Governments tend to be very involved in supporting their country’s agriculture. In various countries, this intervention ranges from funding research programs and irrigation projects, setting stringent regulations and grading standards, managing supply, protecting use of certain names and geographic labelling, and even involvement in farm finance such as by providing credit to farmers. In the United States, the federal government also provides very low-cost crop insurance to protect farmers from natural disasters and even movements in market prices.

New Deal

            Farms are exposed to the risk of crop failure which could be caused by any of a large variety of events: too much or too little rain, heat waves, frost, hail, or outbreaks of diseases or pests. Some of these were either difficult to predict, could destroy crops over large areas, or both. Besides factors that could affect the yield of a farm, farmers were also exposed to changing market prices. This was a risky business. In the 19th century, farmer cooperatives, government departments of agriculture, and even the emergence of futures markets did provide farmers some assistance in managing risk. Private insurance could even provide some protection against certain specific perils but others were too risky to insure, like the risk of flood that could destroy crops along an entire floodplain.

            From the end of the First World War to the Great Depression and Dust Bowl, the fortunes of farmers in the United States were afflicted by setbacks including falling crop prices and land values, pest infestations, droughts, and floods. The existing institutions established to support farmers provided insufficient support. This was a period when farmers left for cities, rural banks failed, and agrarian America was generally in trouble.

            With respect to farms, President Franklin D. Roosevelt’s New Deal focused initially on supporting prices by reducing oversupply but this was just one of the problems faced by American agriculture. The Republican Party nominee for President in 1936, Alf Landon, pitched a crop insurance program to rural voters. It resonated and prompted a larger response by Roosevelt.

Hail damage in Jackson, Minnesota, 1927 (Source: National Crop Insurance Services, Kansas)

            Private crop-hail insurance had already existed and continues to exist as a private insurance product. However, “all-risk” crop insurance in the United States began only in 1938 after the U.S. Congress passed the Federal Crop Insurance Act which created the Federal Crop Insurance Corporation. This insurance covered all perils affecting farm yields and was quite novel in the world; previous experiments were few and short.

            There is a reason crop insurance is a relatively new form of insurance; it is challenging to underwrite and exposes insurers to large risks. Data on farm-by-farm output was limited, challenging underwriting, and risks, at least for some perils, tended to be highly-correlated. For example, if a pest affected crops on one farm, it was likely to affect the entire region. Given the hazards involved, the Federal Crop Insurance Corporation commenced operations by covering wheat alone, though coverage for cotton would be added in 1941 and flax in 1944.

            Despite the bold foray into public crop insurance and a marketing campaign, participation was limited in the early years and, as with all insurance schemes, this threatened the program. If not enough customers signed up, the risk of adverse selection grew, namely the risk that only farmers expecting to use the coverage would buy it. In general, farmers were skeptical of the insurance’s merits, at least at the cost it was offered and policymakers ruled out compulsory insurance on the grounds that this would be too demanding of farmers. Prospective buyers felt that premiums were not always reasonable, understandable given that there was limited data with which to underwrite and price the coverage.

Underwriting

             Because data was limited and often came with gaps, economists and statisticians were hired by the U.S. Department of Agriculture to develop models that could make the most of this data. These models borrowed techniques from private insurance companies. The Department also hired underwriters who visited applicants’ farms to take measurements of potential crop yields, soil types and moisture levels among other statistics.

            The approach could not overcome the challenges intrinsic in launching a new insurance product, especially one as fundamentally challenging as crop insurance. So, from 1938 to 1944, the federal crop insurance program ran underwriting losses every year. The program therefore failed to build reserves that could make it more financially independent. Despite this, farmers routinely thought premiums were too high. This may seem counterintuitive for insurance; premiums seemed simultaneously too low and too high compared to the risk involved, but adverse selection could explain this. Amidst this early failure, the program nearly came to an end but there was no private alternative to such coverage, so legislators in farm regions were still interested in such a program. Still, in 1947, the program’s geographic reach was curtailed.

           In 1945, the Federal Crop Insurance Corporation introduced an underwriting model whereby county committees could use their local knowledge to reject individual applicants. Still, this did not solve the base problem that too few farmers were seeking the insurance consistently, so the pool of applicants was not broad and representative to begin with. This was also an expensive system to maintain. If insufficient numbers of farmers consistently participated, the program would continue to be the victim of adverse selection.

