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Will the spike in food prices lead countries to change the way they handle food and agricultural policy?

Will the spike in food prices lead countries to change the way they handle food and agricultural policy? In terms of providing food aid and development assistance for Africa and a few other poor places, yes. In terms of domestic agriculture, biofuels, and trade policy for richer countries, no. Anti-hunger activists and government officials in some countries had been hoping that the three-day confab here with the long-winded name—the United Nations High-Level Conference on World Food Security and the Challenges of Climate Change and Bioenergy—would result in at least three outcomes: massive commitments of money for food aid and development assistance; a U.N. position opposing corn-based ethanol; and a strong statement on the export bans that some developing nations have put on rice and other staples to keep prices low in their own countries. But the conference had been planned a year ago by the U.N. Food and Agriculture Organization as an event to discuss climate change and biofuels issues long-term. When food prices soared, the meeting became a de facto crisis summit that attracted leaders ranging from French President Nicolas Sarkozy and U.S. Agriculture Secretary Ed Schafer to Iranian President Mahmoud Ahmadinejad and more than 900 journalists. Perhaps expectations rose too high. Over the three days, the attendees—they were not delegates, there were no votes, and there were no calls for pledges of money—promised to provide food or cash for hungry people hit hard by the high food prices and to help bring African farmers into the 21st century. But the matter of greatest discussion was a “comprehensive framework for action” paper that is to serve as a guide “to address the food crisis, to meet immediate needs, and [to] contribute to sustainable food security.” The framework was written by a task force composed of the heads of the U.N. food agencies, the World Bank, the International Monetary Fund, and the World Trade Organization. For some countries, including the United States, keeping certain language out of that paper became as important as what would go into it. The result was a document that did not take a tough stance on either biofuels or the export bans. The world leaders here also didn’t always agree on the nature of the crisis. In his opening statement, U.N. Secretary-General Ban Ki-moon said, “Food production needs to rise by 50 percent by the year 2030 to meet the rising demand.” But it seemed clear from most of the discussions that the current crisis is more about food prices, not availability. Josette Sheeran, a former Bush administration official who is executive director of the U.N. World Food Program, said several times that she had been in marketplaces where there was food but people had no money to buy it. In some countries, Sheeran said, the WFP has begun providing vouchers that are much like U.S. food stamps. As the conference opened, the Saudi Arabians gave Sheeran the last of the $775 million she needs to operate WFP programs this year in the face of vastly higher food prices. Sheeran also praised the Canadians for giving her cash, which will allow her to issue more food vouchers. But she noted that when she does need food, she still has to go to the United States, the European Union, Canada, and Australia to buy it. Those countries are the big producers and, unlike some developing nations, have not imposed export bans. That position takes some of the heat off the United States, which is continuing its practice of requiring that its WFP donations be used almost exclusively to buy U.S.-grown food. Food and Agriculture Organization Director General Jacques Diouf said that the developing world needs $30 billion annually to eradicate hunger and that it was “incomprehensible” that $11 billion to $12 billion in U.S. ethanol subsidies were diverting 100 million tons of cereals from human consumption “mostly to satisfy a thirst for fuels for vehicles.” But Schafer, E.U. officials, and Brazilian President Luiz Inacio Lula da Silva all defended biofuels vigorously, if for different reasons. Schafer emphasized that biofuels can produce energy in rural areas and bring prosperity. Lula, having decided that “the sugarcane Brazil uses to produce ethanol is not food,” declared, “I am not in favor of producing ethanol from corn or other food crops. I doubt that anyone would go hungry to fill up their car’s fuel tank.” National Journal


New money rushing into agricultural futures markets may be aggravating the rise in world food prices

Have world food prices been pushed above normal market levels by pension funds and other institutional investors that have discovered that commodities futures are a good investment and a protection against inflation? Oddly enough, the very same American farmers and grain elevator operators who have made the most money from the run-up in agricultural commodities prices have been asking the Commodity Futures Trading Commission and lawmakers that question. The farmers and elevator operators acknowledge that the higher commodities prices are primarily caused by changes in market fundamentals. These changes include increased demand from newly wealthy China and India, weather conditions in Australia and Canada that hurt crops, higher energy costs, the declining dollar, and the growing use of corn for biofuels. But they also say that institutional investing in commodities futures is pushing prices so high, it risks creating a bubble. “If in fact a ‘commodity bubble’ is developing and that bubble was to pop, the entire grain sector would be devastated,” Gary Niemeyer, an Illinois corn and soybean farmer representing the National Corn Growers Association, told the House Agriculture Committee’s General Farm Commodities and Risk Management Subcommittee on May 15. The issue also has worldwide implications for farmers and consumers, rich and poor alike, because the corn, wheat, and soybeans futures contracts traded on the Chicago Board of Trade, the hard red spring-wheat contracts on the Minneapolis Exchange, the hard winter-wheat contracts on the Kansas City Board of Trade, and the cotton contracts on the New York Board of Trade are used to set and guide worldwide prices for commodities, and for managing the risk inherent in agricultural production and price fluctuations. If those markets were to fundamentally change, it could alter all kinds of decision-making in the farming world. Most commodities traders and the CFTC say that there is no evidence this infusion of new capital has raised prices. “The emergence of the subprime [mortgage] crisis last summer led investors to increasingly seek portfolio exposure in commodity futures,” acting CFTC Chairman Walker Lukken acknowledged in testimony before the Senate Financial Services and General Government Appropriations Subcommittee on May 7. But he insisted that “broadly speaking,” the falling dollar, strong demand for food from the emerging world economies, global political unrest, bad weather, and ethanol mandates are the culprits driving up commodities futures prices across the board. Farmers and their allies did not buy that argument, however. They took their case to Congress, and several key lawmakers are exploring whether legislative action is needed. No one has tried to estimate what percentage of the increase in agricultural commodities prices can be attributed to institutional investors, but indications are that they are having a significant impact. In 2007 the CFTC did start requiring commodities index funds—they’re like mutual funds that invest in a broad range of agricultural futures to try to mimic overall market trends—to report their activities separately. AgResource, a Chicago-based consulting firm, has determined that total index-fund investment in corn, soybeans, wheat, cattle, and hogs rose from $10 billion in 2006 to $42 billion in 2007. The National Grain and Feed Association, using April CFTC data, concluded that index traders held 30 percent