Crop insurance is not a safety net when prices collapse
To compensate for the inability of crop insurance to provide a safety net, Lucas is proposing to raise crop target prices. While he offers no numbers, presumably the target prices would cover a significant portion of the cost of production, something that the current target prices do not provide.
This is definitely one way to address the safety net problem, and it is consistent with farm program philosophy of recent farm bills: if crop prices fall, back-fill major farm-revenue reductions with government payments.
To be a true safety net, target prices will have to be increased significantly, and could be costly to taxpayers. Farmers are paid on some proportion of all of the production of the affected crop, and when crop prices fall, they tend to fall across the board, meaning that target price payments need to be paid on multiple crops at a given time.
Something needs to done. Relying only on insurance products—as appealing as that sounds—does not provide the safety net for the bad times that are sure to come. (Too many decades of observing agriculture prevent us from buying into the usual assertion that “this time is different.”)
Lucas and Peterson deserve credit for recognizing the need to provide a true safety net and proposing an approach that is capable of protecting farmers during the bad times. Whether it would be adequate would depend on the target-price specifics.
The target price approach has some down sides, however. In addition to the potentially large taxpayer cost, the extremely low prices during the bad times send unrealistic price signals to crop users, penalizes crop farmers around the world, and opens up the possibility of Brazil-type WTO legal actions. Also, target prices do not help stabilize crop prices nor do they help protect export markets when the extreme “times” are the reverse: when crop markets become very, very tight.
An alternative approach would be to help farmers with a more market-oriented approach that does not rely on government payments. Allowing production to out-run demand and then depending on the government to make up the difference with payments is not the way it works for other industries.
Not allowing burdensome supplies to reach the market is a much better approach. But individual farmers cannot do that alone and food is an everyday consumer requirement that does not vary with price. That is why farm programs exist and can, with the use of grain-reserve and related inventory management programs, be win-win-win for farmers, consumers and taxpayers.