The search for a better safety net continues

By Sara Wyant

It’s that time of year again. Yes, farmers are gearing up their combines for the annual fall harvest. But as this long, hot summer starts to fade, members of each state farm and commodity organization are also preparing for their annual meetings and deciding what they’d like to see changed in their policy books. One of the items that comes up year after year is the status of the farm safety net.

Ever since federal farm programs were first developed in the 1930’s, lawmakers have fiddled with trying to build something better and longer-lasting. We’ve had farm programs trying to manage supplies, cover the cost of production and support prices. In more recent years, the focus has been on managing both yield and revenue risks. Along the way, we’ve spent a few billions on ad hoc disaster payments and we’ve had to learn more acronyms than you can hardly count. (PIK, AMTA, CRP, CCP, ACRE, etc.) . So what will be next as policy makers prepare for the 2012 Farm Bill?

There are a number of options under consideration, ranging from minor tweaks to elimination of entire programs. Delegates attending the recent Iowa Farm Bureau meeting voted to get rid the approximately $5 billion spent on direct payments annually if those funds could be invested in a revenue protection product.
“Voting delegates discussed a wide range of options and acknowledged regional differences, but agreed this Farm Bill must provide a dependable, fiscally responsible safety net for all farmers,” said IFB President Craig Lang in a press release. “Instead of direct payments, we agreed the money should be used to enhance a sound revenue insurance program, risk management and fair trade,” said Lang. Their policy also calls for the ACRE program to be based on county, rather than state, yields and revenue—and to include revenue protection for livestock as well.

Iowa Farm Bureau’s new policy is generating some headlines, but you will likely hear lively debate this fall as farm groups consider changes in several of the major programs which are currently in place. Here’s a preview of those debates.
Direct payments. These fixed, annual payments were first established in 1996 (Freedom to Farm Bill) and were pitched as a way to gradually transition farmers away from the previous system of target prices and deficiency payments. Direct payments have long come under fire from non-farm interests because they are paid regardless of whether or not anything is produced on the land. Critics also point out that direct payments can inflate land prices and rental rates because at least a portion of the payments accrue to the landlord.

Yet, many landowners say that direct payments give them stability, year-in and year-out, that they might not otherwise have for planning and financing. Their lenders love them perhaps more than they do. Another plus: because direct payments are not influenced by current production and prices, they are well-accepted by the World Trade Organization (WTO) and not considered to be “trade-distorting.”
ACRE: Introduced as part of the 2008 Farm Bill debate, the Average Crop Revenue Election (ACRE) program was designed to protect farmers against revenue losses, regardless of whether the loss was a result of price and/or yield. The ACRE program pays when two conditions are met: the state-level revenue for a crop falls below a guaranteed level and when a farmer actually loses revenue on a farm.

The handful of farmers who did participate in ACRE are likely to benefit handsomely. For example, wheat growers are likely to receive almost $90/acre in Illinois and $70/acre in Missouri, says Troy Dumler, Extension Agricultural Economist, Kansas State University. For corn, Texas non-irrigated growers are projected to receive about $70/acre and in Oklahoma, payments could exceed $140/acre. In time, supporters believe that more growers will “warm” to ACRE and the risk management benefits.

Yet, critics complain that the program is too complex and cumbersome, which they say explains why only 8% of the total number of eligible farms elected to participate in ACRE for 2009. To participate, you had to sign up for all program years (2008-2012) rather than just one year. It’s a tough sell to landlords, who may not be accustomed or willing to make a long-term commitment. Participants also had to forgo 20% of their direct payments and and would be eligible for loan rates which are reduced by 30%. Some would like to see the program be annual, rather than multi-year. Others want to see the state-based trigger changed to a county-based trigger, although it would be an expensive proposition.

SURE: The Supplemental Revenue Assistance Payments (SURE) was included in the 2008 Farm Bill as a way to finally put an end to “ad hoc” disaster programs. It compensates growers who farm in or border a county designated as an agricultural disaster area for a portion of crop losses that are not eligible for payments under the crop insurance program or the Noninsured crop disaster assistance program (NAP). Payment calculations are based on a farmer’s revenue from all crops in all counties (including farm program and crop insurance payments) compared to a guaranteed level based on expected yields and prices. If the actual level is less than the guarantee, a payment is made, based on 60% of the difference between the two.

Critics say the payments are too little, too late. Because the law requires the crop year to be finished so that the season-average farm price can be determined, payments may be delayed for months until after the disaster occurred. Southern farmers, say SURE doesn’t work for them, and have been pushing Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) for another $1.5 billion in ad hoc disaster assistance---the same type that SURE advocates pledged would no longer be necessary. The White House promised Lincoln that those funds would be forthcoming, although Secretary Vilsack recently said that he’s still not sure how his agency will find and administer the aid.

