More than 100 countries offer crop insurance, a sign of the rising popularity of the instrument in providing support for producers since the formation of the World Trade Organization, says an IFPRI report. Premium volumes grew by roughly 16 percent a year, to well above $30 billion, in the decade ending in 2013. The United States accounts for one-third of the premium volume worldwide, with China at about 40 percent of the U.S. level. Japan, Canada and the EU also run large programs.
Much of the growth in insurance “has largely been the result of substantial government support measures,” said IFPRI. In two-thirds of the countries with crop insurance, the government subsidizes premiums, which reduces costs to producers. The average subsidy rate for premiums was 47 percent; the U.S. premium subsidy is around 62 percent with costs forecast at $8.5 billion a year under the 2014 farm law.
“With such high costs, it is little wonder that the larger agricultural insurance programs are generally found in developed countries,” says Joe Glauber, a former USDA chief economist, who authored the IFPRI paper.
“An often-cited impetus for the growth in insurance programs is the potential exemption” from WTO limits on trade-distorting subsidies. Yet few industrialized countries have opted to report their insurance costs as non-distorting or as a general support available to all growers and thus exempt from WTO discipline. The U.S., Canada and the EU list crop insurance as “amber box” supports, subject to reduction; Brazil and India say their programs respond to natural disasters and are exempt from reduction; Mexico says its crop insurance is a developmental program and exempt from WTO limits on farm supports; and China, with premium subsidies of $3 billion in 2012/13, “has yet to include agricultural subsidies as part of its domestic support notifications” to WTO.
The WTO criteria, written 20 years ago, “appear to be poorly fitted for most modern insurance programs,” says IFPRI, adding that insurance cannot be deemed non-distorting if it covers more than 70 percent of production or income based on the average of the past three or five years. A loss threshold of 30 percent may be unduly high for weather index policies or policies based on area yield, says IFPRI, and a longer time span is needed to develop an actuarially sound program. Those issues are being discussed in the ongoing WTO trade round.
Meanwhile, says IFPRI, countries with large insurance programs, such as the United States and Canada, “could come under renewed scrutiny in potential WTO cases …. Recent WTO cases, such as U.S.-Upland Cotton, provide a ready blueprint for such challenges.” In the cotton case, Brazil included crop insurance subsidies in its successful challenge of U.S. supports. Congress created a new cotton subsidy program to resolve the WTO defeat. China and Canada cited crop insurance subsidies in presenting arguments to their own national trade tribunals that the United States was dumping its goods on the world market. The Chinese case involved chicken while Canada challenged corn.
Crop insurance is the largest federal support for agriculture following cuts to traditional crop subsidies in the 2014 farm law. The government pays 62 cents of each $1 in premiums, offsets the administrative cost of delivering coverage, and shoulders most of the burden during catastrophic losses. It also sets the rates for policies, specifies where coverage for particular crops is offered and requires companies to accept all clients.
Farm groups acceded to cuts in crop subsidies in the 2014 farm law in exchange for an expansion of crop insurance, estimated to cost $9 billion a year. Insurance is a familiar concept to city dwellers and easier for farm groups to defend than traditional subsidies.