Managing Risk in the Next Farm Bill

USDA releases thinking paper on how to best manage agricultural risk. Compiled by staff 

Published on: May 8, 2006

Agriculture Secretary Mike Johanns released his first briefing papers to get discussion rolling on farm program reform Monday. The first features risk management and highlights different scenarios for future farm bills.

At the end of March, Johanns announced the release of 41 papers summarizing comments from the Farm Bill Forums and that USDA's next step in preparing for the 2007 farm bill would be to glean from those papers a number of themes that warrant further analysis. The Analysis Paper on Risk Management released today (Monday) is the first such analysis paper based on the more than 4,000 comments received orally and in writing during 52 USDA Farm Bill Forums across the nation.

The paper outlines three main alternatives to risk management in the future. USDA released them as part of the paper as a tool for increased discussion about the possibility of each and to provide producers the opportunity to speak out about the scenarios.

The following is an excerpt from USDA's Risk Management Summary.

Alternative 1: Use the existing structure of farm programs but make them more WTO consistent, reduce their effects on resource use and farm structure, and better target them to producers in greatest need of assistance.

The goals of this option could be met with reduced marketing assistance and price support loan rates, reduced counter-cyclical payment rates, higher direct payment rates, and stricter payment limitations. Programs would be less vulnerable to WTO challenges, resource effects would be lessened, payments could be more targeted toward smaller and mid-size farms, but program benefits would remain concentrated with traditional crops and greater reliance would have to be placed on crop insurance or the private sector to manage income variability.

Alternative 2: Replace marketing assistance loans and counter-cyclical payments with a program that pays producers based on revenue shortfalls.

This option would replace marketing loans and counter-cyclical payment programs with a program designed to stabilize revenue. To fully develop this approach, many questions must be answered on program design (level of guarantee? single commodity revenue or a whole farm revenue? revenue on an individual farm or in a region or nationally?) and program delivery (government or private sector?).

This approach would generate cost savings and generally be more effective at stabilizing farm income than our current programs, but could affect supply, demand and prices depending on how the program is constructed and the level of the revenue guarantee. Savings could be used to address other needs or more commodities than under current programs, and WTO concerns may be reduced but not eliminated.

Alternative 3: Phase out marketing assistance loans, direct and counter-cyclical payments and use savings to expand crop insurance coverage, fund farm savings accounts or expand conservation, rural development, or other programs.

Eliminating direct and counter-cyclical payments and marketing assistance loans would reduce Federal spending substantially, lead to a more market-oriented agricultural sector and remove the negative aspects of current programs to expand production and plant certain crops.

However, the reduction in payments to traditional program crops and expansion in conservation, rural development, and other programs could result in a significant shift in benefits from producers of traditional program crops to producers of non-program crops and livestock. Implementation would be gradual over several years to limit adverse effects on land and asset values. Greater reliance would have to be placed on the development and use of private sector risk management tools to manage income risk.

Johanns also announced USDA will explore conservation for its next theme paper.