As Congress and commodity organizations discuss moving farm policy from target price/direct payments toward some type of revenue insurance, the devil most certainly will be in the details, says Darren Hudson, agricultural economist at Texas Tech University, speaking at the Ag Market Network’s November conference call.
Areas of possible conflict or concern include disparities in shallow losses between regions and commodities, financing complications as seen by lenders and creditors and the need for commodity producers to better manage more types of risk.
Several proposals on the table at the time of this writing focus on paying producers for shallow losses of between 5 percent to 30 percent of expected revenue. “On the surface, (the proposals) seem to make sense,” Hudson said. “But the devil is in the details. There are some things we’re going to change, and it could reshape the system as we move forward.”
Hudson noted that the National Cotton Council’s shallow loss proposal (STAX) “caught a lot in the industry off guard. People had been discussing these types of revenue products for a while, but the cotton group had always been staunchly in favor of direct payment and counter-cyclical type programs.”
In the STAX proposal, the shallow loss plan can be “stacked” with existing traditional crop insurance. The latter would cover greater losses, Hudson noted. “What we don’t want is one of the plans crowding out the existing decisions being made by the producer. The STAX proposal is designed where it’s probably not going to offset a lot of that.”
Hudson says that most of the proposals on the table, “except for the Farm Bureau proposal, eliminate direct payments or reduce them significantly. This says whatever program we end up choosing is likely going to eliminate or significantly reduce the size of direct payments. It’s a pretty dramatic shift in thinking and has gotten a lot of people nervous. I think it’s safe to say we’re moving in that direction.”
There are some complications to a shallow loss risk program, according to Hudson. “In some areas, like south Texas, a drought may occur quite frequently, which means it pays out frequently, therefore the premiums are quite expensive. This is why we don’t have a private sector version of this. It’s too expensive for producers to have it. Other parts of the country may not experience shallow losses all that often. Their yields are more consistent. What they may be more worried about is the price component.”
In essence, these regional differences “create a difference of opinion over how to construct the underlying policy.”
Groups supporting the shallow loss proposals are hoping the government will subsidize the premium a producer is likely to pay, noted Hudson. “The money that would have been spent on direct payments can be shifted over into this. It gets around the political landmines associated with direct payments. It also means that the producer and the government are sharing the risk.”
The structure of financing could also be affected by insurance-based farm policy, according to Hudson. “Existing policy provides a stable flow of cash, so your banker, or creditor or seed supplier can count on a certain amount of cash. The new proposals change the dynamic completely. It puts the onus on the producer to manage that risk.
“Banks and creditors are going to have to rethink how they are going to securitize loans. It may increase borrowing costs and reduce financing availability for some producers. It will ultimately have an impact because banks will do what banks do, protect their assets.”
John Robinson, Extension economist with Texas A&M University, stressed that producers “should be focusing on the price discovery processes in these revenue products. We need to look where the market is telling us prices are going to be in the January-February period. That’s the price discovery time frame for most of our insurance products.
“There is going to be an even greater importance on learning how to choose level of coverage, revenue and yield products tied to your marketing,” Robinson said.