The Farm Safety Net: In Brief
Dennis A. Shields
Specialist in Agricultural Policy
October 21, 2014
Congressional Research Service
7-5700
www.crs.gov
R43758
The Farm Safety Net: In Brief
Summary
The U.S. Department of Agriculture (USDA) operates several programs that supplement the
income of farmers and ranchers in times of low farm prices and natural disasters. The following
programs are collectively called the farm safety net.
• Federal crop insurance is often referred to as the centerpiece of the farm safety
net because of its cost and broad scope for addressing natural disasters. The
program is permanently authorized and makes available subsidized insurance for
more than 130 commodities (ranging from apples to wheat) to help farmers
manage risks associated with a loss in yield or revenue. Insurable causes of loss
include adverse weather such as drought and excess rain. Program cost is
projected by the Congressional Budget Office to total $9.0 billion per year over
the next decade. Producers pay a portion of the premium which increases as the
level of coverage rises. The federal government pays the rest of the premium—
62%, on average, in 2014—and covers the cost of selling and servicing the
policies. This differs from farm programs, which require no participation fees.
• Farm commodity programs historically represented the heart of U.S. farm
policy by virtue of their long history (dating back to the 1930s). Price and income
support is based primarily on statutorily fixed prices and not market prices (as in
crop insurance), which can be quite low in some years. For crop years 2014-
2018, the Agricultural Act of 2014 (2014 farm bill, P.L. 113-79) established
minimum prices via the marketing loan program for approximately two dozen
commodities, including corn, soybeans, wheat, rice, and peanuts. In addition,
producers with production histories for covered crops have a one-time choice
between Price Loss Coverage (PLC) payments and Agriculture Risk Coverage
(ARC) payments, depending on their preference for protection against a decline in
either crop prices or crop revenue. Benefits from farm programs are in addition to
those under crop insurance, and program costs were projected in spring 2014 at
about $3.2 billion per year.
• Agricultural disaster assistance is permanently authorized for livestock and
orchards. With enactment of the 2014 farm bill, nearly all parts of the U.S. farm
sector are now covered by either a disaster program or federal crop insurance,
which is expected to reduce calls for ad hoc assistance. As of mid-September
2014, producer payments totaled $2 billion for losses in FY2012-FY2014.
Additional support is provided by emergency loans and discretionary assistance.
Compared with the previous farm bill, the 2014 farm bill was enacted with more crop insurance
options and higher reference prices designed to trigger payments more often than under previous
law. Funding was accomplished by eliminating direct payments that had been made annually
since 1996 but played no role in managing farm risk because they did not vary with farm prices.
USDA has begun implementing the farm bill commodity programs and crop insurance provisions.
At some point, Members might be interested in reviewing the effectiveness of the revised safety
net and actual costs, which could rise sharply for the 2014 crop year given lower-than-expected
prices. Farm safety net proponents say the suite of programs has been designed for such situations
and is necessary because “one program doesn’t fit all producers and regions.” Critics believe that
a simplified approach might be more effective and less expensive, with funds used instead for
broad societal gains, such as investment in agricultural research or transportation infrastructure.
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The Farm Safety Net: In Brief
Contents
Overview .......................................................................................................................................... 1
Federal Crop Insurance .................................................................................................................... 2
Farm Commodity Programs............................................................................................................. 3
Agricultural Disaster Assistance ...................................................................................................... 5
USDA Discretionary Support .......................................................................................................... 6
Historical Policy Discussion ............................................................................................................ 6
Prospective Issues ............................................................................................................................ 7
Actual Production History (APH) in the 2014 Farm Bill .......................................................... 7
“Generic” Base Acres ................................................................................................................ 7
Potential Farm Program Impacts on Acreage and Prices........................................................... 8
Government Outlays .................................................................................................................. 8
Design of Overall Farm Safety Net ........................................................................................... 8
Figures
Figure A-1. Crop Insurance and Farm Programs ............................................................................. 9
Tables
Table 1. Farm Support by Commodity ............................................................................................ 1
Table 2. Reference Prices and Loan Rates in the 2014 Farm Bill ................................................... 4
Table A-1. Hypothetical Corn/Soybean Farm in 2014 ................................................................... 10
Table A-2. Hypothetical Wheat/Lentil Farm in 2014 .................................................................... 11
Table A-3. Hypothetical Peanut/Cotton Farm in 2014 ................................................................... 12
Appendixes
Appendix. Farm Commodity Program Examples ............................................................................ 9
Contacts
Author Contact Information........................................................................................................... 12
Congressional Research Service
The Farm Safety Net: In Brief
Overview
Congress has devised a variety of programs operated by the U.S. Department of Agriculture
(USDA) to support farm income and help farmers and ranchers manage production or price risk.
The programs essentially supplement farm incomes in times of low farm prices and natural
disasters, and they are collectively called the farm safety net. The three main components are
(1) permanently authorized federal crop insurance, (2) farm commodity price and income support
programs for crop years 2014-2018, and (3) permanently authorized agricultural disaster
programs. Additional support is provided through emergency loans and USDA discretionary
assistance. The suite of programs is designed to allow for maximum farmer choice and flexibility.
