Government Programs & Risk
Major Risk Management Programs
- Federal crop insurance was established in the 1930s to cover yield losses from most natural causes (multiple-peril crop insurance or MPCI). Crop insurance operated on a limited basis up through the early 1980s, when insurance availability was greatly expanded and premium subsidies were increased in the hope of replacing the disaster payment program. Major reforms were legislated in 1994 and 2000. These included the introduction of CAT (catastrophic) coverage and large increases in premium subsidies. In the mid-1990s, revenue insurance was introduced into the Federal crop insurance program and has since become the most popular form of insurance. Whereas crop yield insurance covers only yield losses, crop revenue insurance pays when gross revenue (yield times price) falls below a specified level. More than 290 million acres are insured under the Federal crop insurance program, including more than 80 percent of the acres of major field crops planted in the United States.
- Disaster payments are payments that were made in the past directly to farmers on an emergency basis when crop yields were abnormally low due to adverse growing conditions. During the 1970s, there was a "standing" disaster payments program, with payments made without declaration of a disaster area. Regular payments ceased after 1981, but since then ad hoc disaster payments have been specially approved by the U.S. Congress on a number of occasions. Given the current budget situation and the recent focus on revenue-based programs, the likelihood of future ad hoc disaster programs for crops is low. Significantly, there have been no ad hoc disaster payments following the severe droughts that have occurred over the last several years.
- The Supplemental Coverage Option (SCO), introduced in the Agricultural Act of 2014, is an insurance product that offers producers additional insurance coverage for losses that fall under the levels generally covered by standard crop insurance policies. SCO coverage offers an alternative for eligible producers who elect not to participate in the Agriculture Risk Coverage (ARC) program under Title I of the Agricultural Act of 2014. The program will allow producers to cover a portion of the deductible of their underlying crop insurance policy, with payments being determined on an area (generally county) basis. SCO will be made available beginning with the 2015 crop year. The program will provide subsidies of 65 percent of producers’ premiums. Like traditional crop insurance, SCO is not subject to payment limitations or adjusted gross income eligibility limits.
- The Stacked Income Protection Plan (STAX), introduced in the Agricultural Act of 2014,provides revenue insurance policies to producers of upland cotton beginning with the 2015 crop, in place of coverage for cotton under the new Title I Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs. This change seeks to address U.S. obligations under the World Trade Organization (WTO) ruling on the U.S. cotton program, which found that U.S. upland cotton subsidies under previous Title I programs affected world prices and thus distorted trade. To provide support while the new program is being implemented, upland cotton producers will receive transition payments for crop years 2014 and 2015 in any areas where STAX policies are not yet available. Unlike SCO, STAX policies can stand alone or be used to supplement insurance coverage available through the Federal crop insurance program, protecting against losses that fall within the range not generally covered by standard crop insurance policies. Federal subsidies will cover 80 percent of producers’ premiums. Similar to SCO, STAX is not subject to any payment or income limitations.
- The Price Loss Coverage (PLC) program, introduced in the Agricultural Act of 2014, provides payments to producers of wheat, feed grains, rice, oilseeds, peanuts, and pulses on a commodity-by-commodity basis when market prices fall below a reference price. The payment rate is the difference between the reference price and the annual national-average market price (or marketing loan rate, if higher). The payment amount is the payment rate multiplied by the planted acres of covered commodity up to 85 percent of the farm’s base acres for that commodity, multiplied by the payment yield. Producers may also receive payments on former cotton base acres (“generic acres”) planted to a covered commodity. A one-time opportunity is offered to update the farm’s payment yields for covered commodities to their 2008-12 average yields. Payments will be reduced on an acre-by-acre basis for producers who plant fruits, vegetables, or wild rice on base acres.
- The Agricultural Risk Coverage (ARC) program, introduced in the Agricultural Act of 2014, provides payments for covered commodities on a commodity-by-commodity basis when county crop revenue (actual average yield times national farm price) drops below 86 percent of benchmark revenue (5-year Olympic average county yield times 5-year Olympic average national price). Producers may also choose to participate in ARC based on individual farm revenue instead of county revenue. In this case, the payment is based on the difference between an individual benchmark and actual individual revenues. The benchmark is calculated as the sum of revenue for each covered commodity on all farms enrolled in individual ARC in which the individual has a financial interest, divided by the acres planted to all covered commodities on all those farms.
