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Payments by US Farm Safety Net Program: Differences by Crop

Payments by US Farm Safety Net Program: Differences by Crop

10 May 2013

US - An important aspect of the on-going debate over the new farm bill is the proposed elimination of direct payments. This proposal differentially impacts the program crops, prompting a debate among crops and geographical regions over the distribution of payments by farm safety net programs, writes Carl Zulauf and Gary Schnitkey.

The comparison begins with the 2003 crop year because the counter-cyclical program, an important price risk program, was initially enacted in the 2002 Farm Bill.

Distribution of Direct Payments among Crops

Direct payments ranged from 1.3 per cent and 2.0 per cent of crop sales for oats and soybeans, respectively, to 14.9 per cent and 16.2 per cent of sales for sorghum and rice, respectively (see Figure 1). Thus, the elimination of direct payments will have notably different impacts across the program crops. Figure 1 underscores that, while it is straightforward to note that society questions the appropriateness of making $5 billion in annual direct payments with near record crop income; it is less straightforward how to address the differential impact by crop of eliminating direct payments. Source of the data are the U.S. Department of Agriculture (USDA), Farm Service Agency (FSA). When interpreting this ratio, it is useful to keep in mind that sales are based on production and hence planted acres while direct payments are based on historical base acres.

Direct Payments vs. Net Crop Insurance Payments by Crop

Eliminating direct payments would make crop insurance the primary farm safety net program, culminating a 30-year trend toward an increasing role for crop insurance. Thus, it is important to compare the distribution of payments by these two programs by crop.

Figure 2 presents net crop insurance payments expressed as a percent of crop sales. Net crop insurance payment is calculated as crop insurance indemnity payments received by farms minus the premiums paid by farms. Figure 5 is also generated to facilitate comparison. It presents this difference: net crop insurance payments minus direct payments, both expressed as a percent of sales. Source of the data are USDA, Risk Management Agency (RMA). As can be seen, payments differ across crops, with a range of 8.4 per cent for cotton down to .7 per cent for rice.

The distribution of net crop insurance payments in Figure 2 differs from the distribution of direct payments in Figure 1. Net crop insurance payments and direct payments as a percent of crop sales are most similar for corn and soybeans, as well as oats. This similarity, together with the smaller size of direct payments relative to sales, is consistent with the generally=accepted observation that Midwest corn and soybeans are more willing to accept the shift to crop insurance than other crop-region combinations.

Net crop insurance payments are only 0.7 per cent of rice crop sales while direct payments are 16.2 per cent of rice crop sales. The difference of -15.5 per cent is more than twice as large as the next biggest difference, -7.1 per cent for sorghum. Thus, Figure 5, together with the relatively large size of direct payments to rice (see Figure 1), illustrates why rice is so concerned with the shift from a direct payment to a crop insurance based farm safety net.

Further Reading

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