Smith: Shallow-Loss Insurance Assumes an Ignorance

Posted November 13, 2011 at 4:02pm

Don’t call farmers stupid.

Rarely does any good ever come from portraying a group of people as less intelligent or less competent than they are. Unfortunately, and most likely unintentionally, that is precisely what Jon Scroll, the president of American Farmland Trust; Garry Niemeyer, president of the National Corn Growers Association; and Chandler Goule, Congressional liaison for the National Farmers Union accomplished in their Oct. 27 Guest Observer, “Reform Farm Policy but Keep Safety Net.”

Without realizing what they have said, fundamentally, these three advocates for farm subsidies have implied that farmers do not understand the business they are in.

In the face of some very obvious farm management facts, they have perhaps unwittingly argued that farmers do not understand that, like any other business, their revenues vary from one year to the next.

Worse still, when Scroll, Niemeyer and Goule postulated that a drought, flood or shift in world prices (what they call “global political changes”) would instantly put large numbers of farmers on the verge of bankruptcy, they implied that farmers are not capable of organizing their farms to address those business facts of life.

Nothing could be further from the truth. Most farmers in the United States intentionally maintain financial reserves based on large amounts of equity because they know that their revenues (and costs) vary from one year to the next. Farm families are on average five to six times wealthier than the typical American family (based on net worth) and have higher incomes and, nationally, farm business debt-to-asset ratios are very low, averaging about 12 percent, with many farms carrying no debt.

The farm group representatives’ real agenda is to argue that farmers should not only have access to heavily subsidized crop insurance for losses in excess of 15 percent (or in some locations 25 percent) of their average yields or average revenues, but they should also be given additional free insurance through what is now being called a “shallow loss” program that is funded, of course, at the taxpayers’ expense.

The shallow-loss program would give farmers subsidies to bring them up to 90 percent or even 95 percent of the average revenues they have received for any given crop over the previous five years whenever current revenues from those crops fall below those amounts.

The program would be modeled on the Average Crop Revenue program introduced in the 2008 farm bill and could well be similar to the Agricultural Risk and Revenue Management initiative put forward by Sens. Sherrod Brown (D-Ohio), John Thune (R-S.D.) and Dick Lugar (R-Ind.) and Rep. Marlin Stutzman (R-Ind.).

Any shallow-loss program can only be viewed as a transparent money grab by the rest of us, legislators and voters, unless we can be persuaded that farmers are stupid when it comes to managing their business. In fact, we have to believe that farmers are so inept as managers that their farms will not survive if crop revenues in any given year fall more than 5 percent or 10 percent below their recent record levels and that, as a result, Americans will not have enough food to eat. Anyone who knows anything about American agriculture understands just how implausible that idea is. 

Finally, a typical main street business person or Fortune 500 CEO would love to have a government program that uses taxpayer funds to top up their firms’ revenues when, for any reason whatsoever, their sales shrink by more than 5 percent or 10 percent. They would also know such a program would stultify competition, limit innovation, create barriers to entry for young entrepreneurs, encourage foolish risk taking, remove most incentives for competent management and fairly rapidly undercut their industry’s global competitiveness.

As the American Farm Bureau Federation recently noted in a letter to the House and Senate Agricultural committees, that sort of shallow-loss program will damage productivity, create incentives for farmers to make foolishly risky decisions, make life harder for young people who want to enter farming and (my addition) undercut the farm sector’s ability to compete with countries around the world.

The proposal by Scroll, Niemeyer and Goule does nothing in the way of helping America’s recovery from its debt crisis and economic malaise. Instead, it will only add to the national debt.

Vincent Smith is an agricultural economist at Montana State University and a visiting scholar at the American Enterprise Institute.