Ag Policy, Lecture 17

• Other Significant Policy Issues– Payment Limits (Knutson Chapter 7 ?)– Crop Insurance (Knutson Chapter 7)– Limited Resources (Knutson Chapter 8)

Payment Limits

• Debate began in 1960s• First enacted in 1970

• Current Limits– $40,000 Direct Payments– $65,000 Counter-Cyclical– $75,000 Marketing Loan Gains−New with 2002 Farm Bill is a means test

$2.5 million AGI and less than 75% is Agriculture

Background: A Person

• A person is the unit to which payment limits apply—it may be an individual, an individual in a joint operation, or other entity: trust, limited partnership, corporation

• Under the 3-entity rule, an individual who receives payments may also receive payments from up to 2 other entities in which the individual has up to a 50% interest

Background: An example of maximum payments an individual

may receiveProducer has own operation, 50% interest in

trust A and 50% interest in corporation BDirect CC MLG/LDP

Dollars

Own farm 40,000 65,000 75,000Family Trust 20,000 32,500 37,500Corporation 20,000 32,500 37,500Total 80,000 130,000

150,000Grand total $360,000

Two sides of the Payment Limit Issue?

• In favor of payment limits: Too much money goes to too few Large farms don’t need the money Large payments accelerate consolidation/industrialization

of agriculture Large payments lead to higher land values

• Against payment limits: Programs support production not producer Rules have been set and are being followed Business/investment decisions have been made based on

limits in current law Doesn’t make much difference anyway

Payment Limit Issue

• Position on Payment Limits depends on your opinion of the goal of farm programs

• Three broad issues in agriculture– Farm Financial Health/Declining numbers– Cheap, Abundant Food– Externalilities

• If you think it is about supporting the farmer, you are probably in favor of payment limits

• If you think it is about producing enough food then you would be against payment limits

Distribution of AMTA Payments, 2001

$4.1 bil. Paid to 1.2 mil. Payees

Payment size % of payees

% of payment

s$10,000 or less 91 43

$10-30,000 8 39

$30,000 or more 1 18

Current Limits Do Not Reduce Payments

AppreciablyWhy?• Most farms are not large enough to

trigger limits, although farms in 43 states hit limits in 2001

• Large farms have multiple persons (payment limits) per farm

• No limit on marketing loan benefits

Effect of Current Limits on Payments

02468

101214161820

2001 2001

Billion D

ollars

Amount not paid out due to limits

AMTA

Mktloss

Loan benefits

Crop Insurance/Disaster Crop Insurance/Disaster Relief Relief

• Federally subsidized crop insurance– Administered by Federal Crop Insurance

Corporation (FCIC)– Originated in 1938– Repeatedly changed since then

• Long History of providing Ad hoc Disaster Assistance for yield disasters

BackgroundBackground

• Insurance in agriculture has traditionally been crop yield insurance– Multiple peril (weather, fire, hail, wind,

disease, insects, earthquake, and wildlife) – Based on:

• historical producer yields (Actual Production History APH)

• coverage level chosen (% of APH)

– FCIC determined/developed – Market price converts losses into dollars

Background

• Participation in Crop Insurance has increased due to higher subsidies and certain requirements

1980 – 10% of eligible acres

1999 – 70% of eligible acres

Background (Cont.)Background (Cont.)

• Insurance designed to provide protection against substantial losses– Deductible works like car insurance– Most common coverage in Texas has been

at the 65% level [maximum government subsidy] except cotton (50%)

– Higher levels of coverage have been cost prohibitive

Current Insurance Alternatives

• Actual Production History (APH)• Catastrophic Coverage (CAT)• Group Risk Plan (GRP)• Crop Revenue Coverage (CRC)• Income Protection (IP)• Group Revenue Insurance Policy (GRIP)• Adjusted Gross Revenue (AGR) - schedule F• Revenue Assurance (RA)• Pilot Programs:

• Livestock

• Fruits and vegetables•

Producers HateProducers HateCrop InsuranceCrop Insurance

Southern Producers“Doesn’t pay”“Premiums too high relative to indemnities”

Midwest Producers“My premiums subsidize producers in marginal areas”

There is truth to both points of view

Is There Friction?Is There Friction?

“There are certain parts of the country that have acres that are challenged by weather and farm practices that are not up to what they should be ...the two Texans who lead the House Agriculture Committee come from such districts and have been joined by others in supporting crop insurance”

Senate Agriculture Committee Chairman Richard Lugar (R-Ind.) October 19, 1999

1998 1999TX Corn 3.67 .64IA Corn .41 .19

TX Sorghum

2.91 .61

OK Sorghum

2.09 1.81

TX Cotton 1.92 .99GA Cotton 1.59 1.71

Comparison of Loss RatiosComparison of Loss Ratiosfor Selected States andfor Selected States and

Commodities, 1998 & 1999Commodities, 1998 & 1999

Other ComplaintsOther Complaints

• Low yield becomes part of 10-year history (APH)– Lower yield reduces future coverage levels– Low Yield Higher risk pool Higher premiums– Multi-year disaster can reduce value of insurance

• Some farmers want insurance to be profitable. – Premiums < Expected Indemnities– Does this happen with any other insurance?

Important Insurance Important Insurance PrinciplesPrinciples

• Moral Hazard

• Adverse Selection

CheatersCheaters

• Several have gone to jail for crop insurance scams

• Many have gotten away with it.• Most treat is with respect/dignity

• Moral Hazard (no seed in the planter box)• Entity Switching• CRC Mistake• Agents are often buddies of farmers

Crop Insurance RealitiesCrop Insurance Realities

• Crop insurance provides incentive to produce in high risk areas

• Ad hoc disaster assistance undermines crop insurance program– Incentive not to purchase insurance

• Have had to increase subsidy

Limited Resource Limited Resource DiscussionDiscussion

• What is the policy motivation concerning the use of limited resources?

Limited ResourcesLimited Resources

• Farmland Issues– Meeting food needs– Fragile land– Amenities

• Land Policies– Free Market– Zoning– Right-to-farm– Government purchase of development rights– Preferential property tax appraisal– Land reserve or retirement– Cross-compliance

Limited ResourcesLimited Resources

• Water Issues– Who owns the water– Agriculture vs. Urban use– Market problems

• Water Policies– Market development– Regulating reasonable use– Increase supply of surface water– Allocation

Limited ResourcesLimited Resources

• Energy– Foreign reliance– Agriculture’s potential

• Endangered Species

Ag & Food Policy Ag & Food Policy StakeholdersStakeholders

• Farmers• Agribusiness• Environmentalists• Consumers• Taxpayers

• Can you answer these? – Can you defend/explain either side of the payment limit debate?– What is the 3-entity rule? Can you explain how it works?– Do we save much in farm program spending b/c of limits? Why?– Why are there regional differences in crop insurance debates?– What is a loss ratio?– Explain the concepts of Moral Hazard and Adverse Selection– How do people cheat on crop insurance?– How do ad hoc disaster programs undermine crop insurance?– Can you discuss the issues associated with the allocation of limited

resources?– Can you discuss the options and consequences associated with the

policy options for addressing limited resource use?

Lecture 17, Wrap up