of mounting demands for decit reduction.
The need to nd funds to pay for new commodity programs and the other farm bill titles is one reason to
hope that crop insurance reform may be at hand. Although proposals for new revenue insurance programs in
UIFGBSNCJMMXPVMEBEEUPDVSSFOUDSPQJOTVSBODFQSPHSBNTOPUSFQMBDFUIFNUIFZDPVMEDFSUBJOMZCF
revised to provide a direct substitute. For example, the STAX program for cotton could be altered to provide
UP QFSDFOU DPVOUZMFWFM SFWFOVF JOTVSBODF DPWFSBHF&MJNJOBUJOH DVSSFOU QSFNJVNTVCTJEJFT GPS DPUUPO
JOTVSBODFQPMJDJFTDPVMEDPWFSUIFDPTU4FO,FOU$POSBETOFXTIBMMPXMPTTSFWFOVFJOTVSBODFQSPQPTBMDPVME
CFBMUFSFEUPQSPWJEFZJFMEDPWFSBHFGSPNUPQFSDFOUSBUIFSUIBOSFWFOVFDPWFSBHFGSPNUPQFSDFOU
As demonstrated here, its cost could also covered by eliminating crop insurance premium subsidies.
*UNBLFTOPTDBMPSFDPOPNJDTFOTFGPS$POHSFTTUPCFDPOTJEFSJOHOFXJOTVSBODFUZQFDPNNPEJUZQSPHSBNT
UPQMBDFPOUPQPGUIFDVSSFOUFYUSFNFMZDPTUMZDSPQJOTVSBODFQSPHSBN*G$POHSFTTUSVMZXBOUTUPQVUBTUSPOH
farm safety net in place and make prudent scal choices, it should scrap the current system of premium subsidies
EFMJWFSBCBTJDMFWFMPGSJTLQSPUFDUJPOEJSFDUMZUISPVHI64%"BOEMFUUIFQSJWBUFTFDUPSEPXIBUUIFQSJWBUFTFDUPS
does best: deliver products that generate enough value to induce customers to buy them.
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GIVING IT AWAY FREE33
REFERENCES
#BCDPDL#"i5IF1PMJUJDTBOE&DPOPNJDTPGUIF64$SPQ*OTVSBODF1SPHSBNw1BHFTJO;JWJO+BOE+.1FSMPGG5IF
*OUFOEFEBOE6OJOUFOEFE$POTFRVFODFTPG64"HSJDVMUVSBMBOE#JPUFDIOPMPHZ1PMJDZBOE1PMJUJDBM/BUJPOBM#VSFBVPG&DP
OPNJDT3FTFBSDI6OJWFSTJUZPG$IJDBHP1SFTT
(PPEXJO#,i"O&NQJSJDBM"OBMZTJTPGUIF%FNBOEGPS.VMUJQMF1FSJM$SPQ*OTVSBODF"NFSJDBO+PVSOBMPG"HSJDVMUVSBM&DP
OPNJDT
+VTU3&$BMWJO-BOE2VJHHJO+i"EWFSTF4FMFDUJPOJO$SPQ*OTVSBODF"DUVBSJBMBOE"TZNNFUSJD*OGPSNBUJPO*ODFOUJWFTw
"NFSJDBO+PVSOBMPG"HSJDVMUVSBM&DPOPNJDT
1BVMTPO/%BOE#BCDPDL#"i(FUB(3*14IPVME"SFB3FWFOVF$PWFSBHF#F0GGFSFE5ISPVHIUIF'BSN#JMMPSBTB
$SPQ*OTVSBODF1SPHSBNw+PVSOBMPG"HSJDVMUVSBMBOE3FTPVSDF&DPOPNJDT
FOOTNOTES
"SFDFOUQSPQPTBMCZ4FO,FOU$POSBE%/%DBMMFE3FWFOVF-PTT"TTJTUBODF1SPHSBN3-"1XPVMEEPCPUIQSPUFDUJOH
BHBJOTUBNVMUJQMFZFBSEFDMJOFJOQSJDFTBOEDPWFSJOHBQPSUJPOPGUIFDSPQJOTVSBODFEFEVDUJCMF
0OFSFBTPOGPSUIJTDIBOHFJOMBXXBTUIBUNBOZGBSNFSTPOMZCPVHIUBQFSDFOUEFEVDUJCMFQPMJDZXIJDIJTUIFTBNFUIJOH
BTCVZJOHQFSDFOUDPWFSBHF.BOZJO$POHSFTTBOEQFSIBQTUIFDSPQJOTVSBODFDPNQBOJFTXBOUFEGBSNFSTUPCVZIJHIFS
DPWFSBHFMFWFMTMPXFSEFEVDUJCMFQPMJDJFT*OUIFJSQBQFS#BCDPDL)BZFTBOE)BSUTIPXFEUIBUUIFSFBTPONBOZGBSNFST
DIPTFQFSDFOUDPWFSBHFJTUIBUJUNBYJNJ[FEUIFJSQSFNJVNTVCTJEJFTBOEUIBU64%"DIBSHFENPTUGBSNFSTNVDINPSFUIBOBEPMMBSGPSBEPMMBSTXPSUIPGJOTVSBODFGPSIJHIFSDPWFSBHF#BCDPDLTIPXFEUIBUUIFDIBOHFJOQSFNJVNTVCTJEZTUSVDUVSF
IFMQFEDPNQFOTBUFGPSUIJTPWFSDIBSHJOHMFBEJOHNBOZNPSFGBSNFSTUPCVZIJHIFSDPWFSBHF5IFJSPOZJTUIBU$POHSFTTIBT
OPUSFTDJOEFEUIFOFXQSFNJVNTVCTJEZTUSVDUVSFFWFOUIPVHI64%"DIBOHFEUIFXBZJUDBMDVMBUFTQSFNJVNSBUFTJOUIFNJE
TTPUIBUOPXQSFNJVNTBUIJHIFSDPWFSBHFMFWFMTNPSFBDDVSBUFMZSFFDUUIFDPTUPGUIFIJHIFSDPWFSBHF
5IFSFBTPOGPSUIJTGFBUVSFPG31JTUIBUJUQSPUFDUTGBSNFSTXIPGPSXBSEDPOUSBDUBQPSUJPOPGUIFJSDSPQ5IFSJTLPGBGPSXBSE
contract is that the farmer does not produce enough to deliver against the contract. If harvest prices are higher than the forward
QSJDFUIFGBSNFSNVTUiCVZwNPSFFYQFOTJWFCVTIFMTPGQSPEVDUJPOUPNBLFVQUIFTIPSUGBMM5IFSFJTOPSFRVJSFNFOUUIBUB
farmer must enter into a forward contract for farmers to obtain this extra coverage.
