Farm-Level Impacts of Revenue Assurance

With the onset of the 1995 Farm Bill debate, the issue of government intervention and its appropriate levels will most assuredly be debated. Due to the government's historically strong presence in agriculture, it is probable that the government will stay involved. The debate will, therefore, focus on how government policy can most efficiently assist the agricultural sector. While several problems can be identified within the agricultural policy arena, the inherent instability of farm prices and income have been key in justifying government involvement. Stability is significant in reducing economic stress on farm families and minimizing faulty production and investment decisions. Instability in agriculture is caused by a variety of factors. Weather as well as the existence of disease, insects, and other pests increase yield variability and risk to producers. These factors not only lead to variations in individual producer yields, but also affect national crop production and prices. Producer price risk is further increased by the inelastic demand for agricultural products. The combination of yield and price variability results in a high degree of income risk for farmers. The United States has a 60-year tradition of government intervention in stabilizing farm prices and incomes. Supporting farm prices and income became a farm policy goal during the depression conditions of the 1930's and continues to be a priority. The role of government policy in reducing instability is a significant issue for discussion. Government programs that both limit price and income variability and still allow the market to function by sending economic signals to both producers and consumers are difficult to design (Tweeten; Knutson, Penn, and Boehm). The problem of unstable farm prices, yields, and income and the corresponding optimal level of policy intervention are further complicated by government costs. While the relative cost of agricultural outlays as a percentage of the total federal budget was lower in 1993 at 1.5 percent ($20.4 billion) than its former high of 3.7 percent in 1963 and 1964 ($4 billion), agriculture is being forced to succumb o budgetary pressures. Therefore, the problem becomes one of trying to stabilize and support producer incomes and prices at lower government costs. Tweeten contended that uncertainty and instability constitute a potentially large social cost to society. The payoff is great from carefully formulated public policy that reduces instability and provides benefits to producers and consumers in excess of costs. The difficulty lies in determining the appropriate policies and economic levels to provide such results. Therefore, it is necessary to study the policy alternatives and evaluate their stabilizing ability and associated level of government costs. The purpose of this research is to compare the current program to two alternative revenue assurance programs. A simulation model is developed to generate probability distributions of representative farms' gross receipts and government costs. The level of revenue support and the stability of producer revenues and government outlays to individual producers will be compared for the three alternative policies. This comparison shows alternative consequences that legislators must weigh in determining the best policy option for agricultural producers.