Most farmers and ranchers are eligible for at least one of these federal programs. Some
commodities are supported by only one method; others receive support through a combination of
program tools (Table 1). Within the farm safety net, federal crop insurance is most extensive, as
policies are available for much of U.S. agriculture, including grains, fruits and vegetables,
pasture, nursery crops, and livestock gross margins. About two dozen of these crops (e.g., corn,
soybeans, wheat) are eligible for both crop insurance and farm commodity programs, including
minimum statutory prices. Sugar and dairy have their own programs, while disaster programs
support livestock producers. The federal cost for the farm safety net was projected in April 2014
to average about $12.5 billion per year during FY2016-FY2024 (see note in Table 1).
Table 1. Farm Support by Commodity
Commodity
Federal Crop Insurance
Farm Commodity Programs
Disaster Assistance
Feed grains (corn, sorghum,
Yield or revenue guarantees based
Price or revenue guarantee
—
barley, oats), peanut, pulses
on historical yields and same-year
based on historical yields and
(dry peas, lentils, chickpeas),
market prices, plus county yield or
minimum prices (or five-year
rice, soybeans, other
revenue guarantee for some crops
historical prices); nonrecourse
oilseeds, wheat
(Suppl. Coverage Option—SCO)
loans with minimum prices
Upland cotton
Same as above, plus county
Transition payments in 2014
—
revenue guarantee (Stacked
(and possibly 2015); nonrecourse
Income Protection Plan—STAX)
loans with minimum prices
Sugar
Yield guarantees based on same-
Import quotas, nonrecourse
—
year market prices
loans with minimum prices, and
marketing allotments
Fruits, vegetables, & nursery
Yield or revenue guarantees, &
—
Payment for loss of fruit
other products, incl. whole farm
trees and vines (assets)
Livestock & poultry
Insurance for livestock prices,
—
Payment for loss of
gross margins, & pasture/forage
animals, forage, & feed
Dairy
Insurance for livestock prices,
Margin protection
Payment for loss of
gross margins, & pasture/forage
(milk price minus feed costs)
animals, forage, & feed
Projected ave. annual costa
$9.0 billion
$3.2 billion
$0.3 billion
Source: CRS Report IF00025, Overview of Farm Safety Net Programs (In Focus); costs from CBO.
Notes: Nonrecourse loans (for cash flow and low-price protection) also are available for extra-long staple
cotton, wool, mohair, and honey. Emergency loans in disaster-declared counties are not commodity-specific.
a. Uses CBO estimates for FY2016-FY2024 as of April 2014; projections are sensitive to market changes. The
annual average excludes FY2015 data because payments for new farm programs are not made until FY2016.
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The Farm Safety Net: In Brief
Federal Crop Insurance1
Federal crop insurance often is referred to as the centerpiece of the farm safety net because of its
broad scope and cost. The program makes available subsidized insurance for more than 130
commodities to help farmers manage financial risks associated with a loss in yield or crop
revenue. Insurable causes of loss include adverse weather such as drought and excess rain. A
distinguishing feature is that guarantees are based on market prices and not on statutory
minimums, as provided in farm commodity programs. Program cost was projected by the
Congressional Budget Office (CBO) in spring 2014 to total $9.0 billion per year during FY2016-
FY2024, about three times the level of farm commodity programs.
Insurable commodities include major field crops such as wheat, corn, soybeans, cotton, peanuts,
and rice, as well as many specialty crops (including fruit, tree nut, vegetable, and nursery crops),
pasture, rangeland, forage crops, and livestock (prices and operating margins). Policies cover
more than 250 million acres nationwide. For major crops, three-fourths or more of U.S. planted
acreage is insured under the federal crop insurance program. Producers who grow a crop not
covered by crop insurance can purchase coverage through the Noninsured Crop Disaster
Assistance Program (NAP).
The program is permanently authorized by the Federal Crop Insurance Act, as amended (7 U.S.C.
§1501 et seq.). The Federal Crop Insurance Corporation (FCIC) was created as a wholly owned
government corporation in 1938 to carry out the program. The program is a partnership between
U.S. Department of Agriculture’s Risk Management Agency (RMA) and private industry. RMA
approves and supports products, develops and approves the premium rates, administers premium
subsidies, reimburses private companies for their administrative and operating costs (i.e., delivery
costs for selling and servicing the policies), and reinsures company losses. Producer premium
subsidies account for three-fourths of total federal crop insurance costs.
Farmers annually purchase about 1.2 million policies, with many producers purchasing multiple
policies depending on the number of crops grown and other factors. Policies protect against
individual farm losses in yield, crop revenue, or whole farm revenue. Area-wide policies are
available for some crops, whereby an indemnity is paid when there is an overall loss over a broad
geographic area (e.g., county). For some policies, the revenue guarantee can increase if the
harvest price is higher than the expected price calculated in the springtime prior to planting,
thereby increasing the point at which indemnities are triggered.
In practice, the producer selects a coverage level and absorbs the initial loss through the
deductible. For example, a coverage level of 70% has a 30% deductible (for a total equal to 100%
of the expected value prior to planting the crop); in this case an indemnity is made for losses
exceeding 30%. The producer pays a portion of the premium, and the federal government pays
the rest of the premium—62%, on average, in 2014—plus covers the cost of selling and servicing
the policies. This differs from farm commodity programs (see “Farm Commodity Programs,”
below), which require no participation fees. Also unlike farm commodity programs, crop
insurance has no subsidy limits, and participants can be eligible regardless of income levels.
