The 2012 Farm Bill currently is being debated, with some prospects that it will be passed this year. Much debate centers on the commodity title and how to reconfigure direct payments, the counter-cyclical price and revenue programs (e.g., target price and ACRE programs), and the standing disaster assistance programs (e.g., SURE). Predicting what form these programs will take is difficult. At this point, however, it appears that direct payments will not be included and overall budget outlays authorized in the 2012 Farm Bill will be less than in previous Farm Bills. What likely will result is a counter-cyclical revenue program somewhat similar to the current ACRE program. An ACRE-like program will have risk implications. The risk implications are discussed in this post assuming that providing a safety net is a goal of the 2012 Farm Bill.
Crop Insurance Provides Within Year Revenue Protection
To avoid duplicate coverage, considerations should be given to risk protection offered by crop insurance. Crop insurance is a major program providing within year revenue protection. According to the Summary of Business produced by the Risk Management Agency, 265 million acres were insured in 2011. The 265 million acres represents 83 percent of the 319 million acres planted in principal crops reported by NASS for 2011. Farmers tend to buy revenue products where those revenue products are available. For example, revenue products were purchased on 93 percent of the corn acres insured in 2011.
Because crop insurance is widely used, commodity programs within Farm Bill have much less of a role in providing disaster assistance for within year price or yield declines. For example, if a drought similar to that of 1988 occurred in 2012, crop insurance would provide protection on most acres grown in the United States. Thus, crop insurance covers large, within year yield or price losses, reducing the need for covering these losses within the commodity program.
Across Year and Multi Year Revenue Declines Not Protected by Crop Insurance
Crop insurance will not provide protection against revenue declines that occur across years, of which price declines are a prime example. To illustrate, take a corn revenue policy that has a 180 bushel Trend-Adjusted Actual Production History (TA-APH) and the 2012 projected price of $5.68. A choice of the highest coverage level of 85% results in a guarantee of $869. If the farmer gets the same 180 bushel yield in 2012 as the TA-APH yield, the price can decline to $4.83 without the farm receiving an insurance payment ($4.83 = $869 guarantee / 180 bushel yield). Given a decline of the harvest price to $4.83, the projected price for 2013 likely would be near $4.83. If $4.83 is the 2013 projected price and the 2013 yield equals the 2013 TA-APH yield, the harvest price could fall to $4.11 without the farmer receiving a crop insurance payment. A price decrease to a $4.11 harvest price in 2013 is not unrealistic. Two years of trend line or above yields could result in price scenario similar to that given above.