5IFGSFFJOTVSBODFQSPQPTBMDPOTJEFSFEIFSFJTPOFGPSNPGBYFEWPVDIFSQSPHSBNUIBUHJWFTBTFUBNPVOUPGGVOETUPFBDI
farmer for risk management purposes and allows farmers to spend more to buy additional coverage using their own money.
4FOBUPS3JDIBSE-VHBSSTUQSPQPTFETVDIBWPVDIFSTZTUFNGPSDSPQJOTVSBODFNPSFUIBOZFBSTBHP#FGPSFQSFNJVN
TVCTJEJFTXFSFDBQQFECZUIFBNPVOUPGTVCTJEJFTUIBUBGBSNFSDPVMESFDFJWFGPSBQFSDFOUZJFMEJOTVSBODFQPMJDZ5IJTQPMJDZ
was effectively a voucher program because higher levels of insurance could be purchased but the incremental costs were paid
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&/7*30/.&/5"-803,*/((306134
www.ewg.org "QSJM
for by farmers.
1SFDFEFOUGPS64%"QBZJOHPVUJOTVSBODFMJLFDMBJNTEJSFDUMZBSFUIFQBZNFOUTUIBUIBWFCFFONBEFVOEFSGBSNCJMMQSPHSBNT
TVDIBT"$3&BOE463&XIJDIBSFQBJEPVUVOEFSUIFBVUIPSJUZPGUIF$PNNPEJUZ$SFEJU$PSQPSBUJPO
4FF5BCMFJOIUUQXXXSNBVTEBHPWOFXTGBRTQEG
/PUBDDPVOUFEGPSJOUIJTUPUBMJTUIFDPTUPGUIF64%"3JTL.BOBHFNFOU"HFODZBOEUIF'FEFSBM$SPQ*OTVSBODF$PSQ
#FDBVTFUIJTGSFFZJFMEJOTVSBODFXPVMECFFOUJUMFNFOUUPBMMGBSNFSTUIFSFXPVMECFOPOFFEUPQBZBOJOTVSBODFBHFOU
UPiTFMMwUIFQSPEVDU'BSNFSTXPVMEKVTUTJHOVQGPSUIFJOTVSBODFBUUIFJS'4"PGDFXIFOUIFZTVCNJUUIFJSQMBOUFEBDSFBHF
report after planting. Thus there would be no need to pay agent commissions on this base policy.
5IFGBSNFSWBMVFPGUIFGSFFJOTVSBODFQPMJDZJTTFUFRVBMUPUIFBWFSBHFVOTVCTJEJ[FEQSFNJVNGPSQFSDFOU:1GPSFBDI
crop and state. Actual outlays from any crop insurance program can vary dramatically from year to year. Here the premium rep
SFTFOUTUIFBWFSBHFPVUMBZBDSPTTNBOZZFBSTJTUBLFOBTUIFGBSNFSWBMVF5IJTJTDPOTJTUFOUXJUIUIFXBZUIBUUIF$POHSFTTJPOBM
#VEHFU0GDFDBMDVMBUFTGVUVSFQSPHSBNDPTUT
*ODPOUSBTUUIF5BCMFEBUBSFFDUUIFBDUVBMVOJUTUSVDUVSFUIBUGBSNFSTTFMFDUFEJO
*EFBMMZ3."TFOUFSQSJTFVOJUEJTDPVOUTGPSFBDIDSPQDPVOUZDPNCJOBUJPOXPVMECFVTFEUPDBMDVMBUFOBUJPOBMDPTUTCVU
these discounts were not readily available.
+VTU2VJHHJOBOE$BMWJOBOE(PPEXJOEFNPOTUSBUFUIBUUIPTFGBSNFSTXIPCPVHIUIJHIDPWFSBHFMFWFMTXFSF
MJLFMZUPCFVOEFSSBUFEBUUIFIJHIFSDPWFSBHFMFWFMT#BCDPDLTIPXFEUIBUUIFWBMVFPGSJTLQSPUFDUJPONPUJWBUFTBSFMB
tively low proportion of farmers to buy high levels of insurance.
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Notes:
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