Farm Debt Use by Farms with Crop Insurance

Abstract

A potential economic impact of federal crop insurance (FCI) on the farm sector could be through its effect on debt financing. Debate over FCI covers many potential benefits and drawbacks of the program. Amongst many other arguments, proponents note that FCI could be addressing a market failure for crop insurance because private insurance markets alone would not provide the level of crop insurance demanded by farmers and that FCI helps producers manage risk in today’s volatile commodity markets. Detractors note the high cost to taxpayers of subsidizing FCI premiums and potential distortions to planting decisions. Premium subsidies in 2012 were $6.96 billion. The focus of this article is on the relationship between farm-level debt use and FCI participation. Farm debt levels and leverage have been increasingly covered in both the farm media and popular press. Parallels are often made between rising farm sector income over the last decade and the farm boom of the 1970s, which was followed by a severe downturn. The farm sector debt crisis in the 1980s led to many farm bankruptcies and bank failures, as well as broad changes to agricultural lending practices and the creation of Farmer Mac. Although farm sector debt has been increasing, it has been outpaced by growth in farm asset values, and the farm sector debt-to-asset ratio is currently at a historic low. Many of the current concerns about farm debt are related to concentration of debt or the risk of farm leverage increasing if farm income or farm asset values decline.