Government Programs & Risk
Major Risk Management Programs
- Federal crop insurance was established in the 1930s to cover yield losses from most natural causes (multiple-peril crop insurance or MPCI). Crop insurance operated on a limited basis up through the early 1980s, when insurance availability greatly expanded and premium subsidies increased in hopes of replacing the disaster payment program. Major reforms were legislated in 1994 and in 2000. These included the introduction of lost-cost CAT (catastrophic) coverage and large increases in premium subsidies. In the mid-1990s, revenue insurance was introduced into the Federal crop insurance program and has become the most popular form of insurance. Whereas crop yield insurance covers only yield losses, crop revenue insurance pays when gross revenue (yield times price) falls below a specified level. More than 270 million acres are insured under the Federal crop insurance program, including more than 80 percent of the acres of major field crops planted in the United States.
- Disaster payments are direct payments to farmers on an emergency basis when crop yields are abnormally low due to adverse growing conditions. During the 1970s, there was a "standing" disaster payments program, with payments made without declaration of a disaster area. Regular payments ceased after 1981, but since then ad hoc disaster payments have been specially approved by the U.S. Congress on a number of occasions.
- Supplemental agricultural disaster assistance, introduced in the Food, Conservation, and Energy Act of 2008 (2008 Farm Act), are permanent disaster assistance programs that provide payments to producers of eligible commodities (crops, livestock, farm-raised fish, and honey) for losses incurred as a result of diseases, adverse weather, or other environmental conditions. The program for crop producers is called supplemental revenue assistance (SURE).
- Noninsured assistance program (NAP) payments are made to producers of crops for which crop insurance is unavailable. NAP was created by the 1994 reforms and originally contained an area yield loss trigger in addition to a farm yield loss trigger. The area yield loss requirement was eliminated in the Agricultural Risk Protection Act of 2000.
- Emergency loans have been provided on various occasions to farmers as part of broad disaster assistance packages. Loans are generally repaid to the government at reduced interest rates.
- Emergency feed assistance programs have helped livestock producers obtain feed when local pasture, hay, and forage supplies have been limited due to drought or other adverse conditions.
- Loan deficiency payments(LDPs) protect producers of several major commodities against revenue losses due to low prices. LDPs pay the difference between the government's commodity loan rate and the commodity's loan repayment rate.
- Marketing assistance loans allow farmers to obtain a loan for their commodity at the loan rate and repay it later at a lower loan repayment rate. The net effect is similar to collecting an LDP payment and selling the commodity. Most farmers prefer the LDP method over a marketing loan.
- Counter-cyclical payments (CCPs), introduced in the Farm Security and Rural Investment Act of 2002 (2002 Farm Act), are made when market prices fall below legislated levels. The payments may provide income risk protection to producers of several major commodities when crop prices are low.
- Average crop revenue election (ACRE) is an alternative to CCPs. Producers choosing to participate in the ACRE program give up CCPs and portions of direct payments and loan program benefits. ACRE payments are made when revenue (yield multiplied by market prices) falls below recent historical levels.
Recent Policy Focus
Crop insurance is the major USDA program to help farmers manage risks of crop losses. The size and cost of the Federal crop insurance program have grown since the Agricultural Risk Protection Act (ARPA) of 2000 and the 2002 Farm Act. About 272 million acres were insured in 2008, 67 million more than were insured in 2000. ARPA, which took effect in 2001, increased subsidy rates for higher, more costly insurance coverages, which led to significant premium growth in 2001. More recently, high crop prices have boosted insurance premiums.
Measured in acres, insured program growth has been due largely to new products for rangeland (area hay production) and forage (rainfall and vegetation indexes) that have been offered to producers since 2004. These new products accounted for about 54 million, or 20 percent, of the 272 million insured acres in 2008. Because of their relatively low premium cost per acre, however, they accounted for just 1 percent of total insurance premiums.
Major costs of the insurance program-premium subsidies and administrative and operating subsidies-are tied to the value of premiums. Under the current premium subsidy structure, about 60 percent of total premiums, or more than $5.5 billion in 2008, is paid by the Federal Government on behalf of insured producers. In addition, administrative and operating subsidies are paid to insurance companies for selling and servicing crop insurance policies; these subsidies are based on percentages of total premiums and accounted for about $2 billion in 2008.
