Insurance has long been a normal part of most farming operations. Farmers insure their barns and houses against fire and storm. They purchase insurance for their cars, trucks, and other pieces of equipment. They use hail insurance to protect their crop from loss before they can harvest it. These insurance products work well because the insurance companies are insuring a random risk for which they can calculate a premium that allows them to cover their costs, ensure a profit, and set aside the necessary reserves.

But the present crop and revenue insurance products that are a major part of the current farm program are not like these other insurance products; these products involve systemic risk—that is, price risk that affects every farmer at the same time, unlike fire, hail or other of the more random occurrences of insured risks. Systemic risks put insurance companies in jeopardy at any premium that—in this case—farmers could afford and would be willing to pay. In short, without the massive government subsidies that are paid directly to the insurance companies, the insurance companies involved would cease to offer these revenue insurance products.

In the past and for the most part, when agribusiness firms have become involved in trying to influence the direction of agricultural product, their strategy has been to try to see that farmers make a profit so farmers can afford to purchase their products. Generally, the pass-through to these firms of any government funds involved in the farm program they lobbied for has been indirect. Farmers have used their incomes, including any government payments, to purchase the seed, farm chemicals, equipment, and repairs offered by these firms. Also, any relaxation of production constraints results in increased input purchases and lower ingredient costs for agricultural processors.

With the federal crop insurance program, we have a radical shift in the nature of farm programs. In this case, the subsidy goes directly to the crop insurance industry. The insurance sector uses a portion of those funds, along with the premium portion paid by farmers, to indemnify farmers against systemic as well as more random losses that incur.

This shift toward revenue insurance has created a new and powerful farm-bill constituency. Given the massive amounts of money and huge profits involved, it is not surprising that the crop insurance industry is lobbying hard to make their products the central feature of the 2012 Farm Bill. In addition, it is understandable that this industry is fighting proposals to move the revenue insurance program to the Farm Service Agency where it fits, saving the federal government billions of dollars.

The core policy question becomes: do the interests of the insurance industry coincide with the farm-bill interests of farmers, taxpayers, and society at-large? A couple of farmers we recently talked with put it this way: “When the general public becomes aware that crop revenue insurance guarantees farmers’ profits when prices are high and billions in profits and fees to the private insurance sector, the federal crop insurance program may be as hard to defend as the Direct Payment program.”

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu  and  hdschaffer@utk.edu;  http://www.agpolicy.org.