Here is the next farm program and here’s how you work it

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Coincidence, possibly. But the timing is perfect.  Economists from the USDA’s Economics Research Service and Mississippi State University evaluated one of the primary safety net programs under consideration by Congress in its deliberations on the 2014 Farm Bill. 

Whether the Congress pays any attention to the evaluation is hard to predict, but their analysis will play an important part in farmers’ decisions when it comes time to sign up for a farm program, should the alternative become part of the new safety net.  And it likely will.

The agricultural economists from USDA and Mississippi State looked at the so-called shallow loss program, which allows farmers to buy additional crop insurance to reduce the amount of deductible that has to be shouldered in the event of a crop failure.

Their analysis of the Agricultural Risk Coverage (ARC) program, which is under consideration in the House of Representatives.  It was approved last week by the House Agriculture Committee and will be on the floor for debate likely in June.  It is a nearly parallel plan to the Revenue Loss Coverage (RLC) in the Senate’s version of the Farm Bill. In brief:

ARC payments are triggered if actual revenue falls below 88 percent of benchmark revenue, and payments are capped at 10 percent of benchmark revenue for the current year. Payments can either be made on farm or county level coverage. A key difference is that RLC payments are made based on current planted acreage rather than base.

The RLC program uses the midseason price or the average national price over the first 5 months of the marketing year, to determine actual revenue. The coverages are county-based, like GRP and GRIP, in an effort to eliminate the so-called “moral hazard.”

The economists set out to determine how farmers would respond to the shallow loss concept, and whether they would participate or just reduce their overall insurance coverage. 

They say, “A common feature of the proposals is the use of average revenue over an area, usually a county, as the basis for the coverage.In contrast, by far the most popular plan of insurance for corn, soybean, wheat, and cotton producers is revenue insurance based on yields of an individual farm or sub-unit of an individual farm. This leads to questions of how area revenue coverage would affect individual revenue insurance. How would an area-based shallow loss program affect producers’ demand for crop insurance? Would the availability, at little or no cost, of area-based shallow-loss protection change the coverage levels that producers select at the farm level under the subsidized crop insurance program?”

What is important to know is how much premiums are subsidized, which varies widely with the amount of coverage purchased. 

The economists say, “The subsidy rates are 64 percent of the premium for 60 percent coverage, 59 percent for 65 and 70 percent coverages, 55 percent for 75 percent coverage, 48 percent for 80 percent coverage and 38 percent for 85 percent coverage. Under a provision in the 2008 farm bill a producer can also obtain a higher subsidy rate, up to 80 percent, at a particular coverage level by insuring all acres of a particular crop on the farm as a single, aggregate ‘enterprise unit.’  Participation in enterprise units has become widespread since this subsidy modification.”

For the typical Corn Belt farm, the economists conclude that most farmers would reduce their individual crop insurance coverage to a slightly lower level, and pick up the county-based additional coverage. 

They say, “For corn and soybeans, the individual-level coverage level would drop to 75 percent for most representative farms in the Corn Belt when the county-level supplemental coverage is used. These switches in coverage levels at the farm-level suggest that the farm-level revenue is strongly correlated with the county-level revenue because of relatively strong correlation between farm and county yields.”

Summary:

The shallow loss program is designed to reduce the large impact of a deductible in case farmers purchase crop insurance below the maximum level.  However, the supplemental coverage has a lower cost, since it is county-based. 

As a result of the provisions, the shallow loss coverage may result in farmers buying lower levels of insurance coverage for their farm.  Since the ARC and RLC programs are pending in the House and Senate, respectively, and are quite comparable to each other, one form or another or a blend is quite likely to be included in the Farm Bill.  Farmers should quickly learn how the programs work, because they will probably be a choice offered at the FSA office for the 2014 crop.


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