![](media/image1.png){width="0.7305555555555555in" height="0.5in"}
**United States Department of Agriculture---2007 Farm Bill Theme
Papers**

**Risk Management**

**May 2006**

**I. Introduction**

This paper is the first in a series of briefing papers that assess
general themes advanced at the 2007 Farm Bill Forums held during 2005 by
Secretary Mike Johanns as well as additional related policy ideas that
have emerged in recent months. This paper describes the risks
agricultural producers face, describes and evaluates current key risk
management programs and tools available to producers through the private
sector and government, and concludes with a discussion of general policy
alternatives. The alternatives represent generalized approaches to
addressing some of the key concerns that have been raised with regard to
current programs.

**II. Background: Risks and U.S. Agriculture Today**

U.S. agriculture today continues to face a series of forces that
transformed the general economy during the 20^th^ century. These forces
include globalization of markets, rapid technological change, global
population growth, expansion of regulations, and environmental
pressures. These forces and other factors create a variety of risks for
farmers and ranchers in the operation of their farm and ranch
businesses.

**Risks Facing Agriculture.** Key agricultural risks are generally
organized into five categories.

-   ***Price risk.*** Because agricultural prices are mainly determined
    in global markets, unanticipated changes in global demand or supply
    of a commodity can lead to unexpected changes in the prices received
    by farmers for their products.

-   ***Production risk.*** Production risk is usually associated with
    inability to plant or harvest acreage or changes in crop yields or
    animal production due to environmental variables such as weather,
    pests, or disease.

-   ***Income risk.*** Income risk can be caused by unexpected changes
    in production or prices received by producers as well as by swings
    in prices producers pay for inputs such as fuel, fertilizer, or
    electricity.

-   ***Financial risk.*** Farm financial cash flows and net worth can be
    seriously affected by access to and the cost of debt and by the
    value of capital, which all can be affected by changes in interest
    rates and other factors, thus creating financial risk.

-   ***Institutional risk.*** Federal and State governments can change
    laws or regulations producers count on, such as environmental and
    tax laws or changes in farm commodity programs, creating
    institutional risks.

**Options for Managing Risks.** Agricultural producers have a variety of
options available to help them manage risks. Ideally, risk management
would involve utilizing tools or approaches that: (1) *avoid or limit
potential risks*, (2) *mitigate the effects of unavoidable risks*, and
(3) enable *recovery from the effects of risk events* to ensure the
continued sustainability of the farming operation.

While individual producers may be able to do little to change
institutional risks, they can manage price, production, income, and
financial risks by: diversifying production; adopting better crop
varieties; adopting other technologies, including precision agriculture
and information technology; conserving resources; altering the financial
structure of the farm; using insurance, forward pricing and other
hedging tools; and using off-farm earnings to stabilize farm earnings.
However, not all of these options are available to all producers. For
example, climate in some parts of the country may limit what some
producers grow, off-farm employment may not be an option for some
producers or their family members, and some risk management tools may
not be available for all commodities or regions.

In addition to differing environmental characteristics and
opportunities, it is also important to understand that, financially,
agriculture is a very diverse sector. There are a small number of farms
that account for much of U.S. farm production. There are a large number
of small farms that account for a small share of production, and farming
is not the principal occupation of these operators. Due to the wide
diversity in producers' individual situations, there is not a single
risk management strategy that will be best suited for everyone.
Producers face different risks and need different risk management tools
at their disposal.

**Appropriate Level of Risk Reduction for Federal Programs.** An issue
in program design is the proper role of the Federal government in
helping agricultural producers manage risk. In a market-oriented
economy, business owners face risks associated with their sector and
manage those risks using tools provided by the private sector. That is,
the Federal government does not try to eliminate risks for most types of
businesses, because doing so would result in overinvestment in risky
behavior and cause decisions on resource use that would be inconsistent
with market incentives. Attempts to create a risk-free environment could
also thwart innovation and investment that would foster greater global
competitiveness.

However, risk management tools may be inadequately provided by the
private sector, and in such cases, Federal action may be appropriate. In
addition, Federal intervention has been based on special risks, such as
weather in agriculture which can cause widespread losses affecting a
large number of producers, and on the desire to offset undesirable
market outcomes, such as low income for some groups, despite the
economic inefficiencies that may result.

**III. Private Sector Approaches to Agricultural Risk Management**

There are many private sector approaches to managing risk in
agriculture, including diversifying the enterprise, integrating
vertically, engaging in production and marketing contracts, joining
cooperatives, hedging in futures markets and futures options contracts,
maintaining financial reserves, and working off the farm. Federal
programs that help producers manage risks can sometimes complement these
private sector approaches, but they may also discourage their use, or
even displace them.

**Deciding what and how to produce** can help producers avoid or limit
risk. For example, diversification means producing a mix of commodities
so that low prices or yields for one commodity may be offset by higher
prices or yields for a different commodity in that year. Over 50 percent
of all farms in the United States produce more than one commodity in a
year, with over 20 percent of farms producing three or more commodities.
Smaller and non-family farms tend to have the least diversified
agricultural enterprises. Choosing crops resilient to drought in dry
years, managing irrigation water, reducing energy use, and employing new
technology are additional ways producers may be able to reduce exposure
to risk.

**Vertical integration** can be an effective risk management tool.
Combining two or more successive production stages may provide better
overall management of the production process, reduce overhead, improve
efficiency, and result in outputs better tailored to meet the specific
characteristics desired by consumers. Vertical integration, common in
poultry and pork production, has not been common in grains and oilseeds,
although farmer cooperatives have helped spur an increase in biofuels
production and have been a mainstay in the collection and processing of
milk.

**Production and marketing contracts** enable producers to mitigate
risk. Contracts are agreements between producers and buyers before the
harvest of a crop or the completion of a livestock production stage.
Under a production contract, the producer's payment is based on the
costs of producer-provided inputs, the quantity of production, or both,
and may include a fee paid for the specific services provided. Under a
marketing contract, the focus is on the commodity as it is delivered to
the contractor, rather than on the services provided, and usually
specifies a price and an amount to be delivered, but not how to produce
the product. Producers usually bear all yield risk and frequently all
input price risk.

From 1991 to 2003, the percentage of farms that used contracts as a risk
management tool remained stable at about 10 percent, however, the value
of agricultural production covered by contracts increased from 28
percent to 39 percent. For farms that used contracts, those contracts
covered 20 percent of production on small farms and just over half of
all production on farms with \$500,000 or more in sales.

**Hedging** uses futures or options contracts traded on an exchange to
reduce the risk of adverse price changes prior to an anticipated cash
sale or purchase of a commodity. Hedging allows a producer to diversify
the farm operation without actually changing the mix of agricultural
products on the farm. A futures contract is an agreement priced and
entered into at a point in time to trade a commodity at some time in the
future. Because hedging focuses only on price in a certain market,
hedging can reduce, but not completely eliminate, price risk. With
options, the holder buys the right, but not the obligation, to take a
futures position at a specified price before a specified date. Options
provide protection against adverse price movements, while allowing the
option holder to gain from favorable movements in the cash price. In
this sense, options provide protection against unfavorable events
similar to that provided by insurance policies.

**Financial reserves** can be used to smooth year-to-year fluctuations
in income. In 2004, the median net worth of farm operator households was
\$460,000, a 35-percent increase from 2001. In comparison, median
non-farm household and self-employed non-farm household net worth was
\$93,100 and \$336,000, respectively, in 2004. While the data show that
farm households, on average, hold more financial reserves than the rest
of the public, almost 80 percent of farm household assets in 2004 could
be attributed to farmland, buildings and equipment, and the operator's
dwelling. These types of assets are far more difficult to use to smooth
out annual changes in income compared to more liquid assets such as cash
reserves, savings accounts, and stocks and bonds, but they can be used
to provide collateral for loans.

**Working off the farm** is very common among farm households,
especially small farms. Off-farm earnings can supplement farm earnings
and thereby reduce the income variability for farm households. Across
all farm operator households, only about 10 percent of household income
was from farm sources in 2004, while 90 percent was from off-farm
sources. For large farms (sales of \$250,000 to \$500,000), about 60
percent of total household income was from farm earnings, and 80 percent
was from farm earnings for very large farms (at least \$500,000 in
sales). The ability to work off the farm depends on the amount of time
available to work off farm and the number of off-farm opportunities.
Farm enterprises which are management intensive, such as dairy and hogs,
reduce farmers' ability to manage risk by working off the farm, although
other household members may be able to do so. Off-farm employment can
also reduce health care cost risks by providing affordable health
insurance for farm families.

**IV. Federal Government Approaches to Agricultural Risk Management**

**A. Farm Program Overview**

This section focuses on key Federal programs that help reduce farmers'
price, production and income risks. Government benefits to producers
made under the Agricultural Act of 1949, as amended by the Farm Security
and Rural Investment Act of 2002 (2002 Farm Bill), include payments for
commodity programs, largely direct payments, counter-cyclical payments,
and marketing assistance loan benefits, and payments for conservation
programs, such as the Conservation Reserve Program, Environmental
Quality Incentives Program, and the Conservation Security Program. Crop
insurance is made available under the Federal Crop Insurance Act, as
amended by the Agricultural Risk Protection Act of 2000. In addition, ad
hoc disaster and market loss assistance has been authorized by Congress
in a series of laws for most years since 1988.

Commodity price and income support programs authorized by the 2002 Farm
Bill and funded through the Commodity Credit Corporation (CCC) cover
feed grains (corn, sorghum, barley, and oats), wheat, oilseeds
(soybeans, sunflower seed, canola, flaxseed, mustard, rapeseed,
safflower, crambe, and sesame), upland cotton, rice, and peanuts. Under
the 2002 Farm Bill, participating farmers with base acres of these
commodities are eligible for direct and counter-cyclical payments. In
addition, these commodities and a number of other crops (including
pulses, extra-long staple (ELS) cotton, honey, and wool and mohair) have
marketing assistance loan programs. Ad hoc disaster programs, when
authorized, cover nearly all major crops, including horticulture,
livestock, aquaculture, and trees. Programs that support market prices
by restricting marketable supplies are authorized for milk and sugar,
and depending on the level of milk prices, milk producers are also
eligible for payments.

