Crop Insurance in Relation to Other Components of the Producer Safety Net Joe L. Outlaw Professor & Extension Economist Co-Director, AFPC July 26, 2011

Net Outlays ($B), Source: CBO March 2011 Baseline

Total Payments ($M), Source: CBO March 2011 Baseline

What I Look For in a Safety Net? 1.Does it help when it’s needed and doesn’t when it’s not? 2.Can you explain what your trying to accomplish to a normal person and they understand? 3.Does it help keep people actually farming the land? A.Support goes to those “at risk” B.Bankability - Will a lender consider it in making operating loans? 4.Is there minimal overlap? A.Not getting paid on the same loss twice…

Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria Crop Insurance –Yield insurance passes all my tests –Revenue insurance passes almost all tests If you have any other price/revenue support tool in place there will be overlap Futures market based price – good and less good (perceived or real market manipulation can create politically unacceptable or indefensible outcomes)

SURE –Passes all except for #1– it has paid so late that if you really needed this part of the safety net to kick in – was probably too late (Money from the heavens) and –3b – not bankable –Difficult but can be explained as just whole farm gap insurance –No Baseline Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria

ACRE –Is counter-cyclical but better hope highly correlated with state yields – otherwise might not trigger –Can’t explain it to anybody – much less a normal person –Does support people “at risk” but based off of benchmark prices that for some crops are too low to provide much protection –Has not been seen as bankable – too complicated with multiple triggers –Tremendous overlap with crop insurance Cannot defend paying on the same loss twice… Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria

Direct Payments –Passes #2 (explainable) and 3a (bankable) –Fails on: not counter-cyclical support Not only helping those at risk Overlap??? –I probably should have had WTO acceptability as one of my criteria but… I didn’t Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria

Counter-Cyclical Payments (CCPs) –Passes #1 sort of and #2 explainable –Fails 3a and 3b (“at risk” and bankable) –Does overlap with revenue insurance –If we go this route payment limits would need to be raised – otherwise no bankable protection Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria

Marketing Loan/LDPs –Almost perfect (passes all my tests) –If it had a built in automatic input cost inflation and yield improvement mechanism – we wouldn’t be having this discussion, maybe a WTO discussion, but not this one –Overlaps with revenue insurance Evaluating Safety Net Options Relative to my Criteria Evaluating Safety Net Options Relative to my Criteria

Each of the various components of the producer safety net have their strengths and weaknesses –Each were designed to accomplish a certain goal –Whether I think the tool is any good probably is influenced by what I think it’s goal was/is In a limited budget environment – Choices will have to be made If it were me making the choice I would say all we need is crop insurance and some time of price protection Summary Summary

Thanks!!! Joe Outlaw