Whole-Farm Revenue Insurance Proposed

February 19, 1999

AMES, IOWA--The collapse in hog prices in fall 1998 has renewed interest in using insurance as a way to provide an affordable safety net to U.S. farmers. One option that has received attention is to expand the U.S. Department of Agriculture's crop insurance program to include livestock producers with either price insurance or revenue insurance."The creation of a price or revenue insurance program raises a number of issues regarding what to insure, how to insure it and how much the coverage should cost," Bruce Babcock, professor of economics at Iowa State University, said.One term that occurs frequently in the debate about adding livestock revenue insurance is the concept of a whole-farm safety net (or farm income safety net)."The implication of this phrase is that farmers care more about their end-of-year finances than about any of the components that contribute to this year-end position," said Babcock, who is also director of the Center for Agricultural and Rural Development (CARD) at ISU.This concept also makes sense from an insurance perspective because fair insurance premiums may be far lower for the whole farm than the sum of the insurance premiums on all of the components."The possibility of protecting entire farm revenue at a high but affordable coverage level creates the safety net that is so much in demand," Dermot Hayes, professor in economics at ISU, said.The most straightforward way to incorporate livestock into a farm safety net would be to add the output price and input cost risk price associated with livestock enterprises to an existing whole-farm crop or revenue insurance policy."A component of the whole-farm revenue guarantee would then be the difference between actual and actual net livestock revenues," Hayes said.The U.S. agricultural insurance program has evolved from insuring only individual crop yields to insuring the combined revenues from several crops. The next phase in this evolution may involve the addition of livestock."We argue that the most effective way to insure livestock is to insure expected annual production against output price risk and input cost risk," Babcock said.For more information about whole-farm revenue insurance, visit CARD's web site at www.card.iastate.edu. CARD operates as a policy research and teaching unit within ISU's College of Agriculture. It conducts and disseminates research in the following areas: trade and agricultural policy, resource and environmental policy, food and nutrition policy, and agricultural risk management.