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Abstract

Demand is growing for counter-cyclical farm program payments. One proposal, Supplemental Income Payments for Producers (SIPP), would pay farmers when national farm revenue falls below a certain percentage of average national farm revenue for a crop within a year. The cost of this policy at the 95 percent payment trigger level would have averaged $1.47 billion per year had it been in place from 1977 to 1999. Corn farmers would have received 40 percent of payments, soybean farmers 20 percent, wheat farmers 23 percent, cotton farmers 7 percent, and rice farmers 3 percent. One problem with a national revenue approach is that farmers in a particular state or region could suffer yield losses but still not receive a payment. An alternative policy that addresses this problem could base payments on county revenues or revenues at the crop reporting district level. A county-based program at the 95 percent trigger level would have cost an average of $2.65 billion per year from 1977 to 1999. Corn farmers would have received 35 percent of payments, soybean farmers 22 percent, wheat farmers 22 percent, cotton farmers 10 percent, and rice farmers 2 percent. A revenue guarantee based on past revenue outcomes is likely to influence planting decisions when the market price for a crop falls significantly. Because a drop in market price before planting would greatly increase the likelihood that a farmer would receive a program payment, his or her planting decisions could be significantly influenced by the government program. If, on the other hand, the guarantee was based on the futures market, the farmers' market incentives and government program incentives for planting decisions would be better aligned. Adoption of a SIPP policy at the county or crop reporting district level would greatly decrease the total amount of risk that farmers face, thus decreasing the usefulness of the crop insurance program as it now exists. A more privatized crop insurance program could emerge as insurance companies could offer insurance against losses that would not be covered by program payments.

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