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The Case for Crop Insurance Reform

Is this the way to crop reform?

In Brief

This article, by The Regenerative Agriculture Initiative (RAI) team at the Center for Business and the Environment (CBEY), is part of a series about key opportunities to accelerate regenerative agriculture in the United States.

This article details the fourth key lever: reforming crop insurance to incentivize risk-mitigating, regenerative agricultural practices. 

New rules for crop insurance can include more farmers and create incentives to adopt practices that promote resilience. 

Across the political spectrum, most Americans have favorable opinions of farmers and are happy with the idea that the federal government provides financial assistance to help pay for crop insurance. If they knew crop insurance's full cost, that might change. 

This system, while well-intentioned, leaves out the majority of farmers and encourages the degradation of precious soil and water reserves by rewarding consolidated monoculture crop production. The crop insurance system keeps large-scale commodity farmers reliant on government payments rather than helping them build more innovative and resilient business models that could generate positive regenerative impacts, improve farm resilience to extreme weather, and increase long-term profitability. This article sizes up the United States crop insurance system, describes its design and implementation challenges, and details opportunities for reform to achieve regenerative outcomes on farms. 

Proponents of a regenerative agricultural system may feel like there is little they can do about this issue other than to wait for the powers that be to implement crop insurance reforms. However, becoming educated on the issue and discussing policy reform opportunities in public venues may have a significant impact.  

“Crop insurance has really got peoples’ attention now, and that is helpful to our agenda,” says Bev Paul, a representative at Gordley Associates and lobbyist for the AGree Crop Insurance and Conservation Taskforce. “When I started in 2017, the idea of incentivizing conservation through crop insurance was pretty radical. In just these few years, it has become almost mainstream. That doesn’t mean it will be easy to do, but policymakers broadly don’t think it’s a nutty idea anymore.” 

Understanding this complex system and its perverse incentives, normalizing a conversation about reform, and supporting reform efforts could open up powerful opportunities to help farmers transition to more regenerative farming systems.  

Crop Insurance 101

The crop insurance system protects covered farmers against large financial loss caused by crop failures or market fluctuations. The majority of US cropland – about 74% in 2016, or 290 million acres - is covered by crop insurance. 

Through the crop insurance system, farmers, private insurance agencies, and the federal government share the risk of crop loss and commodity price fluctuation. The program is administered by the Federal Crop Insurance Corporation (FCIC), a wholly owned government corporation managed by the Risk Management Agency (RMA), an arm of the USDA. The policies are sold and implemented by crop insurance agents affiliated with 15 approved private insurance companies.

The federal government plays a major role in supporting this system. Firstly, it acts as a reinsurance agent for insurance providers, sharing in an agreed-upon portion of the companies’ losses as well as in underwriting gains in years when premiums are higher than losses. Secondly, the government massively subsidizes crop insurance premiums paid by farmers. On total crop insurance premiums bought in the US, the government pays an average of 62% of the cost, with farmers paying the rest.

Design Problems: An Insurance System That Discourages Risk Mitigation 

The key design problem of crop insurance is that risk-mitigating agricultural practices face financial penalties in a system that should protect its users from risk. Farmers have always faced risks from the impacts of weather and disease on their crops, but that risk continues to grow as the climate warms, extreme weather events increase in magnitude and frequency, and pest and disease behavior changes

Regenerative practices are likely to aid farmers in this crisis, improving farm resilience, defined as “the propensity of a system to retain its organizational structure and productivity following a perturbation” such as extreme weather or a pest outbreak. A number of site-specific studies demonstrate how regenerative practices can improve farm resilience. A Rodale Institute farm trial found that corn grown organically with cover crops produced 28-34% higher yields than conventional corn in drought years. A Union of Concerned Scientists meta-analysis of field-scale studies found that 70% of farms that used one regenerative practice (cover crops, no till, alternative grazing, perennial systems, or integration of animals with cropping systems) showed an increase in water infiltration, “the first step necessary for reducing flood and drought damage.” Multiple studies have shown how crop rotation and crop diversification can suppress pest and disease outbreaks. 