1 For more information, see CRS Report R40532, Federal Crop Insurance: Background, and CRS Report R43494,
Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79).
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The Farm Safety Net: In Brief
Farm Commodity Programs2
USDA farm commodity programs historically represented the heart of U.S. farm policy, by virtue
of their long history (dating back to the 1930s) and because price and income support is based
primarily on statutorily fixed prices and not market prices (as in crop insurance), which can be
quite low in some years. Program costs were projected in April 2014 by CBO at about $3.2
billion per year over FY2016-FY2024. Funding is provided through the Commodity Credit
Corporation (CCC), USDA’s program financing mechanism. USDA’s Farm Service Agency
(FSA) delivers CCC-funded commodity program benefits through a network of local (“county”)
offices overseen by committees of elected farmers.
The statutory authority underpinning USDA-CCC programs is provided mainly by three
permanent laws: the Agricultural Adjustment Act of 1938 (P.L. 75-430), the Agricultural Act of
1949 (P.L. 81-439), and the CCC Charter Act of 1948 (P.L. 80-806). Congress frequently alters or
suspends provisions of these laws through omnibus, multi-year farm bills. The most recent
omnibus farm law is the Agricultural Act of 2014 (P.L. 113-79). This law is effective for the
2014-2018 crop years. To reduce the deficit and pay for changes to federal crop insurance and
farm commodity programs, Congress eliminated fixed decoupled or “direct” payments that had
been in place since the 1996 farm bill and were not triggered by declining prices or a farm loss.
The 2014 farm bill requires USDA to offer farm commodity support, including minimum prices,
for wheat, feed grains (corn, sorghum, barley, oats), cotton (upland and extra-long staple—ELS),
rice, soybeans, other oilseeds (sunflower seed, rapeseed, canola, safflower, flaxseed, mustard
seed, crambe, and sesame seed), peanuts, refined beet and raw cane sugar, wool, mohair, honey,
dry peas, lentils, and chickpeas. The mix of supported crops reflects historical policy goals and
compromises. The most recent additions were pulse crops (dry peas, lentils, chickpeas) in 2002.
Covered Commodities: Wheat, Feed Grains, Rice, Peanuts, Soybeans, Other Oilseeds, Dry
Peas, Lentils, and Chickpeas. For each “covered commodity” in the 2014 farm bill, eligible
producers (those with past production histories for these crops) have a one-time choice between
Price Loss Coverage (PLC) payments and Agriculture Risk Coverage (ARC) payments,
depending on their preference for protection against a decline in either (a) crop prices or (b) crop
revenue.3 PLC payments make up the difference between the crop’s average market price and its
statutory “reference price” (see Table 2), while ARC payments make up the difference between a
county revenue guarantee (based on five-year average crop prices or statutory minimums) and
actual crop revenue. Payments to a producer are paid on 85% of the farm’s acreage history (i.e.,
“base”). Rather than selecting between PLC and the county ARC guarantee for each covered
commodity, a farmer can select a farm-level “individual” ARC guarantee, which combines all
covered crops into a single, whole-farm revenue guarantee. Payment is based on 65% of acreage
history. In response to a trade dispute with Brazil, upland cotton is no longer a covered
commodity, with support now provided by a new crop insurance policy called the Stacked Income
Protection Plan (STAX) in addition to marketing assistance loans (see below).
2 For more information, see CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79).
3 7 C.F.R. §1412; Commodity Credit Corporation and USDA Farm Service Agency, “Agriculture Risk Coverage and
Price,” 79 Federal Register 57703-57721, September 26, 2014. For program purposes, producers/landowners can
reallocate base acres and update yields between September 29, 2014, and February 27, 2015. They can make the
PLC/ARC program choice between November 17, 2014, and March 31, 2015. Decision tools are available at
http://www.fsa.usda.gov/FSA/webapp?area=home&subject=arpl&topic=landing.
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The Farm Safety Net: In Brief
Table 2. Reference Prices and Loan Rates in the 2014 Farm Bill
Crop
Reference Price
Loan Rate
Crop
Reference Price
Loan Rate
Wheat, $/bu
5.50
2.94
Peas, dry, $/cwt
11.00
5.40
Corn, $/bu
3.70
1.95
Lentils, $/cwt
19.97
11.28
Sorghum, $/bu
3.95
1.95
Sm.chickpeas, $/cwt
19.04
7.43
Barley, $/bu
4.95
1.95
Lg.chickpeas, $/cwt
21.54
11.28
Oats, $/bu
2.40
1.39
Wool, graded, $/lb
n.a.
1.15
Upland Cotton, $/lb
n.a.
0.45 to 0.52
Wool, nongraded
n.a.
0.40
ELS cotton, $/lb
n.a.
0.7977
Mohair $/lb
n.a.
4.20
Rice, $/cwt
14.00; 16.10 for
6.50
Honey,
$/lb
n.a.
0.69
temperate japonica
Soybeans, $/bu
8.40
5.00
Sugar, raw cane, $/lb
n.a.
