For most policies, the statutory premium subsidy rates range  from 38 percent to 80 percent. Federal Crop Insurance Costs and Farm Sector Income and Wealth Grew Significantly from 2003 through 2012

Federal crop insurance program costs and farm sector income and wealth  grew significantly during the period 2003 through 2012. For fiscal  years 2003 through 2007, federal crop insurance costs averaged $3.4  billion a year, but for fiscal years 2008 through 2012, the crop insurance  program cost an average of $8.4 billion a year. For example, for crop year 2012,  revenue policy premium subsidies cost $5.5 billion that year, which  accounted for 82 percent of the $6.7 billion in total premium subsidy costs  to the government. For example,  median farm household income rose from 2003 to 2012 and was higher  than the median income for all U.S. households every year during this   More specifically, on average, median  period, according to ERS data.farm household income was $7,205, or 13.8 percent, more than median  U.S. household income annually during this time period (in constant 2012  dollars that reflect adjustments for inflation). Farm sector income also grew from $73.8 billion in 2003 to $113.8 billion  in 2012. U.S. farm real  estate values increased by 72 percent from 2003 through 2012 due to  high farm income and low interest rates, according to USDA data. Lower ratios signify that farmers are relying less on  borrowed funds to finance their asset holdings. Figure 10 shows these farm  sector debt ratios from 2003 through 2012. Reducing Federal Premium Subsidies for Revenue Policies Would Potentially Save Millions of Dollars with Limited Costs to Individual Farmers

According to our analysis of RMA data, the federal government would  have potentially saved more than $400 million in 2012 by reducing  premium subsidies on federal crop insurance revenue policies by 5  percentage points, and the savings would have been nearly $2 billion with  a 20 percentage point premium subsidy reduction. As a percentage of the total  production cost per acre, these increases would usually have been less  than 2 percent and often less than 1 percent. In 2000, when Congress enacted legislation to increase crop  insurance premium subsidy rates, the new rates immediately became  effective (i.e., upon enactment of the legislation). In contrast, according  to RMA officials, when the agency increases the premiums charged for  crop insurance policies based on new actuarial data, as it did in 2012, it  generally phases in the increases over several years so the impact on  farmers is less dramatic. For example,  the average production costs for corn farmers were about $656 per acre  that year; with the premium cost increases, their production costs would  have increased an average of 0.4 percent, 0.9 percent, 1.3 percent, and  1.7 percent with premium subsidy reductions of 5, 10, 15, or 20  percentage points, respectively. We note that the ultimate impact of such limited production cost increases  on farmers’ income would depend on their individual profit margins. However, for the industry as a whole, the impact on farmers’ income  appears to be minimal. Farm industry groups and some researchers have stated  that changes to crop insurance premium subsidies could result in  reductions in farmer participation and insurance coverage levels. However, available economic literature on the impact on farmer  participation due to premium subsidy reductions indicates that farmers’  response to changes in premium subsidies may be small due to factors  such as their heavy reliance on crop insurance, the attractiveness of  revenue policies, and the increasing importance of crop insurance as  other farm programs are reduced or eliminated. According to some farm industry  stakeholders, many farmers have made crop insurance their primary risk  management tool. Conclusions

Federal crop insurance plays an important role in protecting farmers from  losses caused by natural disasters and price declines, and it has become  one of the most important programs in the farm safety net for farmers,  according to USDA officials and some farm industry stakeholders. Although the impact  of such a reduction is unknown, in the event that Congress reduced the  crop insurance premium subsidy rates, actual information on the impact  on farmer participation would be available if participation were monitored. Matter for Congressional Consideration

To reduce the cost of the crop insurance program and achieve budgetary  savings for deficit reduction or other purposes, Congress should consider  reducing the level of federal premium subsidies for revenue crop  insurance policies. In addition, Congress  should consider directing the Secretary of Agriculture to monitor and  report on the impact, if any, of the reduction on farmer participation in the  crop insurance program. In its written comments, which are reproduced in  appendix II, USDA said it had no comment with the report’s findings. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) trends in federal crop insurance costs  and farm sector income and wealth from 2003 through 2012 and (2) the  potential savings to the government and impacts to farmers, if any, of  reducing federal premium subsidies for revenue insurance policies. We analyzed RMA crop insurance program data  including data on the level of premium subsidies for revenue policies, the  top 10 states that received revenue policy premium subsidies, the  insurance coverage levels chosen by farmers with revenue policies, and  the crops that received the most revenue policy premium subsidies. At the time of our analysis, USDA officials said that 2012  would be the most recent year with complete and stable crop insurance  program data.
Why GAO Did This Study