- Base acres (excluding generic acres) may be reallocated based on 2009-12 plantings. This can have implications for the Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) programs.
- Actively engaged producers on a farm (a category to be defined by the Secretary of Agriculture as part of the Farm Act’s implementation) make a one-time decision for each of the farm’s covered commodities on whether to participate in PLC or county-based ARC. Once the election is made, it remains in place for the life of the 2014 Farm Act. Producers opting for ARC may instead choose individual-based ARC, which automatically applies to all covered commodities on farms enrolled. Individual ARC enrollment must be chosen by all individuals with an interest in those farms. Payments will be reduced on an acre-by-acre basis for producers who plant fruits, vegetables, or wild rice on base acres.
- Noninsured assistance program (NAP) payments are made to producers of crops for which crop insurance is unavailable in that county. NAP was created by the 1994 Federal Crop Insurance Reform Act and originally contained an area-yield-loss trigger in addition to a farm-yield-loss trigger. The area-yield-loss requirement was eliminated in the Agricultural Risk Protection Act of 2000. The Agricultural Act of 2014 expands the program by allowing additional coverage above catastrophic levels for commodities that otherwise would not have additional coverage available to them. Producers pay a fixed premium equal to 5.25 percent of the liability. Payments under NAP cannot exceed $125,000 per individual for a single crop year.
- The Livestock Forage Disaster Program, the Livestock Indemnity Program, the Emergency Assistance for Livestock, Honey Bees, and Farm Raised Fish, and the Tree Assistance Program provide payments to producers of eligible commodities for losses incurred as a result of diseases, adverse weather, or other environmental conditions.
- Emergency loans have been provided on various occasions to farmers as part of broad disaster assistance packages. Loans are generally repaid to the Government at reduced interest rates.
- Emergency feed assistance programs have helped livestock producers obtain feed when local pasture, hay, and forage supplies have been limited due to drought or other adverse conditions.
- Marketing assistance loans allow farmers to obtain a loan for their commodity at the loan rate and repay it later at a lower loan repayment rate. The net effect is similar to collecting an LDP payment and selling the commodity. (LDPs pay the difference between the Government's commodity loan rate and the commodity's loan repayment rate.) Most farmers prefer the LDP method over a marketing loan gain.
Recent Policy Focus
Crop insurance is the major USDA program for helping farmers manage risks of crop losses. The size and cost of the Federal crop insurance program have grown since the Agricultural Risk Protection Act (ARPA) of 2000 and the 2002 Farm Act. Over 295 million acres were insured in 2013, nearly 90 million more than in 2000. ARPA, which took effect in 2001, increased subsidy rates for higher, more costly insurance coverage, which led to significant premium growth in 2001. More recently, high crop prices have boosted insurance premiums.
Measured in acres, insured program growth has been due largely to new products for rangeland (area hay production) and forage (rainfall and vegetation indexes) that have been offered to producers since 2004. These new products accounted for about 57 million, or roughly 20 percent of the 293 million insured acres in 2013. Because of their relatively low premium cost per acre, however, they accounted for less than 3 percent of total insurance premiums.
Major costs of the insurance program-premium subsidies and administrative and operating subsidies are tied to the value of premiums. Under the current premium subsidy structure, about 62 percent of total premiums, or more than $11.5 billion in 2013, is paid by the Federal Government on behalf of insured producers. In addition, administrative and operating subsidies are paid to insurance companies for selling and servicing crop insurance policies; these subsidies are based on percentages of total premiums and accounted for about $1.4 billion in 2012.
Net underwriting gains, the difference between premiums and indemnities, are paid to the insurance companies under the risk-sharing provisions of the Standard Reinsurance Agreement (SRA). Under the SRA, the Federal Government and each company share in the gains and losses on crop insurance policies, though the Government, on average, takes a larger share of the losses than the company and the company takes a larger share of the gains than the Government. Net underwriting gains can vary greatly from year to year depending on crop yields and prices. In 2005 and 2006, annual net underwriting gains were about $900 million. In 2007, annual net underwriting gains were $1.6 billion, and 2013 estimates are for around $650 million.
