Discussion: What Have We Learned from the New Suite of Risk Management Programs of the Food, Conservation, and Energy Act of 2008?
Lubben, Bradley D., Novak, James L., Journal of Agricultural and Applied Economics
New revenue-based support programs in the 2008 Farm Bill represent a fundamental shift in farm programs and risk management decision-making. However, complexity, uncertainty, economics, and, arguably, an incomplete analysis of the new Average Crop Revenue Election (ACRE) program all contributed to low enrollment in the new program in 2009. An effective analysis of ACRE should consider farm programs as part of an integrated risk management portfolio, including crop insurance, marketing, and other risk management tools as opposed to a separate lottery program. Improving this integration could be one of the most significant consequences of the 2008 Farm Bill.
Key Words: farm bill, commodity programs, risk management
JEL Classification: Q18
The 2008 Farm Bill clearly delivered a new, much more complex farm income safety net to producers. On top of the existing price-based support programs (marketing loans, Direct Payments [DPs], and Counter-Cyclical Payments [CCPs]), the federally subsidized crop insurance programs, and the history of ad hoc disaster assistance programs, Congress added two revenuebased support programs: the Average Crop Revenue Election (ACRE) program and the Supplemental Revenue (SURE) assistance program. Both represent a shift toward revenue in the design of farm income support policy. ACRE focuses on crop-specific revenue instead of price. SURE focuses disaster assistance on whole-farm crop revenue instead of crop-specific quantity and quality losses. Both will impact farm program, crop insurance, marketing, and other risk management decisions in very different ways than traditional federal farm policy.
Contributions of the Presented Papers
The invited papers consider these differences and analyze the impact of the new programs. All of the papers seem to see ACRE as more insurancelike than a historic farm program support mechanism. Barnaby et al. analyzed and addressed ACRE and SURE as being adjunct insurance products. ACRE was characterized as "a put option." Zulauf et al. examine overlaps between insurance and the two programs. Harris comments specifically about the offsets of reductions in DPs and marketing loan protection under ACRE with the SURE program. Historic farm programs (2002 and previous), although designed to reduce income risk, have not generally been analyzed as insurance programs, which brings up a question: is this a fundamental shift in farm and political thinking? Will future farm programs and insurance products finally be linked together in some rational fashion? Barnaby et al. seem to indicate that this will be the case, at least on the insurance side.
Harris did a good job of outlining the political situation surrounding the implementation of the ACRE program and the reasons for southern region lack of participation. Prefarm bill discussions and analysis may have led farmers to hope for more than they got out of the program. It certainly led to a lot of confusion. As presented by Barnaby et al., discussions ranged from program payments triggered by farm-level losses to those triggered by county or state losses to the current law requiring both farm-level and state-level triggers. In the South, current law reducing DP and loan rates under ACRE participation led to less than favorable comparisons of ACRE to the Direct and Counter-Cyclical Program (DCP). This was especially the case for cotton and peanut producers and for the reasons outlined by Harris. Figure 1 provides a relative comparison of the effective price protection provided by ACRE in 2009. The effective price that would trigger ACRE payments is 90% of the ACRE guarantee price (2-year marketing year national average price) assuming no yield deviation from the ACRE benchmark. From cotton and peanut producer perspectives, the new ACRE program offered no better effective price protection than the existing DCP; thus, the cut in the DP and the marketing loan rate meant a penalty for ACRE participants. …