Many of the commodity programs described above have been in effect, in
one form or another, since the 1930s. In a more global market
environment, programs are changing in several ways. Within the past
decade, farm-sector benefits from payments that do not distort
production and trade have increased, mainly through initiation of
decoupled, production flexibility contract (PFC) payments under the 1996
Farm Bill and direct payments and counter-cyclical payments under the
2002 Farm Bill. Planting flexibility has allowed production decisions to
better reflect market factors. Marketing loan provisions have worked to
ensure that loan rates do not act as price floors and the government
does not own large surplus stocks. In addition, two past program
structures that relied upon supply controls and market price supports
have been eliminated (tobacco) or restructured (peanuts).

**Direct Payments.** The quantity of a crop eligible for a direct
payment is 85 percent of the crop's base acreage (a producer's
historical acreage) *times* the direct payment yield per acre (a
historical yield). The direct payment for each commodity is the direct
payment quantity *times* the direct payment rate, which is set by the
2002 Farm Bill for the 2002-07 crops. Because they are based on a fixed
quantity and payment rate, direct payments are decoupled from production
and are considered minimally production and trade distorting. Producers
are free to plant most crops on base acreage, with some limitations on
planting fruits, vegetables and wild rice, or can elect to leave base
acres idle and still receive direct payments.

**Counter-Cyclical Payments.** The quantity of a crop eligible for a
counter-cyclical payment is 85 percent of the crop's base acreage
*times* the counter-cyclical payment yield (a historical yield) *times*
the counter-cyclical payment rate. The counter-cyclical payment rate is
based on a statutory target price for each commodity, and the
counter-cyclical payment rate increases when the commodity's
season-average farm price falls, reaching a maximum when the farm price
is at or below, the commodity's statutory loan rate. Since payments are
based on historical acreage and yields, these payments do not depend on
current production, and as such, are less distorting than payments tied
to actual production. As with direct payments, producers are free to
plant most crops on base acres or leave base acres idle and still
receive counter-cyclical payments***.***

**Marketing Assistance Loans.** Farmers are eligible for marketing
assistance loans when they harvest the eligible commodities. To
participate, farmers decide how much of their current year's production
they want a loan on and pledge that amount as collateral. Marketing
assistance loans have a 9-month maturity and accrue interest. These
loans are "non-recourse loans," meaning that the government must accept
the collateral as full payment of the loan at loan maturity if a
producer so chooses. Because marketing assistance loan benefits depend
on current market prices and current production, marketing assistance
loans are considered be the most production and trade distorting forms
of domestic support.

Producers can receive benefits from marketing assistance loans in four
ways. First, a producer may repay a marketing assistance loan anytime
before loan maturity at the alternative loan repayment rate announced by
USDA, if the alternative repayment rate is less than the loan rate plus
accrued interest (marketing loan gain). Second, a producer may elect to
forego taking out a loan and receive the difference between the loan
rate and alternative loan repayment rate (loan deficiency payment).
Third, the producer may take out a loan, turn the collateral over to the
CCC, purchase commodity certificates from the CCC, and use the
certificates to purchase the commodity at the alternative repayment rate
(certificate gain). Fourth, the producer may settle the loan by
forfeiting the commodity to the CCC (forfeiture gain). ELS cotton is
eligible for only the fourth type of benefit*.*

**Programs that Support Market Prices---Sugar and Milk*. ***The sugar
and dairy programs support producers chiefly through restricting
marketable supplies to consumers. The prices of raw cane and refined
beet sugar are supported through nonrecourse loans to processors. If the
market price for raw cane or refined sugar falls below the price support
level, processors may settle the loan by forfeiting the sugar placed
under loan to the CCC. The 2002 Farm Bill authorizes domestic marketing
allotments for sugar, unless imports of sugar exceed 1.532 million tons,
and such imports are not needed to fulfill a shortfall in U.S.
production. When established, marketing allotments restrict the amount
of raw cane and refined beet sugar that may be marketed by sugar
processors. In addition, sugar imports are subject to a tariff rate
quota, which restricts the amount of sugar that can be imported into the
United States at a low tariff, to prevent the price support program from
supporting the world price of sugar.

During FY 2002-05, the sugar price support program has operated at no
net cost to the government, as restrictions on domestic marketings and
imports along with hurricane-related production losses have allowed the
CCC to sell-back any forfeitures of sugar in prior years. However, under
the North American Free Trade Agreement (NAFTA), the import tariff on
Mexican sugar falls to 1.5 cents per pound on January 1, 2007, and to
zero on January 1, 2008. The decline in the import tariff on Mexican
sugar could push imports above 1.532 million tons and prevent
implementation of marketing allotments. Under this scenario, substantial
forfeitures of price support loans could occur, leading to a sharp
increase in the cost of the sugar price support program.

The price of milk is supported through CCC purchases of butter, cheese,
and nonfat dry milk. During 2002 and 2003, higher milk production led to
a sharp increase in CCC purchases of nonfat dry milk. On October 1,
2003, the CCC held over 1.4 billion pounds of nonfat dry milk in
storage. In 2004 and 2005, purchases declined sharply as milk prices
rebounded and CCC inventories of nonfat dry milk were liquidated through
domestic and international donation programs, including assistance to
livestock producers affected by drought.

A new direct payment program for milk, the Milk Income Loss Contract
(MILC) program, was authorized by the 2002 Farm Bill through September
30, 2005. Under the program, producers are eligible for monthly payments
if the price of fluid milk for beverage use falls below an established
level. Payments are made to a producer on the amount of milk marketed
not to exceed 2.4 million pounds in a fiscal year. The Agricultural
Reconciliation Act of 2005 extended the MILC program through August 31,
2007, but lowered the payment rate. Under the MILC Program, \$2 billion
have been paid to dairy producers.

The Agricultural Marketing Agreement Act of 1937 authorizes the
establishment of marketing agreements and orders for a wide range of
commodities. Under this legislation, Federal marketing orders have been
established for milk. Federal milk marketing orders provide for the
establishment of minimum prices of raw milk according to use and the
pooling of receipts across all the uses of raw milk. Within a Federal
milk marketing order, producers receive a blend price for milk
reflecting the weighted-average price for the various end uses for milk
marketed within the boundaries of a Federal order. Generally, farm bills
have not addressed Federal milk marketing orders. However, the 1996 Farm
Bill mandated that the Secretary of Agriculture reform and consolidate
Federal milk marketing orders and the 1985 Farm Bill addressed minimum
Class I differentials.

**Payment limits.** Under the 2002 Farm Bill, direct payments are
subject to a \$40,000 per person payment limitation and counter-cyclical
payments are subject to a separate \$65,000 limit. Loan deficiency
payments and marketing assistance loan gains under the marketing
assistance loan program are limited to \$75,000 per person, while
forfeiture gains and certificate gains are not limited. In addition, an
individual or entity whose average adjusted gross income for the three
preceding years exceeds \$2.5 million is ineligible for direct,
counter-cyclical, and loan deficiency payments; marketing assistance
loan gains; and payments under any conservation program, unless at least
75 percent of the average adjusted gross income is derived from farming,
ranching or forestry operations.

Payment limits apply to "persons," that is each "person" has a separate
payment limit. A person may be an individual (human being) or it may be
an entity used by a producer as a way to organize the farm business,
such as a corporation. The 2002 Farm Bill continued the 3-entity rule.
Under this rule, a person who receives payments as an individual can
also receive payments through two additional entities in which the
individual has up to a 50 percent ownership share in each, effectively
doubling the payment limit.

**B. Distribution of Payments under Farm Programs**

This section examines the overall outlays on farm programs and the
distribution of farm program payments, answering the question of "to
whom" and "where" government payments to producers go and the level of
support the payments provide. First, data on commodity program payments
made in total, by type and by crop are examined. Then, payments received
by farms and farm households are addressed, which allow payments to be
compared to income and other characteristics of the farm and the farm
household. These farm household data are only available on a calendar
year basis.

**Commodity Credit Corporation Expenditures.** Commodity programs are
administered through the CCC. CCC outlays include commodity price and
income support program payments, expenses incurred under several of
USDA's trade and conservation programs, and outlays for ad hoc and
emergency assistance. Crop insurance is not included in CCC outlays.

Total CCC outlays peaked in fiscal year (FY) 2000 at \$32.6 billion as
declining market prices for major crops caused Congress to supplement
production flexibility contract payments authorized under the 1996 Farm
Bill with economic loss assistance payments (Figure 1). By FY 2004, CCC
outlays dropped to \$10.6 billion as prices for major crops recovered,
but prices then reversed and outlays nearly doubled to over \$20 billion
in FY 2005. CCC outlays are forecast to remain above \$20 billion in FY
2006 and FY 2007, as large production has continued to pressure prices
for major crops, increasing counter-cyclical payments and marketing loan
benefits.

![](media/image2.wmf)

Following enactment of the 2002 Farm Bill, the Congressional Budget
Office (CBO) projected spending under the 2002 Farm Bill. During FY
2002-04, actual spending under the 2002 Farm Bill, including ad hoc and
emergency assistance, was well below CBO's forecast. However, actual
spending moved above CBO's forecast in FY 2005, and annual spending is
projected through the end of the 2002 Farm Bill to remain \$1-2 billion
above CBO's forecast made at the time the 2002 Farm Bill was enacted.

**Total Payments by Type of Payment.** For the 2002-05 crop years,
commodity program payments, defined as direct payments, counter-cyclical
payments and marketing assistance loan benefits, are estimated to
average \$11.7 billion per year (Figure 2). Total payments fell from
\$8.8 billion for the 2002 crops to \$6.7 billion for the 2003 crops as
crop prices strengthened, but payments are forecast to increase to \$16
billion for the 2005 crops as crop prices have generally declined in the
face of record or near-record large crop production. Direct payments
have been constant at about \$5.3 billion per year. Counter-cyclical
payments have ranged from a low of about \$0.5 billion for the 2003 crop
year to nearly \$5 billion expected for the 2005 crop year. Marketing
loan benefits have ranged from less than \$1 billion for the 2003 crop
year to over \$6 billion expected for the 2005 crop year

.![](media/image2.wmf)

**Payments by Crop.** Of total commodity program payments during
2002-05, 93 percent are estimated to go to wheat, rice, corn, soybean
and upland cotton producers. These 5 crops accounted for an estimated 21
percent of total farm cash receipts in 2005. Commodity program payments
to corn producers are estimated to average \$5.4 billion per year and
account for 46 percent of total payments made for the 2002-05 crops
(Figure 3). Over this period, 23 percent of payments went to upland
cotton producers; soybean, wheat, and rice producers each received 6-10
percent of the total. Other feed grain, other oilseed and peanut
producers combined received about 7 percent.

