The US farm safety net

In its most recent Farm Bill in 2014, the US eliminated its decoupled direct payments, in part because it was hard to justify making income support payments to farmers at a time when farm incomes were booming due to favourable prices. Instead, it substituted a new set of counter-cyclical payments as part of the US farm safety net. At the same time, it expanded the scope of its federal crop insurance programmes by introducing a new programme to cover ‘shallow losses’ not normally covered by these programmes.

These US developments have led some in Europe to argue that the CAP should move in the same direction. Direct payments should be reduced and the money used instead to support insurance products for farmers or to fund counter-cyclical payments

The US farm safety net has evolved very differently to farm support in the EU, particularly after the 2014 Farm Bill. The 2008 CAP Health Check did permit member states to use up to 10% of their direct payment ceilings to support crop and livestock insurances, but there was little interest in this facility.

The 2013 CAP reform moved support for insurance products into the revamped rural development regulation. It also extended the toolbox to include support for mutual funds which set up income stabilisation insurance for their members. Again, the uptake of this measure in the 2014-2020 rural development programmes submitted by member states was very limited. The Commission in its recent proposal in the so-called Omnibus Regulation  to revise the CAP basic acts has suggested that the rules on operating conditions for these income stabilisation funds could be relaxed in an effort to stimulate their uptake.

One of the questions for the discussion on the next CAP reform which is now beginning is whether it would make sense to move further in this direction. It seems to me the jury is still out on this question.

Most people insure against the very occasional risk of an emergency and are willing to pay a small premium to cover this eventuality. Insuring farmers against market price risk would be a challenge for insurance providers.

Market price variability could mean much more frequent pay-outs and thus correspondingly much larger premiums. Administrative costs could be high. The cost efficiency of the US insurance programme is poor. It has been estimated that every time an American farmer receives one net dollar through the insurance system, it costs two dollars to the American taxpayer.

Unless insurance products are very heavily subsidised as in the US, most farmers would probably continue to prefer to self-insure against market risks, through building up savings in good years and drawing these down in bad years. Such savings behaviour can be encouraged through provisions in national tax systems which permit the spreading of income flows across years.

Nonetheless, there is growing interest across Europe in the provision of revenue and income-linked insurance products to farmers. The use of index-linked insurance may hold promise in reducing administrative costs, although at the expense of increasing basis risk for farmers (this is the difference between what a farmer actually experiences on his or her own farm and what the index used to predict this outcome says is happening).

It makes sense for the CAP to continue to encourage this experimentation at member state level.