of the total overall futures contracts not yet liquidated or fulfilled by delivery, including about 34 percent of soybeans and 50 percent of wheat. Market Mechanisms Conflicts over proper agricultural pricing are almost as old as food production itself. Farmers and the bakers, livestock owners, and others who buy grains and other foodstuffs have tried for centuries to address the fact that crop prices tend to be low immediately after harvest—when supplies are plentiful—and high the rest of the year. In the 19th century, agricultural commodities exchanges were established in the United States in an attempt to bring order to a process in which farmers wanted to lock in the higher prices they were likely to get later in the year while end users sought to minimize those price gains and to guarantee a year-round supply. In a process that continues to this day on the exchanges and in electronic trading, representatives of farmers, end users, and speculators share information about the sizes of crops, the weather, and expected demand; they eventually agree, through the buying and selling of commodities futures, on what prices are likely to be at different points in time. Today it has become common practice for farmers nationwide to sell a certain percentage of their crops to a rural elevator operator months before harvest, especially if prices are high. The elevator operator then goes to a licensed broker on a regulated commodities exchange to sell a contract for future delivery of that crop at a certain price. As part of the agreement, the elevator operator promises to pay an extra fee, or “margin requirement,” to guarantee delivery of the commodity at the contract price even if market conditions force the price higher. Brokers liken the margin requirement to a security deposit on an apartment or a performance bond on a public works contract. For two centuries, futures markets have been the trusted way for farmers and agricultural traders to manage risks and set prices for crops. But new investors in these markets don’t behave the way that traditional traders do and could be distorting prices. As commodities prices skyrocketed to unprecedented levels in the past year, elevator owners have found themselves subject to margin calls costing millions of dollars. Most operators have increased their lines of credit and borrowed the money, but in some cases they have reached their credit limits and have been forced to stop making new futures contracts with farmers or to limit their size and duration. Speculators have always been vital players on the commodities exchanges because they provide the money to buy the contracts. But until recently, most of the buyers and sellers have been smaller investors who had some knowledge of farming and the grain industry, as well as the seasonal ebbs and flows of supply and demand. Pension funds, index funds, and other institutional investors long avoided commodities as too risky and too specialized. As equity and real estate markets became more volatile and commodity prices soared, however, big institutional investors began buying commodities futures contracts. And they keep rolling over the contracts as long as they see the prices rising; they don’t routinely buy and sell like most commodities traders. “These passively managed, long-only contracts are not for sale at any price for extended periods of time, resulting in elevated prices not reflective of demand, increased speculative interest in the market, increased volatility, and pressure on banking resources to fund margins,” Rod Clark, a grain services manager in Mount Vernon, Ind., who represents the National Grain and Feed Association, told the House subcommittee. The CFTC’s View Representatives of farmers and elevator operators have complained bitterly that the CFTC seems more interested in helping the institutional investors and justifying their presence in the markets than in dealing with the agriculture sector’s problems. Commission regulations include restrictions on the number of contracts to discourage excessive speculation, which is viewed as disruptive to the markets. But in response to institutional investors’ greater interest in agricultural commodities, the CFTC in November filed proposed rules in the Federal Register to increase the total number of speculative contracts allowed per month and to exempt broadly diversified portfolios from the speculative limits. On June 3, however, apparently in response to the criticism from the farmers’ representatives and members of Congress, the CFTC announced that it had withdrawn those November proposals. In addition, the commission said it would be “cautious” about establishing any more exemptions for institutional investors, and would develop a proposal to routinely require more-detailed information from commodities index traders. And in a break with its usual policy of keeping enforcement investigations confidential, the CFTC revealed that it is conducting an investigation into the run-up in cotton futures prices in February and March. Ideally, futures contracts based on market fundamentals should converge with cash prices at the end of the contract period, and for most of their history they have. But recently they have not. All of the actors in agriculture say that without that convergence, they cannot trust the markets to discover and set accurate prices. Farmers and elevator operators say that the institutional investors’ inclination to roll over the contracts—hold them “long-only” in their terminology, instead of engaging in short-term buying and selling—may play a role in the lack of price convergence, although they acknowledge that changes in the way the exchanges write contracts may also be a factor. A rebellion in the U.S. countryside forced the CFTC to schedule a public forum in Washington on April 22 to air the views of all commodities market participants. Before any testimony was taken, Lukken, the acting chairman, and the three other commissioners shocked representatives of farmers and elevator operators by declaring that, based on the CFTC’s research, institutional investors were not the cause of the market’s problems. The positions of Lukken and Commissioner Jill Sommers did not surprise the farmers and elevator operators, because they are Republicans seen as close to the trading industry. But the rural contingent was caught off guard when Commissioners Mike Dunn and Bart Chilton, who are both Democrats and former lobbyists for the National Farmers Union, backed their CFTC colleagues. The National Farmers Union has historically been suspicious of the commodities exchanges’ power. Dunn, who chairs the CFTC’s agricultural advisory committee, said in his opening remarks, “Who is responsible for fixing the futures markets? Should Congress or the CFTC draft new legislation or promulgate additional regulations? Or, as I believe, can market participants make the necessary changes to ensure that these markets are functioning properly?” Chilton, the newest commission member, told the Associated Press in an interview published the same day, “Our economists have looked at all the data available … and there doesn’t appear that any inordinate speculation has caused prices to move.” After commission and Agriculture Department economists presented a range of data at the meeting, CFTC economist Jeffrey Harris said, “There is little economic evidence to demonstrate that these prices are being systematically driven by speculators in these markets.” The Farmer’s View National Farmers Union President Tom Buis left the meeting frustrated, saying later in a news release, “There’s something wrong. I have doubts whether the CFTC is the place to rectify the problem—it may warrant congressional intervention. When regulators say a problem doesn’t exist, despite the fact farmers cannot market their commodities, that sounds an alarm.” Buis added, “Input costs have soared, and without the marketing tools to protect against price volatility, farmers are more vulnerable than ever. For anyone to suggest otherwise is out of touch with what is really occurring throughout rural