NOVEMBER-DECEMBER 1998
1999 -- The Year Of The Safety Net?
by Stephen Frerichs and Richard Pasco Secretary Glickman wants 1999 to be the "year of the safety net". Most recently, in his December 28 radio address he defined this activity as "a year in which we build a strong risk management system anchored in a strengthened crop insurance program." Representative Combest, the new Chairman of the House Agriculture Committee has made similar statements -- "developing an adequate safety net for farmers will be one of the first tasks undertaken by the House Agriculture Committee next session." Chairman Combest talks about insurance covering disaster and revenue losses for crops and livestock. Even the President in his December 12 radio address has called for a stronger safety net: "... with too many farm families still in danger of losing their land, and with crop prices still far too low, we know we must do more to strengthen the safety net for our nation's farmers."
What is a "safety net"? How safe is safe? Does it mean farm businesses cannot fail due to price and production risk? Or, is it a system of risk management tools that help farmers mitigate risk as the Secretary states. Risk management implies that risk will be managed, not eliminated. In turn, this means that the safety net will not necessarily make every farmer safe. How a "safety net" is reconciled with risk management will be a critical policy question in 1999. How much Federal intervention is necessary is a crucial decision. What risks are part of the net are also critical decisions.
This article describes the major Federal programs that are the fabric of the current Federal safety net, the current inadequacies of these programs and several options for consideration in 1999. For the purpose of this article, Federal "safety net" programs are programs that are designed to boost farm income by either making direct payments to farmers, manipulating the supply of a commodity to raise farm prices, or increasing demand for commodities through export programs.
THE "PRICE" SAFETY NET
Traditionally, farm policy has attempted to increase commodity prices, reasoning that this would increase farm income. There are many ways for the government to increase commodity prices. Historically, the predominate Federal feature has been a system of prices guarantees through non-recourse loans. By guaranteeing prices above the market price, the government included surplus production. This necessitated a system of supply management or production controls. This system ensured that farmers would receive no less than a pre-determined price, but farmers often planted crops to meet Federal program designs rather than market signals.
In the 1970s, the transition to market oriented policies began with the enactment of farm legislation that provided direct payments to ensure target prices. Market orientated farm policy evolved further during the 1980s and 1990s and culminated with the 1996 Farm Bill, which decoupled direct farm payments from production and lifted most Federal supply controls. U.S. production of peanuts and tobacco is still limited by a Federal quota system and U.S. sugar growers benefit from import quotas. Nevertheless, the 1996 Farm Bill was a monumental shift in Federal farm policy.
The 1996 Farm Bill is not without a "price safety net" however. In addition to direct cash payments under the flexibility production contract (commonly called AMTA payments), it provides for nonrecourse marketing assistance loans and loan deficiency payments for the traditionally supported crops (including oilseeds). This assistance varies with price, but only when the market price drops below the loan rate, which is set below historical price levels.
The loan rate, set nationally by law and regionally by USDA, acts as a price floor for farmers (but not necessarily for the market). Farmers may take a loan, store their grain with the hope that market prices will increase, and know that they can always forfeit their collateral (the crop under loan) to USDA if market prices do rise above the loan rate. The loan repayment rate is the lower of the county loan rate plus interest or the posted county price (PCP). Since the loan is non-recourse, farmers are not required to pay for the difference in the value of the collateral forfeited and the loan rate. As grain is put into storage and pulled off the market, short-term prices should rise. The loan period is currently nine months. USDA is directed by law to operate the loan program in such a manner as to minimize loan forfeitures, the accumulation of stock by the Federal Government, and the cost incurred by the Federal Government for storage. In 1998, USDA made over $5 billion in loans.
Farmers who are eligible to obtain a loan may agree to forgo it and in return obtain a loan deficiency payment (LDP). The LDP is equal to the amount that the loan rate exceeds the PCP. Farmers who take the LDP may sell or store their grain. In 1998 over 1 million loan deficiency payments totaling nearly $2 billion have been made.
For those crops eligible for the loan and those farmers receiving direct payments, the major complaint with this "safety net" is that it is set too low. The loan rate for wheat, for example, is $2.58 a bushel. The target price (guaranteed price) for wheat prior to the 1996 Farm Bill was $4 per bushel. With an AMTA payment of $.663 per bushel, the safety net for wheat is $3.24 per bushel instead of the previous $4 (a 19% decline). Note this calculation is an oversimplification. It does not take into consideration the frozen payment yields of the previous regime, which are imbedded in the AMTA payment rates, nor does is consider the cost of acreage set-aside programs.
