The Risk in Agriculture

The 2014 Farm Bill that was signed into law earlier this year. The Farm Bill puts out nearly $1 trillion ($956 billion) over the next ten years, but only 20% of that goes to farming. Food stamps make up a majority of the bill, but it is the restructuring of farm subsidies that changes agriculture in America. The Farm Bill has changed from Direct Payments to an insurance scheme.

Direct payments was originally established in1995. Farmers originally received payments just for having the property to produce on. This was meant to help farmers during transitional periods between planting and harvesting. But not just farmers were capitalizing on this. David Rockefeller, Jimmy Carter and Bruce Springsteen had all received subsidy payment on previous Farm Bills. There was little incentive for farmer to produce, because there was a guaranteed revenue provided by the bill. If the rich and famous are receiving payments, perhaps direct payments were becoming a superfluous hand out. That is where the insurance plan comes in.

There are two insurance policies to choose from. Farmers decide between insurance on revenue or price. Agriculture Risk Coverage (ARC) insures farms on revenue losses from a reduction in price or yield. The revenue benchmark is created by taking the county average yield multiplied by the average county price (a rolling Olympic average) at 85% (the payment rate a farm is insured). This measure creates a trigger price. When the market price reaches the trigger price insurance payments kick in for policyholders. There is a maximum level of payment per acre on this insurance plan. After a certain threshold, no matter how low the price goes, farmers will receive the same price per acre. The Price Loss Coverage (PLC) does not have that payment cap. Similar to ARC, there is a trigger price. The PLC trigger price is lower than ARC, but payments continue to grow counter-cyclically to the price. The PLC would seem like the obvious choice in the case of extremely low prices, but ARC insures more quickly during small shocks in price or yield.

The bill still directs most of these funds towards large farms. Previously, the top 10% of farmer rake in 75% of all farm subsidies. There is now a cap on the amount commodity support programs may payout ($125,00 per individual, $250,000 per married couple), but this does not include the insurance payouts. If prices fall to short, those that chose the PLC may be receiving more money than before.

It will be interesting to see how these mechanisms change agriculture. Spring is coming and farmers are already beginning the planting season. The change in incentives from direct payments to an insurance scheme seems like the right idea. Farmers will be encouraged not just to have a large plot of land, but to actively engage in farming. Though the bill still focuses much of the aid toward large farms that produce the five row crops (corn, wheat, soy, rice and cotton), progress is being made.

About Jared Soares

Hello, my name is Jared Soares. I am pursuing a degree in economics with minors in mathematics and computer science. Outside of school I enjoy hiking, rock climbing, cooking and performing with the improv comedy troupe Ubiquitous They.

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