2002 Agricultural Policy

1
2002 Agricultural Policy Outlook

• Safety Nets

Barry K. Goodwin Department of Agricultural,
Environmental, and Development Economics
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Important Points to Consider

• What are Safety Nets?
• Risk what is it and how can it be managed?
• Why is the government involved?
• Risk management policies and safety nets
• Constraints on safety nets

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The Safety Net Concept

• Central to policy debate and rhetoric but no
  clear consensus on what it means
• Glickman the 1996 farm bill has left our
  farmers without an adequate safety net
• Daschle Congress should provide an adequate
  farm safety net
• Veneman it is important to provide safety
  nets

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What is Risk?

• Unanticipated movements in prices, yields, or
  revenues
• Sources of risks
• output prices (usually most important)
• yields
• input prices
• liability
• capital gains / losses
• policy changes

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Risk Management Tools

• Crop/Revenue Insurance (public and private)
• Disaster Relief
• Futures (hedging, options, forward pricing)
• Diversification
• Vertical Integration
• Production and Marketing Contracts
• Liability Insurance
• Income diversification (off-farm work)

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Why is Government Involved?

• Conventional Wisdom
• Agriculture is more risky
• Farms have less wealth income and more debt
• Small farms are failing at alarming rates and are
  being replaced by large operations
• Markets cannot provide risk management tools

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The Facts

• Average debt/asset ratio low (lt20)
• Many non-agricultural business fail (70 do not
  last gt10 years)
• Small farms yield most production
• 1940, 50 production came from 11.6
• 1992, 50 production came from 3.2
• Enormous gains in productivity (400)

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The Facts

• Average household income for farms and non-farms
  roughly equal (55K)
• Farm households have more assets
• 1998 492K for farms, 282K non-farms
• Off-farm earnings very important to farms a way
  to manage risk
• Many private risk management tools

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Farm vs. Non-Farm Income
Source USDA-ERS
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1998 Income Distribution
Source USDA-ERS
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Economy-Wide Dissolutions
Source US-SBA
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Farm Bankruptcies
Source USDA-ERS
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Is There a Lack of Safety Nets?

• 2000 payments 24 billion (gt 50 of net income)
• 1998 payments 12.2 billion gt pre-FAIR
• 9.5 billion came as emergency aid
• ARPA provided 8.2 billion to expand insurance
• Administration to report 10.4 bill. as amber box
• 84 of payments go to less than 25 of farmers

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Price Risk
Source Ag. Outlook, ERS, March 1999.
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Yield Risk
Source Ag. Outlook, ERS, March 1999.
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Farm Bill Prospects

• Safety Net concept important
• Competing proposals
• HR 2646 (strong vote in House)
• Lugar Proposal (vouchers)-- DOA
• Senate (Harkin) version brought to floor 12/5
• Cochrane-Roberts version

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Safety Net Aspects

• Post-FAIR characterized by ad-hoc
  counter-cyclical payments
• House/Senate versions formalize counter-cyclical
  payments
• Senate House versions very similar
• Cochran-Roberts uses savings accounts rather than
  counter-cyclical payments

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From the Administration

• Farm subsidies are
• Causing unintended/unwanted consequences
• Encouraging overproduction
• Driving up land rents and costs
• Favors go-slow approach (other pressing issues)
• 175K largest farms have incomes gt135K
• Urged the Senate to defeat Senate version and
  support the Cochran-Roberts Amendment
• Veneman much to support in Lugars ideas
• Govt. should help with unexpected, but not let
  farmers be dependent (safety nets?)

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Farm Bill Debate

• Picture changes daily
• Debate promises to be spirited
• Lugar only reason for passing a 170b farm
  bill now is to allow lawmakers to position
  themselves as friends of the farmer in next
  year's election
• Gramm the American farm program would make an
  old commissar of the Soviet Union sick

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Crop and Revenue Insurance

• Created in 1938
• Important recent changes / events
• 1980 Crop Insurance Act
• 1994 Reform Act
• Introduction of Revenue Insurance
• ARPA 2000
• Ad-hoc disaster relief

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Actuarial Performance
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Insurance Statistics
(dollars and acres in thousands)
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Crop Insurance Facts

• Average farmer gets 1.90 for every 1 paid
• Moral hazard and adverse selection
• Very heterogeneous in support
• Hampered by ad-hoc disaster payments
• Encourages production in fragile areas?
• Many new products under development

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New Programs

• Revenue insurance (insure price and yield)
• Introduced about 6-7 years ago
• Very prominent (largest share in many areas)
• Several Programs
• CRC Crop Revenue Coverage
• RA Revenue Assurance
• IP Income Protection
• GRIP Gross Revenue Income Protection
• Schedule F based on historical tax records

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Revenue Insurance
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2000 ARPA

• Approved June 20, 2000
• A response to pressures for safety nets
• Significant increase in premium subsidies
• 50/100 from 55 to 67
• 75/100 from 24 to 55
• 85/100 from 13 to 38
• Entire revenue insurance premium subsidized

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2000 ARPA

• Replaces yields lt60 of t-yield with 60
• Funding for new product development
• Bars direct RD by RMA
• New pilots (e.g. livestock)
• Expanded risk management education

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Things to Watch

• Many new pilots will emerge
• Concern about heterogeneity across regions,
  crops, farm types
• Premium subsidies very high
• Environmental concerns raised
• Policies favor buy-up and revenue

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Domestic Policy Restraints

• Budget considerations
• HR 2646 170 billion
• Lugars proposal 1/3 of HR 2646
• Harkin proposal not scored, est. 174 billion
• Budget concerns, SS lockbox, etc. seem to have
  faded
• Domestic support restrictions of WTO (19.1
  billion limit on trade distorting policies)
• 1998 U.S. reported 10.4b against 20.7 limit

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Relevance to WTO

• EU Ag. Commissioner Fischler- I am surprised by
  House Bill because it does not fit with what
  U.S. said in Geneva
• Combest- There is nothing in House farm bill
  that artificially drives production
• The Economist One of the glories of American
  farm policy is that, whenever you think it cannot
  get any loonier, it promptly finds a way of doing
  so

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What is Production Distorting?

• Counter-cyclical price/income supports?
• Decoupled payments?
• Emergency payments made after the fact?
• Other safety nets?
• Do ex-post payments affect production?
• Wealth effects change attitudes about risk
• Eases liquidity/leverage constraints

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Conclusions

• Everybody loves safety nets, even if they cant
  agree on what they are
• Farm Bill will formalize ad-hoc safety nets but
  exact form still is unclear
• Farm households are doing relatively well
• WTO important, domestic policy a factor
• Watch for many new insurance products

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Questions ?
Barry Goodwin [phone] Goodwin.112_at_osu.edu