Nevertheless, this lower "safety net" was the source of considerable debate during the 1998 appropriations cycle. Determining a higher level of "safety" was not a smooth process and it led to the first Presidential veto of an agricultural appropriations bill since President Nixon was in office.
The other major complaint is the limited nature of this safety net. The production of cotton, feed grains, peanuts, rice, sugar, tobacco, and wheat has received Federal support dating back to the 1930s (see The Agricultural Law Letter of March-April 1997 for a further discussion). But, in terms of cash receipts, over one-half of U.S. agriculture is not eligible. Livestock and related products, which receive no direct Federal price support, account for 46% of total cash receipts from farming in the U.S. in 1997 ($97 billion out of $209 billion). Fruits, vegetables, nuts and melons account for another 13% of total cash receipts with little or no Federal safety net.
THE CONSERVATION SAFETY NET
Finally, the Conservation Reserve Program (CRP) should be mentioned as a potential component of the price safety net. Today 30.5 million acres are enrolled in the CRP. The acres, under 10 year contracts, are pulled out of production. This lowers the supply of commodities that otherwise would have been planted on this land. Even at today’s low market prices arguably some of these acres would be planted if the CRP did not exist. Clearly, the higher commodity prices are, the more likely the CRP land would be planted.
The Secretary has the authority to enroll up to 36.4 million acres in the CRP. Contracts totaling roughly 3.5 million acres in the CRP expired at the end of fiscal year 1998. The 18th sign up for CRP is currently underway and USDA is expected to sign contracts replacing the 3.5 million acres. Conceivably the Secretary could increase rental bids to sign-up enough land to meet the statutory maximum, pulling another 6 million acres out of production. Alternatively, the Secretary could seek a legislative change to allow shorter contract time periods for additional sign-ups. This would provide additional flexibility to pull land out of production for shorter time periods. It is conceivable that Congress may wish to take a page from history and legislate a large increase in acreage taken out of production by the Conservation Reserve Program. In 1956, the Soil Bank Program was created to pay farmers to take land out of production on a long-term basis. At its peak, the program removed 58 million acres from production.
THE "PRODUCTION" SAFETY NET
The Federal Government often steps in to help when mother nature does not. Unlike the price safety net, more crops are eligible for the production safety net. Two Federal programs provide support to farmers for production losses. The Federal Crop Insurance Program subsidizes insurance products that indemnify farmers for production losses. The Non-insured Assistance Program (NAP) indemnifies farmers who suffer qualifying losses on crops for which insurance is not available. Again, payments to livestock producers for livestock losses are not available, although feed commodities are insurable and are eligible for NAP payments. Also, ad hoc disaster payments have been made in addition to crop insurance payments when production losses are wide-spread.
The common complaint about crop insurance is that the product costs too much for the limited amount of coverage available. The most popular coverage level comes with a 35% deductible. More than 90% of all existing policies have a deductible of 35% or greater. This does not mean that lower deductibles are not available. They are, often at uneconomical prices.
Finally, crop insurance does not provide coverage when losses occur several years in a row. In fact, because the insurance policy is for one year at a time, back-to-back disasters actually work against the insured because the previous year’s performance becomes the basis for predicting performance the next year. Insured yields tend to diminish after a series of back-to-back disasters and premiums rise.
Complaints are myriad regarding the NAP program. The most common complaint is with the area trigger, whereby the area must suffer a widespread loss before individual payments become available (usually a county). In addition, the program carries a 50% deductible once an area does meet the loss threshold requirements.
THE "REVENUE" SAFETY NET
Revenue insurance is a relatively new Federal program. It combines the components of price and production protection to insure against losses in revenue – generally gross revenue for a single crop. Again, it covers only a few crops. It piggy-backs on the existing crop insurance program. However, a "price" loss can trigger an insurance payment. The Federal government has developed an Income Protection insurance policy as a pilot, but lacks authority to operate it nationally. In addition, USDA recently approved a "whole-farm" insurance policy that insures the entire farm revenue rather than revenue from a specific crop. It does include livestock revenue to a limited extent. This policy will be piloted in 1999 for the first time in a very limited geographic area.