The 2014 Farm Act
The Agricultural Act of 2014 (2014 Farm Act) introduced a marked change in U.S. commodity policy, ending nearly 20 years of fixed annual payments based on historical production. New programs offer a variety of payment structures, commodity coverage, and level of yield and/or revenue risk, but all are tied in some way to annual or multiyear fluctuations in prices, yields, or revenues. The new Farm Act continues a movement toward closer links between commodity programs and Federal crop insurance.
Subsidized crop insurance remains the primary form of assistance provided by the Federal Government against bad weather, plant diseases, and other natural hazards. However, the 2014 Farm Act changed the mix of programs available to producers. Repealed programs include Direct Payments, Countercyclical Payments, and the Average Crop Revenue Election (ACRE) program, while the Act introduces two new commodity programs—Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC)—and two new insurance programs—the Supplemental Coverage Option (SCO) and Stacked Income Protection Plan (STAX). While enrollment decisions in the insurance-based programs are made annually, a producer’s decision to enroll in either ARC or PLC is made only once and remains in place for the duration of the 2014 Farm Act. Furthermore, producers are provided a one-time opportunity to reallocate a farm’s base acres (except generic acres) based on 2009-12 plantings and to update the farm’s payment yields to their 2008-12 average yields, which can have implications for both the ARC and PLC programs.
The Price Loss Coverage (PLC) program provides payments to producers with historical base acres of eligible commodities when market prices fall below congressionally established reference prices. Payments are based on 85 percent of the base acres of the commodity, the payment yield, and the payment rate, which, in turn, is based on the difference between the reference price and the higher of the national average market price or marketing assistance loan rate. Producers may also receive payments on former cotton base acres (termed “generic base acres”) that are planted to a covered commodity.
The Agricultural Risk Coverage (ARC) Program provides either county-based or individually based coverage to producers. For growers enrolling in the county-based ARC, payments are provided to those with base acres of covered commodities on a commodity-by-commodity basis when county crop revenue (based on realized prices and yields) drops below 86 percent of the county benchmark (expected) revenue (based on a moving Olympic average of historical prices and yields). Payments are based on 85 percent of the base acres of the commodity enrolled. For those enrolling in the individually based ARC, payments are issued when the actual individual crop revenues, summed across all covered commodities on the farm, are less than the ARC individual guarantee (based on the sum of expected revenues for all commodities weighted by share of plantings). With the individual ARC, however, payments are based on 65 percent of the base acres for all covered commodities for the individual farm.
The Supplemental Coverage Option (SCO) offers producers who enroll in crop insurance additional area-based insurance coverage that takes on the characteristics of the underlying individual policy that is in place (e.g., if the producer has a yield-based policy in place, SCO would provide additional county-level yield coverage; if the producer has a revenue-based policy in place, SCO would provide additional county-level revenue coverage). The program will be made available with the 2015 crop and will provide producers subsidies amounting to 65 percent of their premiums. Crops on farms where producers have elected ARC are not eligible for SCO.
The Stacked Income Protection Plan (STAX) operates much like SCO but is only available for producers of upland cotton. Unlike SCO, STAX can either stand alone or be purchased in conjunction with a companion crop insurance policy. STAX will be made available to producers starting with the 2015 crop. To provide support while the new program is being implemented, upland cotton producers are eligible to receive transition payments for crop year 2014 and for crop year 2015 in any areas where STAX policies are not yet available. Federal subsidies will cover 80 percent of producers’ premiums.
The Noninsured Crop Assistance Program (NAP), which provides weather-related loss coverage for situations where crop insurance coverage is not available, is expanded by the 2014 Farm Act to allow for additional “buy-up” coverage above the catastrophic loss level. Catastrophic coverage requires a fee; “buy-up” coverage requires the payment of both a fee and a premium.
Payments are limited to $125,000 for each individual actively engaged in farming, without specific limits for individual programs. Spouses may receive an additional $125,000. A separate $125,000 limit is provided for payments for peanuts, and cotton transition payments are limited to $40,000 per year. To receive payments, producers must also have an adjusted gross income (farm and nonfarm combined) of less than $900,000. Programs that are subject to these limitations include the PLC, ARC, and NAP programs, while SCO, STAX, and other Federal crop insurance programs are not.
As a result of the 2014 Farm Act, a producer's risk management strategy may change due to the change in programs available. Many of the programs are now more closely tied to production, which raises questions about whether the 2014 Farm Act will provide incentives that could affect total crop production and prices, trade, and regional production patterns, as well as having environmental implications.