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PLAIN ECONOMIC SENSE
For release after Feb. 22, 1999
Column 369
Plugging the Holes in the Farm Safety Net
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Once again I recently had the opportunity to debate my old professor from Kansas State University, Barry Flinchbaugh, on the state of farm policy before an audience of 400 feedgrain and soybean producers. In a nutshell, the environment looks a lot different than it did when the 1996 farm bill was debated in Congress. During the course of our debate, we identified three holes in the safety net: trade, livestock and insurance.
First, let's take a look at the agricultural trade picture. In 1996 agricultural exports peaked at $60 billion. The idea behind freedom to farm was to replace government payments with export payments. Well, it hasn't happened. In 1998 exports declined to $54 billion. For 1999, USDA projects agricultural exports to be $50 billion under normal weather conditions.
Not only has the value of agricultural exports declined, but so has volume. Export volume peaked at 167 million metric tons in 1995 and fell to 140 million metric tons in 1998. For 1999 USDA expects a partial rebound to 150 million metric tons.
Yes, no one foresaw the Asian flu and we've appropriated additional aid to help many Asian nations get back on their feet. Yes, the value of the dollar has come down 10 percent during the past few months which makes our exports less expensive. But the impact of the declining dollar may or may not overcome the offsetting impacts of weaker global economic growth prospects for 1999.
On the positive side, farmers liked the planting flexibility of Freedom to Farm, and the 1996 farm bill has made us more competitive with lower prices in world markets. But the U.S. has also imposed several trade sanctions that have cut into export demand. And having full production except for CRP acres and lower prices to be competitive in the world markets may also mean survival of the fittest and soft and sometimes declining land values.
The bottom line is with normal weather around the world this year, U.S. carryover stocks for corn will grow from 10 percent of use in 1997 to 20 percent of use for 1999. Carryover stocks for soybeans will grow from 5 percent of use in 1997 to 15 percent of use for 1999. Most of the long term forecasters predict relatively low prices for the next several years, unless exports recover. Farmers might consider reducing some of the excess stocks and production capacity, but political consensus has so far not developed in that direction.
The second hole in the safety net is livestock. With the passage of the 1996 farm bill, grain and feed prices became more variable. Previous columns have assessed the various proposals for assisting the pork industry following the historically low prices. Early feedback from many producers suggests a strong negative opinion about the effectiveness of USDA's $50 million assistance deal for small pork producers. While the pork interests have followed through with their request for $500 million in assistance from Congress, few outside of Iowa appear to be listening. The cattle industry is miffed because they lost more equity than the pork industry during the past few years. So perhaps the best that livestock can achieve is parlaying their request into a livestock insurance safety net that is related to the next topic.
The third hole in the farm safety net is insurance. While about two-thirds of the eligible acres were covered by some form of government subsidized private crop insurance last year, Congress and the president still saw fit to provide nearly $6 billion in additional disaster assistance and farm program payments. As a result, several policymakers including the House Ag Committee chair and ranking minority member are on record as favoring a fix in the farm safety net. The president mentioned fixing the farm safety net in his State of the Union speech. Secretary of Agriculture Dan Glickman is on record as favoring a fix, as are several farm state Senators.
USDA has already announced a 30 percent increase in premium subsidies and more benefits for 1999. Some of the initial Congressional ideas for fixing the crop insurance system are projected to cost up to $1 billion, which may well be worth it if more coverages are included. However, that will be quite a feat in a non-election year when the president's budget apparently included no new budgetary provisions for fixing the insurance system.
A real test of crop insurance reform is how to develop a program that works in low loss ratio states such as Iowa, Illinois and Nebraska, and a program that also works in high loss ratio states such as Texas and the Dakotas. Some of the new ideas include cost of production insurance and revenue insurance, which are concepts that can be used on crops and livestock enterprises not currently covered. Whole farm income insurance and individual tax deferred Farm and Ranch Risk Management (FARRM) Accounts are self-help approaches to creating an individualized whole farm safety net.
For insurance to work, there is a need for a profitable price and income level to have existed for the coverage. If the prices do not exist in the first place, a producer has difficulty in insuring the farm into profitability. The unanswered question is whether insurance will remain as an actuarially sound system or whether it will become a new distribution network for government payments.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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