Major Risk Management Programs
Over the years, various government programs have been used to achieve
risk management policy goals.
- Multiple peril crop insurance (MPCI) was established
in the 1930s to cover yield losses from most natural causes. MPCI
operated on a somewhat limited basis up through the early 1980s,
when insurance availability was greatly expanded and premium subsidies
increased in hopes of replacing the disaster payment program.
Major reforms legislated in 1994—introduction of a low-cost
CAT (catastrophic) coverage level, increased premium subsidies,
and a requirement that participants in other farm programs obtain
crop insurance—increased participation to over 200 million
acres, covering the majority of acres of major field crops planted
in the United States.
- Revenue insurance, a cousin to MPCI, was introduced
after the 1994 reforms and has become the most popular form of
insurance in some areas. Whereas crop insurance covers only yield
losses, revenue insurance pays when gross revenue (yield times
price) falls below a specified level.
- 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.
- Non-insured 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 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 under 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.
- Market loss assistance payments were emergency payments
made in 1998, 1999, and 2000 to crop producers. The payments were
designed to cushion the shock to farm incomes from both depressed
market conditions and declining production flexibility contract
payments.
Recent Policy Focus
The 2002 Farm Act has continued major programs
from the 1996 Farm Act—marketing loan provisions (loan deficiency
payments and marketing loan gains) and direct payments for major
field crops—and introduced counter-cyclical payments (CCPs).
Marketing loans provide income support when crop prices decline.
Direct payments, formerly called production flexibility contract
payments, are fixed payments based historical production of wheat,
rice, upland cotton, feed grains and, beginning with the 2002 Farm
Act, soybeans, other oilseeds, and peanuts. Direct payments are
not tied to crop prices or annual plantings. CCPs, also based on
historical
production, provide income support when prices fall below specified
levels.
A number of emergency legislation packages have been enacted in
recent years. Disaster assistance in the form of market-loss assistance
(for low prices) or crop-loss assistance payments (for low crop
yields) was provided to crop producers for the 1998-2001 crop years.
Crop insurance premium discounts, in addition to subsidies, were
included in 1999 and 2000 disaster assistance packages. Ad hoc crop
disaster payments, as well as livestock assistance, were provided
by the Agricultural Assistance Act of 2003.
Crop insurance remains the major USDA program to help farmers manage
risks of crop losses. While participation grew modestly in the late
1990s, some producers considered that crop insurance offered too
little coverage and was unaffordable. The Agricultural Risk Protection
Act of 2000 (ARPA) provided an additional $8.2 billion for insurance
premium subsidies for 2001-05. ARPA raised premium subsidies with
the goal of increasing insurance participation and encouraging use
of higher coverage levels.
ARPA also shifted research on crop insurance product development
from USDA's Risk Management Agency (RMA) to the private sector.
Privately developed risk management products that have been approved
by the Federal Crop Insurance Corporation (a RMA agency) for subsidies
and reinsurance include livestock gross margin and price insurance
pilot programs.
As with other policies, issues of program cost, design, and effectiveness
are concerns in current risk management policy. In the case of
crop
insurance, the goals of broad availability, participation, and
actuarial performance improved throughout the 1990s, but program
costs ncreased
at the same time.
In recent years, questions have arisen as to whether differences
in the dollar-value equivalent of insurance subsidies across crops
might cause farmers to switch from one crop to another, or to plant
on land that might not otherwise be cropped. If so, this could affect
total crop production and prices, trade, and regional production
patterns, and could also have environmental implications. However,
preliminary research at ERS suggests the effects of crop insurance
on planting decisions are rather small relative to other factors
such as crop prices and loan rates.
For Further Details, See...
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