America. For decades we’ve been told to use risk-management tools to protect ourselves, yet when those tools become unavailable, action is warranted. The public is all too aware of the recent credit crisis on Wall Street. We don’t want a lack of oversight and regulation to lead to a similar crisis in rural America.” At the meeting, American Farm Bureau Federation President Bob Stallman told the commission, “The tool [of the futures market] is fundamentally no longer there for the average producer.” The angriest testimony came from Andy Weill of the American Cotton Shippers Association, who testified that in February, speculative trading had driven prices up by more than 50 percent in a two-week period. That increase led to such a loss of faith in the market on March 3, he said, that no potential buyer of a physical commodity, either a textile mill or another merchant, would pay an amount in excess of its spot contract or cash market value on any given day. The cotton futures market had broken down, Weill said, with farmers unable to make production plans and textile mills unable to determine raw fiber costs in future months. “We’ve never seen a market like this,” he declared. It was this jump in cotton prices that the CFTC on June 3 promised to investigate. Various farm groups and the National Grain and Feed Association, which represents elevator operators, millers, and processors, proposed that the CFTC allow agricultural commodity swaps—private, usually one-to-one transactions tailored to the needs of the buyer and seller—to be settled on futures exchanges where there would be a public record of the transactions. The open settlement of such swaps would encourage the development of additional risk-management tools, the association said. The cotton shippers asked the CFTC to require that commodities trading in over-the-counter markets and swaps be a matter of public record. In its June 3 announcement, the CFTC said it would develop proposals for making commodity swaps and over-the-counter trades more open. On the Hill Word of the agriculture sector’s negative reaction to the CFTC’s April 22 forum quickly spread to Capitol Hill. On April 30, House Agriculture Committee Chairman Collin Peterson, D-Minn., told the National Association of Farm Broadcasters that there had been “a lot of disappointment” in how the commission handled the situation. Peterson said he believes, “The smart guys who were in the subprime [real estate market] sold short and saw the best opportunity in the commodity market. They ran this thing up, and I think the prices are artificial.” Hedge-fund managers now think that the commodities market run-up is finished and are pulling out, Peterson said. To emphasize the importance of the issue, he scheduled a subcommittee hearing on May 15, the day after the House passed the new farm bill. At that hearing, farmers and elevator operators repeated their complaints and suggestions. Terrence Duffy, executive chairman of CME Group, which owns the Chicago Board of Trade and the Chicago Mercantile Exchange, testified that his exchanges intend to rewrite some contracts in an effort to increase convergence between futures and cash prices. But he said that suggestions that the index should be subject to higher margin requirements would only “drive users away from transparent, regulated futures markets into opaque, unregulated over-the-counter markets.” At a Senate Homeland Security and Governmental Affairs Committee hearing on May 20, Michael Masters, a managing member and portfolio manager for Masters Capital Management, said that speculation in the commodity futures markets by pension funds and other institutional investors is driving up energy and food prices. The problem is so severe, he said, Congress should ban pension funds from making such investments and take other actions to clean up the futures markets. Masters said that in the last five years commodities prices have increased faster than demand and that the increase can be explained by corporate and government pension funds, sovereign wealth funds, university endowments, and other institutional investors seeking better returns during a bear market in stocks. By rolling these contracts over repeatedly, Masters said, speculators have “stockpiled” oil and agricultural commodities, keeping prices high. “Index speculators’ trading strategies amount to virtual hoarding via the commodities futures markets,” he said. “Institutional investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits.” Sen. Susan Collins, R-Maine, the ranking member of the Homeland Security and Governmental Affairs Committee, said she found Masters’s arguments “compelling” but added, “We want retirees to have a good standard of living,” and allowing pension funds to invest in commodities may be part of that process. Masters countered that pension funds could buy Treasury securities and stocks to address their concerns. “They don’t need to buy [food] inventories,” he insisted. The most serious underlying issue may be credit: its availability to elevator operators and farmers and their fears that if they borrow money based on inaccurate prices they may be endangering their long-term operations. Hearing that concern, the commission has agreed to work with the Federal Reserve Banks in Chicago and Kansas City and the Farm Credit Administration to establish a better understanding of the financing issues that all market participants face in this era of high prices. The National Farmers Union, the National Grain and Feed Association, and farm-state lawmakers all said that the CFTC’s June 3 announcement was a first step in addressing the issues. But American farmers and elevator operators may have to accept that the high prices they have sought for years have also brought them into a world of higher risk and higher finance. Diana Klemme, a licensed futures broker for the Grain Service Corp. in Atlanta, said she favors more transparency in the commodities markets but noted that the entire agriculture sector will have to adjust to the fact that investors want to own commodities. “The world is changing,” Klemme said. “There is extreme interest not just here but abroad in owning commodities as an asset class. If [investors] want to own commodities, they’ll own them.” Jerry Hagstrom, CongressDaily


Farm production has surged just about every place on the planet in the past 40 years except in Africa. Getting it right there could end the food crisis

Every four years, some Washington types decamp for the Midwest to praise the hard work, common sense, and wisdom of Iowa voters, who they hope, not incidentally, will recognize those same qualities in themselves. The presidential candidates class of 2008 collectively racked up more than 1,940 stops in the Hawkeye State this year, giving politicians and journalists alike ample time to view the state's marvelously fertile--and, at times, damnably vast--fields. After three hours of staring at the nearly unbroken stretch of corn and soy fields that lie between Des Moines and Dubuque--some 90 percent of Iowa's land is devoted to agriculture--it is hard to imagine that the world could possibly have a food shortage. Twenty minutes in a grocery store makes the shortfall more believable. U.S. food prices are up 5 percent in 12 months; global cereal, 92 percent. A lot of factors, including trade policies, energy costs, biofuels, and market speculation, have contributed to the booming prices, but the fundamental problem is that there is not enough food. In seven of the past eight years, the world used more grain than it produced; now, the cold laws of supply and demand have come into play. Until the supply of food increases or, less likely, the demand for it decreases, everybody--Iowa farmers, Cambodian fishermen, Kenyan millers--will be paying more for their daily bread. But they won't be paying the same price. For Americans, the poorest of whom spend about a fifth of their income on food, expensive groceries mean cutbacks, coupons, and food banks. For the 2.5 billion people in the world who live on less than $2 a day, pricey food means