Crop Insurance vs Average Crop Revenue
October 25th, 2007 by David Graves
Average Crop Revenue (ACR): A Rational Safety Net or a Slot Machine?
• Not Just a Harmless Choice. ACR has been called a harmless producer choice, but the choice has serious policy consequences not only for the producer but the entire farm safety net.
• Opposed by Most Farm Groups. Aside from one national farm group (whose state members are divided) and a handful of other organizations, the ACR concept was rejected by farm groups and farmers during two years of Farm Bill deliberations.
• No Price Protection. The ACR price guarantee rises and falls with the market, though at a staggered rate. In a period of low prices, the ACR price guarantee also drops, inviting emergency ad hoc economic assistance. In a period of very high prices, unnecessary payments are made even if prices simply moderate. Current non-recourse loans that provide minimum price protection are replaced with recourse loans, allowing USDA to foreclose on farms if prices drop and the loan cannot be repaid.
• No Individual Revenue Protection. The ACR triggers only when statewide revenue for a crop falls below expected statewide revenue. When triggered, payments are made to all farmers in the State, with equal amounts being paid to farmers who suffered no loss and those who suffered substantial loss, though payments to those suffering losses are ultimately reduced (see next bullet).
• Less Yield Protection. Although a producer electing ACR and carrying crop insurance would receive an entire ACR payment if the producer did not receive a crop insurance indemnity (i.e., a bonus payment to producers with no loss), a similarly situated producer that received a crop insurance indemnity would see the ACR payment reduced by a dollar for each dollar paid in crop insurance indemnities (i.e., a penalty on producers with a loss).
• Potentially Higher Crop Insurance Premiums, Especially for Some. Producers who elect ACR would receive a premium discount ranging anywhere from 10% to 40% based on theorized duplication of risk between Federal Crop Insurance and ACR. If a producer loses a crop but an ACR Statewide payment is not triggered, the producer receives a full indemnity though the producer paid 10% to 40% less for the policy. Meanwhile a similarly situated producer remaining under the current farm policy would receive the same indemnity but pay 10% to 40% more for the same policy. The likely effect is to increase the loss ratio for the Federal Crop Insurance program as indemnities remain the same while premiums substantially drop. Will premiums ultimately need to be increased in order to meet the loss ratio required by law? If so, those not experiencing the 10% to 40% reduction will be especially harmed by the increase. In any case, the current Federal Crop Insurance Program will be destabilized.
• Producers in Large States, States with Diverse Growing Conditions Hurt. Because ACR only protects statewide revenue, not individual producer revenue, severe crop losses in one region of a State could be offset by good conditions in another, resulting in no statewide payment and calls for emergency ad hoc disaster aid. Conversely, if a statewide payment is made, producers in the region with good conditions still collect a payment resulting in wasteful spending. This is especially true in larger states and states with diverse growing conditions.
• Compounds the Current APH Problem for Producers with Multiple Year Losses. Because Actual Production History (APH) is part of the formula for determining ACR payments, producers with multiple year losses are penalized under ACR. The additional payment factor lowers ACR payments for producers with APH yields below the State average effectively penalizing growers who have experienced back-to-back losses.
• Duplicative Loss Problem. The amount of premium reduction under ACR is not transparent, resulting in guesswork. Part of the problem is the ACR and individual Federal Crop Insurance policies cover very different risks and should (individual vs. statewide), and therefore do not naturally offset one another. This leads one to the conclusion that this so-called “integration” is no more than a cost-saving measure, with Federal Crop Insurance used to pay for ACR. The result is the destabilization of the Federal Crop Insurance Program, without any clear sense of the degree of damage being done.
• WTO Implications. ACR countercyclical payments, because they are based on current year price and production, are certainly amber box. These amber box payments would replace crop insurance indemnities which today are treated more favorably under WTO rules. Moreover, because ACR fixed payments involve potentially updated base acres, such payments may also be determined to be amber box for WTO purposes. In short, ACR appears to exacerbate WTO issues.
• Eligibility for Standing Disaster. Though advocates have long claimed that ACR would obviate the need for disaster assistance, ACR advocates appear to make certain that producers electing ACR receive payments under the new program.
• Administrative Nightmare. ACR involves the yearly re-rating of crop insurance policies of any producer electing ACR, in addition to potential base changes, the requirement for FSA to collect acreage reports, and changes to the fixed payments on a farm. These changes will put significant additional stress on both RMA and FSA at the same time those agencies are saying they do not have sufficient computer systems to deliver current programs. Producers may annually elect to participate in ACR beginning in 2010. Agents will have to quote crop insurance premiums depending on whether a farm is under ACR or not. Farm serial numbers do not necessarily line-up with crop insurance units. Where the two overlap, farmers will be required to reconstitute either farm serial numbers or crop insurance units. Moreover, it is entirely unclear how or when agents and companies will be notified if a farm is under ACR. FSA will need to have crop insurance APH data as well to calculate the “additional payment” factor for the ACR payment. Currently, FSA does not have this data nor the information systems to make collect, hold and make the appropriate calculations.
• Conclusion. ACR is potentially wasteful of taxpayer money because it makes payments to producers who do not need a payment or when they do not need a payment. ACR is potentially inequitable because it does not make payments to producers who need a payment or when they need a payment. ACR is certainly unpredictable because it makes payments to protect statewide revenue, not individual producer revenue, with neither the producer nor the lender able to bank on it. ACR operates as a slot machine rather than a rationale safety net.