Farming has always been a risky endeavor, and farmers have always had to manage risk as a part of doing business. Over the years, the federal government has played an active role in several ways to help mitigate the effects of production losses and low prices on farm income. For example, USDA's Risk Management Agency (RMA) administers the federal crop insurance program to protect farmers against major production losses. Under this program, RMA subsidizes the federal multiple-peril crop insurance program, which allows insured farmers to receive an indemnity payment if production falls below a certain level. In addition, to help protect farmers against the risk of low crop prices, USDA’s Farm Service Agency administered price- and income-support programs for farmers who grew certain crops--corn, wheat, grain sorghum, barley, oats, cotton, and rice. The 1996 farm bill changed the government’s role. It replaced the income- support programs with “production flexibility contracts” that provide for fixed but declining annual payments to participating farmers from 1996 through 2002. These government payments--known as transition payments--are not tied to market prices, and participating farmers are not restricted with regard to the type or amount of crops that they plant, as they were in the earlier programs. Furthermore, unlike the deficiency payments of the last 6 decades, the transition payments do not rise in years when crop prices are low, nor do they fall in years when prices are high. As shown in table 1, the 1996 farm bill specified that transition payments would total about $36 billion over the 7-year period, declining from about $5.6 billion in 1996 to about $4 billion in 2002. By giving farmers increased flexibility in deciding which crops to plant, the 1996 farm bill allows them to choose the particular crop or combination of crops that they believe offers the best chance to maximize their profits and offset the decline in income resulting from lower government payments. However, the increased flexibility in planting decisions brings other risks. For example, small increases in expected profits may lead many farmers to decide to increase the acreage devoted to a particular crop. This, in turn, could result in the increased production of the crop nationwide and ultimately in lower prices as a result of the greater supply. Section 192 of the 1996 farm bill required that USDA, in consultation with the Commodity Futures Trading Commission (CFTC), educate farmers in managing the financial risks inherent in producing and marketing agricultural commodities. The act specified that, as a part of such education activities, USDA may develop and implement programs to assist and train farmers in using (1) forward contracts, which enable farmers to lock in a price for their crop or livestock production prior to harvest or slaughter, (2) crop insurance, which ensures compensation if crop yields are substantially lower than expected, and (3) hedging--buying or selling futures or options contracts on a commodity exchange, such as the Chicago Board of Trade--which reduces the risk of receiving lower prices for crops or livestock. The act authorized USDA to use its existing research and extension authorities and resources to implement this provision. In March 1997, the Secretary of Agriculture organized a steering committee to direct the government's education activities for managing agricultural risk. The steering committee is chaired by RMA’s administrator and includes a CFTC commissioner; the administrator of USDA’s Cooperative State Research, Education, and Extension Service (CSREES); and the director of USDA's National Office of Outreach. These agencies have different responsibilities. RMA primarily administers the federal crop insurance program; the 1996 farm bill expanded its authority to include a broader risk management perspective. CFTC, which regulates commodity futures and options trading in the United States, also develops and maintains research and informational programs concerning futures and options trading for farmers, commodity market users, and the general public. CSREES develops and conducts agricultural research, higher education, and extension programs to provide education and technical assistance to farmers and the general public. USDA's National Office of Outreach is responsible for ensuring that information, technical assistance, and training are available to all USDA customers, with an emphasis on underserved populations. USDA’s 1996 Agricultural Resource Management Study (Phase 3), based on a statistical sample of farmers, found that about 42 percent of the nation’s 2 million farmers used at least one of the risk management tools--forward contracts, crop insurance, or hedging--to manage their income risk. In 1996, a substantially greater percentage of farmers with agricultural sales of at least $100,000 (large-scale farmers) used each risk management tool than did farmers whose agricultural sales were less than $100,000 (small- scale farmers). Similarly, a greater percentage of farmers whose primary crops were corn, wheat, or cotton purchased crop insurance and used forward contracts than did farmers who grew other field crops. (App. II provides detailed data on farmers’ use of risk management tools by sales level, commodity, geographic region, and the receipt of USDA transition payments.) Table 2 shows