Report: Crop insurance over-subsidized by taxpayers

Taxpayers helped subsidize $7.8 billion in overpayments of crop insurance last year, according to a new report.

With last year's drought leading to much higher prices, farmers were reimbursed at drought prices for their lost crops: $14 billion instead of the $6.2 billion that would have been paid under more standard insurance, according to the report.

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The report, from Iowa State University economics Professor Bruce Babcock, found that federal crop insurance subsidies are so high that farmers buy more generous plans than they otherwise might. (Taxpayers pick up the tab for 62 percent of crop insurance premiums on average.) If crop prices rise after the insurance is purchased, these more generous plans, called revenue protection, reimburse farmers for lost crops at the new, higher price.

"Where is it written that taxpayers are obligated to make 'Cadillac' insurance affordable?" Babcock asked in the report. "Giving farmers incentives to buy such generous insurance plans generates no benefits for taxpayers."

The report was commissioned by the Environmental Working Group, a research and advocacy organization.

Babcock called for capping premium subsidies at a lower dollar-per-acre amount that still incentivizes buying some sort of insurance.

"The cost of the program could be easily reduced by at least 30 percent if subsidies were capped, because farmers would find that they need 'Cadillac' insurance much less if they have to spend their own money to buy it," Babcock wrote.

The report also warns of the cost of a provision in next year's farm bill. That bill is currently being negotiated between the chambers, with the most contentious issue the amount to cut from food stamps.

However, both the House and Senate versions of the bill include a provision called Supplemental Crop Insurance meant to compensate for ending direct cash payments to farmers. Babcock estimates this additional layer of insurance would have led to $6.5 billion more overpayments in 2012.