The Effect of Premium Subsidies on Crop Insurance Demand

The Economic Research Service of the USDA periodically releases reports on various items related to agriculture.  This month, they released a report on the “The Effects of Premium Subsidies on Demand for Crop Insurance“.  The actual report is about 30 pages long and has a very detailed regression analysis for about 10 pages of the report.  However, there are several interesting facts contained in the report that I will summarize here:

• In 1992, producers enrolled 82 million acres and total premiums (including subsidies) were $1.2 billion (in 2012 numbers to account for inflation).  By 2012, crop insurance policies covered more than 282 million acres and premiums exceeded $11 billion.  The actual subsidies grew from $322 million in 1992 to nearly $7 billion in 2012.
• The following table shows the trends of actual acres enrolled in crop insurance since 1990.

As you can see, acres have almost tripled over the 22 year period from 1990 and the percentage of corn, bean and wheat acres covered is all at the 84% level.  Also, the share of these three major crops has dropped from 78% to 68% during that period.

The report also goes into the effect of the Agricultural Risk Protection Act changes made in 2000.  This chart outlines the changes in premium subsidies:

As the coverage level increases, you can see that a major increase in the subsidy occurs.  For example, at the 75% and 80% coverage level, the premium subsidy increases by 31%, while at th 50% and 55% coverage levels, the premium subsidy only goes up by 8%.

With the introduction of the Supplemental Coverage Option (SCO) for 2015 crops being subsidized at the 65% level, it will be interesting to see how this will affect coverage levels compared to the last few years.  Remember, this is only available if you elect PLC.