Will Congress assume part of the burden of managing agricultural risk with ad hoc disaster aid, or will producers assume part of the burden of managing agricultural risk with crop insurance? “Over 80% of insurable crop acreage was enrolled in the program in 2005, and more than half of those acres were insured at coverage levels of 70% or higher. Total liability for the 2006 crop year was approximately $50 billion. Despite this success, Congress once again seems poised to pass another disaster assistance program in 2007,” say Iowa State University ag economists Nicholas Paulson and Bruce A. Babcock. How would you respond to the alternatives of managing your risk?

U.S. agriculture, which includes Cornbelt farmers, Brooklyn consumers, retired taxpayers in Florida, and every agribusiness in between, will be creating a new Farm Bill this year. A lot of work has been done so far, but an agreement will be the result of Capitol Hill politics, and everything is on the table. Paulson and Babcock’s research analysis for the Center for Agriculture and Rural Development (CARD) suggests the answer may lie in one of the more recent forms of crop insurance which exploded in popularity in the spring of 2006.

Federal crop insurance has been expensive for the taxpayer, since it cost $15.5 billion from 2001 to 2005, with $8.8 billion indemnifying farm losses, and the remainder plus premiums being used to pay for the delivery system through local crop insurance agents. That is an estimated $26/A cost to get farmers to sign up. A lesser expensive route is an area or group insurance plan, dating back to 1949 at the University of Illinois, which eliminates individual farm records. The CARD study says, “An often over-looked advantage of an area insurance product is that it would automatically provide disaster aid to farmers faced with unexpectedly low prices or who reside in areas with low yields.” Such a plan is being touted as a revenue safety net that doubles as disaster aid.

You know the programs as GRP (Group Risk Protection) and GRIP (Group Risk Income Protection), since both have been working for several years. How do they work?
• GRP is an area plan of insurance that pays all insured farmers in a county an indemnity when the county average yield falls below a trigger yield.
• The trigger yield is chosen by the insured as a percentage (up to 90%) of the expected (trend) county yield.
• GRIP is an area revenue plan that pays an indemnity when county average revenue falls below a trigger revenue level.
• The trigger revenue is chosen by the insured as a percentage of expected county revenue, which is the product of the GRP trend yield and the expected price as measured by futures markets.
• The Harvest Revenue Option is an optional endorsement to GRIP which turns GRIP into a GRP policy when the harvest price is greater than the expected price.
• Any production losses under the resulting GRP policy are valued at the harvest price.

As an indication of its popularity, Illinois farmers first learned about GRIP in 2003, and by 2006, 37% of corn acreage was covered by GRIP, compared to 28% for CRC, and 22% for RA. The primary reason is the bargain basement cost, compared to the expected indemnity payment, but it was also recognized as a mechanism which provided sufficient risk management protection. Since GRIP is a revenue product, low commodity prices that trigger GRIP means GRIP can also replace LDP’s and Counter Cyclical Payments, should those be lost to WTO trade negotiations. That causes Paulson and Babcock to rhetorically ask if such a program is really crop insurance or is it an ad hoc disaster program.

While that may not seem to be important to a Cornbelt farmer, the issue is rooted in whether the program will be administered by FSA as a disaster payment pass through program with little administrative cost or something else. That alternative would be similar to the crop insurance program for which underwriting companies and agents must get their share, which increases the cost of the program or lowers the payments to farmers.

Paulson and Babcock believe:
1. If the premium rates are actuarially fair, the taxpayer cost of the program would exceed $39 per acre.
2. If rates continue to be calculated by USDA under current formulas, the taxpayer cost would be just under $41 per acre.
3. If rates were modeled after the 2005 harvest revenue option, the taxpayer cost would be just under $43 per acre, which would be comparable to the taxpayer cost for a disaster aid program.
4. However, if this is operated as a crop insurance program, producers would have a premium to pay, and the net benefit would be reduced by that premium.

In conclusion, the CARD report says, “The expected cost of running GRIP through the crop insurance program in 2007 is approximately $42.68 per acre for corn and soybeans in Iowa, Illinois, and Indiana. If every acre planted to corn and soybeans in 2006 were insured under GRIP in these three states (55.4 million acres), the expected cost would be $2.36 billion per year, making it by far the most expensive farm program of all current programs. However, farmers would only receive approximately $1.1 billion of this amount with the rest going to the crop insurance industry.”

Summary:
Development of the 2007 Farm Bill will include a Congressional decision whether to implement perennial disaster assistance programs, or incorporate them into a risk management partnership. While the model for such a policy exists in the group or area insurance programs, there are issues of cost and administration that must be decided, and politics will likely be a major player.