2012 Farm Bill: Managing Risk Wisely

By Bruce Knight

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What programs do we need to support major commodities that American farmers produce? Virtually every farm bill in recent memory has adopted essentially the same general policy for support and risk management for grains and fibers. The only exceptions have been dairy and sugar.

What makes 2012 different is that we no longer have a general consensus that programs to support the various commodities should be the same. Perhaps of greater concern is that farm and commodity organizations have proposed several significantly different approaches for managing risk for program crops.

For example, the Farm Bureau has recommended a “deep loss” program. This strategy would rely on crop insurance to cover the usual ups and downs of weather and market prices, but would provide a backstop deep loss program to stand behind the insurance to cover catastrophic losses.

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On the other hand, some of the commodity groups are pressing for a “shallow loss” program, which would also work in conjunction with the current crop insurance program. However, it would stand in front of crop insurance and provide assistance to farmers whose income varied as little as five to ten percent from normal levels.

Other commodity groups favor a traditional system of target prices and countercyclical payments, provided higher target prices are established, lining up more closely with current market prices.

Unfortunately, the myriad of choices now under consideration has led to a fair degree of disunity within the agricultural community and not surprisingly a lack of clarity in Congress as to what farmers really need to help them with risk management.

I think it's time to pause and reflect as farmers. What help can we reasonably expect the taxpayers to provide us in managing production and market risks?

Do we want protection from small vagaries of nature or markets or do we need protection from those things we can't possibly foresee, the black swans? We can't protect ourselves against government grain embargoes, market closures related to fears such as BSE, highly destructive hurricanes that wreak havoc on our transportation system, rapidly escalating oil prices tied to trouble in the Middle East or other market disruptions linked to wars or terrorism. Unfortunately, though we cannot predict them, we know catastrophes will occur. And, in fact, virtually all of these situations have happened over the past 30 years, many within the past 10 years.

Most of my neighbors in South Dakota don't ask for Uncle Sam's help against the normal swings in the weather or price. The normal ups and downs are not so much a problem for them as the price of living in the Great Plains. I think most farmers share this philosophy. It's those black swans-the totally unfathomable catastrophes that we all know will occur but that we can't see coming-that can devastate us.

All winter I have been meeting with, speaking to, and most importantly, listening to farmers across the country. Livestock producers, specialty crop farmers, grains and oilseeds producers are unified with a concern about the nation's deficit. Fortunately, we farmers are now in the midst of better times. If there was ever an opportunity to sever the cycle of dependency on routine government support, this is it. Let's develop new tools to manage unpredictable problems and use the tools we already have to manage day-to-day concerns. 

Over the past 20 years, crop insurance has evolved into a common tool that most farmers use to manage price volatility and weather variability, whether they produce grains and fiber or specialty crops. It's in place, it's getting better, farmers are using it, and it works. In fact, crop insurance has become vital to all our operations, so the first rule for Congress should be “Do no harm.” We need to continue crop insurance as a first line strategy for managing risk. We need to be sure any new policies complement it.  

So, what is needed at this crossroads? I for one would welcome a “deep loss” backstop to handle catastrophic situations that come out of nowhere and cause unimaginable and unpredictable losses. That's an idea worth exploring as the Senate Agriculture Committee examines risk management in its March 14 hearing.

The best design of risk management tools come about as we are willing to discuss the tough, fundamental issues that go to the core of why we have farm bills. I would like to hear from the readers of this blog on the issue of shallow-loss, or deep-loss as the better role for farm policy.   Which would you prefer?   What is more important on your farm? How should each concept interact with crop insurance?   If there are limited funds for farm programs, what assistance is of greatest need for America's farmers and ranchers?  I look forward to hearing from you. 

About the author: Bruce I. Knight, Principal, Strategic Conservation Solutions, was the Under Secretary for Marketing and Regulatory Programs at the U.S. Department of Agriculture (USDA) from 2006 to 2009. From 2002 to 2006, Knight served as Chief of Natural Resources Conservation Service. The South Dakota native worked on Capitol Hill for Senate Majority Leader Bob Dole, Rep. Fred Grandy, Iowa, and Sen. James Abdnor, South Dakota. In addition, Knight served as vice president for public policy for the National Corn Growers Association and also worked for the National Association of Wheat Growers. A third-generation rancher and farmer and lifelong conservationist, Knight operates a diversified grain and cattle operation using no-till and rest rotation grazing systems.

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