The private sector has also developed several revenue insurance products. These products are hybrids as they build on Federal programs (crop insurance). By far, the most popular is Crop Revenue Coverage (CRC). CRC provides revenue protection on a crop-by-crop basis. The CRC premium associated with the "price" risk of the commodity is not subsidized by the government. The Federal subsidy is limited to the production risk component only. Therefore, the out-of-pocket cost to farmers for CRC is higher than it is for traditional crop insurance products.
THE "EXPORT" SAFETY NET
Falling exports are a major cause of distress in farm country. Exports and export programs are vital to the future prosperity of American agriculture and the entire U.S. economy, with more than a third of U.S. crop production being exported each year. Agricultural exports hit a record $60.3 billion in 1996, generating 900,000 full-time jobs, including 562,000 non-farm sector jobs. However, agriculture exports fell by $3.2 billion to $57.1 billion in 1997, and fell further to $42.2 billion for the first 10 months of 1998. While the current export programs identified below have been successful in assisting U.S. agricultural exports, the real answer to declining exports is trade liberalization. Export programs provide U.S. agriculture with the tools to maintain and expand the sale of commodities in the global marketplace. These programs are too extensive to describe in this issue. They will be addressed in the next issue of the Agricultural Law Letter. The programs to be described include (1) the Export Enhancement Program (EEP), (2) the Dairy Export Incentive Program (DEIP), (3) the Market Access Program (MAP), (4) the Export Credit Guarantee Program (GSM 102/103), (5) the Supplier Credit Guarantee Program (SCGP), (6) the Emerging Markets Program, (7) the Facility Guarantee Program (FGP), (8) the Foreign Market Development Program, and (9) the Section 108 program.
THE COMMODITY PURCHASE PROGRAMS
Foreign Commodity Donations Overseas Under Section 416(b)
USDA also has the authority through the CCC, to acquire U.S.-grown commodities under its surplus removal operations, and make these commodities available for donation overseas. This authority is pursuant to section 416(b) of the Agricultural Act of 1949, as amended, during fiscal year 1999.
On Dec. 7, USDA's Foreign Agricultural Service provided notice in the Federal Register, of its determination that 9,500 metric tons of non-fortified nonfat dry milk, and 50,000 metric tons of corn and wheat may be acquired by the CCC for overseas donation.
On Dec. 23, Secretary of Agriculture Dan Glickman announced that the United States and Russia signed two agreements on food aid -- one for concessional credit sales, and one for donations of three million tons of commodities. Under the concessional credit sales agreement, USDA will provide long-term, low-interest loans for Russia to purchase 1.5 million tons of U.S. corn, soybean meal, soybeans, wheat and rice, including 120,000 tons of beef, 50,000 tons of pork and 30,000 tons of nonfat dry milk, all with a current market value of approximately $400 million. Under the donations agreement, the United States will donate 1.5 million tons of wheat to Russia.
Domestic Commodity Distribution Program
First initiated in the 1930's, the Commodity Distribution Program provides a mechanism for USDA to effectively stabilize agricultural prices in times of market disruptions. Under the program, USDA makes large volume purchases of agricultural commodities that are experiencing depressed prices, which helps remove some surplus inventories from the market, and exerts upward pressure on low market prices.
The Commodity Distribution Program serves a dual-purpose of supporting American agriculture and providing low-cost food commodities to the school lunch and other food assistance programs. This program provides commodities for the National School Lunch Program, the School Breakfast Program, the Summer Food Service Program, the Commodity Supplemental Food Program (CSFP), the Nutrition Program for the elderly, The Emergency Food Assistance Program (TEFAP), and Soup Kitchen/Food Bank Program.
Under Section 32 of the Act of August, 24, 1935, as amended (7 U.S.C. 612c), 30 percent of customs receipts collected during each calendar year are used for expanding outlets for agriculture commodities. USDA uses a portion of these funds to purchase commodities for the National School Lunch Program and for other domestic feeding programs. USDA provides nearly $5 billion in cash and commodities to schools nationwide, serving over 25 million lunches each day through the National School Lunch Program.
On January 8, 1999, Vice President Gore announced a novel new program to make approximately $50 million in direct cash payments to small hog producers to enable them to weather their current economic crisis. Maximum payments per producer will be capped at $2,500, and paid at the rate of $5 for each hog marketed. The authority used was Section 32, which permits direct payments to farmers to reestablish their purchasing power. This is the first time in 38 years that payments will be made directly to farmers under the Section 32 program. However, it probably will not be the last time if other agricultural sectors can make a persuasive case for relief.
