The farm safety net is often described as a cushion for producers against hard times because crop subsidy payments are counter-cyclical — they become larger as commodity prices decline. The federally subsidized crop insurance program is the largest part of the safety net but net indemnities are not counter-cyclical, said four agricultural economists on Monday.
Net indemnities, the amount paid to farmers after premiums are deducted, were highest in years when net returns per planted acre were highest and low when returns were low, said the economists, who examined nine widely grown crops, including corn, soybeans, wheat and cotton, from 2002 to 2020.
“Net crop insurance indemnities are not counter-cyclical to net return…Crop insurance thus performs a different function at the U.S. level than other farm safety net programs,” they wrote at the farmdoc daily blog. “In contrast, commodity program payments are found to be counter-cyclical to net return at the U.S. level for the crops examined in this study.”
One reason for the difference, said the economists from Ohio State University and the University of Illinois, is that crop insurance provides stability against unexpected decreases in yields and prices during a growing season. Commodity programs offer protection across growing seasons. “Crop insurance is providing a different safety net function.”
The economist, Carl Zulauf of Ohio State and Gary Schnitkey, Nick Paulson and Jonathan Coppess of the University of Illinois, said the harvest price option plays an important role in the most popular type of crop coverage, revenue insurance. It uses the higher of the projected price at springtime or the price at harvest time in calculating payments for yield losses. They said their analysis raised the question of whether the harvest price option should be more widely available as a way to more strongly differentiate the role crop insurance in the safety net.