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May 19 , 2006
Three alternative approaches to agricultural risk management have been released in a theme paper put together by USDA in preparation for writing the 2007 farm bill.
According to Agriculture Secretary Mike Johanns, this risk management analysis paper is the first in a series of papers intended to provide information and points of discussion about best policy approaches as the new farm bill is debated. In March, Johanns announced the release of 42 papers summarizing comments from Farm Bill Forums and that USDA's next step would be to glean from those papers a number of themes that warrant further analysis. This first analysis paper is based on more than 4,000 comments received orally and in writing during more than 52 USDA Farm Bill forums across the nation.
"Our purpose with these analysis papers is not to suggest policy but to inform and educate the public. Creating the next farm bill should be a transparent process and I encourage everyone affected by farm policy to be actively engaged and to work with Congress on the next farm bill," Johanns said. "The first step is to ensure that we have all the facts on the table and that is the goal of this paper. My hope is that this analysis will help to focus our national conservation as we work with Congress to develop future farm policy."
The risk management analysis paper describes the risks agricultural producers face and discusses current key risk management programs and tools available to producers through the private sector and government. It concludes with a discussion of program alternatives.
"The options are not meant to be exhaustive or to represent specific farm bill proposals," the Risk Management Executive Summary said. "They are presented as candidates for further public discussion to help inform the 2007 Farm Bill."
The three alternatives include the following:
Alternative 1: Use the existing structure of farm programs but make them more WTO consistent, reduce their effects on resource use and farm structure, and better target them to producers in greatest need of assistance. According to the Executive Summary, the goals of this option could be met with reduced marketing assistance and price support loan rates, reduced counter-cyclical payment rates, higher direct payment rates and stricter payment limitations. Under this scenario, the Executive Summary claims, programs would be less vulnerable to World Trade Organization challenges, resource effects would be lessened, payments could be targeted toward smaller and mid-size farms, but program benefits would remain concentrated with traditional crops and greater reliance would have to be placed on crop insurance or the private sector to manage income variability.
Alternative 2: Replace marketing assistance loans and counter-cyclical payments with a program that pays producers based on revenue shortfalls. This option would replace marketing loans and counter-cyclical payment programs with a program designed to stabilize revenue. To fully develop this approach, the Executive Summary said many questions must be answered on program design (level of guarantee?; single commodity revenue or a whole farm revenue?; revenue on an individual farm or in a region or nationally?) and program delivery (government or private sector?). The Executive Summary said this approach would generate cost savings and generally be more effective at stabilizing farm income than current programs, but could affect supply, demand and prices depending on how the program is constructed and the level of revenue guarantee. The Executive Summary suggests savings could be used to address other needs or more commodities than under current programs, and WTO concerns may be reduced but not eliminated.
Alternative 3: Phase out marketing assistance loans, direct and counter-cyclical payments and use savings to expand crop insurance coverage, fund farm savings accounts or expand conservation, rural development or other programs. The Executive Summary suggests eliminating direct and counter-cyclical payments and marketing assistance loans would reduce federal spending substantially, lead to a more market-oriented agricultural sector and remove the negative aspects of current programs to expand production and plant certain crops. However, the reduction in payments in traditional program crops and expansion in conservation, rural development and other programs could result in a significant shift in benefits from producers of traditional program crops to producers of non-program crops and livestock. Implementation would be gradual over several years to limit adverse affects on land and asset values, the Executive Report said. Greater reliance would have to be placed on development and use of private sector risk management tools to manage income risk.