0.1875
Minor oilseeds, $/lb
0.2015
0.1009
Sugar, refined beet, $/lb
n.a.
0.2409
Peanuts, $/ton
535
355
Source: CRS from 2014 farm bill (P.L. 113-79).
Notes: n.a. = not applicable. Crops with reference prices are called “covered commodities.” Minor oilseeds
include sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, and sesame seed.
Unlike federal crop insurance, producers do not pay to participate in these programs. Payment
recipients can plant any combination of crops on their land, but conservation rules must be
followed. The Appendix contains producer examples of PLC and ARC (county and individual).
Producers, regardless of whether they receive the above payments, also are eligible for
nonrecourse marketing assistance loans and loan deficiency payments, which provide cash flow
and additional price protection at statutory minimum prices. (See Table 2 for loan rates.) To
qualify, a farmer pledges the stored crop as collateral. Nonrecourse loans generally must be repaid
with interest within nine months or else the producer forfeits the pledged commodity to the
government, which has “no recourse” other than to accept it in lieu of money. However, two
features are intended to help avert forfeitures and subsequent buildup of CCC-owned surpluses.
First, the “marketing loan” feature enables the farmer to repay the loan at a USDA-calculated rate
approximating market prices. If that repayment rate is below the loan rate, the farmer captures the
difference as a subsidy (marketing loan gain). Loan deficiency payments (equal to marketing loan
gains) also are available to eligible producers who choose not to take out a crop loan.
Upland Cotton, ELS Cotton, Wool, Mohair, Honey. These commodities are not eligible for
PLC/ARC payments, but producers can receive nonrecourse marketing assistance loans and
(except for ELS cotton) loan deficiency payments.
Payment Limits and Adjusted Gross Income Eligibility. Farm commodity program benefits
(except for “gains” from loan forfeitures) are subject to a combined payment limit of $125,000
per person, with an additional separate limit of $125,000 for peanuts. Also, the income limit per
person for program eligibility is $900,000 of adjusted gross income (three-year average). The
dollar amounts double for a married couple. Finally, persons must be “actively engaged” in
farming. With benefits from forfeited loans not counted against the payment limit, potential 2014-
crop payments for PLC/ARC have generated concerns that loans for cotton and other crops could
be forfeited, resulting in government stock build-up, if producers approach the $125,000 limit.
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The Farm Safety Net: In Brief
Sugar. A combination of import quotas, nonrecourse loans, and marketing allotments (to limit
sales by processors) is intended to support prices at 18.75¢/lb. (raw cane) and 24.09¢/lb. (refined
beet), and at no net cost to the government. A sugar-to-ethanol (feedstock flexibility) backstop is
available if allotments and import quotas fail to keep market prices above guaranteed levels.4
Milk. Dairy producers are eligible for the Margin Protection Program (MPP), which makes
payments when the national margin (average farm price of milk minus an average feed cost
ration) falls below a producer-selected margin ranging from $4.00 per hundredweight (cwt.) to
$8.00/cwt. Participating producers pay premiums for margin coverage above $4.00/cwt. To assist
small farms, lower premiums are charged for the first 4 million pounds (lbs.) of annual output
(approximately 170 cows), while higher premiums are charged on amounts above 4 million lbs. A
25% discount on premiums is available for 2014 and 2015 on coverages below $8.00/cwt.5
Agricultural Disaster Assistance6
The 2014 farm bill permanently authorized three disaster programs for livestock and one for
orchards and vineyards. Nearly all parts of the U.S. farm sector now are covered by either a
disaster program or federal crop insurance, which is expected to reduce calls for ad hoc federal
assistance. CBO estimated annual outlays at approximately $300 million per year for FY2016-
FY2024. The programs are retroactive, and producer payments as of mid-September 2014 totaled
$2 billion for losses in FY2012-FY2014. The programs are:
1. Livestock Indemnity Program (LIP), which provides payments to eligible
livestock owners and contract growers at a rate of 75% of market value for
livestock deaths in excess of normal mortality caused by adverse weather;
2. Livestock Forage Disaster Program (LFP), which makes payments to eligible
livestock producers who have suffered grazing losses on drought-affected pasture
or grazing land, or on rangeland managed by a federal agency due to fire;
3. Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish
Program (ELAP), which provides payments (capped at $20 million per year) to
producers of livestock, honey bees, and farm-raised fish as compensation for
losses due to disease, adverse weather, and feed or water shortages; and
4. Tree Assistance Program (TAP), which makes payments to orchardists/nursery
tree growers for losses in excess of 15% to replant trees, bushes, and vines
damaged by natural disasters.
The programs do not require a disaster declaration, and producers do not pay a fee to participate.
For individual producers, combined payments under all programs except TAP may not exceed
$125,000 per year. For TAP, a separate limit of $125,000 per year applies. Also, to be eligible for
a payment, a producer’s total adjusted gross income cannot exceed $900,000. Separately, for all
types of farms and ranches, when a county has been declared a disaster area by either the
President or the Secretary of Agriculture, producers in that county may become eligible for low-
4 CRS Report R42535, Sugar Program: The Basics.
5 CRS Report R43465, Dairy Provisions in the 2014 Farm Bill (P.L. 113-79).
6 CRS Report RS21212, Agricultural Disaster Assistance; and CRS Report R42854, Emergency Assistance for
Agricultural Land Rehabilitation.
