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Re: Philosophical question on crop insurance subsidies

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There are two separate but not mutually exclusive issues here.

 

One is a matter of the broadest public ploicy- about budgets, deficits, the future of the economy. And granted, that one isn't going to turn on the future of farm spending other than insofar as it indicates the complete failure of will to actually cut spending when it inconveniences even a small lobby group.

 

You can argue that all day long, as people over in Forum literally do.

 

The other one that I was trying to get to is that for the majority of people remaining in agriculture, farm subsidies as constructed may not serve their best interests.

 

In a commodity business, the booty gained by the biggest during a boom will be used to further consolidate during the trough. For people who made fortunes farming in the last 6 years, good for them. But I don't think that the public at large has any obligation to either help or hinder them in keeping it.

 

There needs to be a recognition that the structure of American ag changed continuously over the last 30 years and completely in the last 6.

 

That is a fact although I don't expect any testimony to that from land grant economists at congressional herings. Which might be a good reason to give their funding to the football team where at least the public derives some benefit.

 

 

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Advisor

Re: your insurance agent is wrong....

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Your insurance agent is wrong.  Crop insurance does not insure 100% of total costs, let alone insure a profit.  To date, you can choose to insure 80% of your APH, but that's an expensive choice.  Few policyholders ever use that option.  According to those who study these things, most insure at 70% and some at 75%. 

 

The reality is that even guys with 10,000 acres can go broke, even in good times like we've had.  Go anywhere on any ag chatroom and you will find discussion about Illinois Family Farms and their bankruptcy.  There's more to being successful than having a crop insurance policy. 

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Advisor

Re: Philosophical question on crop insurance subsidies

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Reforming ag policy will never solve the deficit problem, no matter how hard we work at it.  Again, if we look at the total USDA budget, the lion's share, 80%+ goes to food stamp recipients, meals for the elderly, school lunches and other nutrition programs, and this amount has pretty much grown each year for a long time.  The ag portion has been shrinking ever since the 2004 farm bill and shows no signs of increasing, regardless of what farm program is put in place of the 2008 bill.

 

We will never solve the deficit problem until we get more people back to work and the biggest consumers of the federal dollar are subjected to major financial reform.  Entitlements, Defense and interest on public debt are the 10,000 pound gorillas in the room where ag, an ant by comparison, has to figure out ways to survive if the gorillas demand more money.

 

As for ag being completely reconstructed, I suggest we wait around a couple years and see what happens if markets go south thanks to a dozen or more countries that may end up defaulting on their debt.  This includes the U.S..  Can we survive on 4 dollar corn with 6 dollar input costs?  Not for long.

Veteran Advisor

$6 inputs?

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When corn retreats back to $3, you won't be buying $6 inputs.

 

At least if you have something between your ears, you won't.

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Honored Advisor

Re: $6 inputs?

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Red, problem is it may take a year or 2 to get the adjusted when we don't have much competition among input suppliers.

But you are right, we have to be protection our input costs to know where our costs are.

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Honored Advisor

Re: Philosophical question on crop insurance subsidies

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I don't think that scenario is all that implausible.  It certainly more closely parallels the majority of years in the previous past two decades, doesn't it? 

 

As for  federal subsidisies of insurance programs, I think there are a lot of instances where the people in general secure coverage against losses that no insurance company would engage in.  Flood insurance is a prime example that is widely usec and even abused.  I am sure you guys can think of others. 

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Honored Advisor

AAAhhhh..no, my crop ins agent is right!

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Last year guaranteed revenue of $841.50 per acre of corn. At the 85% level...around 30 bucks an acre...whoopty fricken-doo a whole 30 bucks an acre my my how did I ever afford that?  With over $800 guaranteed revenue..that was money in my backpocket.  How did it turn out?  My lowest yield was 177 and highest was 208 so yeah I`m a pretty good bet. A small portion of my corn acres grossed about $1450/acre (no drying) with a too small amount of $7.03 contracted Smiley Indifferent.  Cheapest corn sold for $6.30 hot off the combine.  Small amount of "Vegas" bushels I`ll probably sell for $3.50 in August..oh well Smiley Happy  This yr? well we won`t have a $6.01 guarantee, I wouldn`t doubt that +$700 corn gross will be lockable.  Now the shoe salesman, what guarantee revenue can he lock in?  If this stuff is foreign to you, you must farm in the Mojave dessert or something.  If my net worth was over $100 million and a $20 or $30/acre gov`t ins subsidy was the only thing keeping me afloat, I would definately look for a new line of work..seriously.

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Senior Advisor

Re: Simplify the issue

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Spoiler
 

 

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Advisor

Re: $6 inputs?

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Funny you should mention $3 corn instead of $4.  That scenario would be even more frightening.

 

Regardless of input costs, in a down market with commodity prices, especially if any European country defaults and the crops have already been planted, input costs are locked in.

 

Think of it another way; have you already priced your inputs for the 2012 crop and still are not fully sold on the 2011 crop?  If that corn and beans is already priced, congratulations.  If not, your costs from that crop (2011) are fixed and your revenue is uncertain. 

 

Now, throw in a half dozen countries that are on the verge of default.  Throw in the looming possibility of a war with Iran, either by the U.S. or Israel, perhaps by mid to late summer.  Not to mention we haven't even considered a U.S. default on its debt, thanks to Congress' inability to play nice with each other.  You now have give or take one to almost a year and half of input costs locked in and your risk exists if a tangible market correction takes place. 

 

Yes, there's a real possiblitiy for running through red ink. And yes, there's a possibility for none of these events to ocurr.  But we cannot say with a great deal of certainty that the odds favor the latter at this time.  Ask this question again in two months and we may have a better answer.

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Re: $6 inputs?

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For people with decent proven yield histories, revenue insurance cushions the downside in the adjustment pretty well for a while. It does whether it is subsidized or not, you just have to pay for it in the one scenario.

 

If prices remained depressed for a number of years then that is a different problem.

 

BTW, I wonder how many very large croppers have 7 figure deferred tax liabilities?

 

If you get into a sustained period of lower prices but have to pay taxes anyway due to seelling inventory for cash flow, no depreciation because of fast write-offs etc., that could become a serious chronic problem.

 

Same true on a smaller scale operation as well, just smaller numbers.

 

 

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