![](media/image2.wmf)

**Payments in Relation to U.S. Net Farm Income.** During calendar years
2002-2005, government payments to farmers and ranchers for commodity
programs, conservation programs, and emergency assistance averaged
\$16.2 billion per year, but declining market prices and increased
emergency assistance authorized by Congress in the form of ad hoc
disaster payments caused farm program payments to reach a record \$23.0
billion in calendar year 2005 (Figure 4). Compared with the late 1990s,
commodity payments have declined as a percentage of U.S. net
![](media/image2.wmf)cash farm income, primarily because livestock
sector returns have increased sharply.

**Payments in Relation to Crop Production Value.** In addition to
varying in dollar terms by crop, payments vary substantially as a share
of the market value of production (Figure 5). Measuring support in terms
of market value for the 5 major crops that account for most payments,
support ranged from a low of an estimated 4 percent for soybeans, to 17
percent for wheat, 23 percent for corn, 50 percent for cotton, and a
high of 63 percent for rice over the 2002-2005 crop years.

![](media/image3.wmf){width="4.126388888888889in"
height="3.0944444444444446in"}

**Farms Receiving Government Payments.** The 2004 Agricultural Resource
Management Survey (ARMS) provides calendar year information on the role
of government payments (including commodity program, conservation and
disaster payments) from the perspective of the farm business and the
farm operator household. ARMS data indicate that 39 percent of all farms
received government payments in 2004 (See Appendix Table 1). For farms
that received a payment, the average payment per farm was \$12,517.
Among farms receiving payments, this payment represented an average of
7.4 percent of the farm's gross cash income or 26 percent of the farm\'s
net cash income.

Gross cash income of farms receiving government payments averaged
\$170,166 in 2004, more than three times that of farms not receiving
government payments. Direct payments comprised over one-third of total
government payments, and more farms received direct payments than other
program payments.

# A farm\'s commodity specialization is determined by the one commodity or group of commodities that makes up at least 50 percent of the farm\'s total value of production. Using this definition, about half of all U.S. farms can be classified as a particular type. Farms specializing in *rice* received an average of \$53,660 in 2004, the highest for any commodity farm type. The next highest payments per farm were reported by *cotton* farms, which averaged \$49,327. *Cash grain and soybean* farms averaged \$19,008 per farm, but these farms accounted for 53 percent of payments made. More farms---35 percent of all farms---are classified as *beef cattle* farms than for other categories. These farms, which represent 23 percent of farms receiving payments, received \$6,687 per farm, or 12 percent of all payments. *Dairy* farms averaged \$10,417 and accounted for 5 percent of payments made. Livestock farms receive support because they produce crops that are eligible for payments.

# 

# Distribution by Farm Typology. One typology often used with ARMS data groups farms into three categories: *commercial farms*, farms with sales of \$250,000 or more and the farm operator reports farming as the major occupation (less than 10 percent of all farms); *intermediate farms*, farms with sales under \$250,000 and the farm operator reports farming as the major occupation (25 percent of all farms); and *rural residence farms*, farms in which the farm operator's major occupation is not farming or the farm is a limited resource farm (65 percent of all farms). 

# A much higher share of commercial farms, 69 percent, received payments relative to other types of farms. Fifty-one percent of intermediate farms and only 30 percent of rural residence farms received government payments. Commercial farms accounted for nearly 17 percent of the farms receiving government payments, but received 50 percent of total government payments, reflecting the fact that payments are based on the level of current and historical production (Figure 6).

# 

# Because there are so many more rural residence farms, they accounted for most of the farms receiving payments. They accounted for 56 percent of the farms receiving payments but only 17 percent of total payments. However, rural residence farms accounted for 58 percent of conservation program payments (Conservation Reserve Program, Wetlands Reserve Program and Environmental Quality Improvement Program). 

Although most of the payments went to larger operations, government
program payments contributed a larger share of gross cash income for
smaller farms. The average payment for rural residence farms was
\$4,266, which was 15 percent of gross cash income. The average payment
for commercial farms was \$40,453, nearly 6 percent of gross cash
income.

![](media/image2.wmf)

**Distribution by Farm and Operator Household Income.** Farm households
with household incomes of \$200,000 or more, over 7 percent of all farm
households, received 23 percent of all government payments in 2004
(Figure 7). About 84 percent of their payments were direct,
counter-cyclical, and loan deficiency payments. Nearly one-third of all
farms receiving government payments had household incomes of
\$50,000-\$99,999. About 44 percent of all farm households receiving
payments had incomes of less than \$50,000 and received 32 percent of
all farm payments. Over 12 percent of farms receiving payments had net
cash farm incomes over \$100,000 and received 42 percent of payments.
About 55 percent of farms receiving payments had net cash farm incomes
below \$10,000 and received 26 percent of the payments.

![](media/image2.wmf)

**D. Crop Insurance and Ad Hoc Disaster Assistance**

Under the Federal crop insurance program, insurance companies approved
by the Risk Management Agency (RMA) market and manage the delivery of
crop insurance policies to producers. The Federal government provides
reinsurance and administrative and operating expense reimbursement to
the companies and premium subsidies to producers. Crop insurance
provides coverage for a loss in yield or a loss in revenue (yield and
price) for over 350 commodities in all 50 States and Puerto Rico. In
addition to addressing yield and revenue risks, there are whole-farm
gross revenue insurance policies available in some States.

The Federal Crop Insurance Act was amended by the Agricultural Risk
Protection Act of 2000 (ARPA) to increase participation in crop
insurance through expanded crop and livestock coverage and increased
subsidies. For the 2005 crop year, there were 1.2 million Federal crop
insurance policies in force covering 246 million acres with a liability
of \$44.3 billion. Acres covered in 2005 were up 20 percent from 2000,
the year prior to implementation of ARPA, and liability was up 30
percent from 2000. About one-third of insured crop value is covered by a
basic catastrophic policy whose premium is completely subsidized by the
Federal government. More comprehensive 'buy-up' policies cover the
remaining two-thirds of the insured crop value at an average coverage
level of 70 percent (or a 30-percent deductible). The Federal government
subsidizes an average of 57 percent of the producers' premium. Since
ARPA, buy-up coverage of 70 percent or above has increased sharply,
rising from 22 percent of insured crop acreage in 2000 to 57 percent in
2005 (excluding area yield and revenue plans of insurance). About 60
percent of crop insurance coverage provides revenue protection, the
fastest growing plan of insurance in recent years.

Crop insurance policies were in place on about two-thirds of total U.S.
crop value and 85 percent of the value of the major crops covered by
commodity programs during 2004 (Table 1). However, because policies have
a deductible portion, liability is equal to 39 percent of total U.S.
crop value and 57 percent for the major crops covered by commodity
programs. Seven crops accounted for 80 percent of the total crop
insurance liability in 2005, although participation in a range of
specialty crops is growing. Two crops, corn and soybeans, accounted for
just over half of total insured liability. The grain belt States of the
Midwest, plus California and Florida, account for half of insured
liability. Under ARPA, a pilot program for price insurance for cattle
and hogs was created, with livestock insurance costs limited to \$20
million per year. Participation has been low to date.

  ----------------------- ------------------- ----------------------------
  **Table 1.                                  
  Participation in the                        
  Federal Crop Insurance                      
  Program for Major                           
  Crops, 2004**                               

  **Crop**                **Percent of Crop   **Liability as a Percent of
                          Value Insured**     Crop Value**

  Barley                  63                  42

  Corn                    92                  64

  Cotton                  99                  61

  Sorghum                 99                  65

  Peanuts                 78                  46

  Potatoes                70                  34

  Rice                    58                  25

  Soybeans                80                  56

  Sugar Beets             90                  58

  Sugarcane               71                  23

  Tobacco                 73                  50

  Wheat                   82                  54

  Average                 85                  57
  ----------------------- ------------------- ----------------------------

The total cost to the government of the Federal crop insurance program
averaged \$3.1 billion for 2002-2005. Premium subsidies account for
about three-fourths of the total cost. Compensation to private crop
insurance companies accounts for the remaining one-fourth of the program
cost. Program costs have increased as subsidies were raised through
legislated program reforms in 1994 and 2000 to increase participation
and buy-up coverage.

The actuarial performance of Federal crop insurance has steadily
improved over the years (Table 2). During l981-1990, the loss ratio,
which is total indemnities divided by total premiums (including premium
subsidies), averaged 1.53. During 1991-2000, the loss ratio declined to
an average of 1.07. And during 2001-2005, the estimated loss ratio has
averaged an even lower 0.93. Actuarial performance has improved due to
the continuing assessment of historical experience and adjustment of
premium rates by RMA to better cover expected losses, increases in
participation and buy-up coverage, and increased purchases of revenue
policies.

+--------+-----------+-----------+-------------------+---------------+
| *      |           |           |                   |               |
| *Table |           |           |                   |               |
| 2.     |           |           |                   |               |
| Pr     |           |           |                   |               |
| emium, |           |           |                   |               |
| Inde   |           |           |                   |               |
| mnity, |           |           |                   |               |
| and    |           |           |                   |               |
| Loss   |           |           |                   |               |
| Ratio  |           |           |                   |               |
| for    |           |           |                   |               |
| the    |           |           |                   |               |
| F      |           |           |                   |               |
| ederal |           |           |                   |               |
| Crop   |           |           |                   |               |
| Ins    |           |           |                   |               |
| urance |           |           |                   |               |
| Pr     |           |           |                   |               |
| ogram, |           |           |                   |               |
| 1994-  |           |           |                   |               |
| 2005** |           |           |                   |               |
+--------+-----------+-----------+-------------------+---------------+
| **     | **        | **In      | **Loss Ratio**    | **Government  |
| Year** | Premium** | demnity** |                   | Cost of       |
|        |           |           | **(Ind            | Program**     |
|        | **(\$     | **(\$     | emnity/Premium)** |               |
|        | Mi        | Mi        |                   | **(\$         |
|        | llions)** | llions)** |                   | Millions)**   |
+--------+-----------+-----------+-------------------+---------------+
| 1994   | 949.4     | 601.1     | 0.63              | 367           |
+--------+-----------+-----------+-------------------+---------------+
| 1995   | 1,543.3   | 1,567.7   | 1.02              | 1,523         |
+--------+-----------+-----------+-------------------+---------------+
| 1996   | 1,838.6   | 1,492.7   | 0.81              | 1,430         |
+--------+-----------+-----------+-------------------+---------------+
| 1997   | 1,775.4   | 993.6     | 0.56              | 971           |
+--------+-----------+-----------+-------------------+---------------+
| 1998   | 1,875.9   | 1,677.5   | 0.89              | 1,590         |
+--------+-----------+-----------+-------------------+---------------+
| 1999   | 2,310.1   | 2,434.7   | 1.05              | 2,318         |
+--------+-----------+-----------+-------------------+---------------+
| 2000   | 2,540.2   | 2,594.8   | 1.02              | 2,268         |
+--------+-----------+-----------+-------------------+---------------+
| 2001   | 2,961.8   | 2,960.1   | 1.00              | 2,777         |
+--------+-----------+-----------+-------------------+---------------+
| 2002   | 2,915.9   | 4,066.7   | 1.39              | 3,529         |
+--------+-----------+-----------+-------------------+---------------+
| 2003   | 3,431.2   | 3,257.7   | 0.95              | 3,098         |
+--------+-----------+-----------+-------------------+---------------+
| 2004   | 4,185.4   | 3,205.0   | 0.77              | 3,162         |
+--------+-----------+-----------+-------------------+---------------+
| 2005   | 3,947.8   | 2,334.0   | 0.59              | 2,640         |
| 1/     |           |           |                   |               |
+--------+-----------+-----------+-------------------+---------------+

1/ Indemnity, loss ratio, and cost are projected.

