The American Farm Bureau Federation, in a letter to House and Senate Agriculture Committee members, provides ideas for their consideration should farm-state lawmakers implement a "shallow loss" program or programs relative to the new farm bill.
The Farm Bureau letter notes the discussion about replacing all or some combination of direct payments, target prices, the Supplemental Revenue Assistance Payments Program (SURE) and the Average Crop Revenue Election (ACRE) program with a "shallow loss" program. The US government, under such a program, would compensate producers for relatively small losses. In general, proposals range from a coverage level on the high side of either 90 or 95 percent. This means a producer would suffer the first small percentage of losses, but the federal government would begin to pay for losses when actual income falls by just 5 or 10 percent.
On the low end of the coverage level for a shallow loss program, Farm Bureau said proposals range from 70% to 80%, meaning some combination of all these ideas "would provide farmers with revenue protection that looks similar to this chart:"
A shallow loss program, the Farm Bureau said, "is a drastic departure from any previous farm policy design. Federal farm programs have traditionally existed to help farmers survive large, systemic losses. Shallow losses, however, can arise from a variety of systemic or individual sources and do not typically jeopardize the survival of a farm operation. If a shallow loss revenue protection program is not crafted very carefully, such a program runs the risk of introducing unintended distortions into agricultural markets."
The group said its biggest concern is that by reducing the risk of shallow losses, "farmers may be encouraged to take on more risk than they would in response to market signals alone. This is basically analogous to the classic moral hazard problem of insurance. Insured individuals may engage in riskier behavior than they would if they weren't insured. If someone has a car insurance policy with only a $250 deductible, they may drive faster or in more extreme weather conditions than if they purchased a high-deductible policy."
In a shallow loss revenue program for agriculture, "this risky behavior may manifest in several ways," said the letter signed by Farm Bureau President Bob Stallman. "If a producer knows the government will cover all but 5 or 10 percent of losses, he or she may be inclined to buy more acreage than they can effectively manage and therefore bid up the price of land. Alternatively, some may pay higher cash rents than they otherwise would be willing to pay. They may borrow more money than they otherwise would be comfortable borrowing, and lenders may feel more secure in allowing farmers a higher degree of leverage.
"These effects will not be limited to individual farmers. If anyone is willing to pay more in cash rent, everyone in the area may end up paying the same rate. The same applies to other agricultural inputs as well. Thus, farmers who are not inclined to bid the value of shallow loss coverage into their costs may be compelled to do so by market forces."
While some believe a shallow loss program will make it easier for a new farmer to enter into business because their risk would be limited, the Farm Bureau said it "unfortunately believes the opposite outcome is likely. The producers that are least able to compete in this environment will be those with the least equity in their operations - a group that will include most young and beginning farmers. In this manner, shallow loss coverage could become a further barrier to entry for young farmers and another factor driving further farm consolidation," the letter noted.
"A true safety net program - one focused on mitigating the large, systemic risks that are endemic to agriculture to a much greater degree than in any other industry - avoids most of these problems. Farmers bear a reasonable degree of risk out of their own pocket, ensuring that their decisions will be driven primarily by market signals. Government programs offset part of the systemic risk, ensuring that agricultural production takes place at a level that provides additional benefits to the public at large," according to the letter.
Should Congress support a shallow loss program, the Farm Bureau encourages lawmakers to consider the following:
The whole farm idea may seem more "defensible" to the general public as payments would only be made when a producer suffered a loss on all of his or her eligible crops. But, the Farm Bureau letter said, "the whole farm approach has the potential to create some perverse incentives. The primary problem is that it penalizes diversification," which is "one of the most basic risk management practices that a farmer can undertake."
Besides the issue of diversification, whole farm programs, the letter noted, will tend to pay out more in areas that are more risky for production. "Thus, a whole farm program provides an incentive for more intensive production in more risky areas. This is not the incentive we seek to create in a farm safety net."
The letter ends by recalling that farmers who are diversified are largely required to purchase and maintain various pieces of equipment to be able to grow and harvest specific crops. In a clear signal to Senate Ag Chairwoman Debbie Stabenow (D-Mich.), the letter said, "A typical Michigan producer very well might need different equipment for each of his crops -- wheat, corn and sugar beets. If just one of those crops suffers a major loss, rolling that loss into a whole farm loss does nothing to help offset that equipment cost. On the other hand, some producers only produce one crop and therefore do not face the variable cost issues."