On Dec. 1, 1998, Vice President Gore announced that USDA will buy up to $20 million in U.S. beef to help improve prices for cattle producers and the livestock industry. During fiscal year 1998, USDA bought 145.7 million pounds of domestic beef products at a cost of $158.9 million for distribution to recipients in federal food assistance programs.
Payment-in-kind (PIK) Certificate Program
The 1980s brought a new federal program designed to control production of commodities already in surplus. This first program used specific payment-in-kind (PIK) certificates. Under the 1983 PIK program, farmers who diverted wheat, corn, sorghum, rice or upland cotton acreage from the farm's base, received commodity specific PIK certificates stating the amount of payment-in-kind due from CCC stocks. Participating farmers thus could take physical delivery of a quantity of the actual commodity that otherwise would have been produced. Acreage withdrawn from production was placed in conserving uses, although grazing was permitted during certain months. The 1983 PIK program was designed to hold down production and reduce bulging CCC inventories.
Unfortunately, the response by farmers to the PIK Program was more extensive than expected. The idling of 77 million acres in 1983 adversely affected sellers of agricultural inputs and also caused commodity prices to rise beyond expectations. Allegations of abuse also were a concern because the regular $50,000 payment limitation did not apply to in-kind payments. In one case a corporate farm in California received about $6 million in corn for idling about one-half of the company owned acres.
A different payment-in-kind program emerged in 1985, which must not be confused with the commodity specific 1983 PIK program. In 1985 the Secretary of Agriculture directed that a percentage of certain government payments to participating farmers be made in non-commodity specific certificates rather than by check. A cash market in these generic certificates was created or holders could redeem them for commodities in CCC inventories. Current law does not authorize such certificates.
POTENTIAL DIRECTIONS FOR CHANGING THE SAFETY NET
This past year was marked by low commodity prices for feed grains, wheat, soybeans, cattle, and hogs, drought in the South and Southeast, and significant reductions in agricultural exports, primarily to Asia. Low prices and reduced exports will persist into 1999. In its December forecast for 1999 USDA projects wheat prices in the $2.60 to $2.80 bushel range, corn at $1.80 to $2.20 a bushel, soybeans at $5.15 to $5.75 a bushel. Since then it has lowered its price projections. USDA also does not expect exports to recover significantly as Asia struggles to regain its economic footing.
Farm conditions will not be improved in 1999. And, unlike 1998, 1999 will start with low prices. If this price situation does not improve in 1999, any debate about a safety net will necessarily focus on low prices. Talk about improving the "safety net" or crop insurance appears to be safe because it does not imply opening up the 1996 Farm Bill and Freedom to Farm. But the 1996 Farm Bill is likely to be opened up if a debate about the safety net ensues in an environment of low prices. Clearly, this is where the discussion around the $6 billion emergency relief in the 1998 appropriations bill revolved. Senate Democrats in particular were pushing a proposal to uncap loan rates. So far, however, talk about improving the safety net revolves around changes to the crop insurance program and expanding revenue insurance.
STRENGTHENING CROP INSURANCE
The Current Crop Insurance Program
Crop insurance mitigates only production risk. While important, it can only be one piece of the safety net because it does not insure against changes in price. As mentioned above, the chief complaint with the crop insurance program is that it is too expensive for the amount of coverage provided. The goal of strengthening the crop insurance program is generally two-fold: 1) increase overall participation in the program; and 2) increase participation at the higher coverage levels. In 1997 about 80 percent of the nation’s crop production was eligible for the insurance program and roughly 63 percent of these acres were insured.
The insurance program today is subsidized by the Federal Government. Farmer premiums are subsidized and administrative expenses are paid as well. The current premium subsidy formula is set by statute. For coverage levels less than 65 percent of yield and 100 percent of the established price (65/100), the government pays for the premium equal to 50 percent of yield and 60 percent of price (50/60). Note, if a farmer carries a 50/60 policy, no premium is due. The premium free 50/60 coverage is commonly referred to as catastrophic insurance coverage. In 1999 the premium free coverage and the subsidy drops to 50/55.