Despite the increase in participation and purchase of buyup coverage
levels since the mid 1990s, Congress has continued to provide ad hoc
disaster assistance to producers (Figure 9). Since 1998 over \$14
billion has been provided in disaster assistance to livestock and crop
producers. Factors used to explain Congressional action on disaster
assistance include: low participation or coverage levels in some areas;
unavailability of insurance for some commodities; limited coverage for
livestock, pasture, and rangeland; and deductibles that are perceived by
some as too large.

![](media/image3.wmf){width="4.995833333333334in"
height="3.751388888888889in"}

**E. Conservation**

Natural resource conservation and environmental protection will be
examined in a subsequent theme paper. The theme is discussed here
because there are a range of conservation activities that farmers,
ranchers, and communities may undertake to reduce their risks. Under
USDA conservation programs, production and yield risks may be reduced by
financial assistance, technical assistance, and stewardship programs.
Many of the conservation related approaches to risk management are
particularly effective because they not only reduce risks to producers
they also reduce the future costs of Federal risk mitigation. For
example, grazing land that is well managed and is productive under good
conditions, enables ranchers to sustain production during short-term
droughts and recover more quickly from severe droughts. In addition,
conservation programs address environmental risks beyond the producer by
helping to improve water quality, air quality, and wildlife habitat.

Risks from floods, drought, and invasive species, for example, are
directly addressed through cost share, incentive payments, easement
purchases, stewardship payments, rental payments, and technical
assistance provided by USDA's Natural Resources Conservation Service
(NRCS) and Farm Service Agency (FSA) (Table 3). One NRCS program, the
Snow Survey program, plays a major role in addressing the water supply
risks in the West. Price and market risk are also addressed by financial
and technical assistance and stewardship programs through payments which
affect income support directly and through the potential for decreased
input costs due to adoption of improved management practices.
Institutional risk is addressed through programs that reduce the cost of
complying with existing State and Federal regulations. In addition, the
risks of having to comply with future regulations are reduced through
voluntary installation of conservation measures. Financial risk is also
reduced due to direct capital investment in farm infrastructure and
payments to program participants.

1/Includes Conservation Technical Assistance, Soil Survey, Snow Survey,
Plant Materials Center, Resource Conservation and Development, and
technical assistance for the CCC funded Farm Bill conservation programs,
Emergency Watershed Program, and Watershed Surveys and Planning
Programs.

2/ Includes financial assistance for the Wildlife Habitat Incentives
Program, Environmental Quality Incentives Program (EQIP), EQIP-Klamath
Basin, EQIP-Ground and Surface Water Conservation, Agricultural
Management Assistance, Forestry Incentives Program, Watershed
Rehabilitation, Emergency Watershed Program, Flood Prevention
Operations, EQIP FY-2002 educational assistance, and Watershed
Operations programs.

3/ Includes easement payments for the Grassland Reserve Program
(estimated at 40 percent of Grassland Reserve Program financial
assistance), Wetland Reserve Program, Farm and Ranch Lands Protection
Program, and Healthy Forests Reserve Program.

4/ Includes all payments associated with the Conservation Security
Program.

5/ Includes all payments from the Conservation Reserve Program and the
rental payments from the Grassland Reserve Program (estimated at 60
percent of the Grassland Reserve Program financial assistance).

6/ Does not include Emergency Conservation Program funding.

Environmentally vulnerable lands often are more susceptible to
production risks, such as drought. The Conservation Reserve Program
(CRP), administered by FSA, compensates landowners with annual rental
payments when they agree to place environmentally vulnerable cropland
into conservation covers such as grass, trees, and wetlands. CRP
payments are guaranteed in 10 to 15 year contracts assuring landowners a
revenue stream from their cropland. CRP can thus be used by landowners
to reduce exposure to production risk on marginal cropland, helping
maintain financial risk on farms at an acceptable level. In addition,
voluntary conservation under CRP, as do all USDA conservation programs,
reduces the risk of unanticipated expenditures from future environmental
regulations.

**V. Economic and Policy Issues for Federal Agricultural Risk Management
Programs**

This section provides a general assessment of the support provided by
current programs using several evaluation criteria: reduction of income
risk, the level and comprehensiveness of benefits, resource and
structural effects, program cost, and implications for U.S. commitments
under the World Trade Organization (WTO). Conservation programs will be
addressed in a future theme paper.

**Income Risk Reduction.** The program descriptions and data presented
to this point indicate that current price and income support, crop
insurance, disaster, and conservation programs comprise substantial
resources directed at income risk reduction for U.S. agriculture,
particularly for the principal program crops (food grains, feed grains,
upland cotton and soybeans) and sugar and dairy. The regular provision
of ad hoc disaster assistance has reduced risks even further, but
assistance is highly variable in terms of available dollars. Non-program
crops and livestock are only eligible for ad hoc disaster and
conservation programs and limited insurance programs. The risk reduction
capacity of crop insurance and conservation has expanded sharply under
ARPA and the 2002 Farm Bill, respectively. Conservation financial
assistance is remains small compared with the other support mechanisms
but has the benefit of reducing future Federal and private risk
management costs.

Corn can be used as an example for discussing the income risk reduction
of current programs. During the 2002 and 2003 crop years, the price
received by producers for corn averaged \$2.37 per bushel, about equal
to the average of the 1990s, and corn program payments (direct and
counter-cyclical and marketing loan benefits) averaged \$2.2 billion.
For the 2004 and 2005 crop years, the corn price is estimated to average
only \$2.03 per bushel, 14 percent below 2002-2003. Corn program
payments for 2004-2005 are estimated to be up 290 percent, to an average
of \$8.6 billion. In addition to corn program payments, corn producers
received an estimated average of about \$550 million in crop insurance
indemnities during 2004-2005, compared with \$1 billion averaged during
2002-2003. In the aggregate, both gross and net income from corn
production, including government payments, increased during 2004-2005,
compared with 2002-2003, despite the sharp decline in market prices.

Farm program payments provide producers with substantial protection in
the event of price and yield shortfalls. However, the sharp increase in
payments and income relative to the drop in price suggest that
government price and income support programs may be a blunt mechanism to
reduce income variability or risk. The basic reason is that stabilizing
price or yield alone may do little to stabilize revenue. In the absence
of government price intervention, when aggregate yield falls, prices
rise, and vice versa. This correlation provides a moderating "natural
hedge" against the revenue shortfalls that might otherwise result from
yield shortfalls. Thus, the following effects of payments can be
observed:

-   First, direct payments are fixed and therefore do not offset
    variability. They solely provide income enhancement, which may be
    used to offset business risks.

-   Second, while counter-cyclical payments are negatively correlated
    with price, they ignore production effects and can thus negate the
    risk reducing aspect of the natural hedge. For example, large yield
    increases can reduce prices, triggering a counter-cyclical payment
    but the higher yields also help offset the effect of lower prices on
    income. Because counter-cyclical payments do not take the increased
    income effect of higher yields into account, while mitigating income
    risk, they can more than compensate for a revenue decline and even
    add to income variability. Conversely, in the event of a crop loss,
    prices may rise thus reducing the counter-cyclical payment. Lastly,
    because counter cyclical payments are made on historical production,
    like direct payments, their role may be more income enhancement than
    stabilization.

-   Third, marketing loan benefits, while triggered by low prices, are
    based on a loan rate relative to a local spot market price, not the
    price the producer actually receives from the sale of the product. A
    producer can sell at the market price that is used to lock in the
    loan benefit, or lock in the benefit at a time of weak prices and
    sell later at a higher price. Thus, the loan program may
    overcompensate for a drop in market prices. In addition, loan
    benefits are based on current production. A producer who has a crop
    loss would not receive the loan benefit on lost production, in which
    case, the loan program fails to reduce income risk. Moreover, a
    large national crop loss that results in a higher market price may
    greatly reduce a producer's production eligible for loan benefits
    and may also reduce the counter-cyclical payment. In this case, a
    producer who loses a crop receives no marketing loan benefits or
    counter-cyclical payments.

Crop insurance has seen large increases in participation and buyup
coverage and sound actuarial performance in recent years. However, crop
insurance has a number of issues. Subsidies are rising and disaster
assistance continues to be regularly provided. Crop insurance is in
place for 66 percent of total U.S. crop value but the liability of those
policies is only equal to 39 percent of total U.S. crop value. With an
average premium subsidy of nearly 60 percent, further increases in
premium subsidies to address the coverage deficiency are likely to
increase participation and coverage levels only modestly, with a large
increase in total program costs for each additional acre insured. While
livestock price insurance has been initiated on a pilot basis, questions
remain as to whether such insurance displaces the sale of available
futures and options contracts or discourages private sector development
of alternative tools. Whole farm revenue insurance has been offered in
recent years, but participation remains low. The policy is complex to
sell and administer. Coverage for some specialty crops and livestock
forage remains limited.

**Level and Comprehensiveness of Support.** Government payments are not
distributed evenly across the country or by size or type of farm. This
fact raises questions about the equity of program benefits. Payments
under the price and income support programs are heavily concentrated in
the central and southern parts of the United States, reflecting
production of program crops, with a large proportion of the payments
going to the largest farms with the highest net farm incomes (Appendix
Figures). Crop insurance premium subsidies are also more heavily
concentrated in the central and southern parts of the United States,
similar to the pattern of the price and income support programs.
Conservation payments are somewhat more evenly distributed, reflecting
acreage in farming and ranching.

