Effects of Crop Insurance Subsidies

The journal Applied Economics Perspectives and Policy just published my paper entitled, "Distributional Effects of Crop Insurance Subsidies."  Farmers of the major commodity crops (and increasingly even minor crops including fruits and vegetables) are eligible to buy subsidized crop insurance.  The insurance is, in principle, priced at actuarial fair rate (i.e., the price of the insurance is equal to the expected loss), but the government subsidizes the insurance premium paid by the farmer (in addition to some of the costs of the insurers).  The average subsidy is around 65% of the premium amount.  If there were a similar program for your car insurance, and the annual premium you pay for your car is $1000/year, you'd get back $650 in subsidy.  In addition to this premium subsidy, the latest farm bill also has provisions to subsidize the deducible in the case of a loss.  All this begs the question: what impact do these subsidies have on food prices and production?  

From the abstract:    

Results indicate that the removal of the premium subsidy for crop insurance would have resulted in aggregate net economic benefits of $622, $932, and $522 million in 2012, 2013, and 2014, respectively. The deadweight loss amounts to about 9.6%, 14.4%, and 8.0% of the total crop insurance subsides paid to agricultural producers in 2012, 2013, and 2014, respectively. In aggregate, removal of the premium subsidy for crop insurance reduces farm producer surplus and consumer surplus, with taxpayers being the only aggregate beneficiary. The findings reveal that the costs of such farm policies are often hidden from food consumers in the form of a higher tax burden. On a disaggregate level, there is significant variation in effects of removal of the premium subsidy for crop insurance across states. Agricultural producers in several Western states, such as California, Oregon, and Washington, are projected to benefit from the removal of the premium subsides for crop insurance, whereas producers in the Plains States, such as North Dakota, South Dakota, and Kansas, are projected to be the biggest losers.

Because producers in different states grow different crops, the effects of the subsidies aren't equally dispersed.  I write:

Take for example the comparison of California, which generated about $32.6 billion in annual food-related agricultural output from 2008 to 2012 and Kansas, which generated about $11.2 billion over the same time period. Despite the fact that California generates about three times more agricultural output than Kansas, Kansas farmers received 2.65 times the amount of crop insurance subsidies and attributed overhead ($618 million vs. $233 million) in 2013. Moreover, the states are radically different in terms of the types of agricultural commodities grown. Just under 70% of the value of all food-related agricultural output in California comes from fruits, vegetables, and tree nuts; for Kansas, the figure is only 0.04%.

These differences in commodities produced lead to differences in the uptake of crop insurance subsidies and the prices paid in each location.

To illustrate how this heterogeneity comes about, again consider California and Kansas and the results from 2013. Removal of premium subsidies is projected to increase vegetable (a major California crop) prices by 1.4% and wheat (a major Kansas crop) prices by 7.9% (aggregate reductions in quantities are 0.2% and 3.1%, respectively). The implicit subsidy lost by California producers of vegetables is only 0.16%, whereas the implicit subsidy lost by Kansas producers of wheat is 12%. Thus, California vegetable producers gain an effective price advantage of 1.4% −0.16% = 1.24% whereas Kansas wheat producers experience an effective price change of 7.9% −12% = −4.1%. Therefore, California vegetable producers sell about the same amount of output at about 1% higher effective prices, but Kansas wheat growers sell less output at about 4% lower effective prices. As a result, California producers benefit and Kansas producers lose from the removal of food-related crop insurance premium subsidies.

Even the results in figure 4 mask within-state heterogeneity. For example, despite the fact that Kansas wheat farmers are net losers, California wheat farmers are net winners. Why? Because the implicit price subsidy to California wheat farmers is much lower than the one to Kansas (3.6% vs. 12%). But, not all California producers benefit. California barley, hog, poultry, and egg producers are projected to be net losers from the removal of crop insurance subsidies. Within Kansas, wheat producers lose about $86 million but cattle producers gain about $12 million annually from the removal of the premium subsidy for crop insurance