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Price vs. Revenue Farm Safety Net

An issue of disagreement during the 2012 Farm Bill debate is whether the farm safety net should focus on revenue or price. Until the ACRE program was enacted in the 2008 Farm Bill, farm programs focused on price. This article compares price and revenue programs, focusing on the key role played by the correlation between changes in price and changes in yield. The examination finds that converting to a revenue based farm safety net likely will likely increase the effective risk management provided by the farm safety net and will likely result in more support being provided to Southern crops.

Revenue programs are more encompassing risk-management than price programs because revenue includes yield as well as price. In addition, because the large acreage crops of corn and soybeans have a more negative price-yield correlation than most of the other program crops, a revenue program will cost less if identically parameterized to a price program. These savings can be used to increase the coverage level of a revenue program relative to a price program, further enhancing the ability of revenue programs to provide risk management assistance relative to price programs.

The price-yield correlation varies by a statistically significant amount across U.S. crops historically associated with the farm safety net. It is most negative for the Midwestern and northern Plain State crops and is closest to zero for the Southern crops of upland cotton, peanuts and rice. The differences in price-yield correlation mean that the variability of revenue is relatively greater for the Southern crops while the variability of price is relatively greater for the Midwest and Northern Plain state crops. Because variability is a key factor in determining payments by a risk management program, revenue programs should make relatively more payments to the Southern crops while price programs should make relatively more payments to the Midwest and Northern Plain state crops.

In conclusion, converting from a price based farm safety net to a revenue based farm safety net likely will increase the effective risk management provided by the farm safety net and likely will result in relatively more support being provided to Southern crops. These implications reflect that revenue risk is not just about price risk and yield risk, but also about the correlation between price risk and yield risk.

 

Sources for Figures:calculated using data from U.S. Department of Agriculture, National Agricultural Statistics Service, QuickStats, available online. This publication is also available at http://aede.osu.edu/publications.

 

Read the article at farmdocDaily.

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