Capital-Preservation

           During the 1950s and 1960s, things began to change. Crop prices fell but farmers reacted, not by cutting production, but by investing in new equipment which could lower their costs and give them a competitive advantage. Agriculture became more capital intensive and this capital investment was financed with borrowing. Leveraged farms, and their creditors, were extra-exposed to the risk of disasters like drought or floods.

           Logically, bankers promoted crop insurance since they would benefit from reduced risk; they became important salesmen for insurance which went hand-in-hand with farm credit. Insurance made crops a more suitable collateral which to lend against. In the 1960s, bankers were even paid a commission to sell federal crop insurance. Farmers with debts outstanding themselves would be more inclined to buy insurance so that they could avoid bankruptcy if affected by otherwise manageable perils. Farmers were forced by their changing circumstances to become both more financially savvy and risk averse.

Stabilization

            With insurance becoming more important, the sustainability of the federal crop insurance program began to improve after the mid-1940s. More farmers were signing up for insurance and from 1948 to 1961, premiums exceeded insurance payouts. With results improving, more crops became eligible for coverage. By 1967, eighteen million acres of farmland were insured. This may not seem like a lot but note that even in the 1960s, crop insurance was still fairly experimental.

Growth

            In the 1970s, crop insurance participation was still not particularly high and disaster support for farmers grew larger as the government sought to assist farmers whether they were insured or not. This was not supportive of encouraging insurance so the Federal Crop Insurance Act of 1980 sought to change things. It introduced subsidies for crop insurance sized to 30% of the premium and expanded the number of eligible crops and regions. The goal was to reduce reliance on disaster assistance. Also, in the 1980s, the government employed insurance firms to market and service the policies which were in turn insured by the Federal Crop Insurance Corporation. This arrangement was phased out by the mid-1990s with further reforms.

            After the Federal Crop Insurance Reform Act of 1994, crop insurance was essentially given away for free. Despite the 1980 reform, disaster assistance was still being provided through the 1980s because many were still forgoing coverage. The new legislation tried once more to replace disaster assistance to farmers with a more systematic approach. Only about one-third of farmers bought crop insurance and many who did not refrained because they expected disaster assistance if they were affected by a calamity anyway. After the 1994 act, coverage would also be mandatory for farmers wishing to be eligible for price support programs or certain loans.

            Revenue insurance was added in the mid-1990s. This replaced a program where the government would purchase crops at a minimum price if market prices fell. This form of insurance guaranteed farmers a minimum income, so protected farmers against the risk of adverse price movement and not just farm yield. Understandably, this became a popular option.

            Participation in crop insurance grew rapidly in the mid-1990s. The number of policies in force and acreage insured doubled just between 1994 and 1995. In 2000, legislation allowed private companies to participate in the development of new crop insurance products alongside the Federal Crop Insurance Corporation. Since this reform, similar coverage now exists for livestock as well as crops.

            By 1997, 182 million acres was insured with crop insurance and this grew to 280 million acres by 2012. More remarkably, in excess of 90% of farmers also purchased supplemental insurance beyond the basic product offered virtually free of charge. Coverage extended to 380 million acres and 124 commodities across two million policies by 2019 at a cost of about $8 billion per year to the federal government. This encompassed 90% of corn, soybean, and cotton acreage in the United States and 85% of wheat acreage.

Lesson

            Perils affecting crops are particularly difficult risks for private insurers to insure against. The risks involved can be highly correlated and this means that the worst losses can ruin insurers active in this business. If insurance were on offer it would be very expensive and this discourages participation from farmers who think they will not have to rely on the insurance. This adverse selection is incompatible with efficient insurance. Just because the insurance has to be offered for free to be universal, and therefore most effective, does not mean its costs outweigh its benefits.

           Thus, a public solution was contrived that made crop insurance virtually universal. Government involvement in insurance is quite common, particularly in areas of public interest or difficult for private insurers. In practice, these lines include not only crop insurance but also the likes of mortgage insurance, flood insurance, and terrorism insurance.

More from the Tontine Coffee-House

           Read about the role of Friedrich Raiffeisen in forming rural credit unions and an agricultural recession in 1920s America. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Background on: Crop Insurance, Insurance Information Institute, 15 July 2015.

2.      Hamilton, Shane. “Crop insurance and the new deal roots of agricultural financialization in the United States.” Enterprise & Society, vol. 21, no. 3, 4 Feb. 2020, pp. 648–680.

3.      History of the Crop Insurance Program, Risk Management Agency – U.S. Department of Agriculture. Accessed 14 Apr. 2024.

4.      Rosch, Stephanie. Federal Crop Insurance: A Primer, Congressional Research Service, 18 Feb. 2021.

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