The impacts of the bills are measured against the FAPRI January 1999 baseline which may be found at http://hdl.handle.net/10355/3318At the request of Senator Richard Lugar, Chairman of the Committee on Agriculture, Nutrition and Forestry, FAPRI has analyzed impacts of two alternative risk management proposals.  The first proposal is the Farmers' Risk Management Act of 1999, sponsored by Senator Lugar (IN) and co-sponsored by Senators McConnell (KY), Fitzgerald (IL), and Helms (NC). The second proposal is the Risk Management for the 21st Century Act, put forth by Senator Roberts (KS) and co-sponsored by Senator Kerrey (NE) and others

Adams, Gary Mitchell, 1965-

Babcock, Bruce A. (Bruce Alan)

Hart, Chad E. (Chad Edward)

Westhoff, Patrick C. (Patrick Charles), 1958-

University of Missouri: MOspace

NET FARM INCOME IMPACTS OFALTERNATIVE RISK MANAGEMENT BILLSFAPRI Policy Working Paper #04-99October, 1999Gary AdamsChad HartBruce BabcockPat WesthoffPrepared by the Food & Agricultural Policy Research Institute (FAPRI)University of Missouri101 S. Fifth StreetColumbia, Missouri 65201(573) 882-3576Iowa State University578 Heady HallAmes, Iowa 50011-1070(515) 294-1183FAPRI – Food and Agricultural Policy Research Institute – Alternative Risk Mgt Bills – Page 1NET FARM INCOME IMPACTS OFALTERNATIVE RISK MANAGEMENT BILLSAt the request of Senator Richard Lugar, Chairman of the Committee onAgriculture, Nutrition and Forestry, FAPRI has analyzed impacts of two alternative riskmanagement proposals.  The first proposal is the Farmers’ Risk Management Act of1999, sponsored by Senator Lugar (IN) and co-sponsored by Senators McConnell (KY),Fitzgerald (IL), and Helms (NC).  The second proposal is the Risk Management for the21st Century Act, put forth by Senator Roberts (KS) and co-sponsored by Senator Kerrey(NE) and others1.The analysis focuses on the impacts on U.S. net farm income and governmentoutlays.  In addition, state-level payments and net indemnities under each proposal areestimated.  The impacts of the bills are measured against the FAPRI January 1999baseline, details of which are found in Staff Report #1-99.Scenario AssumptionsThe Lugar bill makes risk management payments totaling $5.1 billion to eligibleproducers for the 2001-2004 crops.  Payment allocations will be determined so as tospend $1.275 billion in each year.  The annual payments for each producer are based ontheir FCIC actual production history (APH) established for the 2000 crop for eachFederally insurable commodity grown by the producer.  To be eligible for payments,producers must use at least 2 approved risk management practices each year.  The billdesignates 8 possible choices such as purchasing crop insurance, utilizing futures oroptions, or diversifying production.  The proposal also reduces the potential forunderwriting gains or losses associated with catastrophic crop insurance (CAT) policiesfor the 2001-04 period.The Roberts/Kerrey bill encourages producers to increase their crop insurancecoverage by increasing premium subsidies and thereby making higher levels of coveragemore affordable.  In addition, it creates a multi-year disaster APH adjustment forproducers who have suffered a natural disaster during at least three of the preceding fiveyears. The bill also opens up insurance to cover livestock as well.  However, in thisanalysis, the livestock provisions have been dropped so that the budgetary costs of theprogram are similar to those of the Lugar proposal.  In addition, the Roberts/Kerreyprogram is assumed to be in place for crop years 2001-2004.  Due to the timing of                                                                1 Additional co-sponsors of the Risk Management for the 21st Century Act are Senators Craig (ID), Burns(MT), Baucus (MT), Grassley (IA), Santorum (PA), Crapo (ID), Johnson (SD), Thomas (WY), Brownback(KS), Hagel (NE), Daschle (SD), Harkin (IA), Enzi (WY), Inhofe (OK), and Conrad (ND).FAPRI – Food and Agricultural Policy Research Institute – Alternative Risk Mgt Bills – Page 2expenditures, some costs for the Roberts/Kerrey proposal fall in fiscal year 2005.Participation in crop insurance is estimated to increase by roughly 5.5 percent overbaseline levels.  The average insurance coverage level increases to between 70 and 75percent.  