inadequate nutrition, poorer health, and less money for school. For the nearly 1 billion people whose daily income is less than $1, it brings starvation to the door. Hungry people are angry people. They have taken to the streets to protest in 30-odd countries so far, and governments are rightfully nervous. "If not properly handled, this crisis could cascade into multiple crises affecting trade, development, and even social and political security around the world," U.N. Secretary-General Ban Ki-moon warned. When food crises arise, the world usually responds with generous sacks of wheat and cups of porridge. This time, it's taking a new approach. At the food security conference in Rome this week, donors pledged billions of dollars for both emergency aid and long-term investments. (See story, p. 39.) The most important news, though, was lost against the summit backdrop: An Africa Steering Group convened by Ban Ki-moon (members are the heads of the United Nations; the African Development Bank; the African Union; the European Commission; the International Monetary Fund; the Islamic Development Bank; the Organization for Economic Cooperation and Development; and the World Bank) agreed on an $8-billion-a-year call to help African governments double crop production through a green revolution and a $4-billion-a-year call to roll out national nutrition programs for children. If the plans stick--and that's a big if--the response to this food crisis might result in other parts of the world looking something like the food system in Iowa today. It's easy to see the well-fed children and ample fields of grain in Iowa; it's harder to see the decades of investment underlying the two. America's food safety net was created in the 1970s, after Robert Kennedy's 1968 poverty tour and a CBS documentary on hunger in America brought skeletal children into the country's living rooms. Congress was shocked and shamed into making food stamps and school lunches available to all who needed them, and it created the Special Supplemental Nutrition Program for Women, Infants, and Children, better known as WIC. Iowa benefited from decades of investment in rural infrastructure, agricultural extension services, university research, and nutrition assistance efforts such as food stamps and the WIC program. Africa would benefit, too. In Iowa, four in 10 infants are enrolled in WIC; one in three children can get free or discounted lunches at school; and one in 10 residents receive food stamps. The massive, $307 billion piece of legislation that Congress passed in May is called the farm bill, but two-thirds of it pays for this food assistance. The rest of the bill, of course, provides for the farm safety net. Iowa produces more corn, soybeans, and hogs than any other state in the country. That bounty comes partly from rich soil and hard work, and partly from decades of investment. Most of the state's commodities reach their markets via the interstate highway system built in the 1950s with federal funds, but the canals and railroads constructed a century earlier first made farming profitable. When the Crimean War broke out in 1853 and Britain needed a new source of wheat, Iowa grain prices jumped because federal, state, and private dollars had created transportation systems to ease delivery of commodities from the center of America to ports and thence to foreign markets. Drainage tiles, laid by farmers with occasional help from the federal government, lie beneath a quarter of the state's farmland. Yields also increased because of public and private research on seeds, fertilizers, farming techniques, and equipment. Federal and state dollars finance agricultural extension offices connecting farmers to Iowa State University, and federal subsidies and crop insurance carry farms through bad years. In return for those investments, Iowa farms contributed $6 billion to the state economy last year. Food for Today In parts of rural Kenya, the hungry season comes every year. In January, farmers sell the last of their maize to pay school fees and purchase household goods and seeds for the next season. The hungry season begins when the harvest money runs out in the spring, and it lasts until June, when the first vegetables and legumes come in. In theory, the farmers should be benefiting from today's high food prices. In practice, they don't have anything to sell. They're buying back their own crops at double the original price just to put food on the table, and they don't have the money to buy the vegetable seeds they need to plant if the hungry season is to end. "At harvest, the farmers have an acute cash shortage, so they sell away even what they need for their family food," said Eusebius Mukhwana, the executive director of the Sustainable Agricultural Center for Research, Extension and Development in Africa. "In these hungry months, people have one meal a day, or less." The World Food Program already provides school lunches to 1.2 million Kenyan children and food rations to 1 million Kenyans affected by drought and the recent ethnic violence there. But the WFP is the global first responder, not the global food stamp program. It can't reach all of the people suddenly facing a hungry season. Before the year began, the WFP planned to feed 73 million of the estimated 860 million hungry people worldwide on a $2.9 billion budget. With rising food and fuel costs, nearly 1 billion people now face hunger, and the WFP has been forced to increase its budget to $4.4 billion to reach 79 million people. Even with more money, the WFP is struggling with the chaos in the commodities markets. Forty countries have established export restrictions that keep food prices down for their people but drive them up, and create supply woes, for everyone else. In Kenya, the WFP lost out on a 4,000-ton food shipment for Somalia after prices rose so fast that the Kenya Cereals and Produce Board could no longer afford the contract price. Pakistan's export ban and a new Iranian export tax together put 43,000 tons of wheat that the WFP intended for Afghanistan out of reach. "There's not really a complete shortage if you're willing to pay the price," said Nicole Menage, the WFP's procurement director, but "it's more and more challenging to find cost-efficient sources within all of these export control measures." (In Rome, U.N. chief Ban fervently called on countries to roll back their export restrictions; so far, only India has heeded his plea and sold rice to the WFP.) Women and Children The WFP's bigger problem, though, is finding a way to reach the newly hungry. "This is not a standard emergency, throw-food-at-it kind of issue," said Julie Howard, executive director of the Partnership to Cut Hunger and Poverty in Africa, a Washington-based group that was founded in 2000 to push for more rural and agricultural assistance to the continent. "Urban areas are being hit, and we don't, in many cases, have the mechanisms to target and deliver assistance effectively. In many countries, something like a food stamp program needs to be put into place, but it's tough to set that up." The WFP is considering substituting cash and vouchers for food rations in some areas. If there's food on the shelves but families can't afford it, vouchers are cheaper than trucking staples in, and they support, rather than undermine, local farm markets. The World Bank has announced $1.2 billion in loans and grants to help countries build food safety nets quickly, as well as get seeds and fertilizer to farmers so they can plant now. America's $1.2 billion budget for international food aid is the biggest in the world, but nearly all of that money is used to purchase commodities here and ship them overseas on U.S. carriers. The WFP and other groups then distribute the food, or, in the case of some nonprofits, sell it to finance development projects. As a result, America gets criticized because its aid floods local markets and loses about half its value before reaching the hungry. President Bush asked Congress to convert a quarter of the $1.2 billion into cash, but he got only a $60 million pilot program in the