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Sunday, March 04, 2012

If (When) There Is A New Farm Bill, It Will Revolve Around Risk Management


What will the safety net look like in the next Farm Bill?  You may ask if there will even be a Farm Bill, and some will say that is a fair question.  In the past few years the emphasis has been shifting from agricultural production to agricultural consumption as the various food assistance programs have captured the lion’s share of the USDA budget.  But the House is poised to slash food assistance programs, and will also likely cut farm support programs, so what is left and what will it look like, when the debate is finished and the vote is taken?

At the recently-concluded Commodity Classic, there was a stated agreement among the leaders of the various commodity associations representing corn, soybean, wheat, and sorghum producers, which tally over 70% of US cropland.  Their joint statement indicated:

“Commodity Classic provides our organizations an opportunity to come together to discuss important policy issues facing our industry.  As Congress continues work on the next farm bill, our organizations agree that an affordable crop insurance program is our No. 1 priority.  We also stand ready to work with House and Senate Ag Committee leaders to create farm programs that provide risk-management tools to growers when they are facing a loss beyond their control.

“We urge Congress to pass a new farm bill this year to provide the level of certainty in America that a short-term extension cannot. The nation is currently facing record high federal deficits and this requires difficult decisions.  We stand ready to do our part to develop more efficient farm policy that will be responsive to taxpayers and effective in helping farms remain viable and productive.

“Our organizations represent more than 70 percent of all crop acres in the United States.  Agriculture is a bright spot in our nation’s economy, sustainably meeting the expanding demands to provide food, feed, fuel and fiber to the world.  We are pleased to see the Senate and House Agriculture Committees have produced such an aggressive schedule and we thank them for their efforts.”

There is certainly nothing there that mentions direct payments, counter-cyclical payments, target prices, loan rates, marketing loans, setaside, farmer-owned reserve or any of the common farm policy terms of past years.  Supply management agriculture was generally buried with the 1996 Farm Bill, and various income support programs that arose with “Freedom to Farm” have seemingly been replaced with USDA-supported risk management programs, primarily crop insurance.

University of Nebraska farm policy specialist Brad Lubben leafs back through the pages of history on farm programs to develop a trend that may show where Congress could be headed as it bears down on writing a new Farm Bill to replace the document that expires at the end of September.  The House held many program audit hearings last year, then the leadership of the House and Senate Ag Committees made a futile attempt last fall to quickly write a Farm Bill for the failed Super Committee, but both are back in gear to write a new Farm Bill by summer.

Lubben reminds us that the initial Farm Bill in 1933 was in the height of the Depression and was designed to keep farmers on the land producing food, which was needed by the consumers and also to keep farmers out of city unemployment lines.  The key was management of the supply by restricting production as a means of driving up the prices paid by consumers (and also livestock operators.)  It was all orchestrated with acreage reduction, storage programs, marketing restrictions, and commodity loans to provide working capital.  At the time there were really no exports to worry about.  But that changed with the Russian wheat deal in the early 1970s, and that mean supply management had to be re-thought.  Income support programs were introduced as a means of creating a safety net in the wake of problems that farmers could not control.

The 1985 Farm Bill changed commodity loans to marketing loans in an effort to reduce government stocks and end the Farmer-Owned Reserve.  But the 30 million acre Conservation Reserve still was a means to control over production.  Successor programs developed the direct payment to add income to $2 corn and $5 soybeans, along with counter-cyclical payments that would provide more of a subsidy payment as prices fell further.  Those programs still exist, but the direct payment program has been the target for farm critics and commodity prices are nowhere near the level that would trigger a counter-cyclical payment.  Instead the most recent Farm Bills have bolstered the crop insurance program, offering more alternatives, increasing premium subsidies and making the program more attractive to farmers to manage risk than to prop up prices or reduce production.

During the last growing season, USDA crop insurance protected over $100 billion worth of crops, and provided about $8 billion in premium subsidies and assistance to companies that were administering the programs.  The ACRE program, which was designed as a safety net program, received little participation because of complications and landowner confusion, but had the potential of being a transition from income support to risk management support. 

For the coming Farm Bill, if the Ag Committees can determine how much money will be allocated for USDA programs, headway will be made on development of a safety net program for farmers.  However, the trend of the past 80 years certainly points toward risk management programs, such as crop insurance, being the work horse of any safety net. Lubben says that is the evolution of farm programs.

If a new Farm Bill will be written by Congress, it will have no supply management, no income support, and probably built around a crop insurance program that will allow farmers to manage their own revenue risk.  Over time, farm policy has changed to reflect the realities of the US economy, and in the past 80 years those changes have lead to today’s focus on risk management.  Even farm groups have endorsed the concept and pledged to work with the government on development of programs to manage risk, rather than income support. 

Posted by Stu Ellis on 03/04 at 11:08 PM | Permalink


I came across your blog when googling for cool biotechnology articles – didn’t expect to find this, but enjoyed some of your posts. Keep it up. Neilesh Neilesh: Thanks, glad you wandered by. ~Stu

Posted by: Neilesh Kumar (Biotechnology Afficionado) at March 5, 2012 1:01PM

If there were a "safety net" for other risky enterprises like restaurants, Broadway shows, and designer fashions, we'd have a whole lot more of them. Not better ones, just more. They would hurt the folks who actually were better at doing these things by flooding the market, raising demand for inputs, and distorting price signals for the end product. Sound familiar? If the new insurance based programs really *are* insurance, the government ought to be able to get out of this business very rapidly once it takes hold, since capitalists will gladly take on properly priced risks. I'm afraid the program will just turn out to be more handouts in a Haloween costume. Phillip: If crop insurance premiums were not subsidized, they would be more expensive; and fewer farmers would purchase the coverage. With a smaller pool of money, the insurance companies would not be able to cover their risk and the program theoretically would fail. There is even a delicate balance now, and with the government cutting income for the insurance industry, it is quickly moving away from a governmental partnership. ~Stu

Posted by: Philip at March 7, 2012 11:11PM

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