Testimony By

Gregg Doud

Vice President, Information Services

World Perspectives, Inc.

The Government's Role in Managing Agricultural Risk

before the

Senate Agriculture Committee

March 10, 1999

Mr. Chairman, members of the Committee. My name is Gregg Doud. I am Vice President of the Market Intelligence Services division of World Perspectives, Incorporated, a Washington-based agricultural market intelligence and consulting company.

The purpose of this hearing is to explore revenue support and risk management alternatives for U.S. farmers including options for a farm revenue safety net. In this context, I would urge that policy alternatives be considered on two separate and distinct paths. The first path includes private sector risk management tools that could include the futures markets, forward contracting, crop insurance and other customized marketing techniques. The second includes the idea of a taxpayer supported safety net by way of a whole farm revenue support mechanism.

In the future, development of farm risk management tools should be kept separate from taxpayer supported farm revenue support programs.

Having made this distinction, what should the safety net look like?

Back in 1933 federal officials determined that the easiest way to bolster the economy of rural American during the Depression was to support the prices of individual commodities. Although they could have chosen any number of different alternatives to achieve the goal of providing a financial safety net to farm producers, they decided upon price multiplied by yield. That policy became embedded into law for more than half a century, despite many problems in meeting changing marketing conditions.

With the passage of the FAIR Act in 1996, U.S. agricultural policy embarked on a new era of liberating America's farmers. Unfortunately, the approach to federal crop insurance programs remain complex and complicated to administer, mostly because of its continuation of the price multiplied by yield format. In one way or another all these programs attempt to do the same thing: increase farm revenues.

Today, USDA's Risk Management Agency (RMA) administers at least 85 different programs of which only a couple do not rely upon some sort of price multiplied by a yield or level of production. As we enter upon the 21^st century, however, dozens if not hundreds of different use-specific commodities, all with the likelihood of requiring different price multiplied by yield calculations, may be required for corn or soybeans alone.

In fact, at the present rate of RMA crop insurance program expansion, Ross Perot's "one government employee administering programs per farmer" isn't far away. After a few minutes of visualizing the overlay of current farm programs over future agricultural market developments, one quickly concludes there has to be a better way to provide the 21^st century farming operation with a revenue safety net.

CONCEPT

WPI proposes that the federal government establish a Farm Production Insurance Corporation (FPIC) that would function as the provider of two safety net programs for U.S. agriculture. Carole Brookins' idea of an FPIC is patterned after the Federal Deposit Insurance Corporation, which ironically, also began in 1933. The two functions of the FPIC would be to guarantee and administer a gross farm revenue protection policy to be known as the Security for Agriculture and Farm Equity (SAFE) Program and to provide reinsurance to private crop insurers.

The concept would not replace or displace private risk management businesses. The role of FPIC/SAFE would be to serve as a safety net supporting farm equity through catastrophic coverage and commercial reinsurance that would maintain and improve the long-term confidence of lenders and commercial providers of risk coverage in the U.S. farm sector.

SAFE would be a voluntary program that allows farmers and ranchers to insure basic farm equity through insuring the average gross farm revenues derived from their whole agricultural operation--including livestock.

SAFE would guarantee anywhere from 50 to possibly 65 percent of an entire farming operation's five-year moving average adjusted gross income. Producers would be able to apply for SAFE coverage through their local county offices, however, they would not have to submit paperwork until a claim was filed.

SAFE would be administered and regulated by the FPIC, which would have a similar context to the Commodity Credit Corporation (CCC) and would be chaired by the Secretary of Agriculture.

Benefits:

§ Would include all facets of U.S. production agriculture

§ Afford farmers and ranchers the commercially accepted business interruption risk protection applied throughout the economy

§ Market oriented and flexible

§ Facilitate an automatic government response to a potential widespread or systemic farm crisis and mitigate against ad hoc emergency program mandates that distort markets.

In addition:

· By shifting the approach of coverage to a whole farm/or farm operation gross sales receipts, the costs of administration and delivery of the programs would be greatly reduced.

· By providing coverage of gross revenues from farm product sales, farmers' reporting requirements to USDA would be substantially simplified.

· FPIC would also provide a mechanism for providing reinsurance to private, unsubsidized crop insurance programs.

SAFE could also offer a "buy up" provision that would allow producers to buy extra coverage possibly up to 75% of their eligible revenues. Of course this would involve a higher premium, with less subsidy. Producers' premiums would increase based on the amount of desired gross revenue indemnification.

As of this moment, this proposal is only a framework in need of significant development and we are certainly not wedded to anything other than the major concept of a whole farm revenue farm safety net that works off of a Schedule F. In addition, the program should be funded by the establishment of a federal trust similar in nature to the Federal Deposit Insurance Corporation, which removes the need for ad hoc disaster assistance. WPI is now in consultation with Texas A&M University regarding further development of this concept.

It should also be stated that we do not think FPIC/SAFE is the end-all cure for economic woes in farm country. We consider it one segment of a U.S. farm policy "strategic triad" that would also include income averaging and Farmers and Ranchers Risk Management (FARRM) savings accounts. The architects of the FAIR Act had such a "strategic triad" in mind that would augment the 1996 farm bill. Unfortunately, the implementation of these U.S. farm policy tools has been a day late and dollar short. We dare say that if they had been put in place earlier, we might not need to have this discussion.

SUMMARY

This concept has been well traveled during the past 1-½ years. In fact, Farm Journal's Top Producer magazine in 1997 referred to this concept as the most innovative farm policy idea of the year. When Carole Brookins first proposed this idea in 1988 she was told that it's ahead of its time. We admit it still might be, but isn't this where we all want to go?

Those of us involved in commodity markets know that no two years are alike and that even the best risk management plans cannot deal with many of the unforeseen circumstances that U.S. production agriculture has faced recently. However, whether it's transition payments, crop insurance or ad hoc disaster assistance, the heart of the matter each and every time is still farm revenue.

Without question, the U.S. government has a necessary role to play in providing a farm revenue safety net. Crop insurance belongs with other private risk management tools available to the farmer today. WPI's FPIC/SAFE is a whole farm revenue safety net alternative that suits both the FAIR Act and the agricultural market innovations of the 21^st century.

QUESTIONS:

1. You say the program should be voluntary. How do you deal with farmers who don't sign up, have a disaster and want assistance after the fact?

2. Would this program be actuarially sound?

3. How would you deal with changes in farming operations?

4. How would you increase participation in areas where revenue losses of this magnitude are few and far between?

5. How do you address the issue of moral hazard?