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Wednesday, April 06, 2011

Farm Bill 2012:  What Will The Safety Net Look Like?


When US farm policy began in the 1930’s the consumer was guaranteed a supply of food because the USDA provided a safety net to ensure farmers had the money to buy inputs and plant a crop.  That safety net was composed of loans on sealed crops and target prices, which carried forward through much iteration including the direct payments that are now an institution of sorts.  But with the writing on the wall indicating the days are numbered for direct payments, the farm safety net will probably be closer to a commodity revenue insurance program.  Since it may only be as far away as the next Farm Bill, you might want to know what it would look like.

You utilize insurance companies in all of your life to transfer the risk that you don’t want to assume.  And the small premium that you pay covers the cost of rebuilding a burned out home, a totally demolished automobile, or the visit to the hospital’s cardiac ward where more than a few farmers find themselves.  Insurance companies are happy to take on that risk because it is predictable.  But they don’t want to take on the risk of covering your crop or livestock production because it is not predictable and they want the USDA to pick up the major share of the risk.  That is why Ohio State University ag policy specialist Carl Zulauf says insurance companies depend on USDA for systemic risk.  That occurs when there are production shortfalls over a large geographical area or multi-year declines in commodity revenue that would bankrupt insurance companies.

Subsequently, Zulauf says the USDA and insurance companies have been long term partners in helping farmers manage risk, with the USDA spending $7 billion this year to financially support crop insurance programs.  For the 2012 Farm Bill, insurance programs may be the bulk of the safety net for agriculture, whether you are raising corn, cantaloupe, or cattle.  And those programs will likely have financial support of the taxpayer because of the systemic risk that is too much for an insurance company to indemnify.  Zulauf, in a recent factsheet, calls such insurance company reliance upon public re-insurance an “incomplete market.”  Along with the need for public assistance for insurance companies, Zulauf also suggests that public assistance should not exceed a farm’s loss resulting from the occurrence of a systemic risk.  In other words, a publicly-funded insurance program should only cover a loss and not guarantee a profit. 

Zulauf says it is possible to include both of those issues in an insurance program.  One element would cover farm financial losses for a wide area risk, such as a drought.  Another element would cover farm financial losses for multiple years of a risk, such as a multiple year drought.  And Zulauf says the cost of the program would be the more costly of those two elements.  For a farm to receive an indemnity payment, Zulauf says the farm has to be in the area of a loss and also suffer a financial loss.  He suggests that benchmark revenues for indemnifying losses are not fixed, but change with market conditions.  For example, fixed rate support provides no real support such as counter-cyclical programs or the fixed rate marketing loan, says Zulauf.

What policy makers will have to determine, according to Zulauf, are the geographic area for the risk; the unit of coverage for farmers whether that is a county, crop, or field; and the level of coverage.  The policy specialist says private firms should assume some of the risk, since farmers are also assuming risk.  If the systemic loss program becomes the farm safety net, it would replace direct payments, marketing loans, and the SURE program.  ACRE would not be needed since it would be covered by the systemic risk program.  The systemic risk program would also eliminate subsidies for crop insurance premiums.  Zulauf says farmers gain a program that can protect them from the risk that can cause widespread bankruptcies through no fault of their own, and the public gains a more streamlined program that is less expensive to taxpayers.

Financial pressures and the stigma surrounding direct payments may force a change in the next Farm Bill to a different safety net that is focused on a streamlined version of a revenue-based crop insurance program.  Premiums may not be subsidized by the USDA, but companies would pick up some of the risk.  Farmers may be indemnified for losses, but could not profit from the program.  Such a program would cover the risks that sometimes cause bankruptcies through no fault of farm operators, and would be less expensive to the taxpayer.

Posted by Stu Ellis on 04/06 at 12:00 AM | Permalink

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