Farm Management Newsletter

Quarterly Publication of Ohio State University Extension

Winter 2001-2002

Safety Nets, Risk Management, and U.S. Farm Policy

By Barry K. Goodwin, Andersons Chair

Risk management has been an important focus of farm policy deliberations over the last several years. Although crop insurance programs have been in existence since the 1930s, the "safety net" concept has taken on new relevance and importance. Little agreement was apparent until the recent House version of Farm Bill (H.R. 2646) was passed by a strong vote of 291-120. The important question now involves the likely actions of the Senate and the schedule of policy deliberations.

Crop Insurance

Although insurance has long been important to U.S. farm policy, it has taken on new importance over the last two decades. The 1980 Federal Crop Insurance Act significantly expanded insurance offerings and implemented very large premium subsidies to encourage participation.

Despite these subsidies, participation remained low, and the actuarial performance of the program has been poor. For example, over the 1980-98 period, the typical participating farmer received $1.90 in indemnities for every dollar paid in premiums.

A major issue that has affected the performance of insurance programs and, in addition, would lead one to question the perceived lack of safety nets, involves the continual provision of ad hoc disaster relief payments. Large disaster payments were made to farmers throughout the 1980s and 1990s.

In 1994, Congress passed the Federal Crop Insurance Reform Act, which provided mandatory catastrophic insurance that was intended to replace disaster payments. However, the years that followed have demonstrated that the legislative discipline necessary to curtail payments in response to low prices or localized yield losses has been lacking.

The 1994 Reform Act did have an important provision that mandated a cost of production pilot program. This, along with developments by private crop insurers, led to the introduction of crop revenue insurance. A variety of different revenue insurance plans now exist, including Crop Revenue Coverage (CRC), Revenue Assurance (RA), and Income Protection (IP). Participation in the revenue insurance programs has been very strong.

1996 FAIR Act

Events in the years that followed the 1996 FAIR Act would lead one to question whether safety nets have truly been lacking. For example, direct payments in 2000 exceeded $24 billion and provided more than 50% of net farm income. Much of this aid came in the form of emergency financial and disaster assistance.

The New Farm Bill

The House version of the 2001-02 Farm Bill seems to formalize much of this ad hoc assistance in the form of counter-cyclical payments that provide substantial support to farmers while maintaining the popular planting flexibility that was provided by the FAIR Act. Estimates of the levels of support provided by the House bill suggest significant increases in support.

Finally, important legislation was directed at the provision of safety nets for farmers through the Agricultural Risk Protection Act (ARPA) of 2000. The Act brought about large increases in premium subsidies for crop (and especially revenue) insurance and provided funds for the development of new crop insurance products. The Act will most certainly result in a variety of new crop insurance products.

Summary

There has been a widespread belief that the post-FAIR farm policy environment failed to provide adequate farm safety nets. This is in spite of record direct farm payments and relatively strong farm household incomes in recent years.

Risk management policies have been available to farmers in the form of crop insurance and, more recently, revenue insurance. This insurance is highly subsidized and generally returns more in indemnities than farmers pay in premiums.

The schedule for the new farm bill remains unclear. Though the final form that safety nets will assume remains unclear, the House version contains provisions for strong support through counter cyclical payments.

The large degree of support provided through these programs is certain to play an important role in upcoming trade policy debates. The European Union has already raised concerns regarding the trade distortions likely to be brought about by the proposed Farm Bill.