Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

Dear Recipient[1]

My recent posting on this WEB page www.agecon.ksu.edu/risk of the paper titled “If Crop Insurance is Working Why Do Farmers Need Disaster Assistance?” generated a number of emails.  As a result I have made a few minor changes to the paper.  Line 8 in the tables was added to show the maximum traditional disaster aid payment.  In an insurance setting the maximum payment is the liability or total dollars of coverage.

I hope my postings are useful but it is not my purpose to cause controversy.  However, every once in a while I do post items that people feel strongly about and this is one of those cases. 

I do appreciate the time required by these people to write.  I also assume if this is what they are thinking there are probably a lot more people with similar views.  These writers gave me their okay to use their emails if I removed their name.  I tried to give some indication of their current occupation but in some cases I had to guess.

I have also included my response back to these emails.  I hope what other people are thinking is useful.

Thanks to all of the people that use this WEB page.  Thanks to those people who felt the issue was important enough to email me.

Art Barnaby

Professor, Agricultural Economist,

Research and Extension,

Kansas State University

Home of the Kansas State University Wildcats!

Art

Yours was the best write up on Crop Insurance I have seen.  Good managers, farming productive land, don't get a very good deal compared to hit or miss land like flood plains do they?

Please include catastrophic insurance data for your three tables, maybe that's a better alternative.  I really would like your thoughts on the catastrophic level of insurance coverage and any comparisons you have done with it. 

Thank you for your fine work. 

Grower

Dear Grower

CAT is such a low level of coverage that even with traditional disaster aid the example corn farm can lose $117 below expected revenue before the there is a “floor” in the revenue.  A zero yield combined with disaster aid and CAT is about $117 below expected revenue for the example corn farm.

Figure 1 shows the results of CAT combined with traditional ad hoc disaster.

CAT with a “free” premium provides very little for the low risk farm.  Except for the $100 processing fee, the CAT program is a standing “disaster program”.  Because Great Plains farms are more likely to suffer losses over 50% than Corn Belt farms, CAT and/or disaster aid always work better for the high risk growing regions.  The buy up coverages are still a better deal for high risk farms than low risk farms, but the difference in farmer paid premiums reduces some of that advantage.

In Kansas we have both high risk and low risk.  Wheat in central Kansas carries about the same risk as Iowa corn, but that is not true for far western Kansas wheat.  Some north central Kansas and south central Nebraska center pivot corn carries less yield risk than Iowa corn.

Disaster aid is just “free” crop insurance.  Because the past disaster programs required a 35% yield loss to trigger payments, it was a much better deal for high risk states.  Great Plains farmers are far more likely to suffer a 35% yield loss than a Corn Belt grower.

ART

Dear Art

But your plan is not serving the purpose of buying votes for the next election.  I did not study your worksheet in detail but yes there is definitely a hole in the crop insurance and any disaster aid should be phased in somewhere above that 35% figure and phased out as it reaches 100%. 

There should be also a provision for other insurance to offset, as locally the guys who had the by far best year in 2001 were the ones who received substantial hail damage.  Collecting MPCI, hail insurance and now possibly disaster, they would be laughing all the way to the bank.

While I am rambling, it's so hypocritical to hear our congressional people whine that it was so difficult to go in every year and get the MLA (market loss adjustment) when needed, but they seem perfectly content to bring up a disaster bill when ever needed, again despite all the boasting they did on how great the new crop insurance program was.

I would have to say the crop insurance program, as my concept of the farm bill is assistance in the form of DP (direct payment) and then price support in the form of CCP (counter cyclical payment).  Crop insurances purpose is for acts of God type of problems, part of the problem is when prices are below breakevens and then they base the insurance price on that and only pay on a percentage you easily see that leads to a problem.  But farmers (I should say humans) are their own worst enemy because if we have a good insurance price (compared to cash) do you think there just might be a little fraud that happens?  I think the answer might lie in some form of what is already out there and that is an all crop-whole farm gross revenue insurance that is township-region (depending on size) based. Anything below the region average, outside of obvious flood or hail, is looked at with a fine tooth comb and the acceptable farming practices portion is enforced for once.

I for one also think that the entire gov't program should be a counter cyclical type of program, why the heck does anyone need any welfare check at $5.00 wheat(not that its here to stay but the occasional year it gets in that range).  Ideally also if they had an exceptional production year where the gross was enough to provide a profitable year why should the gov't be in the welfare business?

