Farm programs should be supplemented by crop insurance

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Will the next farm bill have a safety net, such as the ARC plan passed in the Senate, or will it only be a comprehensive program of crop insurance?  With the desire by the House to “save” $33 billion compared to the Senate’s $23 billion in “savings,” the House Agriculture committee will be completing its work soon on a farm bill.

Many of the House Agriculture Subcommittees are still holding hearings about issues that will be included.  One of those was the Subcommittee on General Farm Commodities and Risk Management, which Thursday heard from witnesses who testified about a safety net for their particular commodity, as well as whether crop insurance should be the primary safety net in the Farm Bill or part of a larger safety net.  One of those witnesses was University of Illinois Farm Management specialist Gary Schnitkey, who outlined six observations about the use of crop insurance to supplement widely-used farm programs.

  1. Prices have increased for many crops since 2006. Since that year, corn has increased 1.97 times of the average corn priced from 1975 to 2006.  Soybeans have increased 1.77 times the long-term price of beans, and wheat has increased 1.89 times the long term price.  He says such higher prices make target prices and loan rates relatively inconsequential.
  2. Production costs have risen.  Pointing to Central Illinois, he says non-land production costs the past two years have been nearly double what they were from 2000 to 2005, and that does not include cash rent.  He says the breakeven price of corn will be over $4 per bushel on 200 bushel-yielding corn, and financial stress will occur if prices are low or corn does not reach lofty yields.
  3. Crop insurance has become a prime crop insurance program.  Schnitkey says its use has increased over time to the point that 80% of planted acres are covered for corn, beans, wheat, and other primary commodities.  And he says it has become the most important risk management tool on many farms.  Schnitkey says crop insurance may cover revenue loss from lower yield, but does not cover other issues facing farmers, and he says the USDA’s Risk Management Agency should continue with its effort to provide more equitable loss ratios.  As an example nearly twice as much in premiums are submitted for corn than for indemnities received, but peanut farmers get back $1.20 for each $1 in premium paid. 
  4. Gaps exist in crop insurance coverage.  Schnitkey says crop insurance covers revenue loss within a production year, but not from one year to the next.  And he added that if prices slowly edge down, then farm revenue levels will erode without any protection.  The current term for that is “shallow losses” and he says that is what caused financial stress in agriculture in prior years.
  5. Farm bill commodity programs based on revenue can aid in covering multi-year revenue declines.  He said the Senate Ag Committee’s Agriculture Risk Coverage program is such an example, in which a revenue drop below 89% of a five year average would be covered as a supplement to crop insurance.
  6. Revenue-based commodity program spending would be roughly proportional to crop value.  He says payments as a percent of crop revenue are likely to be within a narrow range of one another—suggesting that costs relative to the value of the crop are near one another.

Summary:
A program that bases its payments on revenue can provide effective coverage that will mitigate risk. Designed properly, these programs can complement protection by crop insurance, and result in expenditures roughly proportional to crop value.

Source: FarmGate blog



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