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California farmers shifted to groundwater when drought reduced surface water availability

Tuesday, January 2, 2018

Prolonged drought generally results in large reductions in the quantity of surface water delivered, affecting farm production systems that depend heavily on surface water for irrigation. Groundwater may substitute as a source for irrigation water when the availability of surface water declines. For example, although most farmers in California’s main agricultural areas rely on surface water for the largest share of their irrigation needs, many parts of the State have sufficient groundwater reserves to provide a partial buffer against the impacts of drought. However, recurring drought and groundwater “overdraft”—when the amount of water extracted is greater than the amount of water entering the aquifer—have resulted in large declines in aquifer levels in some areas. This chart appears in the June 2017 Amber Waves feature, "Farmers Employ Strategies To Reduce Risk of Drought Damages."

Drought is typically the largest single driver of crop disaster assistance and indemnity payments

Tuesday, October 17, 2017

At any given time, some portion of the country faces drought conditions. In recent years, large areas of the United States have experienced prolonged drought, with significant impacts across entire agricultural sectors. A major drought can reduce crop yields, lead farmers to cut back planted or harvested acreage, reduce livestock productivity, and increase costs of production inputs such as animal feed or irrigation water. Since the Dust Bowl in the 1930s, drought has been an important focus of U.S. farm policy. Early Federal policy mitigated farmers’ drought-induced hardships primarily by providing ad hoc disaster assistance in response to a drought. With changes to the Federal crop insurance program in the 1990s, the emphasis of farm programs shifted from ad hoc disaster assistance to risk management, with a greater reliance on crop insurance to compensate farmers for drought losses. As a result, drought has been the largest individual driver of Federal indemnity payments and disaster assistance for over four decades. This chart appears in the June 2017 Amber Waves feature, "Farmers Employ Strategies To Reduce Risk of Drought Damages."

Grass and forage crops lead applications for the Noninsured Crop Disaster Program, but vegetable crops lead for buy-up option

Monday, July 17, 2017

USDA operates a number of Federal crop insurance and disaster aid programs to mitigate the downside risks inherent to agricultural production (e.g., damaging weather, price, or yield disruptions). However, crop insurance is only available to certain commodities in specified areas. Producers have been able to enroll in the Noninsured Crop Disaster Assistance Program (NAP), which has been managed by the USDA, Farm Service Agency, since 1994. This program insures producers in situations when Federal crop insurance is unavailable to them due to their crop or location. Participants can choose from a basic option that provides catastrophic coverage for only a service fee, or they can pay a premium for higher coverage with the NAP Buy-Up program. Applications for NAP increased from 66,000 to 138,000 between 2014 and 2015. In 2015, the first year that NAP Buy-Up was offered, 16 percent of applicants purchased buy-up coverage. The majority of buy-up applications were for specialty crops like vegetables and fruits and tree nuts. This chart appears in the ERS Amber Waves article, "Applications for the Noninsured Crop Disaster Program Increased After the Agricultural Act of 2014," released in July 2017.

U.S. dairy producers have faced increasing price and feed cost volatility

Thursday, September 1, 2016

Over the last 20 years, U.S. dairy producers have faced rapidly changing milk prices and input prices, primarily for feeds. The monthly average U.S. all-milk price has been highly volatile since 1990, particularly in more recent years. Factors that account for the increasing variability in milk prices include increased U.S. involvement in (and dependence on) export markets, and weather events in both the United States and other exporters that affected production and dairy stock levels. More recently, dairy producers also faced higher feed costs. Dairy producers generally have low adoption rates of traditional price risk management tools, such as forward contracting, and the use of futures and options markets and trading. The Livestock Gross Margin for Dairy (LGM-Dairy) insurance program is a relatively small and new public risk management program overseen by USDA?s Risk Management Agency (RMA) designed to protect margins between milk prices and input (feed) costs, rather than simply supporting prices.? Analysis of the LGM-Dairy program shows that it can be effective in reducing risks, but is unlikely to substantially change farmer?s production level decisions. ?Find this chart and more analysis in Livestock Gross Margin-Dairy Insurance: An Assessment of Risk Management and Potential Supply Impacts.

