Wheat and More….or LessOver the past months, there’s been a lot said about what kind of
a new Farm Bill we should have.
Some people and some organizations would like to drop direct
payments and replace them with a more extensive crop insurance program. But,
from my point of view, this is very bad policy — especially the proposals like
crop insurance to cover shallow losses.
While we debate the new farm program, one thing we need to keep
in the back of our minds is that our country really does have a financial
problem in that we are spending money faster than it’s coming in. To solve the
problem, everybody is going to have to do his or her part.
That includes us farmers.
While we are all farmers, we are also part of something else.
That is, we are all Americans. Instead of developing new self-serving programs,
why don’t we do the right thing –let’s come up with ways for cutting our costs
to the government. Instead of crowding
to the front of the line, let’s think beyond ourselves.
So rather than expand crop
insurance as Corn Growers would have us do, this program and other ag subsidies
should be cut or made more efficient.
The shallow loss concept is nothing more than shallow thinking.
Under this concept, you could expect to get crop loss checks almost every year.
Traditional crop insurance generally covers maybe 70 percent of crop losses – major
losses that don’t occur all that frequently like those suffered during last
year’s drought. But the shallow loss program would push coverage to as much as
95 percent of revenue losses.
No risk farming – that’s a novel idea. I’ll let our friends in
Corn Growers explain this concept to Wall Street investors, futures market
speculators, Las Vegas
gamblers and small business owners. All of these groups also face much
uncertainty but with few exceptions receive no government subsidy.
Of course, costs go up
with the shallow concept. Outside of this problem, what else is wrong with the
idea? Fortunately, other farm organizations like American Farm Bureau see the
shallow loss concept as having serious problems with market distortion. Since
it’s now almost impossible to lose money in farming, Farm Bureau says farmers
will take on more risk rather than responding to market signals.
Farm Bureau President Bob Stallman says with an overly attractive
crop insurance program, farmers are more inclined to react to government
programs than to market signals. The low-risk crop insurance encourages them to
buy more land and to bid up cash rents.
In addition to raising costs of production, it obviously makes it more
difficult for young and beginning farmers.
Noted Ohio State University ag economist Luther Tweeten agrees.
“Insurance subsidies to farmers encourage production, often on environmentally fragile
lands. Indeed, crop insurance subsidies have been found to be the single most
costly distortion of farm markets.
“Additional output distorts food and fiber markets, often to the
detriment of poor farmers in developing countries. An end to insurance
subsidies would sharply curtail all-risk insurance but American farmers would
continue extensive use of other risk management tools,” Tweeten says.
While we ought to be concerned about how our farm policies affect
farmers worldwide, we also need to remember World Trade Organization rules
about trade distortion. Several years back our competitors in the cotton
industry sued the U.S.
over our STEP II program. They couldn’t understand why the U.S. cotton acreage kept increasing
while world prices kept dropping. Of course, it was because of our cotton
subsidies, and, of course, we lost the WTO suit. And, of course, every farmer
in the U.S.
got to help chip in to cover the penalties.
That is the beauty of decoupled payments or today’s direct
payment. It is as clean as you can get concerning market or trade distortion.
But with the expanded insurance proposals, there are powerful incentives to do
the wrong thing.
Crop insurance can be a valuable risk management tool. But again,
to make it less market distorting, it has to cover all crops.
Tweeten also reminds us that with the highest net farm income in
history, farmers are in a very strong financial position and can certainly
afford the cost of these other risk management tools. In other words, the U.S.
taxpayer doesn’t have to subsidize these programs. He continues by saying,
“neither does the taxpayer need to subsidize farmers for equity reasons because
farm households including small farmers on average have considerably higher
income and wealth than nonfarm households.”
Iowa State University ag economist Bruce Babcock also agrees. He
says taxpayer subsidies actually encourage farmers to buy higher coverage than
they may need. He argues that crop insurance doesn’t need to subsidize the
revenue protection component because farmers are already using forward
contracts at their local elevator or the Chicago Board of Trade to lock in
Babcock suggests offering farmers a decoupled risk management
payment to buy crop insurance. Good idea. Provide us nothing more than a basic
policy and if we want to buy up and get tinted glass, electric roll-up windows
and leather seats, we can pay for the extras on our own. But, guess what? If we
have to pay for the extras, Babcock says we’ll buy just the basic level. What
does that tell us?
Vincent Smith, Montana State University ag economist, says the
crop insurance industry is truly broken.
“About 58 percent of crop insurance subsidies ultimately flow to
crop insurance companies and their agents. Crop insurance subsidies are now the
single largest farm subsidy program. The $5.6 billion crop insurance program is
nearly one-third of all expenditures directly targeted to farmers.
“Further, even doing away with crop insurance would do little
harm to farmers. Farmers have repeatedly shown they will not buy crop insurance
without massive government subsidies — that is, they do not think the benefits
are worth the costs. Farmers could protect themselves against financial losses
by making greater use of modern financial techniques such as forward selling,
puts, options and derivatives,” Smith says.
Beyond that, we farmers can do many other things to take care of
ourselves—like paying off debt. Another idea I like is the concept of user
fees. If you want to use programs like crop insurance, pay for it yourself.
And don’t get the idea that I’m against subsidies. I’m just
against self-serving and ineffective programs like the shallow loss idea. A
subsidy I dearly love is to put huge amounts of money into research. Serving on
the Agronomy Department advisory committee at Kansas State
University, I was
dismayed to see how many faculty positions were frozen and how much budgets had
to be cut. For every dollar going into crop insurance subsidies, we ought to be
spending that much on university research. Think how that much less a farmer
subsidy is needed when we have new wheat varieties that yield 5 bushels per
acre more than the next best variety out there. And, believe you me, the U.S. taxpayer
can easily see the benefits of this through lower food costs.
Here’s one final thought. Once again, as we debate the next Farm
Bill, we are being given an opportunity to show what leadership is all about.
But to do so we are going to have to think beyond our own special interests and
Vance Ehmke and his wife,
Louise, grow certified seed wheat in Lane