Crop and livestock insurance. One of the most widely used and accepted form of price and yield risk management, crop insurance covered over 265 million acres last year, according to USDA’s Risk Management Agency. The Noninsured crop disaster assistance program (NAP) fills in some of the gaps in counties where crop insurance is not offered, but RMA is making a major push to expand coverage to historically underserved areas. In recent years, new policies have been developed to cover livestock and dairy producers from individual loss or gross margin. Other policies, such as Adjusted Gross Revenue (AGR) offer revenue protection for the whole farm.
Growers have the freedom to choose the type and level of coverage, and most growers report that insurance policies are relatively easy to understand and use. Delivered by the private sector as part of a private/public partnership, growers usually don’t have to wade through complex program calculations or the federal bureacracy to get paid.

However, growers---especially in the South----complain that crop insurance needs to be substantially improved for cotton and rice. Non-farm ritics charge that policies are heavily subsidized by the federal government. In addition, the Federal Crop Insurance Corporation (FCIC) pays private insurance companies to administer the program and underwrites a large share of the loss risk---although those payments were cut by $6 billion/year as part of an industry-wide renegotiation this year.
Making changes in any of these programs will likely have budget implications, and that’s where the rubber will really start meeting the road. Lawmakers have already signalled that the next farm bill is likely to be a baseline bill, which means there will not be any “new” money added for programs. So before anyone suggests any changes to the farm safety net, he or she will have to be prepared to say where the money is going to come from. “Show me the money” could become the commonly used phrase in the next farm bill debate.

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Vilsack sends mixed messages on risk management

There have been numerous times in my career when I've asked a fairly innocent question of a Secretary of Agriculture, only to get a rather eye-opening response. My first media briefing with former Secretary of Agriculture Ed Schafer provides a good example. I asked about his position on U.S. sugar policy and he gave me an answer straight from his home state of North Dakota, where he had served as an extremely popular governor. There was a communications staffer in the room, but she failed to understand the implications and intervene.

Schafer was so intent on giving me his perspective, based on his former position as Governor, that he forgot that he was now playing in the big league. The President and U.S. Trade Representative were not amused when they read about his response, which ran basically counter to their international trade policies.

Should he have been given some slack? Perhaps, because it was only his first meeting with reporters. But after awhile, you expect government officials to get the terminology and the policies down, and to not make comments when they don't know the answer.

Now we've got another former Governor in the Secretary's seat and he is unfortunately, making some of the same mistakes---even after he's been serving for more than 100 days.

Secretary Vilsack is definitely trying to walk the line with President Obama's policies, but some of his comments make me wonder whether or not he is shooting comments before he has a chance to really aim. Wednesday’s agricultural appropriations subcommittee hearing on his 2010 budget provides a good example.

As we reported on http://www.agri-pulse.com/, Vilsack sought to reassure lawmakers that "the President’s budget maintains the three-legged stool of farm payments, crop insurance, and disaster assistance.” Problem is, the "three-legged stool" he referred to is “farm bill lingo” for farm program payments: direct payments, counter-cyclical payments and marketing loans---not crop insurance and disaster payments.

Vilsack also went after crop insurance companies for their excessive profits. Now, I understand that big business bashing is in vogue, but his comments represented a very mixed message to the record number of farmers who have been paying for crop insurance.

The Secretary said that, while in the past it was hard to get farmers to sign up for crop insurance, today farmers often have to sign up as a condition of qualifying for bank loans or disaster relief “so there’s now more of a mandate.” Vilsack said the result is that private companies “have seen a huge increase in their market. . . so they are making a tremendous amount of money, billions of dollars. . . There is a tremendous amount of profit. . . We just think that this needs to be a fairer deal for taxpayers.”

Hmmm...Why would lenders require crop insurance? Perhaps because farmers who pay for crop insurance policies, many of which are now based on expected revenue, have a valuable risk management tool that allows them to market a crop prior to harvest and actually repay their lenders. It also makes farmers less likely to go begging to Congress for annual disaster assistance or to rely on the new so-called “permanent” disaster program.

Yes, companies received a lot of money for farmers last year but it was because they were insuring crops that, because of last year’s run-up in commodity prices, were worth billions of dollars. And in places like Iowa, where my family farms, the crop insurance industry paid almost $1.1 billion to the farmers for their losses, according to the most recent summary of business data released by USDA’s Risk Management Agency (RMA).

So what type of situation would these companies be in if they charged less and then had to pay for losses on all of the crops they insured at those higher levels? Probably not too eager to stay in the crop insurance business. At present, there are only 16 firms approved by RMA under their Standard Reinsurance Agreement

And it’s not only the insurance companies that could be impacted. How would farm lenders be faring if they didn't get their loans repaid? How many farmers would be in bad financial straits if they had not purchased crop insurance to cover their crop losses?

It’s unclear to me whether or not Vilsack really wants to create a new three-legged stool. Maybe he wants taxpayers to pay more in subsidies for annual disaster payments and less in subsidies for crop insurance. Maybe he’s just running in so many different directions with so little staff, that he needs more time to get “up to speed” on these issues

Regardless, I hope that he takes a more comprehensive look at what’s working for farmers in terms of crop insurance and what’s not, before taking a stand on this issue. Surely there can be some ways to reduce government costs, while still maintaining a strong risk management system that farmers, lenders and even the crop insurance companies can depend on.

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