farm bill. He had more luck with an emergency request this spring: The Iraq war supplemental, as passed by the House and Senate, gives the U.S. Agency for International Development $1.245 billion for the food crisis and allows it to spend $175 million outside the country. The Africa Steering Group's call for a $4 billion investment in nutrition programs is based on a landmark child-malnutrition series published earlier this year in The Lancet, a British medical journal. The research, funded in part by USAID, found that children who miss critical nutrients in utero through age 2 suffer irreversible physical and cognitive damage and that 3.5 million mothers and children die each year as a result of that malnutrition. It also pointed out that 80 percent of the world's malnourished children live in just 20 countries, which means that a targeted prevention program for children, like WIC in America, could have a substantial impact. "If you want to get through this crisis with a minimum of death and disability due to hunger, new money ought to be focused on babies and pregnant women," said David Beckmann, president of Bread for the World, a nonprofit Christian group that lobbies to end hunger at home and abroad. The Lancet's findings rattled food and children's aid groups, which were collectively labeled "fragmented and dysfunctional" by the study's authors, and everybody is scrambling to ramp up or revamp nutrition programs for children younger than 2. USAID is modifying its food aid guidance to reflect the research, and the World Food Program is developing a broad initiative based on the study in conjunction with UNICEF, the World Health Organization, and the World Bank. Out of Favor While governments and global institutions work on the immediate problem of feeding the hungry, they're also looking at ways to prevent the next crisis by increasing food production in Africa. "From the beginning, policy makers have been talking about short-term and long-term responses," said Max Finberg, director of the Alliance to End Hunger, an umbrella group of anti-poverty organizations and institutions. "That's what makes this different from famine crises of the past, where the knee-jerk response has been to meet the immediate need." By absolute numbers, most of the world's hungry--some 527 million people--live in Asia, followed by 213 million in Africa, according to Food and Agriculture Organization statistics. But Asia's total population is far larger, and the proportion of that population that goes hungry has been falling steadily, from 45 percent in 1969 to 16 percent today. The green revolution that began in the 1960s tripled the continent's crop yields, and Asia's current food woes, outside of North Korea, stem more from poverty than production. Africa, on the other hand, does have a food production problem. A third of the population still goes hungry, and African crop yields stagnated at the same time that yields in the rest of the world were surging. Last year, the average acre of corn produced 171 bushels in Iowa and just 21 bushels in Africa. African soils are poor, but that's not the reason for the gap. Agriculture fell out of favor before the green revolution reached the continent. In the late 1980s, most of the developed world looked at global food surpluses--created partly by technology and partly by government subsidies--and decided that agriculture in poor nations was no longer worth the investment. "The idea that developing countries should feed themselves is an anachronism from a bygone era," John Block, President Reagan's Agriculture secretary, said in 1986. "They could better ensure their food security by relying on U.S. agricultural products, which are available in most cases at lower cost." Global development assistance for agriculture fell from a high of $8 billion in 1984 to $3.4 billion in 2004, of which Africa received $1.2 billion. American aid to African farmers fell from $500 million in 1988 to less than $100 million in 2006, according to the U.S. Government Accountability Office. "It isn't that people didn't believe that agriculture was important; other matters just crowded it out," said Peter McPherson, who ran USAID in the 1980s and now serves as president of the National Association of State Universities and Land-Grant Colleges. "Giving a child medicine or food is more appealing and measurable to Congress and other donors." Waking Up to Africa After a decade on the sidelines, African agriculture started edging back into discussions a few years ago. The continent's poverty and hunger numbers were stubbornly refusing to budge, and development groups suddenly remembered that it was agricultural growth that powered the industrial revolutions in England, America, Japan, China, India, Vietnam, and most of the rest of the world. Land and labor are the two resources that most countries have in cheap abundance, and combining them more efficiently has been the key to advancement since Adam and Eve were booted out of Eden. In 2001, Andrew Natsios took over USAID and spent a good chunk of his five-year tenure urging Congress to let him spend more money on agriculture. In 2002, the World Bank recognized agriculture's central role in rural development and reversed a decade-long decline in lending to the sector. In 2003, African heads of state agreed to devote 10 percent of their national budgets to agriculture and to swiftly implement a Comprehensive Africa Agriculture Development Program, or CAADP. In 2004, President Bush created the Millennium Challenge Corp., which has given half its money--$2.8 billion--to agriculture, mostly to build the roads, bridges, and ports needed to connect farmers and markets. In contrast with the Millennium Challenge, which can list some accomplishments, the USAID, World Bank, and CAADP efforts have been more about inspiration than implementation. Congress declined Natsios's requests for more agriculture money. ("USAID filed five annual budgets with more funding for agriculture and most of the money was cut out ... so it is not because the agency has not asked," a bitter Natsios told a House committee last month.) The World Bank recognized the importance of agriculture, but it didn't boost lending much until this year. The CAADP offered a framework for designing and implementing national plans, but countries did better on the former than the latter: Nearly every African nation has plans and a few projects identified, but just four agriculture ministries managed to wrangle the promised 10 percent of the budget from their governments. But all three efforts, and quite a few more, gained new life with the recent rise in food prices. USAID finally got its money--$150 million--in the emergency Iraq supplemental. Robert Zoellick took over at the World Bank last year and immediately put African agriculture on the bank's list of priorities. Aid organizations are tripping over themselves in their rush to declare their support for the CAADP, whatever its content might turn out to be. Most important, Ban, Zoellick, and others have gotten behind a multibillion-dollar effort to launch, through the CAADP framework, an African green revolution. Seeds, Soils, and Markets The keys to the green revolution in Asia were high-yield wheat and rice seeds, and fertilizer. The Rockefeller Foundation, together with the Ford Foundation, paid for the seed development, and USAID and host governments paid for the fertilizer. The result transformed the continent. When the green revolution took off in India and Pakistan, the subcontinent already had the basic infrastructure: massive irrigation systems built over generations, railways constructed by British colonialists to connect farms and markets, and teams of plant scientists trained in universities. Africa, on the other hand, is virtually starting from scratch. Less than 10 percent of its farmland is irrigated. The rest depends on rainfall that is increasingly erratic because of climate change. Roads and railways connect mines, not farms, to markets, and funding for agricultural education and research is minimal. On top of that, Africa's soils