The data presented earlier indicated 39 percent of farms received
government payments in 2004, with a larger portion of commercial farms
receiving payments than small farms. Commercial farms, the largest 10
percent of farms, received 56 percent of all payments. On average,
commercial farms that received government payments received over
\$40,000 and had average net cash farm income of \$217,000. In addition,
payments are highly concentrated by commodity, with 93 percent of
commodity program payments estimated to have gone to wheat, rice, corn,
soybeans, and upland cotton producers during 2002-2005.

**Resource and Structural Effects.** Farm programs have become more
market-oriented over time. Beginning in the 1980s, loan rates were
reduced, payments were eliminated on a portion of base acres, annual
acreage control programs were eliminated, counter-cyclical payments were
based on fixed yields, and direct payments were based on fixed yields
and fixed payment rates. Counter-cyclical and direct payments are
generally thought to have minimal effects on production. As historical
yield data were obtained, crop insurance premium rates were adjusted to
better reflect loss history. Collectively, these changes reduced the
effects of farm and insurance programs on resource decisions by
producers.

Even so, today's programs contain elements that provide incentives for
resource use that may be inconsistent with market signals. For example,
the marketing assistance loan program assures a per unit return at least
equal to the loan rate regardless of how low market prices fall. This
return is assured on all current production. Thus, when market prices
are near or below loan rates, the risk reduction and assured return of
the loan program provide an incentive to plant more acreage and apply
more inputs, such as fertilizer, and thus produce more than would be the
case in the absence of the program. For example, studies conducted
around the time of enactment of the 2002 Farm Bill concluded that the
increase in loan rates under the 2002 Farm Bill would increase area
planted to principal crops by about 2 million acres, or 1 percent.
Studies of crop insurance have also indicated that premium subsidies and
the risk reduction provided by the program have increased planted
acreage, although the size of the effect is debatable.

The experience of dry peas and lentils indicates the potential effects
of a marketing loan program. Under the 2002 Farm Bill and the
Consolidated Appropriations Resolution (2003), Congress established loan
and loan repayment rates for dry peas and lentils that created
incentives for significant acreage expansion. For example, when using
loan rates as the planting incentive for producers, expected returns
above variable costs in 2005 for dry peas and lentils were well above
wheat. Dry pea and lentil area has tripled in the last four years, from
0.4 million acres in 2001 to 1.3 million in 2005, and is expected to
exceed 1.6 million this year. Statutory provisions require that loan
repayment rates be based on lower-valued product (feed or no. 3 grade),
increasing marketing loan benefits that nullify market price signals.

Similarly, the sugar and dairy programs, during times of abundant U.S.
and world supplies, provide incentives to produce more than otherwise by
maintaining market prices above where they would be in the absence of
the programs. To the extent that the supported prices for sugar and milk
and dairy products exceed the market prices that would prevail in the
absence of the programs, consumers of those products pay more, in effect
transferring income to producers. In addition, payments under the MILC
program are tied both to current production and prices, mitigating
income risk but creating incentives to maintain production in the face
of declining prices.

Another effect of commodity programs may be on the size of farming
operations. While program payments may help some producers remain in
business in the short term by augmenting income, program payments may
provide a means for other producers to outbid competitors for farmland
and expand their operations. The latter effect may follow from the
economies of scale associated with large farms compared with small
farms. Data indicate that, on average, large farms have a lower per unit
cost of production than small farms and that the ratio of costs to
revenues is much lower (Figure 10). Consequently, the expected net
return per added acre for a large farm would exceed that for a small
farm, causing the large farm to be able to pay more for additional
acres. That would be true with or without commodity programs. To the
extent that large farms have more capital to invest and as a result are
more productive per acre, they may receive more program payments per
acre, which could help finance their further expansion.

![](media/image2.wmf)

Another effect of commodity programs is their impact on farmland values.
Farmland values depend on many factors, including income generated from
the products produced on the land; other income, such as commodity
program payments; the value of the land in nonagricultural uses; the
presence of environmental amenities; and interest rates. Many studies
have concluded that commodity payments are capitalized into farmland
values with the effect dependent on the degree of competition for land,
crop productivity, costs of production, size of payments, and the
potential for nonagricultural uses. While varying by region, some
studies suggest U.S. farmland values are 15-25 percent higher due to
commodity programs. Increased farmland values and associated higher
rents may accrue to individuals not involved in production, as 40
percent of farmland is rented. Higher farmland values have several
effects: they benefit farm operators who own and invest in farmland;
they may improve access to credit, making land purchases easier; they
may deter new entrants from farming and constrain expansion by more
limited resource farms; they increase costs of production; they increase
investment in farmland by nonfarmers; and they may increase taxes to
landowners.

**Program Cost.** Commodity program costs have increased sharply,
expected to about double in FY 2006 compared with FY 2004. Costs are
expected to remain well above the average of the 1990s. Government crop
insurance costs have steadily increased under statutory increases in
subsidy levels and increased participation, rising from about \$1
billion per year in the mid 1990s to an expected level of \$4.3 billion
for the 2006 crop year. Ad hoc disaster assistance has been consistently
provided in recent years with costs of nearly \$3 billion in calendar
2005. Conservation program costs have increased from \$3.7 billion in FY
2002 to an expected \$5.2 billion in FY 2006. High costs are an issue in
the current Federal budget environment where deficits are large and
persistent. In addition, the dairy and sugar price support programs add
to consumer costs and can result in stock accumulation by the government
which can be difficult and costly to manage.

The 2002 Farm Bill was developed under a budget that permitted spending
to increase by about \$8 billion per year above the levels projected
under a continuation of the 1996 Farm Bill. If the 2007 Farm Bill is
developed under a budget target that is below spending under a
continuation of the 2002 Farm Bill, similar to the situations for the
1996 and 1990 Farm Bills, program costs will become even more of an
issue as spending has to be reduced to meet the budget target. High
costs also have an implication for WTO obligations, as discussed in the
next section.

**WTO Implications**. Domestic farm support policies were recognized as
one source of market and trade distortions when the Uruguay Round
Agreement on Agriculture (URAA) was negotiated. Under the URAA, which
went into effect in 1995, countries agreed to limit subsidies from
domestic policies that were presumed to be the most trade distorting but
were allowed to exempt other policies from any limitations. The
different categories of domestic subsidies are commonly referred to as
the "boxes"---amber box, blue box, and green box. The colors of the
boxes represent the level of trade distortion.

*Amber box* policies are the most production and trade distorting and
generally are payments based on prices or production and price support
programs. Amber box policies are measured by the Aggregate Measurement
of Support (AMS), which is a dollar value of the support provided each
year, calculated using specific rules. The annual limit for the U.S. AMS
is \$19.1 billion.

Amber box policies are further classified into two groups: *commodity
specific* or *non-commodity specific*. The main commodity-specific amber
box policies are payments under the marketing loan programs (loan
deficiency payments, marketing loan gains, and certificate gains) and
the benefits of the price support programs for dairy and sugar.
Commodity-specific amber box support is counted as part of the AMS only
if it equals more than 5 percent of value of production for each
commodity (e.g., wheat specific support must exceed 5 percent of the
annual value of wheat production). Since 1995, commodity-specific amber
box support, as measured by the AMS, has ranged from a low of \$5.9
billion to a high of \$16.9 billion. Dairy has accounted for about \$5
billion annually and sugar another \$1 billion. Marketing loan benefits
have been highly variable because they are based on market prices which
have fluctuated.

Non-commodity specific amber box support cannot be attributed to a
specific commodity. Such support includes crop insurance; input
subsidies, such as irrigation; and the Market Loss Assistance (MLA)
payments made from 1998-2001 under ad hoc disaster assistance
legislation.

As with commodity specific support, there is a *de minimis* rule for
non-commodity-specific support. To be included in the AMS, total
non-commodity-specific support must exceed 5 percent of the value of
total U.S. agricultural output. The total non-commodity-specific support
has been less than 5 percent of the total value of U.S. agricultural
production, and to date, such support has not been notified to the WTO
as part of the AMS. *De minimis* support has increased over time,
reflecting the MLA payments and increased indemnities under crop
insurance programs. Counter-cyclical payments have not been notified to
date, but under current criteria would be considered non-product
specific amber because payments are price-linked although decoupled from
current production.

*Blue box* policies were originally envisioned as transition policies
that would help pave the way for further reforms over time, and are
exempt from the AMS reduction commitments. Blue box policies are program
payments received under production limiting programs, and must be based
on fixed area and yields, a fixed number of head of livestock, or made
on 85 percent or less of a historical level of production. Deficiency
payments (made prior to the 1996 farm bill) were notified as blue box,
since payments met the specific requirements. The U.S. has not notified
any blue box programs since the 1996 farm bill eliminated the deficiency
payment program.

*Green box* policies are not subject to reduction commitments under the
URAA because these policies are assumed to affect trade minimally. The
main U.S. green box programs are USDA food assistance programs, the
Conservation Reserve Program and other conservation programs, and most
disaster payments. Direct payments under the 2002 Farm Act have not been
notified but would be considered green box.

The United States has been under considerable international pressure to
reform its domestic farm programs in the Doha negotiations. To that end,
the United States put forward a WTO proposal in October 2005 that called
for substantial cuts in trade-distorting domestic support. The United
States proposed to cut its amber box limit by 60 percent over a
five-year period. The United States also proposed reducing allowed
levels in the blue box and the *de minimis* categories from the
5-percent level (based on value of agricultural production) by half, to
2.5 percent of the value of production. Under a framework agreement
reached in July 2004, WTO members agreed to a new blue box category,
which would provide for programs that may be price-linked but decoupled
from production (that is, no requirement to produce to receive payments)
to be considered as blue box, such as counter-cyclical payments.

If the U.S. proposals are adopted in the WTO, domestic policy reform is
likely to be needed so as to not exceed the new limits. This is
especially the case for the marketing assistance loan program and the
dairy and sugar price support programs, key amber box programs.

A 60-percent reduction cuts the AMS ceiling to \$7.6 billion. An
estimate for the 2005/06 marketing year suggests an AMS of around \$13
billion, so the U.S. proposal implies a real and substantial reduction
in amber box support. Blue box spending is currently unconstrained.
Based on an historical estimate of the value of production of around
\$200 billion, U.S. blue box spending would be limited to around \$5
billion. The United States would be able to place counter-cyclical
payments in the blue box, which are estimated for the 2005/06 marketing
year at about \$5 billion, and could reach a theoretical maximum of
\$7.6 billion. So again, the U.S. proposal would constrain such spending
in some years. Allowed *de minimis* support would similarly fall by
half; U.S. outlays have been as high as \$7 billion in this category
(mainly non-product specific). There is also a current product specific
*de minimis* level of 5 percent but the United States has notified very
little in that category.

