New Farm Bill Proposal Addresses Systemic Risk

DC Dialogue

Farm Bureau argues that farmers don’t need help with shallow losses but do need help with systemic losses.

Published on: October 28, 2011

Stating that government agricultural support programs traditionally were intended to provide a safety-net to help farmers deal with “large systemic risk issues” rather than “smaller fluctuations in income” that can result from “average weather and market events,” the American Farm Bureau Federation recently sent a farm program proposal to Congress that is an alternative to earlier shallow-loss proposals.

The highly talked about proposals right now supported by the National Corn Growers Association, American Soybean Association and the National Farmers Union include shallow-loss coverage, or specifically the Aggregate Risk and Revenue Management (ARRM) program.

ARRM is designed to provide protection in cases of multi-year revenue declines and limits payments in any given year. It is designed to have minimal overlap with crop insurance payments. SRRP is designed to make large payments in years of large losses. A Systemic Risk Reduction Program (SRRP) proposed by the AFBF (see here) takes many of its design from the Group Risk Income Plan (GRIP), a crop insurance product that indemnifies county yields.

AFBF proposed the SRRP as an alternative to “shallow loss” proposals that would provide government support after a region, or in some cases an individual farmer, faced some initial loss as little as 5 to 10% of expected revenue. But shallow-loss programs were structured to support “only a relatively small portion of a producer’s potential loss, should a major problem occur,” according to AFBF President Bob Stallman.

Stallman says that farmers have the tools and business skills today to protect against those shallow ups and downs, but need help with the large systemic type losses.

“While this systemic risk reduction program is similar to the current ACRE approach, it does represent a radical shift in the structure of government support. This approach to the safety net concept is to provide farmers with more down-side protection and allow them to deal with the upside end of the risk profile on their own,” he adds.

AFBF’s systemic risk reduction program would provide farmers “area-based coverage” that would be similar, but not identical to core-type policies offered today, but at a minimal charge to the farmer. County level yield data would be used for the area trigger, but where data is limited, a crop reporting district or other geographical region would be used. 

One of the major differences between current core-type policies and the systemic risk reduction program is the price used to determine trigger levels would be based on a three-year average, or a five-year Olympic average, depending on budget considerations.

The AFBF plan would provide very low cost (subsidized) crop insurance policies that pay coverage of 70% to 80% revenue loss based on regional differences, similar to disaster or catastrophic payments. In addition, the producer would have the option to top off coverage with an individual insurance policy. “The regional policy would be given at very low cost, and the individual farmer has the choice to add coverage at rates up to 30% cheaper than current policies,” explains AFBF economist Bob Young.

For example, an individual may want 85% coverage for his farm, so premiums for that individual crop insurance policy would be significantly lower, because 80% of potential loss is already covered through this government subsidized regional program.

Gary Schnitkey, economist at the University of Illinois, has written a great overview comparing the ARRM versus SRRP approaches. Essentially he says ARRM will provide more, smaller payments than SRRP, and provide more support during periods of multiple year revenue declines. SRRP will make infrequent but large payments, and is essentially a disaster program.

“Because SRRP is a deep loss program, it will make much larger payments in years of large yield declines, such as occurred in 1988. Given the current design of crop insurance programs, drought years also will result in large crop insurance payments. Hence there will be overlap between SRRP and crop insurance payments, leading to a case in which crop revenue, SRRP payments, and crop insurance payments exceeds five-year average revenue. This will either necessitate a redesign of crop insurance in which crop insurance payments wrap around SRRP, as suggest in the AFBF proposal. Or it will result in farmers taking lower coverage levels because of the protection offered by SRRP. In either case, the SRRP proposal has a substitution effect with crop insurance.

“ARRM will provide more support in case of multiple years of price declines. For example, ARRM in Logan County [Illinois] would have made payments of $29 per acre form 1998 through 2000, a period of low prices. This compares to $17 per acre for SRRP,” Schnitkey writes.