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The Farm Safety Net: In Brief
interest emergency disaster (EM) loans. USDA also has several programs that help producers
repair damaged land following natural disasters.
USDA Discretionary Support
In addition to the explicitly required assistance described above, federal law has long given
USDA the discretion to offer support for virtually any farm commodity. For example, USDA
made direct payments to hog producers in 1999 during a period of historically low prices, and to
fruit, vegetable, and nursery plant growers affected by Florida hurricanes in 2004 and 2005. The
most recent emergency farm assistance extended under discretionary authority was in 2010, when
USDA made farm payments for weather-related and other losses to producers of upland cotton,
rice, soybeans, poultry, and aquaculture. Authority and funding for these various activities can
come from CCC (under the CCC Charter Act) and Section 32 (of P.L. 74-320, a 1935 law).
Section 32 permanently appropriates the equivalent of 30% of annual customs receipts to support
the farm sector through a variety of activities. Most of this appropriation (now about $8 billion
per year) is transferred directly to USDA’s child nutrition account to fund school feeding and
other programs. However, Section 32 also provides USDA with a source of discretionary funds,
which in addition to the direct payments above also pays for “emergency removals” of surplus
agricultural commodities, disaster relief, or other unanticipated needs. USDA annually purchases
hundreds of millions of dollars in meats, poultry, fruits, and vegetables under Section 32.
However, in annual appropriations acts since FY2012, Congress has prohibited the use of
appropriated funds to pay for salaries and expenses needed to operate a farm disaster program
under either funding source.
Historical Policy Discussion
When commodity programs and the federal crop insurance program were first authorized in the
1930s, most of the country’s then 6.8 million farms were diversified and small (by today’s
standards). There was a perceived need to address the severe economic problems faced by this
large segment of rural-based society, where about 25% of the U.S. population resided. Moreover,
it was argued, stabilizing the agricultural sector—through guaranteed minimum farm prices,
income payments to producers, and/or various supply management techniques—would help to
ensure an abundant supply of food and fiber at reasonable prices in the future.
Over the last half century, while farm size and incomes have increased, the perennial challenge of
price and income variability has remained, especially as increased globalization exposed
U.S. agricultural markets to international events. As a result, policy makers have focused
increasingly on risk management rather than traditional price support and supply control. Both
Congress and the Administration sought, for many decades, to steer price and income support
programs onto a more “market-oriented” course, so that the private market rather than the
government would provide economic rewards for production agriculture. And since 1980, to
reduce the potential for ad hoc disaster assistance and provide producers with risk management
tools, the federal crop insurance program has been enhanced for producers multiple times by
increasing subsidy rates and broadening coverage.
Most recently, Congress passed the 2014 farm bill with additional crop insurance options and
higher farm program guarantees (reference prices) designed to trigger payments more often than
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under previous law. Funding was accomplished by eliminating direct payments that had been
made annually to eligible farmland owners since 1996 but played no role in managing farm risk
because they did not vary with farm prices. Also, as part of the trend toward risk management, the
2014 farm bill’s new dairy program and Agriculture Risk Coverage have insurance-like features
that reimburse farmers when a loss is triggered.
Supporters of the farm safety net contend that the authorized programs protect against price and
market volatility, and provide needed support and/or stability to farmers who otherwise would see
plunging incomes and land values due to unfavorable and unpredictable yields. Critics have long
argued that U.S. commodity-based policies are outdated and transfer too much risk from private
businesses (farms) to the federal government, waste taxpayers’ money, and may be detrimental to
society in general, particularly if policies encourage farming on environmentally sensitive land.
Prospective Issues
USDA has begun implementing the farm bill commodity programs and crop insurance provisions.
Several facets of the current farm safety net might be of interest to Congress.
Actual Production History (APH) in the 2014 Farm Bill
In recent years, a particular crop insurance concern of producers affected by prolonged drought in
the Southern Plains has been the inclusion of poor yields used to establish an individual’s
insurance guarantee, which is based on 4 to 10 years of historical farm yields and called actual
production history (APH). To address this, the 2014 farm bill allows a producer to exclude years
with low yields from his or her APH calculation when the average county yield is less than 50%
of the 10-year county average. The farm bill manager’s report directed USDA to implement the
provision for 2015 crops. Given program complexity and significant data requirements, USDA
first indicated that it would not do so until 2016, prompting some Members to press for an earlier
rollout. On October 21, 2014, USDA announced it would implement the provision for crops
planted in spring 2015. Frank Lucas, chairman of the House Agriculture Committee, responded
that he hopes the benefit will be extended also to wheat planted in fall 2014.
