Economist: Senate's Durbin-Brown bill would change current farm safety net
Senators Dick Durbin (D-IL) and Sherrod Brown (D-OH) have introduced legislation that would change the current farm safety net. The Durbin-Brown plan is a Group Risk Income Protection (GRIP) with no Harvest Revenue Option but based on state expected yields rather than county yields.
Durbin-Brown is effectively a "put option" on expected state revenue. The Durbin-Brown revenue guarantee is based on a trend adjusted yield using linear regression based on the state yields for the 27 years from 1980-2006. Once the trend yield is calculated then USDA would forecast off of the trend line to generate the expected state yields for future years of the farm program based on this selected set of state yields.
The Durbin-Brown revenue guarantee is the expected state yield based on the Durbin-Brown formula times the Durbin-Brown strike price times 90%. The state payment is then allocated to the farm level through a formula but if there is no state payment to allocate then there are no farm payments. The Durbin-Brown strike price is the three year average Crop Revenue Coverage (CRC)/Revenue Assurance (RA) price subject to a 15% price cap and cup.
The revenue to count against the Durbin-Brown guarantee is the observed state yield times the CRC/RA harvest price. The legislation does not specify using CRC or the RA price but it could make a difference. The CRC price is capped at $2 for wheat. Therefore if prices increase beyond the $2 limit then the CRC harvest price will be lower than the RA harvest price.
The CRC lower price would reduce the number of dollars to count against the guarantee and increase the Durbin-Brown payment. However, only Portland wheat has hit the CRC price limit but it could happen on other crops in the future with a short crop. All of the analysis in this paper used CRC prices.
Many policy observers believe there will be some type of revenue guarantee similar to Durbin-Brown in the farm bill as an option. It will be presented as a choice but with current strike prices in Durbin-Brown that are much higher than the effective target prices and loan rates, economics will cause farmers to select the Durbin-Brown option. Durbin-Brown would replace the counter-cyclical and marketing loan payments.
It clearly makes a difference in the expected yield depending on the crop years selected to calculate the expected trend yield. Just eliminating one year and using 26 years to set the state expected yield would reduce Kansas corn yield by about 3.5% while increasing Iowa corn yield by about 0.5% and Kansas wheat yield by 0.9%. Kansas wheat would prefer the 18 years 1989-2006 be used to set the Durbin-Brown expected yield. That change would increase the expected Kansas wheat yield by more than five percent while reducing the Kansas corn yield by more than 10%.
The longer data set provides more observations and reduces the effects of recent weather problems. Also it is better to prorate the payment than increase the deductible for budget reasons. If one were to set the deductible high enough there would be no claims.