We assume that a vast majority of insured producers take advantage of theadditional premium subsidy for risk management activities.Impacts on Farm Income and Government CostsImpacts on net farm income and government outlays are presented in Table 1.FAPRI’s analysis of the Lugar bill suggests that net farm income would increase by$4.94 billion above baseline levels for the 2001-05 period.  The increase is the result of$5.10 billion in risk management payments and an additional $0.31 billion in netinsurance indemnities.  These are offset to some extent by an increase of $0.47 billion inexpenses due to changes in capital consumption and net rent to non-operator landlords.Net outlays and budget authority are estimated to increase by $5.64 and $5.65 billion,respectively, over the FY2001-05 period.For the Roberts/Kerrey bill, net farm income is projected to increase by $3.52billion above the baseline for the 2001-05 period.  This is the result of an increase in netindemnities of $3.70 billion, with production expenses rising by $0.19 billion.  Under thisbill, net outlays and budget authority are projected to rise by $5.42 billion above baselinelevels for the FY2001-05 period.Comparison of State-Level ImpactsPayments and additional net indemnities under the two proposals have beenestimated for each state (Table 2).  It should be pointed out that the state-level results areestimates of additional payments and not impacts on farm income.  As with the U.S. farmincome estimates, a portion of the additional payments would be offset with marginallyhigher expenses.  However, FAPRI does not currently maintain farm income models on astate-level basis.In developing the estimates for each state, there are a few critical assumptions thatshould be addressed.  Under the Lugar proposal, risk management payments are allocatedbased on the APH established for the 2000 crop and the average FCIC price level foreach crop.  Based on these data, the Secretary then determines the payment rate that willfully allocate the available funds.  Effectively, the payment rate reflects the percentage ofthe total value of insurable crops that can be covered by the risk management payments.Using recent historical data for the value of production of insurable crops, the paymentrate percentage was estimated at 1.5%.  Using the estimated payment rate and the valueof production of insurable crops for each state, payments under the Lugar bill areestimated in Table 2.  The estimated payments are less than $5.1 billion due to the lack of state-level data for insurable nursery crops and a few specialty crops.  However, the payments doaccount for the following crops: corn, sorghum, oats, barley, wheat, rice, rye, soybeans, flax,peanuts, sunflower, canola, upland and ELS cotton, dry edible beans and peas, wrinkled seedpeas, Austrian winter peas, lentils, tobacco, sugarbeets, sugarcane, citrus, almonds, walnuts,snap beans, processed tomatoes, processed sweet corn, green peas, nectarines, plums, prunes,hay, potatoes, apples, apricots, grapes, cranberries, and pears.FAPRI – Food and Agricultural Policy Research Institute – Alternative Risk Mgt Bills – Page 3State-level estimates of additional net indemnities under both proposals are basedon the proportion of 1999 crop-year total premiums for crop insurance in the individualstates and the assumption of actuarially fair insurance across all states, crops, andpolicies.  Varying loss patterns would create different results.The state-level results reinforce the net farm income impacts for the U.S. as awhole.  Given the payment structure under the Lugar proposal, the majority of stateswould realize greater payments under the Lugar proposal than under the Roberts/Kerreyalternative.  For example, Illinois would be expected to receive $414 million under theLugar bill and $197 million under Roberts/Kerrey.  However, there are a couple ofnotable exceptions.  Both Texas and North Dakota receive substantially higher paymentsunder the Roberts/Kerrey proposal.  In the case of Texas, estimated net indemnities underRoberts/Kerrey total $491 million (the most for any state), as compared to $233 millionunder the Lugar proposal.  Under the Lugar proposal, California is estimated to receivethe most of any state, with payments and net indemnities of $534 million.Concluding RemarksThe two proposals generate approximately the same level of outlays over theFY2001-05 period.  