When crops fail, taxpayers pay.
A popular federal crop insurance program—the Harvest Price Option, or HPO—will cost taxpayers an estimated $21 billion over the next decade in order to guarantee profits for farmers who experience crop failures.
Sen. Jeff Flake (R-Ariz.) and Sen. Jeanne Shaheen (D-N.H.) are aiming to slash agricultural subsidies by eliminating the Option. The bill would keep traditional insurance crop programs in place.
Traditional crop insurance is a safety net protecting farmers during unexpected crop failures. It pays farmers when harvests sell for less than the price predicted at planting season.
An HPO policy guarantees reimbursement based on the highest market price, for example, during a drought that hurts yields and creates a crop shortage that drives up prices. If the crop price at harvest is higher than was anticipated at planting season, and crop yield is lower than expected, farmers with an HPO policy get reimbursed for crop losses based on the higher market prices.
For that reason, HPO policies are popular, insuring in 2016 more than 90 percent of U.S. acres planted with corn and soybeans, and more than 80 percent of acres planted with wheat, sorghum and cotton.
Proponents of HPO claim that without the federal subsidized insurance, American farmers would face harsh economic conditions.
The elimination of HPO most likely won't be the death knell for American farms. It won't even be the end of agricultural subsidies in general. As Reason's own Christian Britschgi has reported, it's not like farmers are short of other options when it comes to taxpayer subsidies.
Joseph Glauber, a visiting scholar at the American Enterprise Institute, recently pointed out to The Hill, prior to HPO implementation in the 90s, the agricultural sector opted to receive similar insurance coverage through the private sector.
Yet HPOs are lucrative for insurance companies as well as farmers. The federal program currently guarantees insurance companies a yearly payment of 14.5 percent of premiums, according to a report of the nonpartisan Congressional Budget Office (CBO). (Sen. Flake and Sen. Shaheen have filed a bill that would reduce that reimbursement rate to 9 percent.)
The federal government also agrees to cover insurance company losses if payouts exceed premiums, the report said. In addition, farmers pay only 40 percent of the insurance premium while the federal government pays the tab for the remaining 60 percent.
"HPO is like insuring your car for $5,000, and getting a check for $10,000 after it's totalled," Flake said in a released statement "It's the kind of program that only makes sense in Washington."