To be sure, these are early days for converting such studies into business models. Partly because the USDA and RMA withhold data about farmlands, according to interviewees who prefer to stay anonymous, the scientific community does not yet have access to the large-scale evidence necessary to affirm causation between regenerative farming and farm resilience to extreme weather. However, based on experience and the site-specific data described above, nearly all the experts the RAI spoke with, from agtech engineers to scientists, believe that regenerative practices do improve farm resilience. 

As outlined in the following sections, the crop insurance system discourages regenerative practices. Thist threatens the system itself because conventional, risky practices will likely lead to larger damages and payouts. It also poses a large barrier to the regenerative movement. 

"Good Farming Practices" do not incorporate any conservation requirements:    
In order to receive indemnities (payments from insurance agencies to compensate for losses), farmers must follow what the system calls “Good Farming Practices” (GFP), determined by the RMA. Farmers’ payouts shrink with the amount of crop loss that is linked to a failure to follow GFP. Though the GFP handbook now acknowledges the use of NRCS conservation practices, it does not incentivize or require farmers to use any conservation or regenerative practices, like adopting soil management practices to increase water-holding capacity in flood or drought-prone areas. And since insurance companies must pay farmers when they lose crops due to extreme weather, farmers with crop insurance see no upside in using practices that can support the resilience of cropland against extreme weather events.

Farmers choose between policies that cover only yield loss or both revenue loss and yield loss. Yield plans cover crop loss due to weather or other environmental disruptions. Revenue protection plans protect farmers against drops in commodity prices even without any crop loss. 84% of covered farmers opt for revenue protection plans, which cover both crop loss and revenue loss. Given the high subsidy on premiums, a revenue plan means that farmers can’t lose.  They make money from the government in any market conditions, giving them little incentive to invest in regenerative practices that might improve resilience. 

Beyond that, revenue protection plans can interfere with the market. As is described in more detail below, revenue protection plans are limited to a small number of commodity crops. Their superior protections over yield loss plans incentivize farmers to grow these specific crops, which can create a glut in the market and perpetuate low prices. 

“You get more and more farmers signing up for few commodity crops, leading to oversupply, which drives prices lower and lower,” explained Gabe Brown, a regenerative farmer. Farmers respond logically. They continue growing crops that perform poorly in the market because their bottom line is protected.
Yield Exclusion:
The “Actual Production History Yield Exclusion” provision in the 2014 Farm Bill changed how crop insurance contracts are determined. Before 2014, the indemnities a farmer would receive for crop and revenue losses were determined based on a calculation of the reasonable yield that farmer could expect, which was estimated from the grower’s historical average yields. The 2014 Yield Exclusion provision allows farmers in certain counties to exclude bad crop years (up to 12) in the documentation they present to insurance agents. In this way, farmers can receive higher indemnities than their farm operations deserve based on inflated yield estimates. 

As journalist Jessica McKenzie concludes on The Counter, “this essentially means farmers can rewrite history, and pretend that the region isn’t as arid or bad for crops as it really is.” An Environmental Working Group report wrote that with this provision, “crop insurance becomes a form of annual income support that encourages farmers to keep planting crops that fail more often than they succeed.”
Prevented Planting:
Prevented planting refers to seasons when external issues, such as flooding, make it challenging or impossible for farmers to plant crops at the appropriate time. For example, heavy rains and flooding across the Midwest in spring 2019 caused an unprecedented 19 million acres of insured acreage to go unplanted. Since farmers’ crop insurance rates depend on their yield history, reporting low yields for one year can cause premium rate spikes. Farmers can make claims for “partial prevented planting” yield loss, which requires them to report yields at 60% of average, which will raise their premium. Farmers can also claim a “full prevented planting loss” if they completely desert the field for that year, allowing them to receive full indemnities for their loss while maintaining their deductible. 