However, the direct payments under the Lugar bill produce asubstantially higher impact on U.S. farm income.  It is important to note that paymentsunder the Roberts/Kerrey bill are only triggered by crop losses.  As a result, the paymentswill be more targeted than those made under the Lugar proposal.Finally, this analysis does not incorporate any potential acreage or price impactsassociated with the two proposals.  The lower cost of risk to a farmer could induceadditional production in higher risk areas and thereby lower prices.  The net effect wouldmost likely be a negative to farm income and a positive to government expenditures, butin aggregate, the magnitude of the impacts are uncertain.Table 1. Impacts of Alternative Risk Management Bills *2001 2002 2003 2004 2005 2001-05 SumLugar Bill (Billion $, Change from Baseline)  Crop Insurance    Net Outlays (FY) 0.033 0.119 0.129 0.156 0.104 0.541    Budget Authority (FY) 0.117 0.123 0.138 0.171 0.000 0.549  Risk Management Payments    Net Outlays (FY) 1.275 1.275 1.275 1.275 0.000 5.100  Total Government Costs    Net Outlays (FY) 1.308 1.394 1.404 1.431 0.104 5.641    Budget Authority (FY) 1.392 1.398 1.413 1.446 0.000 5.649  Net Farm Income (CY) 1.245 1.237 1.227 1.230 0.000 4.939Roberts/Kerrey Bill  Crop Insurance    Net Outlays (FY) 0.490 1.357 1.375 1.379 0.824 5.424    Budget Authority (FY) 1.353 1.368 1.383 1.306 0.007 5.417  Net Farm Income (CY) 0.879 0.880 0.888 0.868 0.004 3.519*  Government Outlays and Budget Authority are on a fiscal year basis.  Net Farm Income is calendar year.FAPRI -- Food and Agricultural Policy Research Institute -- Alternative Risk Mgt Bills -- Page 4Table 2. State-Level Comparison of Payments and Net IndemnitiesLugar Act Roberts/Kerrey Act Difference  State   RiskPayments*Add'l NetIndemnities TotalAdd'l NetIndemnitiesLugar - R/K(Thousand Dollars)  Alabama 27,557 3,781 31,338 44,592 (13,254)  Alaska 0 7 7 87 (80)  Arizona 28,153 1,098 29,251 12,947 16,304  Arkansas 132,945 6,314 139,259 74,461 64,798  California 516,011 17,827 533,839 210,255 323,584  Colorado 80,773 4,934 85,707 58,193 27,515  Connecticut 2,363 318 2,681 3,756 (1,075)  Delaware 7,713 171 7,885 2,020 5,865  Florida 140,342 6,389 146,731 75,357 71,374  Georgia 86,990 10,026 97,016 118,252 (21,236)  Hawaii 8,427 143 8,570 1,685 6,885  Idaho 84,646 2,932 87,578 34,584 52,994  Illinois 397,040 16,739 413,779 197,422 216,357  Indiana 199,937 8,722 208,659 102,867 105,791  Iowa 440,099 23,292 463,391 274,705 188,687  Kansas 204,708 14,445 219,152 170,358 48,795  Kentucky 94,697 3,193 97,890 37,654 60,236  Louisiana 76,118 4,826 80,945 56,920 24,025  Maine 7,498 443 7,941 5,225 2,716  Maryland 19,367 753 20,120 8,882 11,238  Massachusetts 9,580 299 9,879 3,526 6,353  Michigan 87,564 4,226 91,791 49,847 41,944  Minnesota 303,046 24,187 327,233 285,257 41,975  Mississippi 73,761 5,209 78,970 61,431 17,539  Missouri 137,382 8,315 145,697 98,071 47,626  Montana 77,192 5,113 82,305 60,299 22,006  Nebraska 252,684 16,425 269,110 193,719 75,391  Nevada 10,377 12 10,389 141 10,248  New Hampshire 1,380 19 1,398 222 1,177  New Jersey 6,644 225 6,868 2,649 4,219  New Mexico 9,531 917 10,447 10,814 (366)  New York 48,213 818 49,031 9,648 39,383  North Carolina 128,081 7,703 135,784 90,851 44,933  North Dakota 170,879 29,636 200,515 349,522 (149,007)  Ohio 146,087 4,279 150,366 50,462 99,903  Oklahoma 65,069 5,258 70,327 62,016 8,311  Oregon 57,597 1,242 58,839 14,652 44,188  Pennsylvania 67,230 931 68,162 10,985 57,177  Rhode Island 288 9 297 103 193  South Carolina 33,059 2,451 35,510 28,904 6,606  South Dakota 153,206 13,829 167,035 163,098 3,937  Tennessee 54,818 3,224 58,042 38,022 20,020  Texas 191,732 41,603 233,334 490,659 (257,325)  Utah 16,189 100 16,289 1,178 15,112  Vermont 527 38 565 443 121  Virginia 34,455 2,480 36,936 29,255 7,681  Washington 145,376 3,630 149,006 42,817 106,189  West Virginia 1,756 143 1,899 1,687 212  Wisconsin 128,566 5,005 133,571 59,027 74,544  Wyoming 19,340 414 19,754 4,883 14,871  Sum 4,986,994 314,094 5,301,088 3,704,408 1,596,680* Total payments are less than $5.1 billion due to the exclusion of insurable nursery crops and   some specialty crops from the estimates.FAPRI -- Food and Agricultural Policy Research Institute -- Alternative Risk Mgt Bills -- Page 5

Net Farm Income Impacts of Alternative Risk Management Bills

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