The proposed farm bills (with one exception) for the 2013-2017 period are languishing in Congress and have a hole in the safety net. It would take a few years to expose the hole and odds now seem low that it would occur, but it is there just waiting.
The main safety net is crop insurance, with revenue insurance being the most popular type of policy. It accounted for 85 percent of the 189 million acres of corn, soybeans and wheat that were insured this year.
Revenue insurance uses average production history (APH) yield multiplied by price and then multiplied by level of coverage to determine the amount of revenue guarantee. Therefore, if the APH or price declines, so will the guarantee. The price used is determined from a relatively short period, which is one month.
Fortunately, we have experienced several years of historically high prices which have provided a strong crop insurance safety net. Unfortunately, this period, not coincidently, has ushered in record high costs. For example, the cost per acre of raising wheat in North Dakota has doubled since 2006.
The hole in the safety net will be exposed when there is a significant drop in prices. The crop insurance revenue guarantee will fall but costs likely will remain high, at least initially. Potentially, this can expose producers to a large financial loss.
In this situation, what can shore up income? Shallow-loss programs such as the proposed Agriculture Risk Coverage (ARC) of the Senate farm bill and the Revenue Loss Program (RLC) of the House farm bill are designed to only cover up to 10 percent of crop income shortfalls when certain criteria are met.
Also, these programs have similar shortcomings as revenue crop insurance does, but they are slower-acting. Limited payments are made when a calculated "actual crop revenue" is less than a calculated "benchmark revenue." Five-year Olympic average marketing year prices are used in the determination of the benchmark revenue. The impact of falling prices on these safety nets is slower because a multiyear average price is used.
In concept, the programs that provide the last line of defense against the impact of falling prices and could stuff this hole in the farm safety net are the current Marketing Loan and Countercyclical Payment programs and the proposed Price Loss Coverage (PLC) program in the House farm bill.
Loan rates under the current Marketing Loan program are an old component of the farm safety net dating back to the 1933 farm bill. Its mechanisms have evolved through time, but the loan rate essentially puts a revenue floor on each bushel produced. The higher the loan rate, the better the safety net. From 1998 through 2001, market prices were at or below loan rates and large loan deficiency payments were made to producers. However, loan rates have not kept pace to protect revenue against ever-escalating production costs.