The unintended consequences of crop insurance

We have entered into an era of climate change and increased extreme weather events with farmers suffering increased volatility and uncertainty in their production. Methods of agricultural risk mitigation are essential and are the topic of discussion at the upcoming Informal AGRIFISH meeting of EU agriculture and fisheries ministers. Crop insurance (CI) programmes are often cited as a key tool for managing risk but, while the goal of reducing volatility in the food system is noble, most existing CI schemes that have been implemented around the world have been shown to be both environmentally damaging and financially irresponsible.

Just as CI is under consideration in Brussels, ministers in Westminster are also discussing implementing CI within the post-Brexit agriculture policy. The Soil Association’s recent policy briefing, “Lessons to learn from Crop Insurance programmes worldwide”, examined the unforeseen consequences of this method of risk mitigation. 

The report looks at examples of crop insurance models on a global scale and concludes that they have negative environmental impacts. The most-widely examined CI model is the system in the United States. American crop insurance programmes have direct correlation with land-use change since “excessive risk transfer creates incentives to plant on marginal and environmentally sensitive lands that would otherwise be too risky to farm” and an estimated 20% of net wetland loss in the US from 1992-1997 was related to increases in CI subsidies. 

In corn farms in the American Mid-West, studies observed higher rates of fertiliser and pesticide use on farms that had greater programme participation. This increase was due to the “psychological wealth effect” as people felt wealthier and therefore were willing to spend more. The studies determined that ending federal CI programmes would reduce nitrogen fertiliser use by 7%-10%. Additionally, monoculture farms tend to prevail under a CI system. While crop diversification has been traditionally used by many farmers as a risk management tool, CI disincentivises diverse crop cultivation and therefore the positive environmental benefits associated with crop diversification are also forgone.

Crop insurance is also a fiscally irresponsible. The public, rather than farmers, bear the majority of the financial burden of CI since it’s a government-funded programme. Therefore, since farmers pay only a minor share of the premium, it means that farmers are likely to financially benefit from yield-loss or mismanagement which creates a classic moral hazard risk. In the United States, the average rate of return on crop insurance for all farmers in all states between 2000 and 2014 was 120 percent per year.

 

As a result of being insured, farmers are less inclined to farm in ways that might better protect them from risk. Organic farming, as an example of agroecological production, has been found to be a successful method of climate risk mitigation. IFOAM EU report “Organic farming, climate change mitigation and beyond states that, “organic agriculture empowers farmers by helping them design agronomic systems that are more resilient towards the impacts of climate change, by enabling them to reduce dependence on external inputs, and by promoting the development – rather than the degradation – of the natural resources on which we depend for food production”.

Farmers across the United States and in many other countries heavily rely on crop insurance, which has the potential to weaken environmental protection at considerable cost to taxpayers. All the evidence points towards riskier farming practices being employed in areas where crop insurance schemes are available, with substantial impacts on land-use change, wildlife and increased agrichemical use. We would encourage EU leadership to explore other options that can support both farmers and the environment.

Honor Eldridge, Soil Association (IFOAM UK)

 

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