| September 26, 2013

A new way to do farm policy

Recent debates over a government shutdown and the debt ceiling have overshadowed the drama surrounding the farm bill. But the farm bill will eventually be back on the table, and when it is, the time for fresh ideas will have arrived.

In 2012, the USDA paid out $14.9 billion in farm subsidies​, with Oklahoma receiving $382 million. The latest iteration of the farm bill is moving in a more favorable direction of "crop insurance" rather than direct subsidies, although some level of subsidies would remain for some commodities. Unfortunately, this type of insurance is unlike any insurance you and I pay for our car or house. The insurance payments are heavily subsidized and benefits often flow to large insurance companies. According to this article in Bloomberg:

The government subsidies show how a program created to safeguard the nation’s farmers has evolved into a system that in most years all but guarantees profits for insurers. In 2012, taxpayers spent $14 billion paying more than 60 percent of farmers’ insurance premiums, the companies’ operating costs and the lion’s share of claims triggered by a historic drought, according to the Congressional Research Service.

What is to be done? Agricultural economists at the University of Georgia, Octavio Ramirez and Greg Colson, recently made an interesting proposal. They write:

Given the escalating costs of crop insurance to taxpayers and the lingering doubts of whether it can provide an effective and equitable safety net for all producers, the natural question emerges: Is there an alternative safety net scheme that could be broadly applicable at a lower cost to taxpayers? One possibility, which has been debated off and on during farm bill discussions since the mid-1990s, is a system based on individually owned savings accounts that would serve as a backstop in times of negative revenue shocks.

They describe further:

The proposed CISA system is similar to programs already used in the United States and internationally for health and unemployment insurance, but is designed to mimic the current crop revenue insurance programs with which farmers are now so familiar. Under CISA, producers would be eligible to annually deposit a pre-determined percentage of their before-tax income in an interest-bearing personal savings account. Farmers could then withdraw money from the account when their revenue in a particular year falls below a pre-specified threshold. For example, akin to traditional crop insurance, if a producer's revenue is just 65% of his or her past five-year average and the pre-selected revenue guarantee was 75%, then he or she would be able to withdraw an indemnity equal to the 10% difference. If the farmer, at some point, does not have a sufficient CISA balance to cover a justified withdrawal, the required funds are lent to the account by the overseeing government agency at the same interest rate earned on savings.

As with any proposal, there are some downsides, but this is just the kind of freer-market thinking needed in food and agricultural policy.

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