Production and price impacts of US crop insurance programs

Does subsidized crop insurance cause farmers to alter their crop planting choices? What are the effects of such changes on total crop production, prices, and producer net returns? How might regional patterns of production change? To what extent do the resulting changes in crop production and prices offset insurance subsidy benefits to farmers? These concerns are particularly important in view of the current farm bill debate and WTO negotiations. This study attempts to illustrate the nature of market impacts across regions and for major commodities, as estimated by changes in acreage, production, price, and net returns, directly attributable to Federal crop insurance. Commodity- and region-specific price wedges based on expected crop insurance net indemnities are incorporated into a national policy simulation model that accounts for intra- and interregional acreage shifts and cross-commodity price effects. Simulation results suggest that subsidized crop insurance leads to small shifts in aggregate plantings. Nationally, wheat and cotton acreage appears to increase the most in response to these subsidies. Somewhat stronger effects emerge at the regional level as planted acreage expands most in the plains states. Cross-price and intertemporal price-feedback effects tend to dampen the own-price effect, reducing the extent of the acreage shifts. A related insight is that market adjustments may offset some of the benefits of insurance subsidies to farmers. To the extent that subsidized crop insurance leads to expanded acreage and higher production, market returns to farmers will be reduced due to the inelastic demand for the major crops. This reduction in market returns partially offsets the subsidy benefits of crop insurance.