Academic journal article Chicago Fed Letter

Taming Agricultural Risks

Academic journal article Chicago Fed Letter

Taming Agricultural Risks

Article excerpt

Experts from academia, policy institutions, banking, and the farming industry gathered at the conference to examine the chief risks facing the agricultural sector and the different approaches to managing them-in particular, those most relevant to farm operations in the Seventh Federal Reserve District.1 Most conference participants agreed that in general, agricultural producers have strong balance sheets after several years of high incomes and they have adequate risk-management strategies to survive a downturn in farming. Yet, some speakers noted that certain segments of agriculture-especially beginning farmers and producers that expanded rapidly during the boom times-face morechallenging circumstances to manage in the years to come, particularly given the declines in field crop prices during 2013.

David B. Oppedahl, Federal Reserve Bank of Chicago, kicked off the conference by going over the major categories of agricultural risks. He showed several maps of crop insurance indemnities produced by the Risk Management Agency (RMA) of the U.S. Department of Agriculture (USDA) in order to discuss the weather-related risks across the country. These maps illustrated widely differing results from year to year, as negative effects from weather varied across the nation and triggered shifting patterns of payments for agricultural damages. The drought of 2012, which hit the Seventh District especially hard, resulted in the highest payments for crop damages ever under the RMA's programs, noted Oppedahl. In addition to weatherrelated risks, agricultural production faces disease and pest risks, he said. Other key categories of risks are price or market risk (e.g., fluctuations in input costs and output prices), financial risk (e.g., shifts in interest rates and credit access), institutional risk (involving government policies), and human risk (including farmer health and labor issues).

Insuring against farm risks

Eldon F. Gould, owner-operator of a family farm, gave the keynote address, sharing his experiences not only as a lifelong grain and livestock producer but also as a former administrator of the RMA. Gould described the substantial growth in the RMA's liabilities due to the high commodity prices of the past few years and the fairly recent expansion of its coverage to include additional counties and crops. Agricultural producers rely on the RMA's insurance programs, as well as the knowledge of its county agents, to protect themselves against potential losses. Cultivating solid relationships is vital to the mission of the RMA because doing so not only fosters teamwork but also encourages transparency, both within the agency and between county agents and farmers, said Gould. Moreover, he argued that new technologies can assist in achieving even greater transparency (and reducing fraudulent insurance claims)-e.g., properly calibrated monitors on tractors can now allow for accurate and timely dissemination of field data. In closing, Gould advocated for agricultural producers to be better heard on other issues that affect farm enterprises-such as changing consumer trends and perceptions of quality (e.g., in regard to genetically modified foods and livestock management practices).

Thomas P. Zacharias, National Crop Insurance Services (NCIS), discussed the state of the crop insurance industry and its role in managing farm risks. He laid out the collaborative relationship between insurance providers, which are members of NCIS, and the RMA in making subsidized federal crop insurance available to farmers. As Zacharias explained, the private insurance companies must sell policies to all eligible farmers in states where they operate, and they must also collect premiums, adjust policies, bear underwriting risk, pay all claims, and train staff to sell and service policies; meanwhile, the RMA vets private insurers, sets premium rates, subsidizes premiums, makes payments for private companies' service delivery costs, and sets underwriting standards. …

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