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Corn+Soybean Digest

Have You Thought About A New Farm Safety Net?

Congressional ag committees have been preparing for the past year to get an early start on the next farm bill, knowing full well that budgetary issues will be dominant, but a close second will be the national will on whether to support any type of a safety net for agriculture. That diminishes annually and if there is a safety net in the next farm bill it will have to be efficient to avoid criticism and simple enough to gain farmer participation.

What risks will you have to manage in 2013, when the current farm bill expires? Will they be any different than they are now? Probably not much, if at all; but risk-management tools may be considerably different in their approach to protect your revenue. Agricultural economist Vincent Smith of Montana State University offered his perspectives earlier this year at USDA’s Annual Outlook Conference. While many farmers think they know just about all of USDA’s program alternatives, Smith indicated there are many ways to skin the proverbial cat:

1) In 2001, CCC payments were made in 80 different FSA programs.
2) In 2002, countercyclical payments added to the complexity.
3) In 2008, ACRE added a new suite of five standing disaster programs.
4) There are at least 22 different agricultural insurance products.
5) For a Corn Belt farmer with three crops and hogs, there are more than 150,000 farm-wide insurance options from which to choose, not including the ACRE/DCP decision.

Smith says the nation needs to be a Good Samaritan when it comes to development of ag policy. Farmers face atypically severe risks from adverse weather and financial hardship. And he says there is a consensus that farm programs would be efficient, benefit those intended and minimize the effort to help beneficiaries. And he is quick to say the current farm safety net may not be meeting that goal.

For example, government subsidies for crop insurance companies have continued to increase, with insurance company income at $3.67 billion, and government outlays for premium subsidies at $2.7 billion. He says other costs have become burdens on farmers, the cost of the Risk Management Agency, and the cost sustained by FSA for administration of the ACRE program.

To resolve the problems Smith identifies, he suggests a weather-related risk-management program delivered by the Internet, costing much less than $3.5 billion. Farms would be indemnified against drought, abnormal frost, excessive precipitation and extreme heat. He says subsidies would be based on estimated expected value of crop (per acre) and receive a fixed percentage of the crop value as a subsidy (same for all crops). Smith says the data is available down to the township level from NOAA, and the data for assessing indemnities are already collected by a government agency, with delivery costs much lower than what insurance companies provide.

The unanswered questions would revolve around crop planting decisions as they pertain to acreage and yield, as well as crop values. Livestock insurance is not addressed by this plan, and catastrophic event consequences need to be addressed. Smith admits that crop losses are not always correlated with complex weather, so indemnity payments may not be commensurate with losses. However he says weather indexes can be used with county yields, and satellite data can be combined to reconcile weather with crop data.

With the advent of the debate on a new farm program, agriculture and Congress must develop a safety net program that not only works for agriculture, but must be efficient and be acceptable to the taxpayer. Recent farm programs have been too complex, required too many decisions and have shifted money from farm programs into crop insurance companies. A solution might be a more simple weather insurance program applied at the township level, which indemnifies against weather adversities. There are some weaknesses, but resolutions are achievable.

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