For coverage levels equal to or greater than 65 percent of yield and 100 percent of the established price (65/100), the government pays for that portion of the premium equal to 50 percent of yield and 75 percent of price (50/75). In no case does current law allow the government to pay more than 50/75. Because of this cap, the out-of-pocket cost to the farmer of higher coverage levels increases disproportionately.
For example, the premium subsidy rate on average at the 65/100 coverage level is 42%. At the 75/100 level the premium subsidy rate is 23 percent. Moving from 65 percent to 75 percent coverage roughly increases the total premium by 77 percent. Using a numerical example, if the farmer’s total premium at 65/100 coverage level is $100, the farmer pays $58 and the Government pays $42 (note this is not the government’s cost but more of a book keeping matter). By selecting the 75/100 coverage level the premium would be $177. The farmer now pays $135 (a 133 percent increase). The Government still pays $42.
As a result, most farmers carry 65% coverage or less. Roughly one-third of all acres insured are at the 50/60 coverage or catastrophic insurance level. Over 90% of all acres insured are at 65 percent coverage or less. This means that most farmers carry a deductible of 35 percent or higher.
A deductible of 35 percent or greater appears to be inadequate in light of a wide-spread natural disaster and low commodity prices. The 1998 appropriations bill provides $1.5 billion in ad hoc disaster payments for 1998 crop losses. Most of these payments will be made to farmers who had insurance. For many the payments will be in addition to crop insurance indemnity payments, AMTA payments and emergency market loss assistance payments.
What is Adequate Crop Insurance Protection?
What then is an adequate crop insurance safety net? Or, what is a reasonable deductible? Some have suggested that additional premium subsidies should be provided to encourage farmers to buy insurance with a lower deductible. Several generic proposals have emerged. One proposal would uncap the current premium subsidy formula to provide a proportional subsidy at all coverage levels. Another proposal would invert the current subsidy formula, providing higher levels of subsidy at higher coverage levels and lower levels of subsidy at lower coverage levels.
Uncapping the subsidy formula is not without cost. If the government subsidized all MPCI coverage levels at the same rate as it currently subsidizes the 65/100 coverage (42%), the additional cost to taxpayers could run from $500 million to $750 million annually depending on how many farmers switch to the higher coverage levels as a result of the increased subsidy.
We do not know how many farmers would increase their coverage levels if the subsidy were proportional at 42 percent. Even with a proportional subsidy, the out-of-pocket cost for the farmer increases by 77 percent. In the earlier numerical example, the out-of-pocket cost would increase from $58 to $103 as the insured elects a 25 percent deductible instead of 35 percent. However, we can assume some farmers would increase their coverage.
Some economists argue that the current subsidy formula should be inverted -- more subsidy should be available at higher coverage levels. Inverting the formula, subsidizing the 75 percent coverage level at 42 percent while dropping the subsidy rate at the 65 percent coverage level to 23 percent would probably drive many farmers out of the program. As stated earlier, because of the current rating structure the cost of 75 percent coverage is on average 77 percent greater than 65 percent coverage. A 42 percent subsidy, while significant, may not sufficiently mitigate this basic economic relationship. In addition, if the subsidy at the 65 percent coverage level were dropped to 23 percent from 42 percent (a 45 percent decline), many farmers would be expected to lower their coverage levels below 65 percent.
What level of subsidy is appropriate to attract additional business to the 75 percent coverage level? This is not easily answered. Keeping the out-of-pocket costs the same for farmers as they move from 65 percent coverage to 75 percent coverage would mean that the subsidy rate would have to approach 67 percent of the cost of 75 percent coverage – nearly a threefold increase in the current subsidy rate. Applying this formula to the existing 1997 level of business would cost the taxpayer more than $1.2 billion annually (this assumes no increase in participation). So the rating of 75 percent coverage relative to 65 percent coverage raises the taxpayer cost of increasing the subsidy substantially in order to attract a significant increase in business at the 75 percent coverage level.
STRENGTHENING CROP REVENUE INSURANCE
Unlike traditional crop insurance, revenue insurance provides protection against lost revenue regardless of whether its caused by low yields, low prices or a combination of both. Since farmers pay their bills with revenue – the product of price and yield, one would expect revenue insurance to be a superior product compared to traditional crop insurance, which does not insure against changes in price. Indeed, the three revenue insurance products that have been available in the market since 1996 have proven to be popular with farmers. Yet of the myriad approaches Federal farm policy has taken over the years to boost farm income, subsidized revenue insurance has not been attempted on a nationwide scale.
