What is in this article?:
- With a risk management focus, Farm Bill negotiations will need to answer seven questions.
Question 5: Will the program use historical or planted acres to indemnify producers?
Last year's revenue program largely was based on planted acres while last year's target price program made payments on historical base acres. Generally, risk management is enhanced by basing payments on planted acres.
To some extent, the answer to this question is related to whether the program will react to market conditions. If a program reacts to market conditions, it can more easily be based on planted acres.
Fixed target prices raise concerns when a fixed target price is set high relative to the market price. This will cause producers to plant more of the crops with higher fixed target prices, especially if payments are based on planted acres or if planted acres are significantly smaller than base acres.
Hence, historical bases, especially historical bases that are updated close to the time that fixed target prices are set, have to be used when the program does not react to the market, or else production distortions become potentially more important.
Question 6: How much overlap will be allowed between Farm Bill programs and crop insurance?
Crop insurance has become a large program that many farmers view as their primary risk management program. Given this emphasis, how will the Farm Bill programs complement crop insurance? Most insurance products purchased today are revenue products, making it potentially easier to minimize overlapping payments from crop insurance and multiple year revenue programs.
Low prices can trigger payments by both crop insurance and target price programs, but historically this overlap in payments has not been addressed in designing target price programs. On the other hand, overlapping payments by crop insurance and across-year revenue programs have been an integral part of the design discussion, both in the design of the ACRE program in the 2008 Farm Bill and in the design of the ARC and RLC programs in the 2012 Farm Bill drafts.
Question 7: Does a farm have to have a loss to trigger payments?
Farms will not necessarily have to have a loss to receive program payments. For example, prices may be low enough to trigger target price payments but the farm may not have a revenue loss because yields are high enough to offset low prices.
In a similar manner, if a revenue program is based on county revenue, county revenue may be low while farm revenue may not be low.
Having a farm loss condition in the program causes payments to go to only to farms that have losses. On the other hand, inclusion of a loss condition increases the complexity of the program.
Designs of the Farm Bill programs will largely answer the above seven questions. In some cases, these are contentious issues across regions and across crops.
For example, some may want a revenue program while others desire a target price program. Hence, resolution of these issues likely will require compromise, perhaps leading to unclear answers to the above questions.
It is highly unlikely that any party to the Farm Bill negotiations will receive all their desired answers to the above questions and will therefore have to choose which of these questions are more important to them.