Federally subsidized crop insurance, which farmers can buy to help manage the risk inherent in farming, has become one of the most important programs in the farm safety net. Revenue policies, which protect farmers against crop revenue loss from declines in production or price, are the most popular policy type and account for nearly 80 percent of all premium subsidies. The crop insurance program's cost has come under scrutiny while the nation's budgetary pressures have been increasing.
GAO was asked to look at the cost of the crop insurance program. This report examines (1) trends in federal crop insurance costs and farm sector income and wealth from 2003 through 2012 and (2) the potential savings to the government and impacts on farmers, if any, of reducing federal premium subsidies for revenue policies. GAO analyzed USDA crop insurance program data and farm sector income and wealth data from 2003 through 2012 (most recent year with complete crop insurance data); reviewed economic literature and documents from stakeholders including farm industry groups and researchers; and interviewed USDA officials.

What GAO Found

The cost of the federal crop insurance program and farm sector income and wealth grew significantly from 2003 through 2012. The cost of crop insurance averaged $3.4 billion a year from fiscal years 2003 through 2007, but it increased to $8.4 billion a year for fiscal years 2008 through 2012. According to the U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA), the agency that administers the crop insurance program, subsidies for crop insurance premiums accounted for $42.1 billion─or about 72 percent─of the $58.7 billion total program costs from 2003 through 2012. Revenue policies, the most frequently purchased crop insurance option, accounted for $30.9 billion of the total premium subsidy costs for 2003 through 2012. Crop insurance premium subsidy rates—the percentage of premiums paid by the government—are set by Congress and would require congressional action to be changed. For most policies, the rates range from 38 to 80 percent, depending on the policy type, coverage level chosen, and geographic diversity of crops insured. As premium subsidy costs increased, farm sector income and wealth indicators also increased. For example, for each year from 2003 through 2012, median farm household income exceeded median U.S. household income. Specifically, on average, median farm household income was $7,205, or 13.8 percent, greater each year than U.S. household income, in constant 2012 dollars. Farm sector income also grew from $73.8 billion in 2003 to $113.8 billion in 2012, in constant 2012 dollars. Farm real estate values, another measure of farm prosperity, increased by 72 percent from 2003 through 2012, in constant 2012 dollars, and farmers relied less on borrowed funds to finance their holdings.
Reducing premium subsidies for revenue policies could potentially result in hundreds of millions of dollars in annual budgetary savings with limited costs to individual farmers. For example, the federal government would have potentially saved more than $400 million in 2012 by reducing premium subsidies by 5 percentage points, and the savings would have been nearly $2 billion by reducing these subsidies by 20 percentage points. Although such reductions would have required farmers to pay more of their premiums, the impact on their average production costs per acre would have been limited, usually less than 2 percent, and often less than 1 percent. For example, for corn, premium subsidy reductions of 5 and 20 percentage points in 2012 would have raised average production costs per acre by about $2.80 and $11.20, respectively. These increases would have been about 0.4 percent and 1.7 percent, respectively, of the total average production cost per acre of $656 that year for corn. The ultimate impact of such limited production cost increases on farmers' income would depend on their individual profit margins. However, for the industry as a whole, the impact appears to be minimal. In 2000, when Congress enacted new premium subsidy rates, the new rates immediately became effective. In contrast, when RMA increases the premiums charged for policies, it generally phases in the increases over several years to lessen the impact on farmers. Documents from farm industry groups and some researchers note that reductions in premium subsidies could result in lower farmer participation in the program and lower insurance coverage levels. However, available economic literature indicates that farmers' response to such reductions may be small due to factors such as the attractiveness of revenue policies and increasing importance of crop insurance as other farm programs are reduced or eliminated. In addition, other stakeholders identified incentives that would help keep farmers in the program, including pressure from lenders to maintain crop insurance coverage and the importance of crop insurance to many farmers as their primary risk management tool. In the event that subsidy rates were reduced, actual information on the impact on farmer participation would be available if participation were monitored.

What GAO Recommends

To reduce the cost of the crop insurance program, Congress should consider reducing the level of federal premium subsidies for revenue crop insurance policies, including a phased reduction, if appropriate, and directing USDA to monitor and report on the impact, if any, of this reduction on crop insurance program participation. In written comments, USDA said it had no comments on the report's findings.