Existing Revenue Insurance Products
With the exception of a new pilot program in 1999, existing revenue insurance products guarantee gross revenue on a crop-by crop basis. Crop Revenue Coverage (CRC) is the most popular revenue insurance product on the market today. It guarantees a minimum income per acre. The minimum income is the product of the traditional yield guaranteed under the existing crop insurance program times the higher of a base price (price established before planting) or a harvest price. Both the base and harvest price are determined from futures contract prices. Because the revenue guarantee calculation uses the higher of the base or harvest price, CRC provides "upside" and "downside" price protection. Income Protection (IP) provides only "downside" price protection. That is, only if the harvest price is lower than the base price will a revenue loss be considered. Beginning with the 1999 crop, Revenue Assurance (RA) will also provide up- and downside price protection at the option of the insured. It only provided downside protection in 1998.
No Current Subsidy for CRC
Because CRC (and now RA) covers up- and downside price movements, premiums are generally higher than traditional multi-peril insurance, which has a fixed price. Again, the current subsidy formula works against the farmer. The Federal Government currently does not subsidize the component of the premium associated with the price risk. The premium subsidy is capped at the equivalent MPCI subsidy at the MPCI price. If the CRC price were the same as the Government’s price election, the farmer’s out-of-pocket cost for CRC is roughly 50% greater than the equivalent MPCI coverage. However, the CRC price is not likely to ever be equal to the MPCI price election due to differences in price setting methodologies. Because CRC provides a guarantee based on the higher of two prices, in general (although not always) CRC will provide a higher price guarantee than traditional MPCI. The price differential combined with the current subsidy formula means that the farmer’s cost for CRC compared to MPCI is actually greater than 50%.
CRC Helps in Marketing Crops
The ability to aggressively market a crop is the principal advantage of crop revenue insurance product with replacement value at harvest (up and downside price protection). One of the chief concerns of farmers who forward contract the sale of their crop is a major crop failure and the ensuing inability to meet the terms of the forward sale. Farmers can mitigate this risk by purchasing option contracts or by insuring their crop with a revenue insurance product that provides harvest replacement value protection. Because the futures market is not subsidized, the price component of CRC is not subsidized – or so the logic goes behind the current subsidy formula. If one were subsidized versus the other, unfair competition would result. Yet anecdotal evidence over the past two years suggests that farmers are more apt to forward market their crops with CRC than without. That is, the two products might be complementary rather than competitive.
The Option of Subsidizing CRC & RA
One way to strengthen the safety net would be to subsidize revenue insurance products at the same rate as the equivalent MPCI policy. Subsidizing CRC and RA in 1999 and beyond at the current equivalent MPCI level would cost the government $200 to $300 million annually. This would lower the cost to the farmer and allow more farmers to use revenue insurance to more aggressively market their crops. For example, farmers with CRC corn policies this past year received a $2.84 per bushel price guarantee. Yields were large enough such that large indemnity payments under the CRC contract were not paid this past year. But those farmers who forward contracted their corn at $2.84 as a result of their revenue insurance policy are in much better financial shape than those who waited until harvest to sell, receiving a price near the loan rate of $1.89 per bushel.
There are two principal drawbacks to the current crop revenue products. First, the price discovery mechanism relies on futures contracts. Many crops have no futures market. Therefore, a different price discovery method would have to be devised for these crops. Also, with no futures market the ability to take advantage of the marketing benefit that the revenue product provides is greatly diminished. Second, if prices are low prior to harvest and remain low through harvest, the current revenue policy will guarantee the low price. It does not boost revenue above market prices.
WHOLE FARM REVENUE INSURANCE
For products without a futures market and those commodities for which insurance is currently not available, a revenue insurance product that protects against revenue decline for the entire revenue of the farm rather than crop-by-crop may be a feasible alternative. USDA will pilot such a product in 1999.
The product, “Adjusted Gross Revenue”, will be available in selected counties in four states in 1999. The pilot is intended to test the feasibility of insuring producers who primarily grow crops that are currently not insurable. However, it could be easily expanded to include crops that are insurable, but for which no futures contract market currently exists. The insurance plan is based on a farmer’s previous five years of Schedule F tax information.
As with any completely new product, there are bound to be kinks to be worked out. One thing is clear with this approach however. Farmers will not be able to forward market individual crops with the whole farm product.