“Generic” Base Acres
To reduce the potential for excess production and subsequent market distortions, the 2014 farm
bill continues to “decouple” farm payments from actual plantings by instead making PLC/ARC
payments on a farm’s historical “base acres.” Each farm has crop-specific bases equal to
historical planted acreage on that farm. Also, as part of a package to address a long-term trade
dispute, the 2014 farm bill excluded upland cotton from PLC/ARC and renamed upland cotton
base (totaling 17.5 million acres) as “generic” base. Generic base becomes eligible for program
payments if a covered crop is planted on the farm. Thus, generic base is an exception to the broad
decoupling of plantings and farm program payments. (The precursor to ARC, called “ACRE,”
also tied government payments to same-year plantings.) The domestic and trade policy concern is
that farmers with generic base might pursue potential farm program payments by planting certain
covered crops in low-price years. For example, producers with generic base might have an
economic incentive to plant additional peanuts if the combination of expected payments and
market returns is greater for peanuts than for alternative crops (see Table A-3).
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Potential Farm Program Impacts on Acreage and Prices
The 2014 farm bill increased program payment triggers (reference prices) for covered
commodities (see list in Table 2). The additional price protection was designed to provide
financial cover for producers until crop prices rebound and incomes rise. One concern is that
prospective payments could increase supplies when low prices would otherwise discourage
farmers from planting or applying inputs. Larger supplies could intensify the price pressure and
increase government costs. Several program features are designed to minimize any adverse
supply effect, such as paying only on historical base acreage and not current year plantings
(except for generic base), and then only on a portion of base (85% in the case of PLC and ARC-
County and 65% for ARC-Individual). Also, if farm prices were to remain low for several years,
the ARC guarantees (and therefore payments) would decline as older, higher prices fall out of the
five-year moving average guarantee. In contrast, PLC price guarantees remain fixed in statute.
Government Outlays
Given the outlook for record corn and soybean yields in 2014 and declining farm prices,
government outlays for the farm commodity programs for 2014 crops could be significantly
higher than earlier expectations. Some are saying that farm payments could be as much as $6
billion for corn alone and possibly $8 billion for all commodities, or more than double the CBO
estimate made earlier in 2014 based on stronger market assumptions.7 Official estimates for 2014-
crop outlays will not be available from USDA, CBO, and others until early 2015. With ongoing
congressional concern for budget deficits and federal spending, the combined cost of farm
programs and crop insurance is expected to garner the attention of policy makers who want to
reduce federal spending. Proponents of farm spending, however, point out that weak prices likely
will have the opposite effect (i.e., reducing prospective outlays) for federal crop insurance
because premiums (and premium subsidies) typically decline in tandem with falling farm prices.
Moreover, supporters point out that the safety net has been designed for such situations.
Design of Overall Farm Safety Net
Challenges for farm policy makers over the years have included the complexity of the farm safety
net, development of programs with similar but not identical objectives and payment mechanisms,
and the potential for different programs to make payments for the same loss.8 For example, the
current farm safety net for “covered” commodities has several variations of “counter-cyclical-
style” payments, including marketing loan benefits, traditional price payments (PLC), and
revenue payments (ARC-County Coverage). All three focus to some extent on price declines.
Farmers can also add “revenue protection” crop insurance for individual farm yield (and revenue)
risk, but without minimum prices used in farm programs. (See Figure A-1 for the interaction of
crop insurance and farm programs.) Proponents say the options are necessary because “one
program doesn’t fit all producers and regions,” while others believe that a simplified approach
might be more effective and less expensive, with savings used for purposes that generate broad
societal gains, such as investment in agricultural research or transportation infrastructure.
7 Philip Brasher, “Crop Subsidies Could Top $8 Billion Due to Price Plunge,” CQ Roll Call, September 16, 2014.
8 For background and analysis on program overlap, see Erik J. O'Donoghue et al., Identifying Overlap in the Farm
Safety Net, USDA Economic Research Service, Economic Information Bulletin Number 87, November 2011,
http://www.ers.usda.gov/media/149262/eib87_1_.pdf.
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The Farm Safety Net: In Brief
Appendix. Farm Commodity Program Examples
The 2014 farm bill (P.L. 113-79) established commodity programs that make farm payments
when either annual crop prices or revenues are below statutory reference prices or historical
revenue guarantees. Producers have a one-time choice:
• For each covered crop on each farm,
• Price Loss Coverage (PLC), or
• Agriculture Risk Coverage-County (ARC-CO)
• Or, for all covered crops on each farm,
• Agriculture Risk Coverage-Individual (ARC-Individual)
Hypothetical examples in the following tables illustrate several types of farms and how farm
commodity programs might trigger payments given 2014 farm bill parameters and expected
prices for 2014 crops, using USDA forecasts made in October 2014.
• Table A-1: Corn/Soybean farmer selects PLC for corn and ARC for soybeans
• Table A-2: Wheat/Lentil farmer selects ARC-Individual for the entire farm
• Table A-3: Peanut/Cotton farmer selects PLC for peanuts, with generic base
(formerly upland cotton base) attributed to same-year peanut planted acreage
In addition to farm commodity programs, producers who purchase federally subsidized crop
insurance may also be eligible for an indemnity if price and yield conditions specified in the
policy are triggered. The 2014 farm bill made available a second federal crop insurance policy
called the Supplemental Coverage Option (SCO) to cover part of the deductible on the underlying
policy. (Note: SCO cannot be purchased for commodities enrolled in ARC.) For farm examples of
crop insurance, see CRS Report R40532, Federal Crop Insurance: Background.
