Provide risk management tools for producers

Provide risk management tools for producers.

Agriculture is an inherently risky business, subject to floods, droughts, and unanticipated pests and diseases. During the Great Depression and the Dust Bowl, the federal government created risk management programs for farmers that buffered the effects of declining prices and volatile weather. At the time, the average farmer’s income was about one-third lower than that of the overall U.S. population. The large proportion of people who lived in rural America had few if any alternatives to farming, and their production was important to a growing nation. By 2011, however, the situation had changed. The number of farm and ranching operations had declined drastically, the average farm household’s income was substantially higher than non-farm households, and job opportunities in rural America extended well beyond farming. The original rationale for these programs no longer fits the circumstances of American agriculture.

Budget pressures in Washington have further raised questions about the safety net for farmers. The approximately $5 billion annually in direct payments to farmers, which is based on historical crop acreage rather than demonstrated financial need, has come under special scrutiny. Most economists agree that these payments do not put much additional money in farmers’ pockets. Rather, the payments are absorbed by increases in land and input costs, especially for those who rent a significant share of their farmland. In recent years, the focus of farm safety net programs has also shifted toward ensuring farmers’ access to crop insurance, in which the government subsidizes both premiums and administrative costs.

Ensuring the steady production of a healthy, abundant, and affordable supply of food in the United States is a core national interest. Therefore, the government must continue to ensure that farmers and ranchers can manage their risks. But a more cost-effective set of risk management tools is necessary to minimize the financial burden borne by taxpayers. The nation must ask, to what extent farming faces unique risks, and what role government and the private sector should play in reducing risk? And, when the federal government does provide subsidies, should they be linked to adoption of specific practices (e.g., linking crop insurance subsidies and conservation compliance)? Creating incentives for prudent long-term management of risk, rather than management for short-term gains, will also be essential. These are all issues that must be raised and resolved in any discussion of the role of risk management in U.S. agriculture.

Insured crop acreage 1981-2010

 

Crop insurance payments 1963-2011

 

Composition of farm safety net payments 1999-2010

 

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