ADM Crop Risk Services

GRAND ISLAND, Neb. (DTN) -- There is no shortage of farm-bill proposals for agricultural economists to study, but there is a problem trying to make sense of how each program would play out at the farm level.

Several university extension specialists in Plains states are holding risk management and crop-insurance forums this week. Experts thought they would have a single farm bill to break down by Tuesday, but the leaders of the House and Senate Agriculture Committees missed a self-imposed deadline to roll out a bill. Right now, everyone is relying on studying some of the proposals that are at times difficult to analyze.

"It's very fluid," said Kansas State University agricultural economist Art Barnaby. "It's hard to tie anybody down on these plans and the thing is most of this is being negotiated right now behind the scenes."

The House and Senate Agriculture Committees have proposed $23 billion in budget cuts to the Joint Select Committee on Budget Reduction, or the so-called "super committee." That budget proposal, which the super committee could change, right now indicates about $15 billion would be cut from commodity programs over 10 years, demanding changes in the farm safety net.

A policy question, however, is that beyond reflecting the budget cuts, what are policymakers trying to achieve? Right now, much of the talk centers on "shallow loss" or gap protection that would cover farmers from a payment point where the crop-insurance indemnity ends.

Barnaby summarized some of the possible programs being considered, noting that some of the proposal writers have tweaked their numbers, percentages and payment triggers dramatically since then.

Several plans out there being considered create a hodge-podge of acronym alphabet soup. They include the Aggregate Risk and Revenue Management plan, or ARRM, by Sens. John Thune, R-S.D., and Sherrod Brown, D-Ohio; the System Risk Reduction Program, proposed by the American Farm Bureau; the REFRESH Act proposed by Sen. Richard Lugar, R-Ind.; the Crop Risk Options Plan proposed by Rep. Randy Neugebauer, R-Texas; and the Crop Revenue Guarantee Program by Sen. Kent Conrad, D-N.D.

Each plan has multiple variables, but notably with risk management plans, farmers will collect payments a lot less. Under ARRM, for instance, Nebraska farmers would collect a payment less than one in four years. It would also have a $65,000 cap.

Another issue with various plans is that they could encourage farmers to simply buy catastrophic crop insurance coverage and rely on the bump in payment that would come from the new program. The Congressional Budget Office scored budget savings for one of the proposals for that exact reason. The savings would come from lower crop-insurance premium subsidies.

Barnaby said the challenge is creating a gap plan that would trigger at a 10% loss, or 90% of income protection. At the same time, the plan should stop farm losses at 30% or 70% of income, which would cover deeper losses, but also continue to place most farm income protection levels with private crop insurance.
"If I am right and it's the gap approach they are going to, by definition it's the most palatable," Barnaby said. "I know the commodity groups want to be closer to the farm gate, but when you get down to the farm level, it becomes a very expensive program, and also very costly to administrate, which nobody is even talking about that."

After the 2002 farm bill, USDA began looking at cutting Farm Service Agency offices because the programs were easier to administer. The 2008 farm bill programs were more complicated, allowing FSA to justify its offices. Barnaby noted FSA spends $1.1 billion a year in administration to implement programs that will spend less on farmers and shift more demands onto crop insurance.

"The administration costs should be factored in when designing the program because you can create programs that have lower administrative costs," Barnaby said.

The problem with some of the risk management programs proposed is that they are based on three- to five-year crop averages. In some states such as Oklahoma, Texas or Kansas that have had two or three recent disasters with crops, the yield guarantees would have be exceptionally low to trigger payments, Barnaby explained.

"They would start in 2013 with a low yield number because it's a five-year Olympic average yield," Barnaby said.
These low-protection quirks for states with disasters will likely get adjusted upward given that House Agriculture Committee Chairman Frank Lucas is from Oklahoma and Senate Agriculture Committee ranking member Pat Roberts is from Kansas -- two states that have faced struggles with crop disasters in recent years.

Crop insurance already has become a driver of risk management even without a new farm bill. Premiums were $11.7 billion for the 2011 crop year, up 45% from 2010. The crop value covered in 2011 is $110 billion with about 250 million acres covered.

Tom Zacharias, president the Crop Insurance Information Service, said policymakers like crop insurance because farmers take on a role of risk management and share in the program costs.

"We can argue if they (farmers) pay too little or pay too much, but they have a dog in the fight," Zacharias said.
Further, indemnity payments are more timely than SURE, and the program can largely change or adapt quickly to problems that arise in production. Payments also are not in excess of a farmer's losses.

"Crop insurance is a program that has done what it's been asked to do," Zacharias said. "If you look at the proposals, crop insurance is the primary in all of them."

The goal of lawmakers has been to provide more risk management against a major collapse of crop prices while shifting way from direct payments. Risk management, however, means not everything gets covered, and not everyone collects.

Brad Lubben, an economist and extension policy specialist at the University of Nebraska, said models he has run show that payment under some shallow-loss programs might pay $100 million a year in a state such as Nebraska, while direct payments in the state now pay about $350 million.

"There will be a transition here to lower expected farm payments," Lubben said.

As for sticking the farm bill in the super committee legislation, that would prevent amendment changes on the House and Senate floor. Lubben said House lawmakers have shown a willingness to cut programs and would be more likely to eliminate the safety net when looking at record farm income coupled with record deficits.

"I don't know if it survives an open floor debate with the record budget challenges," Lubben said.

Chris Clayton can be reached at chris.clayton@telventdtn.com

(AG)

This has been reprinted with the permission of The Progressive Farmer.