Managing Risk With Revenue Insurance
February 8th, 2007 by David Graves
The Economic Research Service (ERS), an agency of the U. S. Department of Agriculture (USDA), as part of its total portfolio of work, analyzes a broad array of issues and questions regarding agriculture and agricultural economies, including production and marketing economics and risks. In June, 2006, ERS published a study on Whole-Farm Approaches to a Safety Net, by Robert Dismukes and Ron Durst. From that study, ERS released a report in November, 2006, on Managing Risk With Revenue Insurance by Robert Dismukes and Keith H. Coble. Both releases were made in the ERS publication Amber Waves.
In the November report, authors Dismukes and Coble conclude that revenue insurance may do a better job of stabilizing farm income and may protect more farms than other risk management tools because, as they further point out, crop revenue insurance offers farmers a way to manage revenue variability that results from yield and price risks. However, the authors also conclude that the combining of risks, as revenue insurance does, may not provide farmers with what policymakers and the farmers themselves regard as adequate coverage. Dismukes and Coble point out the combining of risks in one policy can mean less frequent, lower payments to farmers when the risks offset each other. From their work on the subject, the authors are able to conclude that experience suggests farmers prefer to separate insurance protection. To support this conclusion, they pointed out that most participants in the Federal Crop Insurance Program subdivide their farm acreage for insurance purposes, even though doing so requires that they forgo a premium discount.
Well, well. I think the authors just put their finger on why the Federal Crop Insurance Program is considered to be successful and has grown to be a critical part of farmers’ risk management plans today as reported by the Secretary of Agriculture and other high ranking USDA officials on many occasions, including testimonies before Congress and as recently as statements contained in the USDA 2007 Farm Bill Proposals. Farming is complex, varied and, yes, very risky. One size will simply not fit all. To efficiently and effectively manage this environment, farmers need options and flexibility. Through the continued support of Congress, the Federal Crop Insurance Program has grown and expanded its portfolio of policies and policy options to help ensure farmers are better able to satisfy their individual risk management needs. Thus, the 2007 Farm Bill should first and foremost seek to do no harm to the Federal Crop Insurance Program and the private insurance companies and agencies responsible for delivering the program to America’s farmers.
Your thoughts are welcome.