Brazil's successful challenge to U.S. cotton programs has significant
direct and indirect implications for farm programs. In response to the
WTO panel findings on prohibited subsidies, the United States has
already made changes to one trade program, and legislation in place will
eliminate the Step 2 program for upland cotton as of August 1, 2006.
More importantly for domestic farm programs, however, is the panel
finding on serious prejudice. The panel found that "price-based" U.S.
domestic support measures---marketing loan payments, Step 2 payments,
market loss assistance payments (no longer used), and counter-cyclical
payments---caused serious prejudice in the sense of significant price
suppression or depression in world cotton markets in 1999-2002.

To comply with the panel ruling, the U.S. was required to withdraw the
subsidies or remove the adverse effects of the subsidies by September
21, 2005. The Step 2 program will be eliminated as of August 1, 2006,
but the United States has taken no direct action concerning marketing
loan benefits or counter-cyclical payments.

The WTO findings raise a host of indirect issues for other commodities
and farm programs. The most obvious is that the marketing loan and
counter-cyclical programs apply to other commodities. The panel also
concluded that direct payments are not in fact green box payments
because of planting restrictions on fruits and vegetables. Although the
United States is not required to directly address this finding, many
other commodities also receive direct payments and this finding could
have wide ramifications.

**VI. Alternative Approaches to Agricultural Risk Management**

This section considers several alternatives to current risk management
programs. The alternatives presented are not meant to be exhaustive, nor
are they meant to represent specific farm bill proposals. No alternative
is being advocated. Rather, the alternatives represent generalized
approaches to addressing the concerns that have been raised with regard
to current programs. They are presented as candidates for further public
discussion to help inform the 2007 Farm Bill debate.

**Alternative 1: Use the existing structure of farm programs, but make
them more WTO consistent, reduce their effects on resource use and
structure, and better target them to producers with the greatest need
for assistance.**

Participants at the USDA 2007 Farm Bill Forums and others have indicated
support for the current mix of programs but were concerned about their
vulnerability to challenge under WTO, particularly given the outcome of
the recent WTO cotton case. Many also thought program benefits should be
targeted towards small and mid-sized farms that are potentially more
vulnerable to income variability. In addition, some have argued current
programs encourage farm consolidation, since larger farms receive more
assistance than small farms.

To address WTO and resource concerns about the production and trade
distorting effects of current programs, marketing assistance loan rates
could be reduced to minimize the probability of U.S. amber box support
exceeding WTO limits. Producers could be compensated through a
commensurate increase in direct payment rates. As counter-cyclical
payments are subject to discipline in the WTO, counter-cyclical payment
rates could also be reduced. In addition, stricter payment limitations
could be put in place that would target payments towards smaller and
mid-sized farms.

**WTO implications.** Amber box support (marketing assistance loan
benefits and counter-cyclical payments) would be reduced significantly,
but could be offset by increases in green box support (direct payments).
Because of the WTO cotton ruling on direct payments, modifying the
prohibition on planting fruits, vegetables and wild rice to ensure
direct payments would continue to be exempt from discipline in the WTO
would be prudent. Exceeding WTO limits on domestic support would
continue to be a vulnerability, but that probability would be greatly
reduced by the decline in marketing assistance loan benefits and
counter-cyclical payments.

**Effects on income risk.** Marketing assistance loans would continue to
provide a safety net in the event of large price declines, but would
lessen the extent to which producers of program crops are insulated from
market signals and thus lessen the possibility that commodity programs
distort planting decisions. Increased direct payments would ensure that
the current level of support is largely maintained for program crops.
With less reliance on government support through marketing assistance
loans, there would likely be increased demand for privately offered risk
management tools, such as forward contracts, and futures and options.
Demand for revenue insurance coverage would also likely increase.

**Effects on budget, distribution of payments across commodities, and
resources.** Lowering marketing loan rates and the maximum
counter-cyclical payment rates would reduce budget outlays; however, the
level of savings would be determined by how much of the decrease in
marketing loan benefits and counter-cyclical payments was offset by
increased direct payments. Under this option, program benefits would
continue to flow to those crops and producers that traditionally have
benefited from commodity programs. As a result, land values and values
of other assets of producers of traditional program crops would largely
be maintained. However, benefits could shift marginally among program
crops as more payments would be based on historical rather than actual
plantings.

**Effects of payment limitations.** With a shift to direct payments in
the 1960s as a means of supporting farmers, the size of payments to
individuals came under scrutiny. Current payment limitations trace to
1970 when legislation established three separate payment limits of
\$55,000 for wheat, feed grains, and upland cotton. Since then, limits
were changed several times, with the focus being on a dollar cap on
various types of payments and some attempts to tighten eligibility
requirements. The Commission on the Application of Payment Limitations
in Agriculture concluded in 2003 that current payment limits reduce
payments by 1-2 percent or \$100-\$200 million annually. The modest
reduction in payments indicates that producers can reorganize their farm
businesses to reduce the effectiveness of payment limits. Any new
payment limit regime that addressed the dollar limits would also have to
address the issue of who and what types of entities are eligible for
payments. Assuming stricter or more effective limits could be
implemented, they would most adversely affect cotton and rice producers,
but every State would have some producers who would have payments and
incomes reduced. The effect of stricter payment limitations on land
values, while expected to have little effect nationally, are likely to
vary considerably from region to region, reflecting regional differences
in land markets and the number of producers affected. Tighter payment
limits would likely have negligible effects on planted area, supply,
demand, and prices, due to the shift of support from marketing
assistance loans and counter-cyclical payments to direct payments.

**Alternative 2: Replace marketing assistance loans and counter-cyclical
payments with a program that pays producers based on revenue
shortfalls.**

A common theme expressed in many of the Farm Bill Forums was the desire
to stabilize revenue. Programs that attempt to stabilize price or yield
are not as efficient at stabilizing producer revenue as programs based
on a target level of revenue. For example, a producer whose crop is
affected by drought has less production and will receive less in
marketing assistance loan benefits. Also, counter-cyclical payments do
not compensate producers whose crops are affected by drought, since
payment yields are fixed and they might not even be planting the base
crop.

Under this option, marketing loans and counter-cyclical payment would be
replaced with a program paying producers whenever farm revenue fell
below a target revenue level. In designing such a program, several
questions arise. These include:

-   Should target revenue be based on individual commodities or whole
    farm revenue?

-   At what level of aggregation should the revenue level be determined?

-   What should be the level of the revenue guarantee?

-   Would a revenue-based program replace or complement the current crop
    insurance program?

The first issue is whether the target revenue is based on individual
commodities or on whole farm revenue. Commodity-specific target revenue
programs most closely mirror current crop-specific programs, while whole
farm revenue guarantees would address aggregate farm revenue shortfalls
more efficiently and cheaply because they would take into account
potentially offsetting effects among commodities. Whole farm revenue
would include crops and livestock not currently covered by current
commodity programs. However, record keeping needs for a whole farm
revenue program may be quite large compared to single crop revenues,
particularly for those producers who produce multiple commodities.

The second issue concerns the level of aggregation used to determine
both the target revenue and the revenue shortfall. Programs that are
based on individual farm-level revenue would most effectively mitigate
revenue shortfalls; however, they would require extensive record keeping
and oversight to prevent fraud and abuse. Moreover, if the revenue
guarantee is set too high, producers may have little incentive to
produce or market a crop in the most efficient and timely manner,
similar to the "moral hazard" problem that occurs when insurance
guarantees are set above the market value of the insured commodity. The
more farm-specific the calculation of the revenue shortfall, the lower
the incentive would be for a farmer to use private sector risk
management tools.

Alternatively, a target revenue program could be based on an area-based
revenue (e.g., county revenue), where every producer within the area
would receive the same payment rate. Basing program payments on
area-based revenue would provide sufficient incentives to produce and
market crops efficiently and would minimize record keeping requirements.
However, such a program would less effectively mitigate risk than an
individual-based program, since area-based revenue is less correlated
with an individual producer's revenue.

The third issue relates to the level of the target revenue guarantee.
One option would base the target revenue guarantee at 70 percent of
expected market revenue. Such a program would be generally consistent
with WTO criteria for green box programs. Savings from such a program
could be provided to producers in the form of direct payments (also
green box) or redirected to other types of programs, such as rural
development, conservation, or research. Alternatively, a target revenue
program could be based on current target price levels. Such a program
would give producers similar levels of protection as under current
programs, but would be more effectively targeted to shortfalls in
revenue, rather than simply price. Because the level of benefits would
be similar to current programs, vulnerability to WTO challenges, while
potentially lower than under current programs, would remain,
particularly if revenue payments were based on planted area rather than
historical area. A third alternative would be to provide an overall
revenue guarantee by basing a portion of the guarantee on an
individual-based program and a portion on an area-based program,
designed to fit within current or future WTO constraints. The higher the
level of the guarantee, the more the program objective moves beyond
revenue stabilization and toward revenue enhancement.

The fourth issue concerns whether a revenue-based program substitutes
for the current Federal crop insurance program or whether the two
programs operate together. For example, since a revenue-based program
would protect production that is adversely affected by weather, it could
be argued that a revenue-based program would eliminate the need for
Federal crop insurance. In fact, many Federal crop insurance policies
are already revenue based. Alternatively, a revenue-based program could
be developed that completely substitutes for the current Federal crop
insurance program in terms of commodity coverage and the variety of risk
management products currently available. Under the current crop
insurance program, a revenue-based program with a guarantee set above
expected market revenue (revenue enhancement) would be viewed as "over
insurance" and inconsistent with the current actuarially sound crop
insurance program.

**WTO implications.** In general, the less a target revenue program is
tied to actual farm revenue, the less likely the program is considered
amber box and subject to potential reduction commitments under the WTO.
However, current WTO green box criteria for income safety net programs
would require target revenue guarantees to be set based on a maximum of
70 percent of the average farm revenue of the preceding three years (or
five years, excluding the high and low years). These criteria apply to
both individual and area-based revenue guarantee programs. In
comparison, a target revenue program based on current target price
levels would establish a target revenue guarantee of well in excess of
average market revenue for program crops.