Farmers rationally would prefer to grow nothing rather than to have low yields. As evidence, 99.9% of the time farmers choose to take full prevented planting loss over partial. As an NRDC report explains, not only are prevented planting payments expensive - costing $9.8 billion over the past decade - but “there is no requirement or incentive to protect the abandoned ‘full prevented planting’ acres, which will be exposed to the elements and susceptible to erosion and degradation if nothing is growing there. This degradation can make the land more prone to losses during years when farmers are able to plant a crop there.”  

Disregard for Diversified Operations:
Though crop insurance is meant to be available for over 100 crops, 94%  of coverage goes to only six commodities. This presents a challenge to farmers seeking to reap the rewards of managing more diversified and specialty crop operations, which can also be more resilient to the challenges of extreme weather.

There are three main barriers to accessing insurance for specialty crops, such as fruits, vegetables, and specialty grains. First, policies for these crops are only available in a limited number of states. For example, strawberry policies are only accessible in California and green bean policies are only available in three states. Second, only 13 crops are eligible for protection, and only in certain regions. The Farm Advisory Service (FAS) attributes this deficit to the lack of market instruments used to determine revenue insurance indemnities for specialty crops, specifically that “these crops often do not have centralized price discovery mechanism such as a futures exchange for developing price projections prior to planting. They also often lack data on actual harvest-time prices.” And finally, coverage is still not available for a number of niche crops, including blackberries, lettuce, and most leafy greens. 

The key barrier to accessing policies for diversified operations seems to be that, for the most popular policies, farmers have to sign up for unique coverage for each crop that they grow. For diversified operations, the paperwork required for creating this type of contract, which includes three years of yield history, can be an insurmountable logistical hurdle. 

“There isn’t a package ready for non-commodity crops where you can say, ‘I want this,’ and they have something you can apply for,” says Sally Worley, Executive Director of Practical Farmers of Iowa. “It doesn’t really exist like that here.” 

The 2014 Farm Bill did include a new crop insurance option, called Whole Farm Revenue Protection (WFRP), which removes some of the barriers to crop insurance protection of diversified farming operations. This policy insures the entire farm, whatever the mix of crops and livestock, rather than requiring farmers to set up policies for each individual crop.

Unfortunately, enrollment in the program is low, which has been attributed to both lack of awareness on the part of farmers and lack of understanding or advocacy on the part of insurance agents. Additionally, some stakeholders report that the return on investment for using the WFRP option is so low that it doesn’t merit the intensive application process required, which includes preliminary revenue history forms, three reports during the growing season, and various worksheets. On top of that, insurance agents are compensated based on the value of each policy they write rather than the time it takes to create the policy. Since the paperwork for a WFRP is much more laborious, agents often see little upside to working on these policies. All that being said, the WFRP option marks a step in the right direction for supporting diversified farming operations. 

Yet it’s a step that few farmers want to take, even though lenders and investors see the insurance as a risk reducing factor.The National Sustainable Agriculture Coalition states that “lenders often require farmers to have crop insurance in order to qualify for loans.” 

“We do see [crop insurance} as an attractive feature,” says one farmland investment manager, who asked for anonymity when discussing capital criteria. “It helps to satisfy that some of the risk is being mitigated.” So farmers feel pull to insure from lenders and from regulators. 

Implementation Imbalance: Massive Federal Funds for a Small Share of Farmers

The federal government spends an average of $8 billion per year on subsidizing the crop insurance system. In 2019, based on lower crop yields, lower prices, and a large number of prevented plantings, the USDA estimates the government will spend $10.5 billion, which would be the highest pay-out since the drought years of 2012 and 2013. In contrast, the farm bill allotted $1.75 billion for EQIP (Environmental Quality Incentives Program) financial and technical assistance for agricultural conservation practices and only $400 million over ten years for research on organic production systems. 

The surveys we mentioned earlier indicate that the American population believes that the main beneficiaries of crop insurance are small family farms that face high risks of failure without it. The actual distribution skews the other way. In 2017, family farms defined as large or very large (with an average of $357,000 in annual household income and $1.7 million respectively) and non-family corporate farms made up 4.1% of US farms and received 51% all crop insurance indemnities. In 2018, the same demographic of farmers received 43% of indemnities.

