Every developed country in the world works to maintain a viable food sector. And every developed country maintains a safety net to keep producers on the land (except New Zealand). In general, our programs should be as minimal as possible; designed to limit loses, not guarantee profits; not be market distorting; and should lead to more farmers on the land, not fewer.
About every five years congress writes a new farm bill. 2018 is a farm bill year (with a real possibility of dragging into 2019). The farm economy is not good and the wish list is long (all budget increases): better dairy program, better cotton program, more CRP acres, higher PLC targets, higher loan rates, foot and mouth vaccine bank. The Secretary of Agriculture is giving lots of signals there will be no additional funds for agriculture. (Update: With the budget the Congress has just approved, is it possible that spending increases are now possible?)
Agriculture needs to choose between title I (ARC, PLC) and crop insurance. Agriculture is sometimes criticized for “double dipping” here, and the criticism is not without some merit. Both programs function as safety nets. They complement each other a little but ARC and crop insurance work very much the same. The farm bill should stop drifting in the direction of these “shallow loss” approaches. Private insurance companies are innovating plenty of those. A simple PLC price floor is a defensible safety net.
ARC and PLC payments lag crop production by 12 months. Raising loan rates closer to market prices (a floating loan rate like Farm Bureau proposes) gives more immediate cash flow support to producers.
Everyone is speculating about a big showdown on crop insurance. In this environment, a strong crop insurance program is a defensible crop insurance program. Premium subsidies and Harvest Price Option are the big targets. I support capping premium subsidies for each producer between $50 – $70,000. I support keeping the HPO but capping the maximum payout at about 150% of the spring price.
We are familiar with the principle of phasing out or capping various subsidies, tax credits, deductions. (Government helps out with something up to a certain point and then a person is on their own to figure it out.) This is how the dairy program has worked: Above 4 million pounds of production, figure on operating without a government price floor.
Objectors to capping premium subsidies predict that larger farms will drop coverage if they don’t get subsidies on all their acres. Conventional wisdom is that an exodus will “leave more riskier, smaller producers in the risk pool”. But no one has offered any data that larger producers file fewer claims than other producers. (Agrisolutions, a large ag accounting firm, has found no evidence of this). If there was evidence of this sort of adverse selection, objectors would have put it on the table long ago.
The National Sustainable Agricultural Coalition has identified 60 producers who receive $1 million or more in crop insurance subsidies. If only those 60 producers’ premiums were capped, just that savings would pay for almost half of a hoof and mouth disease vaccine bank. And crop insurance would be more defensible to crop insurance detractors. Do we really want a 10,000 acre farmer to get the same insurance subsidy on every acre as a 500 acre beginning farmer?
Side Effects of Subsidies
All of us know that any federal crop subsidy – to some degree – gets built into the cost of farm ground. And we accept that – to some degree – as a side effect of having a safety net. But we should not accept this side effect to an unlimited degree. Capping the level of premium subsidies to individuals would somewhat limit this side effect
If premium subsidies aren’t limited, the government – to some degree – is subsidizing the consolidation of American agriculture. If market forces take our industry toward increased consolidation, so be it. But the government should not subsidize that consolidation.
Harvest Price Option
The rationale for HPO is to ensure that a producer can financially cover forward sales in the event of a crop failure. HPO also protects livestock feeders who need most of their production for feed.
HPO has also demonstrated that it can generate windfall payments in extreme situations. 2012 was a devastating crop year in the Midwest. Crop insurance was critical to farmers’ survival that year. At the end of the drought, 2012 was also the best financial crop year for many farmers.
The financial windfall was because of HPO. Unless a farmer was heavily forward priced, 85% APH x $7.50 (corn) is a very big number even for someone with a total loss. Capping HPO payments at 140-150% of the spring acre guarantee would somewhat contain these extreme cases. Forward pricing and livestock feeders can still cover risk above these levels with calls.
Conservation Reserve Program
I support more acres to be eligible for enrollment in CRP (as high as 40 million) or establishing a short term conservation initiative (Soil Health and Income Protection Initiative, SHIPP). SHIPP enrollment would be for 3-5 years, pay 1/2 the county CRP rate, be limited to 15% of a farm.
These changes let CRP function somewhat like a set aside program. I realize that even short term land retirement is ridiculed by some as outdated in the era of globalization. Setting aside some of our more fragile ground makes sense to me in this period of overproduction. The term “soil bank” is an old one but I don’t believe it is obsolete.