Net underwriting gains, the difference between premiums and indemnities, are paid to the insurance companies under the risk sharing provisions of the Standard Reinsurance Agreement (SRA). Under the SRA, the Federal Government and each company share in the gains and losses on crop insurance policies, though the Government, on average, takes a larger share of the losses than the company and the company takes a larger share of the gains than the Government. Net underwriting gains can vary greatly from year to year depending on crop yields and prices. In 2005 and 2006, annual net underwriting gains were about $900 million. In 2007 and 2008, annual net underwriting gains were $1.6 and $1.1 billion, respectively.
The 2008 Farm Act
The Food, Conservation, and Energy Act of 2008 (2008 Farm Act) trimmed some of the subsidy rates and reduced budgetary costs of the insurance program by shifting the timing of payments.
While subsidized crop insurance remains the primary form of assistance provided by the Federal Government against bad weather, plant diseases, and other natural hazards, disaster assistance payments are also frequently provided. Between 2000 and 2007, four ad hoc disaster programs were enacted at a total cost of about $9 billion. The 2008 Farm Act established a permanent Supplemental Agricultural Disaster Assistance program, which includes programs for crop and livestock producers.
The Supplemental Agricultural Disaster Assistance program for crop producers, called Supplemental Revenue Assistance (SURE), is linked to crop insurance. To be eligible for SURE payments, a producer, with some exceptions, is required to obtain crop insurance or, if crop insurance is not available, to participate in the Non-Insured Crop Assistance Program (NAP). The SURE guarantee is based on the producer's level of insurance coverage: the higher the insurance level, the greater the SURE guarantee, up to 90 percent of the producer's expected revenue. Eligible producers in counties declared disaster counties by the Secretary of Agriculture, or in contiguous counties, or those who show proof of an individual loss of at least 50 percent may receive SURE payments for crop production or crop quality loses. Losses are measured in terms of a shortfall in whole-farm revenue, which includes crop insurance indemnities and commodity program payments, so that producers are not paid more than once for the same loss. The SURE payment is equal to 60 percent of the (positive) difference between the SURE guarantee and total farm revenue.
The 2008 Farm Act has continued, with some modifications, the major commodity income and price programs from the 2002 Farm Act (for more information see Program Provisions)-direct payments, counter-cyclical payments (CCPs), marketing assistance loans and loan deficiency payments for major field crops-and has added a new program, Average Crop Revenue Election (ACRE). Direct payments are fixed payments based on historical production of wheat, rice, upland cotton, feed grains and, beginning with the 2002 Farm Act, soybeans, other oilseeds, and peanuts. Marketing loans and CCPs provide income support when crop prices decline below loan rates and target prices specified in the 2008 Farm Act. Loan benefits depend on current production, while CCPs are based on historical production.
ACRE, which is an alternative to CCPs, differs in important ways from the traditional commodity programs. It makes payments based on gross crop revenue and, thus, provides a degree of yield as well as price protection. It also uses recent market prices, rather than fixed target prices, to set the level of protection. By incorporating yield risk and recent market prices, ACRE could be an attractive alternative for producers in areas of high yield risk and for crops with market prices well above the trigger levels of traditional commodity programs. The choice to participate in ACRE, however, is not simple. Producers choosing ACRE must give up 20 percent of their direct payments and agree to a 30-percent reduction in their commodity loan rates. Expectations about future crop prices, yield levels, and price and yield variability are critical elements in the producer's assessment of the relative benefits of the various commodity programs.
While ACRE provides potential income support for producers, it also provides risk management benefits that might overlap with those of the subsidized crop insurance program. Many producers obtain revenue-based protection under the crop insurance program. Even though crop revenue insurance uses different revenue triggers than ACRE, the triggers may be correlated.
Using revenue as the basis for commodity program payments raises questions about the efficiency of a revenue versus price program in reducing financial risk. Some have argued that a revenue-based program is more effective in reducing risk because of the inverse correlation between yields and prices. Widespread yield losses can boost prices above price program trigger levels, providing little or no assistance when producers have little production to market at higher prices. Conversely, high yields, by increasing supply, can drop crop prices, triggering payments to producers even though production and potentially market revenue is high.
A producer's risk management strategy, as a result of the 2008 Farm Act, may change because of the trimming of some of the insurance program subsidy rates, the addition of Supplemental Agricultural Disaster Assistance, and the ACRE alternative to counter-cyclical payments. This raises questions about whether the 2008 Farm Act will provide incentives that could affect total crop production and prices, trade, and regional production patterns, as well as environmental implications.
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