A look at revenue assurance

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Although many outside of agriculture hoped this would be a year of reform, not much in the House farm bill is considered reform. But the buzz surrounding a "reformed countercyclical program" - known as revenue assurance - ties farmers' safety net to price and yield likely will land a version of the program in a final farm bill.

The House approved bill provides a one-time option to choose revenue counter-cyclical payment based on national-level revenues.

Carl Zulauf, economist at OhioStateUniversity, said the fact that the House included the revenue option dramatically increases the probability that a revenue component will find its way into the final bill.

The House bill and Administration proposal based payments on national revenue. A Senate bill proposed a state-level aggregate, an approach supported by the corn growers. Prior to the approval of the House farm bill, Zulauf did an analysis of different revenue proposals including an old version from the corn growers wanting a county level. Now they support a state approach, predominantly because of budget savings.

Zulauf explains that as you move the site down from national to state to farm, costs increase. National yields are always less variable than individual farmers. The further down you go, the program does a better job of matching the individual farmer's risk, he added. However, if you move down levels you start to remove the incentive to buy insurance. Zulauf questioned if this is something we want to do in farm policy.

At the national level, the payment is triggered on national events. As you move to a more disaggregated program, you start to have great payments to those areas that have the higher risk, Zulauf said.

If you're talking about the farm level program, the farmer who benefits the most is one who has a higher risk on the triggering mechanism - in revenue's case price, yield or revenue.

As a farmer, you need to question what is more variable in your area - price or yield? Then in addition, how negatively correlated are they to each other. To the extent they are negatively correlated, it dampens the variability of a natural hedge, Zulauf said. "Part of the assessment of revenue vs. price is how variable are your yields? And how negatively correlated are those yield prices?"

If you look at jut yield risk, there is a lot of research done. For instance, if you look at historical numbers yield risk tends to be the greatest in the Southeast and the Mid-Atlantic, Zulauf stated, explaining these areas may benefit more from a revenue approach.

The same evaluation can't be done with revenue because we don't tend to collect prices at anything less than a state level.

More information is needed to tweak out how a good revenue assurance program will work. Zulauf said he and many others will use the next several weeks to generate data on proposals.

Prior to the final Senate debate on the bill in September, more of that information will be available to policymakers.

The President still wants a bill on his desk by the end of the year. It's unlikely a final bill will be approved by both chambers prior to the Sept. 30 expiration date. However, Congressional members say they'll shoot to have one done by early November to help farmers plan for next year's crop.

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