that, among all U.S. farmers, a substantially greater percentage of large-scale farmers used each risk management tool than did small-scale farmers in 1996. Among large-scale farmers, at least 52 percent purchased crop insurance, at least 55 percent used forward contracts, and at least 32 percent engaged in hedging. In contrast, no more than 16 percent of small-scale farmers purchased crop insurance, no more than 29 percent used forward contracts, and no more than 22 percent engaged in hedging. Available data were insufficient to determine whether large-scale farmers hedged with futures or options contracts to a greater extent than small-scale farmers in 1996. Table 3 shows that at least 70 percent of those large-scale farmers who received transition payments purchased crop insurance, at least 66 percent used forward contracts, and at least 34 percent engaged in hedging in 1996. However, the minimum extent of usage was even greater among farmers who had more than $500,000 in sales and received transition payments--at least 73 percent purchased crop insurance, at least 78 percent used forward contracts, and at least 50 percent engaged in hedging in 1996. As table 4 shows, among all U.S. farmers, a greater percentage of those whose primary crop was corn, wheat, or cotton purchased crop insurance and engaged in forward contracting than did farmers who grew other field crops or raised livestock in 1996. Among farmers who primarily grew corn, wheat, and cotton, at least 54 percent purchased crop insurance and at least 50 percent used forward contracts. In contrast, among farmers who primarily raised other field crops, 43 percent at most purchased crop insurance and 45 percent at most used forward contracts. In addition, hedging was used by at least 35 percent of cotton farmers, which was a higher percentage than for farmers who grew other field crops in 1996. However, available data were insufficient to determine whether corn and wheat farmers engaged in hedging with futures or options contracts to a greater extent than did farmers who primarily raised other crops or livestock. Table 5 shows that, among corn farmers who received transition payments, at least 54 percent purchased crop insurance, at least 61 percent used forward contracts, and at least 31 percent engaged in hedging in 1996. Among wheat farmers who received transition payments, at least 81 percent purchased crop insurance, at least 46 percent used forward contracts, and at least 15 percent engaged in hedging. Among cotton farmers who received transition payments, at least 88 percent purchased crop insurance, at least 59 percent used forward contracts, and at least 25 percent engaged in hedging. To prepare farmers for managing their risks, USDA has focused primarily on developing regional or state partnerships of government, university, and private organizations to foster a risk management educational program. The university partners developed and implemented a series of regional and local risk management conferences targeted initially at groups that influence farmers--bankers, crop insurance agents, grain elevator operators, and agricultural educators. USDA expects that these individuals will provide farmers with specific information for using risk management tools as the program continues. During fiscal year 1998, USDA also awarded 17 grants for risk management education projects, provided funding to land grant universities to promote additional risk management education efforts, and funded the development of an electronic risk management education library. In fiscal year 1998, USDA obligated $5 million of RMA’s $10 million for crop insurance research to RMA’s risk management education initiatives-- amounting to about $2.50 per U.S. farmer. These funds were the predominant source of risk management education funding within USDA. In comparison, a CSREES official told us that CSREES typically obligates only about $100,000 per year, primarily for specific risk management education projects. The official noted that land grant universities may also use a portion of their general CSREES education funding to support risk management education projects; however, the amount that universities spent in fiscal year 1998 is not known. For fiscal year 1999, USDA has allocated $1 million of RMA’s $3.5 million for crop insurance research to risk management education. In response to the 1996 farm bill’s requirement that it educate farmers about managing their production and marketing risks, USDA used a September 1997 national risk management education summit to initiate a series of 20 national and regional risk management education conferences. USDA’s conferences focused on developing partnerships with “third-party influencers” in an effort to leverage the available government funds to train those who are in a position to educate farmers on risk management tools. According to USDA’s director of risk management education, the training would enable third-party influencers to demonstrate to farmers how the various tools fit together in an overall risk management and marketing plan. These individuals interact frequently with farmers and are in a position to influence the risk management decisions farmers make. For example, land grant college or extension service educators provide various training and advisory services to farmers on both the production and business aspects of farming.