Farm programs are quite complex and program subsidies seemingly have convoluted formulae to determine commodity payments. The World Trade Organization is a compilation of laws, developed by diplomats who depend on a cadre of strategic thinkers, few of whom have ever tried to balance a crop budget or grease a sprocket. But there is relatively simple linkage between the goals of the WTO and the 2007 Farm Bill that most farmers can sink their teeth into and understand with relative ease. It is all about phasing out price insurance and phasing in revenue insurance; and that little change in concept will make all the difference in the world. With that said, we wrap up our two part focus on changes to expect in the 2007 Farm Bill.

Simply put, our trading partners do not like US farm programs which encourage production, such as marketing loans, LDP, counter-cyclical payments, and any “per bushel” payment that will tend create over production. Any surplus commodities depress world market prices and producers in other countries who are not beneficiaries of farm subsidy programs then suffer financial losses. Consequently, the “price” programs that have been common to agriculture since the 1930’s, have drawn hostile fire.

By changing “price” to “revenue” the hostility diminishes. Our trading partners could care less if the US farmer is the poorest or the wealthiest in the world. They have no complaints about any USDA subsidy program which under girds farm revenue, since revenue can be accumulated without producing burdensome surplus commodities. Subsequently, the concept of revenue insurance is being promoted as one which will achieve the goals of US farm programs, without being a lightening rod for trade complaints.

So what is revenue insurance? We’re glad you asked, and USDA economists Robert Dismukes and Keith Coble provide the answers in the November edition of USDA’s e-magazine Amber Waves. They say, “As a tool based on revenue shortfalls rather than on yield or price shortfalls, revenue insurance can be more effective at stabilizing income than insurance plans or farm programs that protect against yield and price risks separately or that provide fixed-income transfers.”

Insurers, whether commercial or public (USDA) do not like variability, and would prefer stability, such as low variation in crop yields. Economists Dismukes and Coble say the heart of the Cornbelt provides that perfect scenario for revenue insurance, “Not surprisingly, many areas with large amounts of corn and soybean production tend to be areas of low yield variability. Yield variability for corn, for example, is low in Illinois and Iowa, which together account for about a third of the U.S. corn crop. Because of the low yield variability and the strong price-yield correlations, revenue insurance costs are relatively low in these areas and producers tend to see a correspondence between revenue variability on their farms and the protection offered by revenue insurance.” Revenue insurance began with Crop Revenue Coverage in 1996, and CRC and its cousins have grown in such popularity that 57% of the 2006 corn, bean, and wheat acreage was covered by revenue insurance.

Unlike a Canadian gross revenue insurance program in the 1990’s which used unusually high historical prices to indemnify producers, US revenue insurance programs have utilized futures contract values. These have been transparent, and visible to farmers and insurers. Such a guaranteed price “simplifies calculation of revenue guarantees and losses and ensures that coverage is consistent with current market prices.”

Another variation of revenue insurance is “whole farm revenue insurance,” which guarantees a minimum net farm income, instead of just commodity revenue. However, such a program could be difficult to administer without cross-linking USDA and IRS computers, which has drawn farmer criticism.

Another point of criticism about insurance programs is that multiple year losses will diminish revenue guarantees, since they are based on historical records. Although that could easily be solved with the implementation of a target revenue mechanism, that would revert to potential increases in production, and we’re back to where we started.

Summary:
Farm revenue insurance is a concept that steps beyond price insurance which can encourage over-production and draw WTO complaints. Revenue insurance, whether it is a commercial product, or integrated into the new Farm Bill, will provide financial protection to farm families that will be acceptable to US trading partners. There are many variables that could be used in the calculations, and writers of the Farm Bill and the World Trade Organization rules will have to ensure their language is complementary to ensure that farm revenue is protected, without encouraging additional production.