**Effects on income risk.** Target revenue programs are generally more
effective in stabilizing farm income the closer they are targeted to an
individual producer's whole farm revenue. As mentioned above, this must
be balanced with other concerns, such as ensuring appropriate market
incentives for producers to produce and market their crops efficiently,
providing incentives for producers to use private sector tools for
managing risk, and avoiding excessive record keeping.

**Effects on budget, distribution of payments across commodities, and
resources**. Replacing current marketing loans and counter-cyclical
programs with commodity-specific target revenue programs would likely
result in cost savings if the level of the revenue guarantee were set to
provide protection similar to current programs. This is because price
and yield tend to move in opposite directions, providing a partial
offset in the calculation of a producer's actual revenue. The
distribution of benefits among producers would remain roughly similar as
under current programs, although payments to areas and crops where
revenue variability is higher (e.g., Northern and Southern Plains) would
be somewhat greater. For a revenue-based program, payments are
determined by both price and yield movements, which can vary
significantly depending on crop and region. The cost savings could be
used to address needs of the non-program and livestock sectors or fund
other programs that would support agriculture and rural areas.

The costs of basing target revenue on a whole farm concept and extending
coverage to non-program commodity producers would depend on the level of
coverage and the extent of eligibility. Such a program, if extended to
non-program commodities, could result in a significant relative shift in
benefits from producers of traditional program crops to producers of
non-program crops and livestock, and would likely result in commensurate
increases in land values for newly-covered commodities and potential
shifts in land use. Effects on current program crop producers could be
mitigated by increasing direct payments for program crops, but this
would increase program costs, unless offset by lowering the revenue
guarantee for all producers.

**Alternative 3: Phase out marketing assistance loans, direct payments,
and counter-cyclical payments, and use savings to expand crop insurance
coverage, fund farm savings accounts and/or expand conservation, rural
development, or other programs.**

Many Farm Bill Forum participants supported expansion of conservation
and rural development programs. Conservation and rural development
programs help all farmers, not just traditional program crop producers.
In addition, farm savings accounts have been promoted as an alternative
to help stabilize incomes.

Increased funding for conservation programs in the 2007 Farm Bill has
been a topic of interest. While conservation and environmental programs
will be discussed in a subsequent theme paper, it is important to note
that conservation programs can aid in risk mitigation through improved
soil and water management, technical assistance, and stewardship
programs. In addition to reducing risk and addressing conservation
goals, conservation-based payments can also be viewed as payments for
ecosystem services that producers provide, in addition to their
commodity production. If designed properly, conservation programs have
the added benefit of being green box programs under the WTO and hence
exempt from reduction commitments. Shifting payments to meet
conservation goals could result in a significant shift of program
benefits from current program crop producers to areas and practices that
yield larger environmental benefits.

Funding for counter-cyclical payments and marketing assistance loans
could also be redirected to meet broader agricultural and rural
development needs, such as providing improved agricultural and rural
infrastructure or stimulating rural economic development through the
development of new markets and other opportunities. Such funding would
largely be WTO-consistent and could potentially provide risk management
for farm households through greater off-farm employment opportunities.
For example, funds could be provided to States in the form of block
grants based on the current distribution of commodity payments; however,
shifting funds to meet broader rural development goals could shift
benefits away from producers to rural residents in general. Rural
development programs will also be the focus of a subsequent theme paper.

In recent years, several proposals have been put forward for a
whole-farm revenue safety-net program not linked to production of
particular commodities and potentially available to all farms. Prominent
among these proposals are farm income stabilization or savings accounts.
Farm income stabilization or savings accounts are designed to encourage
farmers to manage risk by making deposits to special accounts in
high-income years and making withdrawals, when needed, in low-income
years. The government would provide incentives, such as tax deferrals
and/or matching contributions, to encourage farmer participation and to
help farmers accumulate reserves.

Income stabilization accounts have the potential to overcome some of the
disadvantages of current farm safety net programs, since they could be
applied to a wide variety of farming situations and could be decoupled
from individual crop production decisions. However, risk protection
under income stabilization accounts would depend upon the reserves in
individual accounts, which could vary with the level of participation,
the generation of new savings, and the distribution or concentration of
program benefits. While USDA analyses of three prominent farm savings
account proposals suggests that some farmers could build balances over
time, the use of a tax-based net or gross income measure to determine
eligibility and the limited capacity of some farmers to make eligible
deposits suggests that the distribution of program benefits could be
even more concentrated than under current programs. Farm savings
accounts may not provide sufficient coverage for many farmers,
especially in the early years of the program or when successive
disasters deplete funds. At the same time, depending upon the structure
of the program, some farmers may be allowed to build subsidized balances
beyond the levels necessary to satisfy risk management goals.

**WTO implications.** Phasing out commodity programs would eliminate
amber box support programs. WTO implications would depend on how the
savings were redirected in other areas. For example, increased spending
on conservation and other programs would have to be consistent with WTO
green box criteria for such programs to avoid simply shifting amber box
support from one type of program to another.

Under current WTO criteria, income stabilization accounts would not be
considered green box unless the trigger for withdrawal was set at 70
percent of the average income level over the previous three years (or
previous five years, excluding the high and low). Other countries'
experience with stabilization accounts (e.g., Canada's Net Income
Stabilization Account and its successor, Canadian Agricultural Income
Stabilization program) set trigger levels at 85 percent of net farm
income.

**Effects on income risk.** This option would shift program benefits
from traditional program crop producers to broader participation based
on other goals, such as conservation, rural development and agricultural
infrastructure, such as research. Income risk protection would decline
for traditional program crop producers but likely increase for other
commodity producers. The alternative would leave in place the Federal
crop insurance program to provide a safety net for producers. In
addition, producers would have another tool for managing risk, farm
savings accounts. In general, as current program support is phased down,
producers of traditional program crops would be expected to expand their
use of private sector risk management tools, since the level of
government-provided risk protection would decline relative to current
programs.

**Effects on budget, distribution of payments across commodities, and
resources.** Eliminating direct and counter-cyclical payments and
marketing assistance loans over time would eventually reduce Federal
spending substantially. Part or the entire savings would be used to
improve crop insurance and expand conservation, rural development, or
other programs to meet the broad needs of all producers. The reduction
in payments to traditional program crops and expansion in crop
insurance, conservation, rural development, and other programs, along
with the authorization for farm savings accounts, would result in a
significant shift in benefits from producers of traditional program
crops to producers of non-program crops and livestock. Due to potential
adverse effects on the land and asset values of program crop producers
from such a proposal, program implementation would be gradual over a
number of years. The phasing out of current programs would eliminate the
income enhancement of current programs, focus on income stabilization,
lead to a more market-oriented agricultural sector by increasing
producer responsibility for risk management and removing the negative
aspects of current programs to expand production and plant certain
crops.

**VII. Suggestions for Further Reading**

The following is a list of selected USDA publications related to the
issues raised in this paper.

Claasen, Roger and Mitch Morehart. *Greening Income Support and
Supporting Green*, Economic Research Service, USDA, Economic Brief No.
(EB1) 6 pp, March 2006. <http://www.ers.usda.gov/Publications/EB1/>

Dismukes, Robert and Joseph Glauber. "Why Hasn\'t Crop Insurance
Eliminated Disaster Assistance?" *Amber Waves*, Economic Research
Service, USDA, June 2005.
<http://www.ers.usda.gov/AmberWaves/June05/Features/WhyHasntCropInsurance.htm>

Farm Business and Household Survey Data: Customized Data Summaries from
the Agricultural Resource Management Survey (ARMS). USDA, March 2006.
<http://www.ers.usda.gov/Data/ARMS/>

Hamrick, Karen (Editor). *Rural America At A Glance, 2005*. Economic
Research Service, USDA, Economic Information Bulletin No. (EIB4) 6 pp,
September 2005. <http://www.ers.usda.gov/Publications/EIB4/>

# 

# Harwood, Joy, Richard Heifner, Keith Coble, Janet Perry, and Agapi Somwaru. *Managing Risk in Farming: Concepts, Research, and Analysis.* Economic Research Service, USDA, Agricultural Economics Report No. (AER774) 136 pp, March 1999 

Jones, Carol A., Hisham El-Osta, and Robert Green. *Economic Well-Being
of Farm Households.* Economic Research Service, USDA, Economic Brief No.
(EB7) 6 pp, March 2006. <http://www.ers.usda.gov/Publications/EB7/>

Lambert, Dayton, Patrick Sullivan, Roger Claassen, and Linda Foreman.
*Conservation-Compatible Practices and Programs: Who Participates?*
Economic Research Service, USDA, Economic Research Report No. (ERR14) 48
pp, February 2006. <http://www.ers.usda.gov/Publications/err14/>

MacDonald, James, Janet Perry, Mary Ahearn, David Banker, William
Chambers, Carolyn Dimitri, Nigel Key, Kenneth Nelson, and Leland
Southard. *Contracts, Markets, and Prices: Organizing the Production and
Use of Agricultural Commodities.* Economic Research Service, USDA,
Agricultural Economic Report No. (AER837) 81 pp, November 2004.
<http://www.ers.usda.gov/Publications/aer837/>

MacDonald, James, Robert Hoppe, and David Banker. *Growing Farm Size and
the Distribution of Farm Payments.* Economic Research Service, USDA,
Economic Brief No. (EB6) 6 pp, March 2006.
<http://www.ers.usda.gov/Publications/EB6/>

*Report of the Commission on the Application of Payment Limitations for
Agriculture, Submitted in Response to Section 1605, Farm Security and
Rural Investment Act of 2002.*

Office of the Chief Economist, USDA, 168 pp, August 2003.