On the question of a hole in the program(s), I have to answer that with another question and that is, is that hole referring to a farmer losing money?  If it is then it is not the government’s role to make sure that no farmer ever has a loss, maybe the hole needs to be reduced but based on the previous assumptions it can't ever be eliminated.

Thanks

Farm Manager

Dear Farm Manager

Is that first 35% of loss a “hole” in crop insurance or a “hole” in the new farm program where farmers lose there counter cyclical payments cause by higher prices and fewer bushels to sell at the higher prices?  I really don’t want to debate that argument because it is very political but the net result is there is a “hole” in the USDA safety net.

Disaster aid would not guarantee profits.  The losses in the tables are revenue shortfalls below the revenue expected for the crop.  There is a large variation in costs between growers of the same crop.  Therefore one could have two growers that achieve the expected revenue but one has a net income loss while the other has a profit.  I defined the expected revenue for the corn example as the average yield times the new crop futures price of $2.32 plus the direct payment.  At $2.32 there would be no expected counter cyclical payment.

When I first worked on the Crop Revenue Coverage contract there were some people suggesting this would guarantee profits and others said CRC would guaranteed price.  Neither is true because it guarantees revenue with a zero basis, and I think most people now understand that revenue is not the same as profit.

One of the reasons the payment was broken between direct payment and counter cyclical payment is that the direct payment is considered non-trade distorting and therefore, does not count in the World Trade Organization (WTO) subsidy limits.  WTO is also the reason farmers were not allowed to prove their yields for the direct payment.  If growers had been allowed to prove yields for the direct payment then it would have been considered trade distorting and subject to WTO limits because the subsidy would have been tied to producing higher yields. 

The counter cyclical (CC) payment is considered trade distorting but non-commodity specific.  If it had been considered commodity specific then it would have been combined with the loan deficiency payments and would have increased the odds of the USA exceeding WTO limits.  The USA may be challenged on the interpretation that the CC payment is non-commodity specific, but that was the best ruling that American farmers could hope for under WTO rules.

Dear Art

Art, perhaps the question was phrased wrong.  If it were phrased as

this:

If the farmer's are "working" crop insurance, why should the taxpayers have to foot another disaster program?  It seems that this question is not the ones that some agricultural (and perhaps political) leaders really want answered.

The answer below might be interpreted by some that agriculture should be considered like a regulated public utility--and guaranteed a level of return.  The impact on returns of events this year is still quite low compared to what was observed in most of the history of U. S. agriculture.  We have moved a long way to transferring much of the risk to the public sector with interesting structural consequences to be observed in the next generation.

Ag Consultant

Dear Ag Consultant

It sure looks like we are going to have a disaster program.

If we are going to have one, then is the past disaster aid program the best method?

ART

Dear Art

Good question.  Some from the urban areas may wonder why not bag crop insurance and just beef up the disaster assistance.

Ag Consultant

Dear Consultant

I have hit a hot issue because I am getting emails on the WEB.  I am getting it from both sides.  Some say that we should not pay disaster aid, while others are getting after me for including the direct payment that farmers have already spent and my work makes things look too good.

Some farmers are saying this hole is the fault of the new counter cyclical farm payment while others are saying it is the fault of the crop insurance program.  The only thing I am sure of is that the first bushel of loss is not an insurable risk at premiums the market is willing to pay.

Some urban areas may wonder why should there be any farm program.  In seminars I have asked farmers "could you farm without the government"?  What if public policy ending all agricultural subsidies, closed down USDA, eliminated extension service, the experiment stations, would the result be no farmers?  Of course this would end my job and the experiment station would argue they are helping to improve technology so that future farmers will be even more productive.  However, is it possible the private market would do that research and education?

Normally farmers say no, they can not farm without the government.  But then I ask if there was no government payment would somebody plant Iowa to corn?

After a little thought, they normally agree that Kansas will be planted to wheat and Iowa will be planted to corn because that is the best use for the land.  Elimination of farm programs would cause only a slight increase in commodity prices because a few marginal acres would not be planted and it may slow down some planting in other countries, but our LDP program probably has already slowed foreign plantings.  The major adjustment would be in land values and cash rents. 

