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Economist: US Farm Bill Shifts to Risk Management, Reduces Overlap

Economist: US Farm Bill Shifts to Risk Management, Reduces Overlap

02 May 2012

ANALYSIS - Karl Zulauf, agricultural economist and professor at The Ohio State University, said with the elimination of direct payments, creation of ARC, and enhancements to crop insurance, the 2012 Farm Bill mark-up clearly moves the US farm safety net in the direction of risk management, writes Sarah Mikesell, TheCropSite senior editor.

"A commonly-expressed desire for this Farm Bill was to reduce overlap in farm programs," he said. "This objective is clearly accomplished by limiting the ARC program to losses between 11 to 21 per cent as compared with the larger range of losses covered by both ACRE and SURE. However, because different prices and yields are used to determine the ARC benchmark value and the insurance plant guarantee values, overlap continues to exist."

Assuming ARC comes to fruition, Zulauf said farmers will have a choice - enroll in the individual or county ARC program. The individual farm ARC provides protection for yield losses on the individual farm. However, the county ARC has a higher coverage rate (75 per cent vs. 60 per cent), offering more protection for losses that occur due to yield losses over larger areas or because of low prices.

"From the perspective of managing risk, the $50,000 limit on ARC payments per payment entity is a key issue," he said. "Risk management programs like ARC will make large payments when a farm experiences a sizable loss. However, occurrence of such a loss is not known until after the crop is planted. To limit payments when they are most needed undermines the program and makes the management of farm risk much more difficult."

Farmers also will have to decide on use of Supplemental Insurance Option to replace individual insurance with a combination of individual and county coverage, which he said could be an important tool to better allow a farmer to customize risk management to the risks on his own farm.

2012 Farm Bill Crop Safety Net for 2013-2017 Crop Years

  1. Marketing Loans retained.
    • Loan rates remain the same as for the 2012 crop year, except cotton's loan rate can be lowered.
  2. Agriculture Risk Coverage (ARC) program created.
    • Farmer makes a 1-time, irrevocable election to participate in individual farm ARC or county ARC if county has sufficient data.
  3. Crop Insurance retained and adds new Supplemental Coverage Option that allows individual insurance to be supplemented with county insurance to cover all or part of the individual insurance deductible.
    • makes 2008 Farm Bill pilot program for enterprise crop insurance permanent
    • insurance APH yield will be calculated using 70 per cent, instead of 60 per cent, of insurance transitional yield
    • irrigated and non-irrigated enterprise insurance is to be made available in counties
    • any future Standard Reinsurance Agreement should be budget neutral
    • separate insurance program is created for cotton, called the Stacked Income Protection Plan (STAX)
Program Parameters that apply to both Individual and County ARC Programs
  • Crops covered: wheat, corn, sorghum, barley, oats, long grain and medium grain rice, pulse crops, soybeans, other oilseeds, peanuts
  • Payments are made on an individual crop basis.
  • The election is for the entire farm operation, not for an individual FSA farm.
  • Coverage is for losses between 11 per cent and 21 per cent relative to the benchmark value.
  • For a covered crop, eligible acres are all acres planted or prevented from being planted to the crop on a farm during a crop year.
    • A farm's total eligible acres cannot exceed its average eligible acres for the 2009-2012 crops.
  • Election decision applies to all acres under operational control of the farmer, including acres added after the election.
    • Acres that change farms are subject to the election decision of the new farmer.
    • Conservation Reserve acres converted back to cropland can be added to eligible acres.
  • Benchmark values are calculated to the extent practicable for irrigated and non-irrigated acres.
  • Limit on payment per payment entity per year is $50,000 for peanuts and $50,000 for all other covered crops.
    • In general, the rules for determining a payment entity are the same as in the 2008 Farm Bill.
  • No payments can be received if a payment entity's average adjusted gross income over the 3 preceding taxable years exceeds $900,000 (Adjusted Gross Income Limitation).
  • Conservation compliance and wetland protection must be met to be eligible for ARC payments.

Sarah Mikesell, Senior Editor

Sarah Mikesell, Senior Editor



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