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New, improved crop insurance key to understanding RCCP

Bruce Babcock says the best way for Southern farmers to relate to the National Corn Growers Association's Revenue Counter-Cyclical Program proposal may be to think of it as a much-improved version of crop insurance.

Babcock, professor of economics and director of the Center for Agricultural and Rural Development at Iowa State University, knows crop insurance is not at the top of many Southern farmers' lists of favorite subjects.

“Cotton and rice farmers in certain areas are not big purchasers of crop insurance at all,” he said in an interview in the CARD offices in Ames, Iowa. “It's hard to see a lot of crop risk when you have an irrigated crop such as rice. So their production is relatively stable.”

Such feelings are not unique to cotton and rice producers, says Babcock, whose research on risk management has led to the development of several new crop insurance products, including Group Risk Income Protection.

“One reason corn growers are making this proposal is they think it will provide a better safety net than they have now,” he said. “They think replacing marketing loans and counter-cyclical payments with a revenue-based insurance program that provides them better coverage will give them a better safety net.”

While many think Iowa and Illinois when they think corn growers, the fact is the Revenue Counter-Cyclical Program is more than a product of the “Big I” states.

The National Corn Growers' Public Policy Action Team, the group that developed the RCCP, has representation from Kansas — the NCGA president (Ken McCauley) is from the state — Texas, Minnesota, Iowa, Illinois, Kentucky and others.

“This has won support from all over the country because no one likes the crop insurance program,” says Babcock. “They think it doesn't provide enough coverage, the premiums are too high for the coverage or they don't like that when multiple-year losses occur, the coverage goes way down.”

The fact farmers may be about to receive another disaster payment is another sign the current program isn't working. “Even if it doesn't pass, the fact that it came within three votes of winning in the Senate suggests crop insurance is not the substitute for disaster payments it was designed to be,” he said.

“So, basically, the corn growers said, ‘OK, let's design a safety net that we think will work for us and let's put it in the farm law.’” (Since Babcock was interviewed, the House and Senate have passed disaster aid amendments in the Iraq/Afghanistan supplemental appropriations bill.)

Babcock recognizes making a revenue-based, crop-insurance program the centerpiece of the new farm bill will require a big adjustment on the part of Southern farmers whose thoughts on the program can be summed up by statements like “farming for the insurance.”

“That stigma is certainly there, but it's ironic that with the importance of the marketing loan farmers don't see there is a stigma with that, as well,” he said.

Farm groups like the Corn Growers and Agriculture Secretary Mike Johanns have talked about the marketing loan's tendency to overcompensate producers when they don't need it and under-compensate them when they do.

“It can certainly be a problem, particularly in dryland cotton areas, where farmers can get half a crop and half a payment or they can have a bumper crop and an overpayment (through the marketing loan),” he said. “The current programs protect against low prices, but they do nothing about yield or production costs.

“Hopefully, you buy enough crop insurance to make up for the shortfall in production, but not many cotton farmers buy crop insurance.”

He says the Corn Grower proposal would eliminate the marketing loan by replacing it with a recourse loan; i.e., a program in which farmers could borrow money from the government against their crop but would have to repay the proceeds with interest rather than forfeit the crop to the government if prices fell.

“A revenue-based program would take into account the amount of production you had,” Babcock notes. “You wouldn't just automatically get a deficiency payment because of the low price. If you had a bumper crop, you would reduce the payment to account for the amount you produced.”

Most corn growers would acknowledge they fared well under the current farm bill when they had bumper crops and low prices in 2004 and 2005, he said. “They knew they were getting a $100-per-acre check, and it was a very profitable time for them.

“In soybeans and wheat, they lost crops and that drove the price up. Of course, they didn't get a marketing loan payment. When you target price, it has its downside. That's the whole idea behind targeting revenue, instead.”

Babcock believes farmers will come to appreciate the county-level approach to the Corn Growers' proposal. Unlike the current program, the RCCP triggers payments based on county yields and prices.

“If the cotton price or the rice price goes down, that will help trigger a payment,” he said. “Or, if a widespread weather event occurs. For most farmers, if their yields are down, their neighbors' are down, too. Most yield variability occurs at the county level.”

The revenue-based approach is moduled on a new product called Group Risk Income Protection or GRIP that Babcock helped develop. The program has become extremely popular among Midwest corn producers. “The product is now being sold in cotton areas, but it's not available for rice,” he said.

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