<http://www.usda.gov/oce/reports/payment_limits/index.htm>

U.S. Department of Agriculture. Economic Research Service. "Trade Issues
and Agreements: U.S. WTO Domestic Support Reduction Commitments and
Notifications."
<http://www.ers.usda.gov/briefing/farmpolicy/usnotify.htm>

# Westcott, Paul C., C. Edwin Young, and J. Michael Price. *The 2002 Farm Act: Provisions andImplications for Commodity Markets.* Economic Research Service, USDA, Agriculture Information Bulletin No. (AIB778) 67 pp, November 2002. [**http://www.ers.usda.gov/Publications/aib778/**](http://www.ers.usda.gov/Publications/aib778/) 

#  

Young, Edwin. "Government payments and the farm sector: Who benefits and
how much?" Farm and Commodity Policy Briefing Room, Economic Research
Service, USDA, March 2005, 12 pp.
<http://www.ers.usda.gov/briefing/FarmPolicy/gov-pay.htm>

+-------------------+----------+----------+---------+---------+-------+
| **Appendix        |          |          |         |         |       |
| Table 1.          |          |          |         |         |       |
| Distribution of   |          |          |         |         |       |
| Government        |          |          |         |         |       |
| Payments to       |          |          |         |         |       |
| Producers by      |          |          |         |         |       |
| Various           |          |          |         |         |       |
| Characteristics,  |          |          |         |         |       |
| 2004**            |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
|                   | **Number | **Number | **      | **Gover | **    |
|                   | of       | of       | Percent | nment** | Share |
|                   | Farms**  | Farms**  | of      |         | of**  |
|                   |          |          | Farms   | **Pay   |       |
|                   |          | **Rec    | Rece    | ments** | **Go  |
|                   |          | eiving** | iving** |         | vernm |
|                   |          |          |         |         | ent** |
|                   |          | **Pa     | **Pay   |         |       |
|                   |          | yments** | ments** |         | **    |
|                   |          |          |         |         | Payme |
|                   |          |          |         |         | nts** |
+-------------------+----------+----------+---------+---------+-------+
|                   |          |          |         | **T     | **%** |
|                   |          |          |         | housand |       |
|                   |          |          |         | \$**    |       |
+-------------------+----------+----------+---------+---------+-------+
| **Farm Typology** |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Rural residence   | 1        | 406,901  | 49.8    | 1,      | 16.9  |
| farms             | ,373,956 |          |         | 735,839 |       |
+-------------------+----------+----------+---------+---------+-------+
| Intermediate      | 529,071  | 270,386  | 33.1    | 2,      | 27.6  |
| farms             |          |          |         | 821,207 |       |
+-------------------+----------+----------+---------+---------+-------+
| Commercial farms  | 204,898  | 140,338  | 17.2    | 5,      | 55.5  |
|                   |          |          |         | 677,093 |       |
+-------------------+----------+----------+---------+---------+-------+
| **Farm Type**     |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Cash grain and    | 315,728  | 287,583  | 35.2    | 5,      | 53.5  |
| soybean           |          |          |         | 489,384 |       |
+-------------------+----------+----------+---------+---------+-------+
| Other field crops | 419,393  | 215,923  | 26.4    | 1,      | 14.7  |
|                   |          |          |         | 509,302 |       |
+-------------------+----------+----------+---------+---------+-------+
| Cotton            | 16,230   | 15,980   | 2.0     | 788,245 | 7.7   |
+-------------------+----------+----------+---------+---------+-------+
| High valued crops | 139,052  | \*13,778 | \*1.7   | 207,483 | 1.9   |
+-------------------+----------+----------+---------+---------+-------+
| Beef cattle       | 734,305  | 187,194  | 22.9    | 1,      | 12.3  |
|                   |          |          |         | 251,766 |       |
+-------------------+----------+----------+---------+---------+-------+
| Hogs              | 33,579   | 14,640   | 1.8     | 280,341 | 2.7   |
+-------------------+----------+----------+---------+---------+-------+
| Poultry           | #34,434  | #5,885   | #.7     | 66,971  | 0.7   |
+-------------------+----------+----------+---------+---------+-------+
| Dairy             | 60,461   | 47,312   | 5.8     | 492,849 | 4.8   |
+-------------------+----------+----------+---------+---------+-------+
| General livestock | \        | \@29,330 | #3.6    | 170,554 | 1.7   |
|                   | *354,743 |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| **Operator        |          |          |         |         |       |
| Household         |          |          |         |         |       |
| Income**          |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Negative or no    | 102,794  | 55,012   | 6.7     | 1,      | 11.7  |
| income            |          |          |         | 199,592 |       |
+-------------------+----------+----------+---------+---------+-------+
| Positive but less | 373,343  | 129,727  | 15.9    | 808,848 | 7.9   |
| than \$25,000     |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$25,000 to       | 486,498  | 174,373  | 21.3    | 1,      | 12.2  |
| \$49,999          |          |          |         | 243,461 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$50,000 to       | 625,995  | 230,318  | 28.2    | 2,      | 21.9  |
| \$99,999          |          |          |         | 238,461 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$100,000 to      | \        | 92,712   | 11.3    | 1,      | 12.3  |
| \$149,999         | *218,849 |          |         | 263,016 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$150,000 to      | 96,570   | 38,503   | 4.7     | 772,024 | 7.5   |
| \$199,999         |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$200,000 or more | 156,772  | 75,371   | 9.2     | 2,      | 23.2  |
|                   |          |          |         | 372,754 |       |
+-------------------+----------+----------+---------+---------+-------+
| Nonfamily farm    | 47,103   | 21,610   | 2.6     | 335,560 | 3.3   |
+-------------------+----------+----------+---------+---------+-------+
| **Size of         |          |          |         |         |       |
| Payment**         |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Positive but less | 707,909  | 707,909  | 86.6    | 3,      | 36.7  |
| than \$25,000     |          |          |         | 757,581 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$25,000 to       | 64,369   | 64,369   | 7.9     | 2,      | 22.4  |
| \$49,999          |          |          |         | 293,660 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$50,000 to       | 22.514   | 22,514   | 2.8     | 1,      | 13.1  |
| \$74,999          |          |          |         | 342,059 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$75,000 to       | 12,086   | 12,086   | 1.5     | 1,      | 10.1  |
| \$99,999          |          |          |         | 036,833 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$100,000 to      | 5,727    | 5,727    | 0.7     | 684,772 | 6.7   |
| \$149,999         |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$150,000 or more | 5,020    | 5,020    | 0.6     | 1,      | 10.9  |
|                   |          |          |         | 119,430 |       |
+-------------------+----------+----------+---------+---------+-------+
| **Sales Class**   |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Less than         | 1        | 267,292  | 32.7    | 582,162 | 5.7   |
| \$10,000          | ,201,417 |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$10,000 to       | 400,288  | 183,643  | 22.5    | 941,170 | 9.2   |
| \$49,999          |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$50,000 to       | 170,201  | 112,485  | 13.8    | 1,      | 10.3  |
| \$99,999          |          |          |         | 052,860 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$100,000 to      | 167,948  | 131,182  | 16.0    | 2,      | 20.5  |
| \$249,999         |          |          |         | 101,798 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$250,000 to      | 88,863   | 70,526   | 8.6     | 2,      | 22.1  |
| \$499,999         |          |          |         | 256,761 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$500,000 to      | 44,728   | 30,761   | 3.8     | 1,      | 16.1  |
| \$999,999         |          |          |         | 648,759 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$1,000,000 or    | 34,480   | 21,736   | 2.7     | 1,      | 16.1  |
| more              |          |          |         | 650,501 |       |
+-------------------+----------+----------+---------+---------+-------+
| **Net Cash        |          |          |         |         |       |
| Income**          |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| -\$40,000 or less | \*61,878 | 27,919   | 3.4     | 901,560 | 8.8   |
+-------------------+----------+----------+---------+---------+-------+
| -\$39,999 to      | \        | 78,285   | 9.6     | 429,941 | 4.2   |
|                   | *272,050 |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| -\$9,999 to \$0   | 788,187  | 161,103  | 19.7    | 480,892 | 4.7   |
+-------------------+----------+----------+---------+---------+-------+
| Positive but less | 444,854  | 184,873  | 22.6    | 840,063 | 8.2   |
| than \$10,000     |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| \$10,000 to       | 267,506  | 161,418  | 19.7    | 1,      | 14.4  |
| \$39,999          |          |          |         | 473,746 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$40,000 to       | 143,959  | 103,336  | 12.6    | 1,      | 17.4  |
| \$99,999          |          |          |         | 789,366 |       |
+-------------------+----------+----------+---------+---------+-------+
| \$100,000 or more | 129,491  | 100,691  | 12.3    | 4,      | 42.1  |
|                   |          |          |         | 318,737 |       |
+-------------------+----------+----------+---------+---------+-------+
| **Acres           |          |          |         |         |       |
| Operated**        |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| Less than 100     | 1        | 190,685  | 23.3    | 405,206 | 4     |
| acres             | ,053,565 |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+
| 100 to 249 acres  | 464,248  | 212,145  | 25.9    | 838,397 | 8.2   |
+-------------------+----------+----------+---------+---------+-------+
| 250 - 499 acres   | 255,007  | 153,542  | 18.8    | 1,      | 11.9  |
|                   |          |          |         | 217,127 |       |
+-------------------+----------+----------+---------+---------+-------+
| 500 - 999 acres   | 154,247  | 113,797  | 13.9    | 1,      | 19.3  |
|                   |          |          |         | 978,588 |       |
+-------------------+----------+----------+---------+---------+-------+
| 1,000 to 1,999    | 101,048  | 82,191   | 10.1    | 2,      | 25.7  |
| acres             |          |          |         | 629,537 |       |
+-------------------+----------+----------+---------+---------+-------+
| 2,000 acres or    | 79,811   | 65,264   | 8.0     | 3,      | 30.9  |
| more              |          |          |         | 165,174 |       |
+-------------------+----------+----------+---------+---------+-------+
| \* indicates that |          |          |         |         |       |
| the standard      |          |          |         |         |       |
| error of the      |          |          |         |         |       |
| estimate is       |          |          |         |         |       |
| greater than 25   |          |          |         |         |       |
| percent and less  |          |          |         |         |       |
| than or equal to  |          |          |         |         |       |
| 50 percent. \#    |          |          |         |         |       |
| indicates that    |          |          |         |         |       |
| standard error is |          |          |         |         |       |
| greater than 50   |          |          |         |         |       |
| percent and less  |          |          |         |         |       |
| than or equal to  |          |          |         |         |       |
| 75 percent. @     |          |          |         |         |       |
| indicates that    |          |          |         |         |       |
| the standard      |          |          |         |         |       |
| error of the      |          |          |         |         |       |
| estimate is       |          |          |         |         |       |
| greater than 75   |          |          |         |         |       |
| percent.          |          |          |         |         |       |
|                   |          |          |         |         |       |
| Source: Economic  |          |          |         |         |       |
| Research Service, |          |          |         |         |       |
| Agricultural      |          |          |         |         |       |
| Resource          |          |          |         |         |       |
| Management        |          |          |         |         |       |
| Survey, 2004      |          |          |         |         |       |
+-------------------+----------+----------+---------+---------+-------+

**Appendix Figures**

![](media/image3.wmf){width="3.9166666666666665in"
height="2.9368055555555554in"}

![](media/image4.wmf){width="3.9166666666666665in"
height="2.9368055555555554in"}

![](media/image5.wmf){width="3.926388888888889in"
height="2.9444444444444446in"}