Iowa Ag Review: Volume 14, Issue 2
Record crop prices are signaling the world’s farmers to produce more. The recent prospective acreage report released by the USDA shows that the ability of U.S. farmers to grow more is limited by a lack of land. The USDA projects that acreage planted to crops in the United States will increase by about 1 percent in 2008 relative to 2007 acreage and about 2.5 percent relative to 2006 acreage. This lack of a supply response by U.S. farmers shows how insensitive aggregate U.S. planted acreage is to price changes, at least in the short run. It explains why introducing a major new demand for agricultural output in the form of biofuels should be expected to have such a large impact on commodity prices.
The crop insurance industry enjoyed another banner year in 2007, collecting $6.5 billion in premiums yet paying out only $3.2 billion in losses. I estimate that the industry will collect a record $2.8 billion from taxpayers. In contrast, the net amount that farmers received from the program in 2007 was only $750 million. Interestingly, since the beginning of this decade, the $11.3 billion in net payments to farmers (indemnities received minus farmer-paid premiums) is about equal to the amount that taxpayers have paid the industry ($11.1 billion). Overall, taxpayers have spent more than $22 billion since 2000 delivering about $11 billion in net payments to farmers, making crop insurance one of the least-effi cient means by which taxpayers support the farm sector
Crop farmers are enjoying record high profi ts because of dramatically higher market prices. Farmers’ increased demand for land, seed, fertilizer, and machinery has resulted in higher prices and profi ts for sellers of these inputs as well. One industry that is also enjoying the higher crop prices is the crop insurance industry. It benefits from higher prices because the formulas used to determine industry revenue automatically generate higher expected subsidies as crop prices rise. Actual subsidies depend in part on crop losses, but administrative and operating subsidies are directly tied to crop prices. Figure 1 shows how total industry revenues from insuring the nation’s corn, soybean, wheat, and cotton farmers have risen in recent years. Revenues could rise by another 25 percent in 2008 if crop losses are similar to those in 2007.