Abstract: Precisely How Risky Is Agriculture? The Fall and Rise of Crop Insurance

Shane Hamilton

Abstract

In 1938 the U.S. Congress created the world’s first “all risk” crop insurance. Private firms had sold hail insurance to farmers for decades, but the new government program was intended to address a much wider array of risks—including not only “natural” disasters such as hail and drought, but also the more abstract risks of price volatility in commodity markets.

To date the only histories of the American experiment in all-risk crop insurance have been written by economists and lobbyists for the industry. Economists tell a clear narrative of market failure. As one 1982 attempt to provide a “general theory” of crop insurance declared, “competitive insurance markets generally will not exist.” Or as a 1997 paper by a leading crop insurance economist repeated, “Historical experience strongly suggests that markets for crop insurance would fail to exist without government subsidies.” Lobbyists for the industry tell precisely the opposite story, declaring crop insurance to be an effective, efficient, profitable tool for managing the inherent uncertainty of agricultural production.

This presentation seeks to explain how all-risk crop insurance first came to life, was declared dead at mid-century, and then rose again, zombie-like, from the 1980s onward to stalk the agricultural marketplace. This is not, I suggest, a simple story of either market failure or market success, but instead a story of how policy responses to asymmetrical information have contributed to a process of unsteady financialization of the agricultural marketplace.