Will crop insurance benefits replace direct payments?

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With direct payments evaporating with the expiration of the 2008 Farm Bill September 30th, does the federal government lose its big stick to force compliance with conservation programs?  After all how can an expired benefit be withheld for not complying with required environmental programs, such as highly erodible lands, swampbuster, sodbuster, and wetland conservation initiatives?  Or will crop insurance take the place of direct payments and become the enforcer?

For the past decade, direct payments have been distributed at $5-6 billion per year to farmers who operate nearly 7 acres out of 10 in the US, but will not be part of the Farm Bill that will replace the current law.  While not every farming operation participates in the various environmental programs that carry penalties if not fulfilled, those that do are subject to losing direct payments on their cropland.  The alternative could be replacing direct payments with crop insurance, says USDA economist Roger Claassen in his recent assessment of the future of environmental compliance.  After all, crop insurance likely will be the only farm program left in the next farm bill, which will be extended to a majority of farming operations that are mandated to comply with various environmental programs. 

About 100 million acres or 25% of US cropland is considered highly erodible and potentially subject to conservation compliance requirements.  A 15 year study from 1982 to 1997 found that USDA conservation programs saved about 300 million tons of soil per year.  More recently, commodity program payments, such as direct and counter-cyclical payments and marketing loan benefits, accounted for 64% of all payments subject to environmental compliance requirements.

Claassen found that 448,000 farms received direct payments, which represents 20% of farms and 283 million acres of cropland.  126,000 of those will still have to comply with the conservation programs on their farm because they also receive some level of conservation payment.  141,000 farms which operated 33 million acres of cropland received direct payments, but did not participate in crop insurance or receive conservation payments.  Obviously, the expiration of direct payments would eliminate any incentive for conservation programming on those farms.  Another 181,000 farms operating on 141 million acres received direct payments and also bought crop insurance.  Since they did not receive conservation payments, they would be candidates for making crop insurance a compliance benefit for upholding their conservation requirements.

Claassen’s survey found that most environmentally sensitive land tends to be in areas where crop insurance subsidies are smaller than direct payments.  He says, for example, “59 percent of cropland that is highly erodible due to wind is located in areas where direct payments exceed crop insurance subsidies. An even larger proportion of cropland that is highly erodible due to water (for sheet and rill erosion) is located in these areas.”  He says crop insurance participation is high, and 80% of eligible acres for corn, wheat, soybeans, and cotton are covered. 

One factor that may have a significant impact is the amount of federal subsidy for crop insurance premiums.  Claassen says higher crop prices have increased premiums, and higher federal subsidies of the premiums have enticed more farmers to participate. “Whether crop insurance could offset a loss of DPs as an environmental compliance incentive will depend largely on:

  • The number of producers and acres covered by crop insurance relative to direct payments.
  • Overall size of crop insurance subsidies and direct payments; and
  • The distribution of crop insurance premium subsidies compared with that of direct payments. 


Summary:
With the elimination of direct payments the federal government will lose its ability to force compliance with conservation programs by withholding funds.  However, a small group of farmers who are in conservation programs also are participants with crop insurance.  In some cases the lost direct payments are less than crop insurance premiums and others are more than crop insurance premiums.  However, the opportunity to either participate in crop insurance or the level of the subsidized premium may represent an incentive to continue with conservation compliance.

Source: FarmGate


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