Revenue insurance with the government paying most of the premium. Now that's a sweet deal. Wouldn't oil producers like to have insurance that would replace lost revenue due to the plunge in the price of oil? That's not likely to happen for the oil industry, but for farmers it's easy. The government provides revenue insurance for farmers based on the highest price reached during the season.
Farm subsidies are basically wealth transfers. And many politicians garner favor among special interests with promises of more such transfers.
I've written about farm subsidies before, and since those programs are so ingrained in our government it's easy to get complacent about them. So it's nice to see someone as influential as Helen Fessenden, staff writer for Econ Focus, the economics magazine of the Federal Reserve Bank of Richmond, address them in The Crop Insurance Boom. Here are some excerpts:
Critics of crop insurance subsidies, however, point to the fact that the program is still a transfer from taxpayers to farmers and private insurance companies, and as constructed, it is more income support than classic insurance. The government covers about 60 percent of the cost of farmers' insurance premiums as well as 100 percent of administrative and operating costs for insurers, which means farmers can sign up for policies that provide payouts far more generous than reflected by their out-of-pocket cost. ...
"The paradox is that crop insurance may be intended as risk management for farmers, but it actually encourages more risk-taking," said Vincent Smith, agricultural economist at Montana State University. "It's a transfer of risk away from the insurance firms and the farmers." ...
One of the program's most controversial aspects is the policy design. For most crops, farmers have an array of plans to choose from, but the most dominant is an option called revenue protection. Under one of the most popular revenue-protection plans, a farmer can purchase a policy to insure yield losses or revenue losses on certain crops, but he bases that coverage on the highest price of the season. If a low yield drives up the price of a crop from spring to harvest, the farmer is indemnified for lower yields at the higher harvest-time price; if the price falls over the course of the season due to overproduction, the farmer may use the higher springtime baseline when calculating compensation. Either way, this option maximizes the payout from the insurer. Revenue protection contrasts with yield protection, in which a farmer is protected against harvest-time losses in yield, say, in the case of drought; those payouts are pegged to the price projected at springtime. In 2014, about 75 percent of policies were revenue protection, compared with only 13 percent that were yield protection.
By the way, the government pays for 60% of the insurance premium -- a nice freebie for those on the receiving end. The oil industry has been targeted by Democrats for as long as most of us have been around. And not long ago there was the cry that oil industry subsidies should be cut. Well, there aren't any oil industry subsidies in spite of the losses and layoffs following the price crash. If anyone is serious about cutting subsidies they need to go for the farm bill.
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