Changes in U.S. double-cropped acreage roughly mirror commodity prices

Thursday, September 1, 2016

Double-cropped acreage has varied from year to year. Because decisions about double cropping are made annually, fluctuations are likely as farmers respond to changing market and weather conditions. For example, higher commodity prices give farmers more incentive to intensify production and could offset revenue shortfalls from lower potential yields when double cropping. From 2004 to 2012, total double-cropped acreage roughly paralleled soybean, winter wheat, and corn prices. When commodity prices at the time of planting decisions were increasing or relatively high, total double-cropped acreage also increased. Total double-cropped acreage peaked at 10.9 million acres in 2008, when prices for soybeans, winter wheat, and corn also peaked. In 2005 and 2010, nearly every region witnessed declines in double-cropped acreage amid commodity price declines. This chart is found in the ERS report, Multi-Cropping Practices: Recent Trends in Double-Cropping, EIB-125, May 2014.

Dairy farmers shifted to catastrophic coverage under the MPP-Dairy Program in 2016

Thursday, September 1, 2016

The Margin Protection Program-Dairy (MPP-Dairy) is a risk management program introduced in the 2014 Farm Act. MPP-Dairy is designed to protect agricultural producers against adverse movements in the difference between milk and feed prices (the margin). Enrollees receive catastrophic coverage, for an annual $100 enrollment fee, that provides payments when a national-average margin falls below $4 (the average monthly margin was $8.30 in 2004-13). Farmers can purchase additional ?buy-up? coverage, for margin thresholds ranging from $4 to $8 in 50-cent increments. Almost 25,000 farms?55 percent of licensed U.S. dairy operations, accounting for 80 percent of 2014 U.S. milk production?enrolled in the program for 2015 coverage. Forty-four percent of enrollees?with more than three-quarters of production covered by MPP?chose catastrophic coverage. Farms may change coverage annually, and many did so in 2016, as the shares of farms and production under catastrophic coverage rose, moving away from all levels of buy-up coverage. This chart is based on data found in the ERS report, Changing Structure, Financial Risks, and Government Policy for the U.S. Dairy Industry, March 2016.

Most nonfarm income of farm households comes from wages & salaries

Thursday, September 1, 2016

In 2013, only about one-quarter of total farm household income came from farming. Because of the broad USDA definition of a farm (which includes places with the potential for as little as $1,000 in annual sales), more than half of farm operator households consistently incur a net loss from farming activities in any given year, and far more do not earn the equivalent of a market wage for their on-farm labor. As a result, most farm operator households rely heavily on off-farm income. Of the total off-farm income earned by all farm operator households, the majority comes from wages and salaries earned by household members through nonfarm jobs, followed by income transfers (e.g., Social Security) and profits from nonfarm businesses owned by farm household members. As a group, U.S. farm operator households earn their income from a wide range of activities, reflecting the diverse set of skills, knowledge, and economic goals held by farm operators and their families. This chart is found in the ERS topic page, Farm Household Well-Being, updated November 2014.

Use of crop insurance on U.S. farms continues to grow

Wednesday, August 10, 2016

The share of U.S. cropland insured has increased from less than 30 percent in the early 1990s to nearly 90 percent—299 million acres—in 2015. Passage of the Federal Crop Insurance Reform Act in 1994 led to a spike in the use of crop insurance, reflecting the introduction of low-coverage, fully subsidized Catastrophic Risk Protection Endorsement (CAT) insurance and a temporary requirement that producers obtain insurance coverage to be eligible for other commodity support programs. CAT insurance pays only 55 percent of the price of the commodity on crop losses in excess of 50 percent, and farmers have increasingly opted to purchase insurance with higher coverage levels—known as "buy-up" insurance—for greater protection against risk. Premiums for buy-up policies are also subsidized, and these subsidies were increased in the 1994 Act as well as under the Agricultural Risk Protection Act of 2000. While buy-up policies are not fully subsidized like CAT insurance—in 2015 producers paid, on average, 38 percent of the total cost of buy-up policies—they in some cases can protect more than 75 percent of the value of a crop. By 2015, buy-up policies covered 95 percent of insured cropland. This chart is from the ERS report, How Do Time and Money Affect Agricultural Insurance Uptake? A New Approach to Farm Risk Management Analysis, released on August 1, 2016.

