Issued by Carl Zulauf, Department of Agricultural, Environmental and Development Economics, The Ohio State University
An important aspect of the ongoing debate over the new farm bill is the proposed elimination of direct payments. This proposal differentially impacts the program crops, prompting a debate among crops and geographical regions over the distribution of payments by farm safety net programs. We believe this issue is the most important in the farm bill debate. We therefore examine it in more detail. This post specifically compares the distribution of payments by the direct payment, crop insurance, and price risk programs. The comparison begins with the 2003 crop year because the counter-cyclical program, an important price risk program, was initially enacted in the 2002 Farm Bill.
University of Illinois' Farmdoc breaks down distribution of direct payments among crops
This post builds upon the discussion in these recent farmdoc post: "U.S. Crop Safety Net Policy: Overarching Considerations and the Current Farm Bill Debate," available here
; "Farm Bill Negotiations: Selection between Three Programs," available here
; and "Questions That Will be the Focus of the Upcoming Farm Bill Debate," available here
Distribution of Direct Payments Among Crops
Direct payments ranged from 1.3% and 2.0% of crop sales for oats and soybeans, respectively, to 14.9% and 16.2% of sales for sorghum and rice, respectively (see Figure 1). Thus, the elimination of direct payments will have notably different impacts across the program crops. Figure 1 underscores that, while it is straightforward to note that society questions the appropriateness of making $5 billion in annual direct payments with near record crop income; it is less straightforward how to address the differential impact by crop of eliminating direct payments. Source of the data are the U.S. Department of Agriculture Farm Service Agency. When interpreting this ratio, it is useful to keep in mind that sales are based on production and hence planted acres while direct payments are based on historical base acres.
Direct Payments vs. Net Crop Insurance Payments by Crop
Eliminating direct payments would make crop insurance the primary farm safety net program, culminating a 30-year trend toward an increasing role for crop insurance. Thus, it is important to compare the distribution of payments by these two programs by crop.
Figure 2 presents net crop insurance payments expressed as a percent of crop sales. Net crop insurance payment is calculated as crop insurance indemnity payments received by farms minus the premiums paid by farms. Figure 5 is also generated to facilitate comparison. It presents this difference: net crop insurance payments minus direct payments, both expressed as a percent of sales. Source of the data are USDA, Risk Management Agency. As can be seen, payments differ across crops, with a range of 8.4% for cotton down to .7% for rice.
The distribution of net crop insurance payments in Figure 2 differs from the distribution of direct payments in Figure 1. Net crop insurance payments and direct payments as a percent of crop sales are most similar for corn and soybeans, as well as oats. This similarity, together with the smaller size of direct payments relative to sales, is consistent with the generally=accepted observation that Midwest corn and soybeans are more willing to accept the shift to crop insurance than other crop-region combinations.