SUPPLEMENTAL REVENUE INSURANCE
As stated earlier, 1999 will start with low prices, and it may end with low prices. Therefore, any safety net debate will have to address low prices. In addition to rehashing the debate about the adequacy of the current loan rate levels and AMTA payments, a revenue insurance product that provides an “above the market price” revenue guarantee should be considered.
Under this option the Federal Government would subsidize an additional price endorsement above the existing price guaranteed by the crop revenue policy. Private insurance companies already offer such an endorsement, albeit without a Federal subsidy. For example, farmers today can purchase additional per bushel price protection on a CRC contract. Under this endorsement, the base price for corn and grain sorghum can be increased by up to $.50 per bushel. Soybeans can be increased by up to $1 per bushel, spring wheat by up to $.65 per bushel, and cotton by up to $.25 per pound.
This type of a product could be subsidized by the Federal Government. Because farmers would pay for a portion of the premium associated with the higher price, the total cost to the taxpayer should be less than the ad hoc approach taken to boost farm income in the 1998 appropriations bill. The potential exists for this type of product to distort markets. However, the large deductibles currently associated with revenue insurance should help mitigate the distortions. In addition, farmers would pay a portion of the premium associated with the product.
CONCLUSION
The Administration appears to be poised to open a debate about the current farm safety net with a proposal that focuses on crop insurance. If prices remain low in 1999 as most expect, the debate will quickly move away from crop insurance, which does little to alleviate low prices, and focus on Federal programs that boost farm income. Revenue insurance should be part of this debate. It is an untried alternative that is superior in many ways to the existing safety net programs.
The Agricultural Law Letter Goes Online
by Michael McLeod We are proud to announce that this is the last issue of the Agricultural Law Letter that will be published in the traditional manner. We will in the future publish it on the internet. It can be found on our firm web site, www.mwmlaw.com, as well as on a new website we are creating, www.agriculturelaw.com. We will introduce a number of new features on this website that will provide much more timely and abundant information about agricultural law, policy and economics.
The current issue as well as past issues of the Agricultural Law Letter are now available online at www.mwmlaw.com. If you would like to continue to receive a printed copy, the one year subscription price is $25. Please contact Mary Carter Hudgins by phone at 202-842-2345 or by e-mail at agletter@mwmlaw.com to let us know your preference. If we do not hear from you by February 28, 1999, we will remove your name from the mailing list. For those who choose to read the Agricultural Law Letter online, if you will provide us with your e-mail address, we will notify you when a new issue is published.
Randy Green Joins Firm;
Burton Eller Accepts A New Positionby Michael McLeod We at McLeod, Watkinson & Miller are happy to announce that Randy Green, the Chief of Staff of the Senate Agriculture Committee, will join the firm. He will bring a host of expertise and experience to the firm.
Randy has had a diverse career in agricultural policy, which began in 1982 when he was Chief Legislative Assistant for Agriculture to Rep. Charles Stenholm (D-TX). Subsequently, he obtained experience in the private sector, serving as the Manager of Government Relations for the American Soybean Association and as Director of the Wheat Export Trade Education Committee.
He began his association with Senator Richard Lugar (R-IN) and the Senate Agriculture Committee in 1989, when he joined the committee staff. His service on the committee was interrupted by a stint at the U.S. Department of Agriculture, where he served as Deputy Undersecretary for International Affairs and Commodity Programs and Acting Undersecretary of Agriculture. With the end of the Bush administration, Randy returned to the Senate Agriculture Committee and became the Chief of Staff in 1997. Randy is very well respected on both sides of the aisle and in both houses of Congress, as well as in the Department of Agriculture. We look forward to his association with the firm.
Also, we want to let the many friends of Burton Eller know of his career change. Burton has accepted the position of President of the Textile Rental Services Association of America. This organization represents the linen supply, uniform rental, health care linen, and dust control industries. Its membership includes both United States and international companies. The association is headquartered in Ft. Lauderdale, FL and has a government relations office in the Georgetown area of Washington, DC.
Certainly we will miss Burton's presence in agriculture, where he has had a distinguished 30-year career, including the last two with our firm. From 1991 to 1996, Burton was the chief executive of the National Cattlemen's Association. For those of you who would like to keep in touch with Burton, his new phone number is (202) 833-6395.