Federal Crop Insurance costs vary with enrollment, subsidy rates, and crop losses

Friday, January 23, 2015

The Federal Crop Insurance (FCI) program is the primary USDA program to help farmers manage risks of crop losses. The size and cost of the FCI has grown since the early 2000s; insured acreage expanded by almost 90,000 acres from 2000 to 2013—about a 45 percent increase—in large part due to higher subsidies introduced in the 2000 Agricultural Risk Protection Act (ARPA) and the 2008 Farm Act. Higher insured acreage, increased subsidy rates—especially for the more costly coverage levels—and higher crop prices have combined to boost the price of insurance premiums in recent years. The major costs of the FCI program—premium subsidies and loss claims (which can vary greatly from year to year)—are tied to the value of premiums. In 2012, the widespread U.S. drought led to a large increase in the government share of indemnities due to crop losses. Under the current premium subsidy structure, an average of 62 percent of total premiums is paid by the Federal Government on behalf of insured producers in 2013. Administrative and operating subsidies, which include subsidies paid to insurance companies for selling and servicing insurance policies, are relatively stable over time, but have increased from an average of $0.96 billion in 2003-05 to about $1.52 billion in 2011-13. Find this chart and additional information on the Risk Management topic pages.

Double-cropped acreage varies by region

Thursday, May 29, 2014

Over the last decade, growing demand for agricultural commodities—for both food and fuel—has increased the incentives for farm operators to raise production. Double cropping, the harvest of two crops from the same field in a given year, has drawn interest as a method to intensify production without expanding acreage. In the U.S., the prevalence of double cropping varies by region. The variation across regions reflects farmers’ response to local conditions such as weather, climate (particularly growing season length), policy differences, and market incentives. The Southeast, Midwest, and Southern Plains regions lead the country in total double-cropped acreage. About one-third of the total double-cropped acreage over 1999-2012 was in the Southeast (2.7 million acres on average), and slightly more than one-fifth was in the Midwest (1.8 million acres on average). However, relative to each region’s total cropland acreage, the Northeast, Southeast, and Southwest all have larger shares of cropland used in double cropping than other regions. The Northeast had the largest share of double-cropped acreage (nearly 10 percent, on average) of the region’s total cropland, and the Northern Plains had the smallest (less than 0.5 percent on average). This chart is found in the ERS report, Multi-Cropping Practices: Recent Trends in Double-Cropping, EIB-125, May 2014.

Drought affects California agriculture, irrigation water deliveries a growing concern

Thursday, May 8, 2014

The driest year on record for California, following several prior years of drought, is likely to have an impact on the State’s agricultural production in 2014. On January 17, 2014, the Governor of California declared a drought emergency and as of March 4, over 94 percent of California’s nearly $45 billion agricultural sector was experiencing severe, extreme, or exceptional drought. The livestock sector is more directly exposed to exceptional drought (about 62 percent) than the crop sector (just over 50 percent). Given that much of California’s agricultural production takes place on irrigated land, effects of the drought depend on the cost and availability of water from irrigation in addition to local rainfall. Shortages of irrigation water sourced from snowfall are already evident, and the extent to which growers will be able to offset these reduced surface water supplies by pumping groundwater is uncertain. Find the table underlying this chart and additional analysis in California Drought 2014: Farm and Food Impacts.

Contract changes improve convergence of futures and cash prices for soft red winter wheat

Friday, January 24, 2014

Futures markets play an important role in price discovery (determination of prices through the interaction of market supply and demand) for major agricultural commodities, and provide a tool for growers, traders, and processors to mitigate risk. For futures markets to perform these functions effectively, the price of a commodity held in a futures contract must match (or “converge”) with its price in the cash—or spot—market when the futures contract expires. During 2005-2011, cash and futures prices for soft red winter (SRW) wheat failed to converge to the generally acceptable “basis”—or difference between the cash price and futures price—of plus or minus $0.10/bushel. At times the basis exceeded $1.00/bushel. In response, the futures exchanges modified their SRW contracts to better align contract terms with changes occurring in cash markets for factors including storage rates, major delivery locations for SRW, and quality specifications. Following these changes, cash and futures market prices for SRW have moved closer together, improving the effectiveness of futures contracts in determining prices and as a tool to manage risk. This chart is based on Recent Convergence Performance of Futures and Cash Prices for Corn, Soybeans, and Wheat, FDS-13L-01, released December 30, 2013.