are ancient. The fertile topsoil that nourishes Iowa's corn is a legacy of centuries of prairie cover untouched by human hands, and 150 years of farming have already eroded half of it. In Africa, much of the land has been exposed to cultivation for centuries. To cope with the depleted soils, African farmers traditionally rotated their crops, allowing individual plots to lie fallow for years before they were planted again. But as the continent's population grew and the size of plots shrank as they passed through successive generations, farmers could no afford to let a field go unused. As a result, farmers have essentially been mining their soils. Asia's green revolution is harder to duplicate in Africa. Africans rely on far more crops than just wheat and rice, and the vast continent's soil is poorer and its weather more temperamental. Everywhere else in the world, fertilizer replenishes the nutrients demanded by constant crop production. In Africa, sparse roads and suppliers in rural areas, and a transcontinental infrastructure that makes it hard to get imported goods to landlocked nations, drives fertilizer costs up by 200 to 600 percent, putting it out of reach for many farmers. African fields receive just 5 to 10 percent of the average amount of fertilizer used on other continents. The Rockefeller Foundation spent $20 million and 15 years trying to solve the African soil problem without using fertilizer before giving up in 2000. "You can develop strategies that work on the research station and even in a test village, but they're not adopted by farmers because they require too much labor," said Gary Toenniessen, Rockefeller's managing director. "You have a woman farmer who's got to fetch water, watch kids, and do umpteen other things, and the option of growing some nitrogen-fixing trees that she'll cut the limbs of and bring in as a source of nitrogen just doesn't reach her priority list." What does work, however, is combining a little bit of fertilizer with a similar amount of organic replenishment from, say, manure, composting, or crop rotation. It's called Integrated Soil Fertility Management, and if there were markets and extension systems to sell the chemicals and teach the technique, many farmers could dramatically increase their yields with just a little more cash and labor. But most African market and extension systems collapsed in the 1980s and 1990s, when the World Bank and the IMF pressed countries to curtail government spending. The two institutions correctly believed that often-inefficient and corrupt government programs inhibited the development of a private sector. The problem was that the private sector didn't see much profit potential in subsistence farms, which account for about 60 percent of Africa's total. Rockefeller Revisits In 1999, when African agriculture was still the last item on the global agenda, the Rockefeller Foundation came to the rescue again. It doubled down on its Nairobi-based programs, giving them almost all of the foundation's agriculture budget. In 2001, Rockefeller decided to take a closer look at agricultural inputs and education. If Coca-Cola could profitably deliver bottles of brown sugar-water to every small village on the continent, there had to be a way for agriculturalists to reach farmers. The foundation funded programs in Kenya, Malawi, and Uganda to train and certify rural shop owners as "agro-dealers"--essentially agricultural suppliers--who then received credit guarantees so they could purchase supplies. These dealers processed nearly $900,000 worth of fertilizer and seeds in the first two years, and they rapidly expanded from there. One rural Malawian, Janet Matemba, sold $250,000 worth of seeds and fertilizer in 2007. "She does that by packaging seeds and fertilizer in small quantities and demonstrating new technologies behind the shop and in the community," said Akinwumi Adesina, who won last year's Yara Prize for an African Green Revolution for establishing Rockefeller's agro-dealer model. Like other dealers, Matemba provides most of the agricultural advice in her area. "The agro-dealers are beginning to fill some of the gap left by the demise of the public extension system," Adesina said. The certified agro-dealers soon created their own national associations for better financial and political bargaining. In 2005, when Malawi was facing another food crisis and decided to reverse more than a decade of World Bank advice by spending $50 million on fertilizer subsidies, it handed out coupons that farmers could redeem only at government stores. The agro-dealers associations complained vociferously, and the government relented, allowing redemption of the 2006 and 2007 coupons at public and private stores. Malawi nearly tripled its crop production and transformed hunger scares into food surpluses. The final element of Rockefeller's Africa program was plant research and development. The wheat and rice seeds for Asia's green revolution were developed by two Rockefeller-supported groups of national and international scientists. But Africans, unlike Asians, consume many more staple crops than wheat and rice, and Africa's growing conditions are more temperamental and varied: Seeds developed at the African Rice Center and the International Institute for Tropical Agriculture are often defeated by local soil conditions, water shortages, and pests. "In Africa, there's no such thing as one size fits all, and that's what international centers do," Toenniessen said. "What was lacking was the initial investment in building the capacity of the national programs to take what they get from the international research and adapt it to local programs." So instead of one center in Africa, Rockefeller supported a loose network of them. By financing local seed companies and 25 teams of African scientists at various national institutes, as well as sending agriculturalists to graduate school, it helped develop more than 100 new African crop varieties. Alliance for a Green Revolution On its own, Rockefeller's seven-year, $150 million Africa program was good, but it wasn't magical. African governments and other donors and researchers were also working on the problems, developing similar solutions and coming to the same basic conclusions: Crop research, fertilizer, rural credit, and functioning rural markets could go a long way toward feeding the continent's 213 million hungry people. That's not the end of the agenda, of course. It will take enormous investments in transportation, education, irrigation, and trade, as well as changes in tax policies, to unlock the potential power of African farmers. But a rural mother of four with just a few acres to feed her family has to start somewhere, and waiting for governments to get their acts together isn't a promising strategy. Rockefeller's program finally got the magic touch in 2005, when the Bill and Melinda Gates Foundation took a hard look at African agriculture development plans and the Rockefeller models for seeds, soils, and markets. The Rockefeller and Ford foundations catalyzed the green revolution in Asia. With enough money, could Rockefeller and Gates finally spark one in Africa? In 2006, with support from the Rockefeller and Gates foundations, the Alliance for a Green Revolution in Africa was launched. Its initial 10-year goal is eliminating hunger for 30 million people. Former U.N. Secretary-General Kofi Annan chairs the group; Amos Namanga Ngongi, the former deputy executive director of the World Food Program, is the president; and Akinwumi Adesina is the vice president. So far, AGRA has announced two initiatives: $150 million for seed improvements and $180 million for soil conservation. Proposals for water and rural markets are waiting in the wings. AGRA's deep pockets are helping to expand the earlier Rockefeller projects. In Kenya, for example, the alliance is expanding the number of certified agro-dealers from 243 to 1,800; it is funding Kenyan scientists working on cassava, sorghum, sweet potatoes, and maize; and, in a partnership with the Kenyan government, Equity Bank, and the International Food and