Association Perspectives

Risk Management Accounts

Concept would eliminate ad hoc disaster assistance, fill in the gaps of crop insurance, and enable farmers to save for retirement.

State wheat associations and the National Association of Wheat Growers are proposing a concept called Risk Management Accounts (RMA), a self-help plan that would eliminate ad hoc disaster assistance, fill in the gaps of crop insurance, and enable farmers to save for retirement.

While crop insurance provides reasonable protection beyond an initial, uninsurable loss, coverage is unavailable or uneconomical for the first 15 to 50% of loss. Past efforts to provide emergency disaster programs/ad hoc disaster point to a void in producer protection.

But co-insurance, if structured as an accumulating individual fund, can fill the void, providing the means for farmers to build equity for uninsurable losses.  Producers could deposit funds equivalent to 4% of the value of their insured crops in a tax-deferred account. These funds would be matched with federal funds at a percentage equal to each producer’s crop insurance coverage level.

Limits on contributions and withdrawals would provide predictability and stability. RMA’s would be held by financial institutions, and must be liquidated within five years of termination of the farming business.

There would be a cost of establishing and administering such a program, but at a fraction of ad hoc disaster costs now (with none of the politics).  The income security of such a plan would have the additional benefit of making it easier for one family-farming generation to pass the business down to another.

It’s a sound idea that at the very least, should be established in the next farm bill as a pilot-scale program, with a mechanism in place for further expansion.

NDSU Studies Logistical Costs, Strategies for Wheat Segregation

A recent study authored by ag economists Shannon Schlecht, Bill Wilson, and Bruce Dahl at NDSU examined logistical costs of increased grain segregations in the marketing system.

Special segregations that provide unique qualities for end use products are being specified by buyers. As users of wheat become more specific about quality, the number of quality segregations that the logistical pipeline must accommodate increases. The  additional cost of increased grain segregations will influence the optimal level of wheat variety segregations marketed in a supply chain.  Not surprisingly, logistical costs increase as more segregations and storage categories are added. 

This Agribusiness & Applied Economics Report No. 551 can be found online at http://agecon.lib.umn.edu/cgi-bin/detailview.pl?paperid=15459

The Concept of Risk Management Accounts

Tax Status: Funds deposited in RMA’s would be tax deferred, to be taxed on withdrawal.  

Who would be eligible: Producers who buy crop insurance at any level would be eligible. Accounts must be held in the name of the policy holder.

Annual contribution percentage: Up to 4% of Whole Policy Projection (WPP) for the current year.  The formula for Whole Policy Projection would be as follows: (WPP=APH x Crop Insurance Indemnity Price x Total Acres of all crops insured x insured’s share).  

Maximum annual contribution: A $20,000 limit per policy holder would allow full participation for farms with WPP up to $500,000. 

Government Match: Match based on level of crop insurance purchased up to 4% of total crop insurance guarantee.  For example, at a 70% level of coverage, and assuming the producer contributes the maximum 4% of WPP, the match would be 4% x 70% x APH x Crop Insurance Indemnity Price x Total acres of all crops insured x insured’s share; or more simply 4% x 70% x WPP 

Maximum fund balance: 30% of WPP, up to a maximum of $150,000. This allows full participation for farms with WPP up to $500,000. 

Withdrawal trigger: Triggered by 7.5% minimum yield loss based on WPP. At this level a crop that is less than 92.5% of normal could be supplemented with the Risk Management Account.

Maximum withdrawal: In any year, withdrawal would be limited to actual whole policy loss less crop insurance payments. 

Termination of Farming Business: Mandatory distribution to policy holder or heirs & assigns, not to exceed five years from date of termination. 

Account investment restrictions: Accounts held at financial institutions. Investments limited to insured investments. 

Source: Al Skogen, past president, North Dakota Grain Growers Association