Crop insurance is not a safety net when prices collapse
Until now, Congressional farm bill action has centered on the Senate where the Agriculture Committee has forwarded a bill to the full Senate. The commodity title of this legislation eliminates Direct Payments, relies on crop insurance, and provides farmers with the option to participate in a shallow loss program at either the farm or the county level. It has been criticized by Southern farmers—especially growers of cotton, rice, and peanuts—as providing inadequate protection for their crops. Recent interviews of House ag leaders by Jerry Hagstrom of The Hagstrom Report highlight some critical issues that deserve attention as the House Agriculture Committee begins deliberations on the 2012 Farm Bill.
Hagstrom writes, House Agriculture Committee Chair Frank “Lucas said that the Senate’s ‘shallow loss’ that would cover some losses beyond crop insurance is ‘a great tool’ in good times when prices are high, but would not provide proper safety if prices plummet.
“Because payments under the shallow loss program would depend on revenue comparisons that would gradually go down under such circumstances, ‘there would be a free fall to the bottom,’ Lucas said. On the other hand, target prices written into the bill would trigger prices whenever prices reached a certain level.
“‘You write a farm bill for the bad times,’ Lucas said.’”
In that same article, Hagstrom quotes House Agriculture Committee Ranking Member Colin Peterson as saying, “‘Crop insurance looks like a really big deal, but if prices go down…you’re going to be insuring yourself for a loss,’ Peterson said. ‘I do not see crop insurance as a safety net.’”
According to Hagstrom, Lucas intends on including both a shallow loss program and target prices in the House legislation, allowing farmers to choose between the two.
Economists and analysts inside and outside of Washington have largely ignored the insurance elephant in the room that Lucas and Peterson see so clearly: the inability of crop insurance to protect farmers against extended periods of low prices.
As we have pointed out repeatedly in this column and elsewhere, the very mechanism that makes crop revenue insurance attractive when prices are rising, since “revenue guarantees change each year with changes in annual prices,” also makes it ineffective when prices tumble for multi-year periods of time. Peterson’s statement, “I do not see crop insurance as a safety net” is correct. Crop insurance is an excellent tool to insure farmers against random risks—risks like hail damage, but a safety net it is not.