Agriculture Organization, AGRA is providing fertilizer coupons to farmers and $50 million in credit for farmers and rural markets. AGRA's work and its money have attracted attention and new commitments. On May 29, the New Partnership for Africa's Development--a program formed in 2001 under the African Union--Japan, and AGRA announced a 10-year joint venture to double African rice production. AGRA is also using its wallet and influence to better coordinate agricultural aid. World Bank and GAO reviews of past agricultural investments in Africa heavily criticized a lack of concentration and coordination within and between aid agencies and governments. So the alliance is pushing African governments to use the Comprehensive Africa Agriculture Development Program to target aid to their "breadbasket zones," places where existing water, soil, infrastructure, and markets offer better production potential. AGRA is trying to persuade the international aid agencies to adopt the same focus. The idea is that once concerted investments in those zones bear fruit, governments can use the ensuing revenues to develop another spot in their country. "Any country you pick has those breadbasket zones, and then you spread it from there," Adesina said. The zone plan is gaining traction. On June 4, the heads of all three U.N. food agencies--the World Food Program, the International Fund for Agricultural Development, and the Food and Agriculture Organization--announced an agreement with AGRA to focus on the breadbaskets. America's Millennium Challenge Corp. is finalizing a similar agreement. Granted, nothing announced so far by AGRA, or anyone else, comes close to the $8 billion a year that the Africa Steering Group estimates Africa needs for a green revolution to take off, or, for that matter, the $4 billion it says is required simply for nutrition programs. But nobody ever claimed that food and farm infrastructure is cheap: America, after all, will spend $307 billion on its farm programs in the next five years. We call them investments. Corine Hegland, National Journal Magazine


Swiss Re - World insurance in 2007: emerging markets leading the way

According to the latest Swiss Re sigma study, world insurance premium income grew 3.3% in real terms in 2007, reaching USD 4 061bn. This growth was primarily driven by the life business in industrialised and emerging markets and to a lesser extent by the non-life business in the emerging markets. Life insurance premiums increased 5.4%, which is above the previous ten year average. Non-life premium growth was robust in the emerging markets (+10%), but decreased in the industrialised countries (-0.3%). However, both the life and non-life industries are financially sound despite the challenging economic environment. Life insurance: pension and annuity products drive growth According to Daniel Staib, one of the study’s authors, “Despite a macroeconomic environment characterised by marginally slower economic growth and rising inflation, life insurance continued to expand in 2007 with world life insurance premiums increasing by 5.4% to USD 2 393 billion.” Sales of retirement and other wealth accumulation products spurred growth in the industrialised economies. Life insurance in the emerging markets was fuelled by strong economic performance and catch-up potential. Key drivers of growth in the life business: the trend towards single premium business and pension and annuities products continued to drive sales in countries where an aging population and reductions in state social security benefits were causing a shift from a traditional life insurance model to a pension-driven one; the growing economies of the emerging markets with a relatively young population and an expanding middle class are driving sales across all products; in 2007, the severe credit crisis and turbulent financial markets did not significantly affect life insurance sales.  Non-life insurance: profitable despite slow growth Global non-life premium growth slowed to 0.7% in real terms, totalling USD 1 668bn in 2007. Non-life premium growth continued to follow divergent trends in the industrialised and the emerging markets. While premium volume retreated in the industrialised markets, growth slowed marginally in the emerging markets. Though downward pressure on premium rates continued in some countries, overall technical results were favourable and profitability remained sound. Outlook: healthy growth in life, a stagnant non-life sector Growth in life insurance premiums in 2008 is expected to moderate as capital and stock market turmoil dampen demand.  Daniel Staib notes, “As the economic environment and capital markets stabilise, life insurance is projected to resume its strong performance in the medium term, both in terms of growth and profitability.” In regard to the non-life business, he adds, “Non-life insurance premiums are expected to fall in the industrialised economies. However, non-life premiums will continue to grow in the emerging economies, albeit at a slightly slower rate than in the recent past. ” The effects of the sub-prime crisis are expected to be limited, resulting in lower investment results. A further concern is rising global inflation, which will increase claims costs in liability insurance and other long-tail business lines as well as  hamper profitability. Note: Swiss Re’s sigma study "World insurance in 2007" examines the insurance markets of 147 countries, making explicit reference to 88 This publication can be downloaded in English, German, French and Italian. The Spanish, Chinese (simplified) and the Japanese version will follow shortly. Downloads  World insurance in 2007: emerging markets leading the way Assekuranz Global 2007: Schwellenländerauf dem Vormarsch L'assurance dans le monde en 2007: les marchés émergents ouvrent la voie Assicurazione mondiale nel 2007: mercati emergenti in espansione SIGMA


Swiss Re - Disaster risk financing: how new forms of private-public risk transfer make societies more resilient

The rising impact of natural diasters is driving up the cost of disaster relief and reconstruction for the public sector, especially in developing countries where insurance penetration is still low. Swiss Re’s focus report “Disaster risk financing: reducing the burden on public budgets” shows how recent risk transfer solutions offer governments, development banks and relief organisations models to access pre-event financing, and enable them to allocate relief funds more efficiently by using insurance and capital market instruments. Link to publication Disaster risk financing: reducing the burden on public budgets The impact of natural catastrophes on societies has increased considerably over the last two decades, driven by climate change, population growth and expanded economic activity. While average insured catastrophe losses between 1970 and 1989 were USD 8.3 billion per annum, these losses went up to USD 32 billion per annum between1990 and 2007. At the same time, disasters such as the recent earthquake in China are only rarely insured in many countries. In 2007, a total of 335 natural catastrophes led to overall economic losses of USD 64 billion across the globe, of which USD 40 billion were uninsured. These losses had to be carried by individuals, companies and the public sector. In countries with less financial resources, a catastrophic event can result in higher deficits and debt for the public sector, which not only shoulders the cost of relief efforts, but is also responsible for rebuilding public infrastructure. In Turkey, for example, an earthquake in 1999 caused an economic loss of 11% of GDP. In 1986, an earthquake in El Salvador cost as much as 37% of GDP. Shifting from post-event to pre-event financing “Risk avoidance and mitigation strategies must be the first priority in managing natural disasters. However, no organisation or country can fully insulate itself against extreme events. Transferring catastrophic risk therefore has to be a key element in the financial strategy of every disaster-prone country or region in order to enable and sustain growth,” said Reto