Again, the vast majority of farm insurance pay-outs go to only a handful of crops. Six commodities in the U.S. - corn, soybeans, wheat, cotton, rice, and peanuts - receive 94% of crop insurance pay-outs, but they represent only 28% of total farm and ranch receipts. Farmers and ranchers that produce other key agricultural products, such as milk, beef, poultry, eggs, tomatoes, apples, and lettuce, receive minimal insurance support. 

The Congressional Research Service describes the problem this way:  “When farm program payments are linked to specific crops, they can influence relative market incentives and resource allocations. The stronger the payment-to-crop linkage, the greater the potential for producers to alter their crop choices based on the relative likelihood of program payments.” Farmers are incentivized to raise the agricultural products that provide them with the least financial risk, leading them to rely heavily on short rotations of whichever of the six top conventional commodity crops grow in their region, decreasing the diversity and resilience of their land. 
Opportunities for Reform

Crop insurance reform is not a partisan issue. From conservative and moderate think tanks to progressive environmental groups, an ideologically-diverse set of groups agree that the crop insurance system is detrimental to the economy, the environment, and the majority of farmers. This section describes a number of reform proposals put forward by these organizations. 

Remove Disincentives for Cover Cropping: 
The AGree Economic and Environmental Risk Coalition includes researchers, academics, farmers, former USDA officers, and NGO leadership who together “advocate for common-sense policies that protect both natural resources and farmer’s livelihoods.” Through a series of dialogues with thousands of stakeholders, AGree determined that crop insurance was a primary lever informing farmers’ cropping and management decisions. Thus, they developed a specific Crop Insurance and Conservation Task Force. 

“The goal of the AGree Coalition is to see crop insurance ratings take into account the risk-reduction benefits of conservation practices,” says executive director Deborah Atwood. One of AGree’s first aims was to remove the disincentive for covered farmers to plant cover crops, a key regenerative farming practice that can help prevent erosion and improve climate resilience. Before 2018, the Farm Bill impeded the adoption of cover cropping by imposing strict and inconsistent termination dates by which farmers must kill their cover crops. These dates may not make sense for a farmer’s local context. If farmers did not follow these strict, specific guidelines, they were at risk of losing their crop insurance.

After lobbying by AGree, the 2018 Farm Bill provides farmers with more flexibility in when and how they plant and terminate cover crops while remaining eligible for insurance. Indeed, the revised Good Farming Practice Handbook states that “the use of NRCS Conservation Practices (including cover cropping) will have no impact on Federal crop insurance coverage.” Though this change does not incentivize planting cover crops, it no longer impedes their planting. 

Increase Data Sharing Across the USDA:
As described above, the scientific evidence tying regenerative practices to farm resilience and risk-mitigation still relies on site-specific data. System data creates systemic reform. Only a “denser network of case examples [can] really prove” the tie between regenerative farming and resilience “and understand how to give prescriptions to growers,” argues Emma Fuller of software firm Granular.The AGree crop insurance task force believes that the best way to build this case is to establish data sharing amongst the three departments at the USDA - the RMA, which manages the crop insurance system, NRCS, which provides financial and technical assistance to farmers and ranchers that want to adopt conservation practices on their farms, and the Farm Service Agency (FSA), which manages commodity price guarantee programs. AGree states that aggregated data amongst the three arms could “shed light on how conservation practices affect crop yields, farm and ranch profitability, and soil health.” The NRDC points out that this data could also allow the crop insurance system to make “actuarially justified rate adjustments for farmers based on their management practices, and ultimately encourage more farmers to adopt risk-reducing practices,” meaning that farmers with regenerative, risk-mitigating systems could pay less for crop insurance coverage.

