Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
10/8/99
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE
For release Oct. 11, 1999
Column 384
More Farm Crisis Policy Options
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
The previous column* examined several domestic policy suggestions for dealing with a farm crisis: (1) increase transition payments, (2) increase commodity loan rates, (3) re-establish a farmer-owned reserve, and (4) expand the Conservation Reserve Program. This column examines four more concepts that have been proposed and the consequences.
Option 5. Increase Funding for USDA Guaranteed Loan Programs. Historically, the Farmers Home Administration was set up by the United States Department of Agriculture to serve as an agency lender of last resort for farmers who could not access credit from private lenders. During the 1980s, USDA had $28 billion in direct loans with farmers. Since 1990, USDA has been reorganized and has shifted policy from direct farm lending toward working through private lenders by providing farm loan guarantees. Today, some 48,000 farmers have 65,000 loans from banks and other lenders that are guaranteed by the Farm Service Agency. To be eligible, farmers still must certify that credit would not be obtainable otherwise.
Interest Assist is another USDA loan program that provides interest reduction assistance for eligible borrowers when starting a farm or restructuring farm operations. Farmers do not receive the assistance unless they demonstrate an ability to cash flow their operations. These USDA programs reduce higher interest payments normally charged by lenders to financially vulnerable borrowers.
As prices recently declined to historic lows, demand for these funds increased and USDA's allocated funds were exhausted. Farmer applications still poured in. Many of these operations include young farmers with high levels of debt. Increasing USDA Guaranteed Loan Program funds targets aid to farming operations where assistance can make a difference between survival and financial failure.
Option 6. Increase Disaster Aid. Congress has been trying for decades to encourage farmers to purchase insurance coverage and reduce the need for Disaster Assistance. In spite of these efforts, ad-hoc disaster relief totaled $20 billion from 1985 to 1993. Farmers have experienced many cycles in which USDA encourages participation in insurance programs until a disaster occurs. Congress then passes additional disaster aid. In turn, this reduces incentives for farmers to purchase crop insurance in the future because farmers anticipate additional disaster aid will be forthcoming. Before the 1999 emergency farm assistance bill passed, some disaster assistance for drought conditions in the South and East and for the aftermath of Hurricane Floyd was being considered.
Option 7. Fix Crop Insurance. Crop insurance has been around since 1938. The concept is to insure a proportion of the yield at a predetermined price. Poor participation and poor actuarial performance have plagued the program. From 1985 to 1993, these programs paid out $2 for every $1 paid into the program by farmers, according to Barry Goodwin, North Carolina State University.
Yet, farmers and bankers argue that yield coverages and price elections are inflexible and not adequate. They also suggest that higher coverages should receive higher subsidies and that stronger links are needed between crop insurance and income protection. Proponents claim that a world class agricultural insurance system would provide affordable coverages so that most farmers are covered for all significant losses and major disasters.
At a minimum, proponents argue for continuation of higher premium subsidy levels initiated last year. Cost of production insurance, whole farm insurance, livestock and feed insurance, and crop fertilization insurance are among the innovative proposals. Extra funding for insurance has been included in this year's farm aid package.
Critics suggest that it is unreasonable and too costly to insure agriculture into profitability. Other critics also raise concerns about the influence of agricultural insurance industry profit motives. Citing a General Accounting Office (GAO) report that indicated private industry processing costs for CAT (catastrophic) coverage at $200 per application, a local FSA official suggested FSA could process CAT applications for about $20 per application. "Why not have USDA process the forms if the government is paying 90 percent of the processing costs?" he asked. "You could still allow the private sector to continue to receive sales margins and distribute more benefits directly to farmers."
Option 8. Incentives to Save for Bad Times. Participants at a recent national symposium in Georgia, titled "The Future of American Agriculture," concluded that even with insurance reforms, not all farmers will buy insurance for a variety of reasons. The concept of matching funds for farmer savings accounts received a positive recommendation from conference participants. The Canadian Government matches farmer contributions dollar for dollar up to a maximum annual contribution under their Net Income Stabilization Account (NISA) program. Keith Coble of Mississippi State University, former USDA expert on the topic, said the Canadians have found the NISA program to be complementary to private sector crop insurance--both are available in Canada.
Crop insurance premiums represent a cost of production. A matching savings account program diversifies the farmer's investment portfolio and adds to the farmer's balance sheet assets. The Canadian experience shows this tool is particularly useful for livestock producers and farmers of specialty crops for which private insurance is not readily available or affordable. NISA accounts add to the deposit base in rural communities, which enhances opportunities for rural development.
Coble also indicated that providing farmers with matching incentives to save for bad times may not totally eliminate the desire for disaster aid programs. In Canada, farmers recently have lobbied for disaster aid even though more than half the Canadian farmers have set up NISA savings accounts and the average NISA account balance is $16,600, nationally.
Congress included a Farm and Ranch Risk Management Account (FARRM) concept in the tax bill recently vetoed by the President. The FARRM concept is different from the Canadian program and uses tax incentives instead of matching dollars. Thus, the FARRM concept has less marginal benefit for farmers in lower tax brackets, while those in higher tax brackets have greater incentives to participate. Some form of farmer savings account is likely to resurface in the future.
This column is the second in a series of two on farm policy issues. The first column is posted on the ISU Extension web site at http://www.extension.iastate.edu/newsrel/ under the headline The Traditional Domestic Policy Options for the Farm Crisis.
ml: isupes
Extension programs are available to all without regard to race, color, national origin, religion, sex, age, or disability.