If you are like most Americans your savings account is minimal, if it exists. If you are like most farmers, your financial cushion has been re-invested in more land or better machinery. With the Congressional hearings on the new Farm Bill, periodically there are calls for policy that push farmers toward establishment of risk management accounts that provide a year to year financial cushion, as well as a fund that would permit a farmer to retire. Not that you would think you personally need either of these, but let’s play “what if…”

Farmer savings accounts have been proposed for many years, and were part of the 2002 Farm Bill debate. They have taken many forms with many advocates, but aren’t here just yet. Purdue University economists, as part of their new series on Farm Bill alternatives, have taken a look at farmer risk management accounts. Whether such accounts are used for financial risk management or retirement, some advocates have called for them to replace all or part of farm subsidy programs. You would build your account in a high income year, and use the account in low income years.

Among the ways it might be built up:
1) You would create a qualified savings account, and certain government payments would be deposited, along with your own voluntary contributions
2) A fund would be created from tax deductible money, with tax free earnings such as on an Individual Retirement Account.
3) Government bonds with a higher rate of interest could be issued as a special savings instrument for qualified participants.

Canadian farmers have had such a plan for a number of years. The account can receive up to 3% of net sales then matched with governmental contributions with maximums on both amounts. Or the producer can contribute up to 20% of net sales with higher interest rates and certain tax advantages applied. Money can be withdrawn in several ways:
1) If income falls below a 5 year average net returns after costs
2) When taxable income falls below a fixed level.
3) When a farmer retires
4) When a farmer withdraws from the program

The US Farm and Ranch Risk Management Account program was proposed for the 200 Farm Bill. Similar to the Canadian plan, but different in the way the contributions and withdrawals are given tax treatment. In 2001, the USDA Commission on 21st Century Production
Agriculture called for the program to supplement other farm programs.

Farmer Savings Accounts have been proposed as a new component of domestic producer support that would be more acceptable to the World Trade Organization than current farm program payments. Proposed by the Chicago Council on Global Affairs, the funds would be similar to 401 (k) accounts, backed by government matching funds and could be used for a variety of farm family needs, including retirement or health expenses.

The Farm Income Stabilization Account is a specific proposal for the 2007 Farm Bill and would replace current government commodity payments with contributions to a special farmer savings account. The contribution would be a percentage of adjusted gross revenue, but would decline as that number increased. Funds would also be based on conservation practice. Farmers could also deposit tax deferred funds into the account and could make withdrawals when adjusted gross revenue falls to 95% of its five year average.

The Purdue economists say the alternatives provide funds for use during times of financial stress and could be a more disciplined approach to financial risk management. They compare it to counter cyclical payment, disconnected from land values and possibly reducing capitalization of farm programs into land values. Such plans also protect against loan defaults and create rural economic development.

Such accounts will take time to build, and farmers with low income will have a more difficult time building an account. And the Purdue economists another issue is the will of Congress to let them work, by avoiding the pressure to provide disaster payments in times of crop failure and low income. These accounts also push farmers to diversify their assets into financial holdings, not just farmland and machinery

Summary:
Farmer savings and risk management accounts have been proposed in many forms over the years, and the 2007 Farm Bill may provide a pilot program. Through a combination of farmer contributions and government contributions, the programs could provide an opportunity to avoid trade issues, as well as prevent farm program payments from causing inflated land values. The accounts could also help farmers diversify their assets, which could be used to pay family expenses during times of low income, as well as provide a retirement fund unrelated to the vagaries of a “farm sale.”