If public policy were to eliminate government agricultural programs there would be a major agricultural adjustment that would be on the scale of the 1980 farm crisis.  I would expect elimination of the farm program would cause land values to fall by 50 percent and land rents would follow.  No need to write any cards and letters on this because this is NOT going to happen.  Public Policy makers are not going to take the political “heat” for that adjustment in the agricultural industry.

However, the point is all of these government payments get bid into land values and cash rents. Only landowners benefit over the long run from farm payments.  But it is a really good question to ask a group of farmers to get them to think about farm programs.

ART

Art, is this an echo of Earl Butz?

Seriously, 20 plus years ago when I was at USDA working on public policy options, it would have been hard for me to imagine that we would be willing to spend the kinds of money that we are on the various forms of disaster assistance including crop insurance.

I don't know if it is good or bad other than my suspicion is that we are hastening the kind of agricultural structure that policymakers say they don't want.

It is especially surprising to me that there is a clamor for crop assistance since, due to hard working people like you; farmers have come a long ways in understanding risk management.  The livestock side for disaster assistance is easier to rationalize.

Ag Consultant

Dear Ag Consultant

I checked the Butz comment with Flinchbaugh.  His comment was “I know Earl Butz”, “I was a friend of Earl Butz” and “Barnaby is no Earl Butz”!

I normally get “hammered” for being too liberal because I am very pragmatic about spending money on agricultural programs.  Many pragmatic policy analysts assume politics require money be spent on agriculture, therefore do as little damage to the market as possible.  Regardless, it is good to recognize the reason the USA has wheat production is because somebody plants it not because of a USDA program.

ART

Dear Art

I am responding to your question "If crop insurance is working, then why do we need a disaster payment (program)?"

First of all, I supervise crop insurance and similar related services for an ag lender in the Corn Belt . 

I thought in 1988 or thereabouts, when the first threat of no disaster payments unless you bought crop insurance, was made, that the government renege on enforcing that concept was just awful, and made us look very dumb as crop agents.

They have done it a couple times since.  And they're doing it again.  The irony of it all is that DP (disaster payment) recipients can get away with buying CAT coverage, which fails to hold the safety net at the same level where the disaster measurement kicks in - 65% of normal.  So, they are setting people up for future disasters.  For agents selling insurance, CAT's don't pay much commission either.

Politically, it would be very dangerous to enforce the threat of having no disaster relief.  Farming is enough of a risk, and enough of a challenge to completely through our US farmers out into the cruel business world.  (Even though government is picking up about half of the premium on crop insurance already.)  Additional financial trouble in US agriculture would only hasten the ongoing trend of the small/middle sized farmer going out of business.  So, it is politically right to step in and "save" the family farmer when something bad happens.

You and I enjoy cheap food, compliments of the farm program, which helps keep the cash flows of agriculture in the black - a little bit anyway.  Absent this flow of government money, we could be facing higher food costs, due to the interruptions in the supply and delivery of the raw product.  Over production and low prices would otherwise be answered by non productive land being left out of production, and the farmers left would only operate what was easy to get to, and productive in the first place.  Another mega trend that would accelerate would be the vertical integration of larger market players who would eventually control critical supplies when short, and drive costs (not necessarily commodity prices) higher for consumers.

So, our government wants nothing to do with mass exodus of family farmers.  And double protection via crop insurance and disaster payments appears to be one way to prevent that.  It makes those of us who sell insurance very angry.  Pending legislation needs to continue to reward those that were pro-active enough to participate in the cost of risk management by purchasing crop insurance.  In fact this is a must.  Without it, we lose a lot of momentum.

Please pass along our frustration over the way this is handled by government.  While I think I understand the logic, it still is grossly unfair.

Ag Lender

Dear Ag Lender

I think one can design disaster programs, if there is going to be one anyway, that does less damage to crop insurance.  I have been providing input to the NCGA on such a policy.  It is their policy and I will leave it to them when and if they release it.

I don’t agree that we would have higher food prices without government payments.  Most of the cost of a loaf of bread is the processing, transportation, marketing, etc. and very little of the cost is a bushel of wheat.  No government subsidy would only slightly reduce planting acres with only a “small” increase in grain prices.  The point is all of these government payments get bid into land values and cash rents.  With no government subsidies, land value and cash rents would fall.  A decline of 50% in land values would not be surprising.  See my response above on this same issue.

ART