Three elements of choice for farmers were unfolding, according to a report about the farm bill compiled jointly by University of Illinois economist Gary Schnitkey and Ohio State University economist Carl Zulauf as the full House and Senate were gearing up to debate.
The three choices were described as a farm revenue program, a target price program, and a supplemental insurance program. And we agree the next farm bill will likely include two, if not all three of these programs.
Here’s the gist of each as of mid-May, with our caution that lots of details have to be worked out over other contentious issues (such as cuts to food stamp funding) between the GOPcontrolled House and Democrat-controlled Senate.
- Revenue Program. The Senate version is called Agriculture Risk Coverage (ARC) and the House’s version is called Revenue Loss Coverage (RLC). Both ARC and RLC are designed to make payments when revenue falls below an average of previous revenues. Because guarantees are based on previous revenues, these revenue programs will tend to make payments in cases when prices decline and then stay low over multiple years. In contrast, crop insurance will not provide protection across years. If, for example, the projected price in 2014 is $4.50 rather than this year’s $5.65, crop insurance will not provide protection against the decline from $5.65 to $4.50. Revenue programs are designed to fill this gap in a crop insurance-based safety net.
- Target Price Program. The counter-cyclical programs contained in the 2002 and 2008 farm bills were examples of target price programs. Target price programs traditionally set target prices for the length of the farm bill. Payments then occur when marketing year average (MYA) price falls below the target price. The payment bushels per acre usually are set based on historical yields from a base period. Similarly, base crop acres are set based on historical acres planted. There are challenges for lawmakers. Setting targets below prices actually expected will provide little downside price protection, while setting them too high can result in payments even during high yield years, leading to charges of non-compliance with WTO rules.
- Supplemental Insurance Programs. Both House and Senate Ag Committee bills have these. In addition, there’s a cotton STAX, which is made available for only cotton, with a Supplemental Coverage Option (SCO) for other crops. These supplemental insurance programs enhance crop insurance coverage by providing payments for shallower losses than those covered by the underlying crop insurance policy. For example, suppose a farmer takes a 75 percent coverage level on his/her farm-level crop insurance policy. The supplemental insurance policy will be available from a 90 percent coverage level to the 75 percent coverage level. And the “band” from 90 percent to 75 percent is based on county yields or county revenues, depending on the form of the underlying farm-level policy. Unlike the revenue and target price programs, these supplemental insurance programs do not address multi-year price protection, as guarantees will be reset each year based on current levels of futures prices. Moreover, there may be difficulty in designing these policies for all areas of the United States. For example, some counties may not have sufficient acres in certain crops to calculate county average yields for those crops.