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Efficacy of Farm Bill Programs in Reducing Risk on Midwest Grain Farms

Gary Schnitkey and Krista Swanson

Summary

The Federal farm safety net available to American farmers includes both crop insurance and commodity title programs. Federal crop insurance is made available to farmers, with a large portion of the premium subsidized by the Federal government. The 2018 Farm Bill offered further risk support through the choice of two commodity title programs: Agriculture Risk Coverage (ARC) providing county level revenue protection and Price Loss Coverage (PLC) providing individual level price protection.

Our presentation stems from our current study analyzing the importance of crop insurance and commodity title programs in reducing intertemporal risks. We examine how much crop insurance and commodity title programs reduce the tails of net worth and debt-to-asset ratio distributions, as well as chance of bankruptcy, over time. Our objective is determining whether crop insurance or commodity title programs are most important in mitigating farm risk under numerous likely price scenarios for the next five years.

In the analysis a representative case farm’s financial performance is simulated in a stochastic model over five years. Given likely price scenario, PLC is expected to provide greater risk reductions than ARC. Commodity title programs provide important risk mitigating impacts because of their intertemporal nature. High levels of Revenue Protection (RP) also have important risk mitigating impacts. The combination of PLC and RP at the highest coverage level has the most beneficial risk reducing impact. Results of this study are valuable as farmers prepared to make a two-year election between ARC and PLC later in 2019.

Details

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