Figure A-1 illustrates the interaction between
Figure A-1. Crop Insurance and
crop insurance and farm programs. The bar on
Farm Programs
the left depicts the expected revenue (prior to
planting) under a typical crop insurance
revenue policy with a 30% deductible (the
farmer absorbs the first 30% of the loss). If
the farmer selects PLC, an SCO policy can be
purchased to cover part of the deductible (see
PLC column). If a farm loss occurs, an initial
indemnity is triggered under the farmer’s
individual crop insurance policy (depicted by
the green box). A second indemnity from
SCO would be paid (blue box) if there is also
a loss at the county level. Overall, the farmer
incurs a loss of approximately 14% (white
box at top). A separate PLC payment (not
Source: CRS.
shown) is made if the farm price is below the reference price. In contrast, if ARC is selected
rather than PLC (see ARC column), the farm is not eligible for SCO and only an ARC payment
(red box) and insurance indemnity (green box) would be made if triggered.
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The Farm Safety Net: In Brief
Table A-1. Hypothetical Corn/Soybean Farm in 2014
(farmer selects Price Loss Coverage (PLC) for corn and Ag. Risk Coverage (ARC) for soybeans)
Step 1.
Step 2.
Step 3.
Step 4.
Data
Payment Formula
Calculation
Payment
Price Loss Coverage (PLC) for corn: payment occurs when actual farm price ($3.40/bu.) is below reference price ($3.70/bu.)
Corn
Payment =
Payment =
Corn
payment =
Reference Price = $3.70/bu.
(Reference Price - Actual Price)
($3.70/bu. - $3.40/bu.)
$12,750
2014 Actual Price = $3.40/bu.
x Base Acres
x 500 acres x 85%
Farm Base = 500 acres
x 85% acreage factor
x 100 bushels/acre
Farm Program Yield =
x Program Yield
= $12,750
100 bu./acre
Agriculture Risk Coverage – County (ARC) for soybeans: payment occurs when actual county revenue ($/acre) is below guarantee
Soybeans
Benchmark Revenue =
Average yield and price calculations
County
Nat’l
5-year “Olympic” average county yield
Average yield =
yield
price
x
(38 + 40 + 42 ) / 3
bu./acre
per bu.
2009
36
$9.59
5-year “Olympic” average national
= 40 bu./acre
price
Average price =
2010 38 $11.30
($11.30 + $12.50 +$13.00) / 3
2011 40 $12.50
The “Olympic” averages exclude the
= $12.27/bu.
2012 42 $14.40
high and the low years (in italics at
Benchmark Revenue =
2013
44 $13.00
left).
$40 bu./acre
Data in italics are not used in
calculation.
x
$12.27/bu. =
$491/acre
Revenue Guarantee =
Revenue Guarantee =
Benchmark Revenue x 86% guarantee
$491/acre x 86%
factor
= $422/acre
2014 county yield = 40 bu./ac
2014 Actual Revenue =
2014 Actual Revenue =
2014 nat’l price = $10.00 /bu.
county yield x national price
40 bu./acre x $10.00/bu.
= $400/acre
Farm Base (soybeans) = 500
Payment =
Payment =
Soybean
acres
payment =
(Revenue Guarantee - Actual
($422/acre - $400/acre)
Revenue)
$9,350
x 500 acres x 85%
x Base Acres x 85% acreage factor
= $9,350
Total farm payment = PLC for corn + ARC for soybeans
$22,100
Source: CRS, based on statutory provisions of P.L. 113-79, hypothetical data (county yields, farm program
yields, and farm bases), and USDA crop prices (2014 “actual” prices are forecast as of October 10, 2014).
Notes: Statutory parameters include the reference price, the payment acreage factor (85%), and the guarantee
factor for “shal ow losses” (86%). Payments do not depend which crop is actual y planted and are scheduled to
be made in October 2015 after final 2014-crop price and yield data become available. In ARC, reference prices
serve as minimums; maximum payment is 10% of the benchmark revenue. In both PLC and ARC, the loan rate is
used if higher than actual price. Higher prices or yields might not trigger a farm payment for 2014 crops.
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The Farm Safety Net: In Brief
Table A-2. Hypothetical Wheat/Lentil Farm in 2014
(farmer selects Agriculture Risk Coverage-Individual for entire farm—wheat and lentils)
Step 1.
Step 2.
Step 3.
Step 4.
Data
Payment Formula
Calculation
Payment
Agriculture Risk Coverage – Individual (ARC): payment occurs when actual whole-farm revenue ($/acre) is below whole-farm guarantee
2014 total plantings = 600 acres
2014 Planting Shares:
2014 Planting Shares:
Wheat = 500 acres
Wheat: (2014 wheat plantings /
Wheat: 500 ac. / (500 ac. + 100 ac.)
2014 total plantings)
= 83%
Lentils = 100 acres
Lentils: (2014 lentil plantings /
Lentils: 100 ac. / (500 ac. + 100 ac.)
2014 total plantings)
= 17%
Wheat
Average Revenue Calculations:
Average Revenue Calculations:
Farm
yield
x Nat’l price = Rev.
The “Olympic” averages exclude
Wheat:
bu./acre
per bu.
$/ac. the high and the low revenue years
($217/ac. + $290/ac. + $302/ac.) / 3
(in italics at left)
2009
36
x
$5.50* = $198
= $270/ac.