In response to the efforts of the AGree Task Force, the 2018 Farm Bill directs the USDA to create an agricultural data warehouse, where information that is currently siloed in the three separate departments could be gathered and organized. However, a culture and history of safeguarding producer data within the RMA, described by interviewees who prefer to remain anonymous, may make collaboration amongst the three arms of the USDA challenging. 
Cap Subsidies Tightly:
The Environmental Working Group, The National Sustainable Agriculture Coalition (NSAC), and the smaller Center for Rural Affairs advocate for strict caps on crop insurance premium subsidies in order to limit the amount that large and very large farms can profit off of government pay-outs. Specifically, the Center for Rural Affairs advocates for a $50,000 subsidy cap per operator. NSAC links the crop insurance system’s “unlimited subsidies” to large farm operators to “farm consolidation;” as rich farmers get richer, they can continue to expand their operations, leading to “declining farming opportunities” for new, small-scale, and minority farmers. The group argues that, by starting to break this cycle of expansion, subsidy caps will increase “economic opportunity” for rural communities and diverse farmers. This reform effort links to the “healthy communities” principle in the RAI’s regenerative agriculture definition, which includes equitable access to land and resources. 

Eliminate Yield Exclusion:
The Natural Resources Defense Council (NRDC) calls for the complete elimination of the yield exclusion option. By removing the option, farmers will no longer have this perverse incentive to continue managing their crops using a failing conventional strategy. Instead, the NRDC argues, this reform will encourage farmers to “adapt to the challenging conditions and try a new strategy.” These new adaptive strategies should include regenerative practices such as diversifying crops to help reduce pest and disease outbreaks and planting cover crops to improve soil quality and help reduce the on-farm impacts of extreme weather.

Reform Prevented Planting Rules:
The NRDC advocates for reformed prevented planting rules that incentivize risk-mitigating practices such as cover crops by either “requiring cover crops during years when a full prevented planting loss is incurred or by assigning higher yields to farmers who use cover crops.” Through the first option, farmers would protect acreage vulnerable to soil erosion and degradation. And through the second option, farmers would be rewarded for using a key regenerative practice. 

Eliminate Revenue Protection and Advance the Whole Farm Revenue Plan (WFRP):
Reform can cut a bipartisan figure. The Heritage Foundation, a right-wing think tank, advocates for the RMA to offer only yield protection for risks such as extreme weather and disease, rather than revenue-protection policies, which cover risks to profitability caused by market fluctuations. The group argues, “the recent shift towards revenue-based policies is a means to provide excessive protection for farmers for even minor dips in revenue. These policies go way beyond the concept of a safety net.” Their belief is that farmers should be able to lose due to the market, in order to promote innovation and adaptation in their agricultural practices and business models. 

As described above, the Whole Farm Revenue Plan covers diversified cropping systems, a foundational element of regenerative agriculture, but it is not well known or understood by farmers or crop insurance agents. The NRDC calls for the USDA to increase participation in the WRFP program by educating insurance agents about these policies and encouraging them to promote them. More specifically, the National Sustainable Agriculture Coalition (NSAC) advocates for a pilot program that provides increased compensation or an alternative compensation structure for agents working on WFRP policies in order to remove the disincentive to write these more laborious programs. This reform would allow the crop insurance system to both better financially support farmers that already manage diversified operations and incentivize conventional monoculture farmers to diversify, knowing that the risk of their transition to new crops would be mitigated through insurance coverage. 

Next Steps on the Regenerative Frontier 

It is clear that crop insurance perversely incentivizes cropping practices that are detrimental to the majority of America’s farmers and farmland, creating a significant barrier to the adoption of regenerative agriculture. In order to stimulate a large-scale transition to regenerative systems that create better outcomes for people and the planet, the crop insurance system must be reformed not only to remove disincentives to regenerative practices but to include incentives, providing upsides to farmers who adopt these practices. Whether non-profit managers, scientists, investors, or business leaders, regenerative agriculture proponents have the power to join reform efforts and advocate for sensible policies that support farmers who already do this work and encourage conventional farmers to transition.