Crop insurance indemnities rise with drought

Friday, November 22, 2013

Federal crop insurance has become a key component of producer risk management in the United States. Producers participate by purchasing policies from private insurance companies to cover possible losses on the commodities they expect to harvest in a particular crop year, with premium rates set by the Federal Government. Most producers choose revenue loss policies, which cover potential losses to both their average yield and the expected price of the commodity at harvest. The Federal Government pays a share of the producer’s premium. In most years, total premiums (including both the producer and government shares) have been above indemnities (outlays for losses). Severe drought and other weather losses in 2011 and 2012 caused indemnities to rise above premiums in those years. In any given year, individual producers may pay more for their premium than they receive in indemnities, but even in years of low losses, total indemnities have been higher than the premiums paid by producers. For additional information, see the Risk Management topic pages.

Non-converging futures and cash prices likely due to storage-rate difference

Friday, August 30, 2013

From 2005 to 2010, the prices of expiring U.S. grain futures contracts routinely exceeded the corresponding delivery market cash prices. This phenomenon, termed “non-convergence,” was particularly noteworthy in wheat markets. By appearing to simultaneously imply different prices for the same grain, non-convergence can create market uncertainty. What explains this phenomenon? When grain futures contracts expire, the seller gives the buyer a certificate that can be exchanged for a specific amount of grain, rather than transferring the actual physical commodity. Because the buyer can hold these certificates indefinitely, they provide a method to store grain, and futures exchanges charge the buyer a recurring certificate storage fee. During 2005-2010, market conditions often led the price of storing the physical commodity to exceed certificate storage fees, so expiring futures contracts became a more attractive way to store grain than holding physical grain in a warehouse. As a result, the same grain became more valuable when represented by an expiring futures contract, so the price of futures contracts rose above cash market grain prices. Addressing the divergence in storage rates is the most effective way to prevent future episodes of non-convergence. This chart is from ”Solving the Commodity Markets’ Non-Convergence Puzzle,” in ERS’s August 2013 Amber Waves magazine.

Emergency haying and grazing on land in the CRP peaked in 2012

Friday, August 23, 2013

USDA’s Conservation Reserve Program (CRP) engages farmers in long-term (10- to 15-year) contracts to establish conservation covers on environmentally sensitive land. As of June 2013, about 27 million acres of farmland were enrolled in the program. An important provision within CRP is that under certain circumstances, farmers can utilize their CRP lands for managed or emergency haying and grazing. The haying and grazing of CRP land can provide important benefits to farmers, particularly during major droughts when other sources of livestock feed are scarce, and, if done correctly, can also improve the environmental value of the conservation covers. During the 2012 drought, farmers conducted emergency haying and grazing on almost 2.8 million acres and managed haying and grazing on another 700,000 acres. This chart is found in the Amber Waves article, “The Role of Conservation Program Design in Drought-Risk Adaptation,” July 2013.

Simulating the interactions between climate adaptation and conservation program design

Monday, May 20, 2013

Farmers can adapt to their local climate in many ways, including through participation in USDA programs. In regions of the country that face higher levels of drought risk, farmers are more likely to offer eligible land for enrollment in the Conservation Reserve Program (CRP). As a consequence, CRP is both more competitive in these regions and drought-prone counties are more likely to face a binding CRP acreage enrollment cap. When counties are near their enrollment cap, farms are less likely to offer eligible land for CRP because those offers are less likely to be accepted for enrollment. In simulations of offer rates based on observed historical data, a national increase in the county CRP acreage enrollment cap to 35 percent of cropland in each county (from the current level of 25 percent), results in more offers from eligible farmers in drought prone regions of the Great Plains and the Intermountain West. This map is found in the ERS report, The Role of Conservation Programs in Drought Risk Adaptation, ERR-148, April 2013.

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