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.