2010
38
x
$5.70 = $217
2011
40
x
$7.24 = $290
Lentils:
2012
42
x
$7.77 = $326
($334/ac. + $275/ac. + $312/ac.) / 3
2013
44
x
$6.87 = $302
= $307/ac.
Lentils
Benchmark Revenue =
Benchmark Revenue =
Farm
yield
x Nat’l price = Rev. 5-year “Olympic” average revenue
Wheat: $270/ac. x 83% = $224/ac.
cwt./acre
per cwt.
$/ac.
for wheat
2009
14
x
$26.80 = $375
x wheat 2014 planting share
Lentils: $307/ac. x 17% = $52/ac.
2010
13
x
$25.70 = $334
+
5-year “Olympic” average revenue
Total Benchmark revenue =
2011
11
x
$25.00 = $275
for lentils
$224/ac. + $52/ac.= $276/ac.
2012
12
x
$20.70 = $248
x lentil 2014 planting share
2013
15
x
$20.80 = $312
Data in italics are not used in
Revenue Guarantee =
Revenue Guarantee =
calculation; *reference price of $5.50
Benchmark Revenue x 86%
$276 / acre x 86% = $ 237 / acre
serves as a minimum price for wheat.
guarantee factor
2014 Actual Crop Revenue Data
2014 Actual Revenue =
2014 Actual Revenue =
Farm prod. x Nat’l price = Revenue
Sum of crop revenues divided by
($106,200 + $26,600) / 600 acres
total 2014 planted area
Wheat:18,000 bu. x $5.90 = $106,200
= $221/ac.
Lentils: 1,400 cwt. x $19.00 = $26,600
Total Farm Base = 600 acres
Payment =
Payment =
Farm
payment =
In this case, base acres = total planted
(Revenue Guar. - Actual Revenue)
($237/acre - $221/acre)
$6,240
acres
x Base Acres x 65% acreage factor
x 600 acres x 65% = $6,240
Total farm payment
$6,240
Source: CRS, based on statutory provisions of P.L. 113-79, hypothetical data (acreage and yields), and USDA
crop prices (2014 “actual” prices are forecast as of October 10, 2014).
Notes: Statutory parameters include the reference price, the guarantee (“shallow loss”) factor (86%), and the
payment acreage factor (65%). Payments are scheduled to be made in October 2015 after final 2014-crop price
and yield data become available. Reference prices serve as minimums; maximum payment is 10% of benchmark
revenue. Higher actual prices or yields might not trigger farm payment for 2014 crops.
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The Farm Safety Net: In Brief
Table A-3. Hypothetical Peanut/Cotton Farm in 2014
(farmer selects Price Loss Coverage (PLC) for peanuts, with Generic Base attributed to peanuts)
Step 1.
Step 2.
Step 3.
Step 4.
Data
Payment Formula
Calculation
Payment
Price Loss Coverage (PLC) for peanuts: payment occurs when actual farm price ($400/ton) is below reference price ($535/ton)
Reference Price = $535/ton
Payment =
Peanut Payment =
Peanut payment =
2014 Actual Price = $400/ton
(Reference Price – Actual Price)
($535/ton - $400/ton)
$34,425
Peanut Base = 200 acres
x Base Acres
x 200 acres
Farm Program Yield = 1.5
x 85% acreage factor
x 85%
tons/acre
x Program Yield
x 1.5 ton/acre
2014 Total Plantings = 300
acres of peanuts
= $34,425
Note: payments do not
depend on same-year
plantings.
Generic Base = 100 acres
For plantings on Generic Base:
Payment on Generic Base =
Payment on Generic Base =
(formerly Upland Cotton
Base)
Payment = same formula as
($535/ton - $400/ton)
$17,213
above but Generic Base acres
Note: payments on Generic
are attributed to a particular
x 100 acres x 85%
Base depend on same-year
covered commodity in
x 1.5 ton/acre
plantings of covered crops.
proportion to actual plantings
for that crop year.
= $17,213
In this case, all Generic Base
(100 acres) are attributed to
peanuts because no other
covered commodity was
planted in 2014.
Total farm payment = PLC for peanuts + PLC for Generic Base (planted/attributed
$51,638
to peanuts)
Source: CRS, based on statutory provisions of P.L. 113-79, hypothetical data (acreage and yields), and USDA
crop prices (2014 “actual” prices are forecast as of October 10, 2014).
Notes: Statutory parameters include the reference price and the payment acreage factor (85%). For each crop
year, generic base acres are attributed to (i.e., temporarily designated as) base acres to a particular covered
commodity base in proportion to that covered crop’s share of total plantings of all covered commodities in that
year. The loan rate is used in the payment calculation if it is higher than the actual price.
Upland cotton is no longer a covered commodity and not eligible for PLC/ARC payments (marketing assistance
loans remain available). Instead it is eligible for a new crop insurance policy called Stacked Income Protection or
STAX (see CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79)). Transition payments
are made for upland cotton for the 2014 crop year, and for 2015 if STAX is not available.
Author Contact Information
Dennis A. Shields
Specialist in Agricultural Policy
dshields@crs.loc.gov, 7-9051
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