- Focus on the use of public (futures markets) and private (crop insurance) risk management tools to manage farm revenue risk.
- Investigates policy-important areas of federal crop insurance, fertilizer decisions, and environmental quality.
- President of a family-owned grain farm Montana producing wheat, canola, barley, and peas.
- All 7 Best Practices
- Pre-Call Discovery Process
- One-on-One Call with Expert
- Session Summary Report
- Post-Session Engagement
Agriculture Insurance, Futures and Options for Optimal Farmer Decision Making
- Short-term risk mitigation strategies can create long-term risk.
- The federal crop insurance program is a genuinely gigantic insurance policy. People started responding to that after realizing that there's not a lot of risk and a whole lot of profit. With that profit they start buying land to expand their operations. But other people figured it out, too, so now everyone is bidding up the land prices. The new risk, then, is that they are removing the profit by bidding up the land and have, indirectly, brought all that risk back on themselves. Essentially, they are just moving to a new plateau of risk. One measure of that is a study that showed that the cost of producing corn doubled in just 10 years.
- Increased production on marginal lands is a source of additional risk.
As federal crop insurance has helped create stable income streams for grain producers, it has provided opportunities to expand production into marginal crop lands that produce less grain with more risk. But this motivation only happens for a few years because as you keep having a claim your guarantee for the next year goes down. It's a little like wrecking your car all the time. Your premiums go up, and it costs you so much to get the lower deductible.
Many of these marginal lands also are more susceptible to erosion, which can damage the quality of the land and contribute more to pollution and waterway sedimentation. This has led to new rules under the federal Farm Bill that acreage in the federal crop insurance program needs to be under conservation compliance.
- The federal crop insurance program is vulnerable to fraud.
A lot of the federal crop insurance program essentially is hidden behind a black box. You can't figure out who got what indemnity. For other farm programs you can find how much subsidy producers get in direct payments. The U.S. Department of Agriculture's Risk Management Agency, however, has not released the names of the producers who get indemnities, nor how much of an indemnity nor even how much they pay in premiums.
Early on, there were basically legalized fraud issues that grew out of loopholes that the agency just didn't realize were there. Most have been fixed. Still, there's really nobody looking over what you do when you harvest your crops. It's typically a self-reporting issue. This opens up the agency to some rather simple scams. For instance, a farmer could store much of his grain in a neighbor's bins. The grain is not on the farmer's property; when the adjuster comes out to measure the grain you harvested, it appears that you harvested much less grain than you did, apparently because of low yield. This results in a larger and fraudulent claim. The agency simply does not have the resources to go after every little operation.
- Exchange traded funds are adding volatility to and skewing commodity markets.
In recent years, financial tools have been developed that allow investment in commodity funds that trade on the stock market. They're called exchange-traded funds, or ETFs. They have allowed potential investors, who will never touch a bushel of corn, to take a position in the corn market through their stock accounts. So, essentially, you have this increasing demand in these markets but it's not real. They, basically, are acting like speculators.
This has infused the commodity markets with a whole lot of money. A person in the stock market typically likes to buy corn contracts and essentially bid up the market. Many traders don't realize they also could short sell – that is, sell a contract up front with the idea of buying a contract later to make the profit. Part of the issue is that this trading is removed from actual grain markets, and farmers don't even necessarily know it's going on even though it likely is skewing markets for reasons unrelated to crop conditions or volume.
- Farm production economics are undermining traditional social roles in rural America.
There's been a real shift towards more economics-only decision making in production agriculture, and it's putting a strain on some of the long-standing, traditional relationships in rural communities. Landlords aren't showing a lot of loyalty to their tenants, for instance. When someone knocks on the landlord's door and offers a whole lot of money, he says: "I'll take it." He doesn't even have a conversation anymore with his neighbor who was renting the land. It can put a sour note on relationships in the community.
There are cases in which people who have been farm neighbors for years won't even wave at each other on the road anymore. The traditional social construct in which you are helpful to your neighbors is slipping away. One thing that some have done to get around that a little bit is that they'll drive 50 miles to another county to rent land at a higher price so that they don't anger all their friends in their neighborhood. It underscores that there is sometimes more than economics in farm decision making.