Schnarwiler, Head of Swiss Re's Public Sector Business Development. Swiss Re’s latest focus report visualises the significant value in shifting the traditional disaster relief approach – raising scarce funds after the event hits – to an approach that accumulates funds and funding sources before a disaster occurs. Creating a new generation of financial risk transfer solutions A new generation of sovereign insurance (or “macro-insurance”) instruments can make it easier for governments to cope with disasters. Governments will be able to deliver immediate relief to the victims of natural disasters without suddenly creating a significant burden on public finances.One recent example of this approach is the GlobeCat securitisation programme designed by Swiss Re. Launched in December 2007, this solution uses financial instruments with an innovative trigger mechanism to transfer Central American earthquake risks to the capital markets. GlobeCat provides a payout based on the size of the population affected by a specific earthquake. For example, USD 1 million of donations or government funds can be used to secure contingent disaster relief funds in the amount of USD 45 million. In parallel, innovative micro-solutions can protect previously uninsured individuals and small enterprises from the catastrophic financial consequences of weather-related risks. Swiss Re’s Climate Adaptation Development Programme (CADP), launched in 2007, aims at providing financial protection against drought conditions for up to 400 000 people in Africa. Based on climate risk indices, CADP will contribute towards developing a risk transfer market that will help smallholder farmers in Africa buy agricultural inputs, overcome a lack of collateral, draw upon agricultural extension services and accumulate income. Partnership in risk transfer and financing “While governments, development banks or NGOs are constantly getting better at managing disasters more actively, they are finding it more and more difficult to address the financial implications of large-scale natural disasters. New forms of public-private partner­ships allow them to leverage their funds through the use of insurance and capital market instruments,” said Michel Liès, Member of Swiss Re's Executive Committee. Swiss Reinsurance Company Ltd Swiss Re is a leading and highly diversified global reinsurer. The company operates through offices in more than 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA-“ by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. SIGMA


Ukrainian trade tariffs for agriculture and food before and after WTO accession

Publication provides tables with custom duties in Ukraine before and after accession WTO. The data is based on official documents adopted by Ministry of Agriculture and Ministry of Economics. 1) Import tariffs: Seeds/other plants origin inputs Current import duty[1] Bound rate % at date of accession[2] Final bound rate %[3] Rye ?20/t 20 - Buckwheat; millet ?50/t 20 - Coriander; cumin 0 % 20 - Barley ?20/t 5 - Rice 5% 5 - Grain sorghum hybrids 2% 5 - Sugar beet seed ?22000/t 5 - Sunflower seed 0% 5 - Maize, wheat, soybean, rapeseed, flax 0 % 0 - Mushroom spawn, 10% 15 - Сaraway 0 % 15 - Anise 0 % 20 10 (in 2013) Cotton, sesame, castor, safflower, hemp, palm nuts 20 % 5 - Poppy 5 % 5 - Mustard 10 % 5 - Alfalfa; clover; lupine; Kohlrabi; vetch 0 % 5 - Meat and Dairy Products Current import duty Bound rate % at date of accession Final bound rate % Bovine semen, bovine embryos 0 % 5 - Pure-bred breeding horses 0 % 15 - Pure-bred breeding cows 0 % 5 - Liquid milk ?0.1/liter 10 - Milk powder ?0.5/kg 10 - Butter ?1.5/kg 10 - Buttermilk ?0.2/kg 10 - Yoghurt NA 10 - Kephir NA 10 Eggs ?1/kg 12 - Cheese ?0.8/kg 10 - Natural honey 13 - Meat of bovine animals, frozen 10 %, but not less ?600/t 15 - Meat of swine, fresh, chilled or frozen 10%, but no less than ?0.6/kg ?1.0/kg (parts) 12 - Meat of sheep and goats, fresh, chilled or frozen 10%, but no less than ?0.6/kg (mainly) 10 - Poultry (uncarved) 10 %, but not less ?400/t 15 - Poultry (carved, parts) 30 %, but not less ?1500/t 12 - Other products Current import duty Bound rate % at date of accession Final bound rate % Sugar[4] 50%, but no less than 0.3 Euro per 1 kg 50 - Other sugar, including lactose, maltose, glucose, fructose 0.3 Euro per 1 kg 5 (only Sucralight 0%) - Sunflower seed oil 0.8 Euro per 1 kg 30 - Molasses 0.08 Euro per 1 kg 10 - Machinery Current import duty Bound rate % at date of accession Final bound rate % Mowers; hay collecting machines; straw and hay presses; potato diggers; beet diggers; grapes harvesters; machines for cleaning, sorting and screening eggs, fruits etc., milking machines and dairy machinery, 0 0 - Diesel engines for wheel agricultural tractors 5 5 - Plough; harrow; cultivators; scarifies; weeding machines; manure spreaders 10 0 - Poultry incubators and brooders 0 10 - Machines for cleaning, sorting and grading seed, grain or dried leguminous vegetables 0 5 - Bakery machinery 3 8 - Brewery machinery 2 1 - Machinery for the manufacture of confectionary 1 0 - Machinery for sugar manufacture 12 10 - Machinery for the preparation of meat and poultry 12 10 - Hand tools: spade, picks, saps, pitch-fork, rakes, axes etc; milk skimming machines 0 10 - Fertilizers Current import duty Bound rate % at date of accession Final bound rate % Nitrogen based 5 6.5 - Phosphorus based 5 6.5 - Potassium based 5 6.5 - Natural potassium salts (carnallite, sylvinite, etc.) 0 6.5 - Mixed elements or other fertilizers 5 6.5 - 2) Export duties: Product Export duty % at date of accession Final bound rate % Sunflower seeds, whether or not broken 16 10 (6 years upon accession) Linseeds, whether or not broken 16 10 (6 years upon accession) 3) Tariff quota: Ukraine will open a tariff quota on raw cane sugar (260 000 tonnes annually, and increasing to 267 000 tonnes by 2010). This quota will be administered on a first-come first-served basis[5] within 3 years of accession. Data source: Ø       Report of the Working Party on the Accession of Ukraine Ø       Schedule of Concessions and Commitments on Goods (Addendum) Ø       Ministry of Agricultural Policy Department of International Collaboration, Head of Department: Mykhailo Rudenko (+38044) 278-79-42 Division of Trade Policy, WTO and International Markets, Head of Division: Rustam Yuldashev (+38044) 278-84-97 Ø       Ministry of Economy WTO Enquiry Point and Notification Authority (+38044) 272 1147 Authors: Anna Kuznetsova: Mariya Ryzhkova Justyna Jaroszewska: Heinz-Wilhelm Strubenhoff German-Ukrainian Policy Dialogue in Agriculture Reytarska 8/5-A, Kyiv Tel: (+38044) 235-7502, 278-6360 E-mail: [1] Addendum to the Law of Ukraine “On Custom Duties in Ukraine” #  2371-III  from April, 5, 2001 with revision by the Law of Ukraine # 2775-IV from May, 31, 2007. [2] The “bound rate at date of accession” is the agreed tariff that the government commits not to raise above a specified level upon WTO accession. [3] The final bound rate of duty is indicated if differing from the "bound rate at date of accession". It will be implemented according to the date specified in brackets. The date in brackets refers to 1 January of the year indicated. [4] On the amount that exceeds quota. Import tariff for the quota amount will be 2% from January 1 of the year after the Ukraine WTO accession year (according Low of Ukraine “On Establishing Tariff Quota on Importing Raw Cane Sugar into Ukraine”, # 404-16, 30.11.2006). [5] First-come first-served is a service policy whereby the requests of customers are attended to in the order that they applied for a quota, without other biases or preferential treatment. German-Ukrainian Policy Dialogue in Agriculture


Weather index insurance for agriculture and rural areas in lower-income countries

American Journal of Agricultural Economics • Dec, 2007 Innovations in risk transfer for natural disasters in lower-income countries, in particular weather index insurance products, can be used to shift various weather-related risks. This article discusses the linkage between weather risk and poverty; provides background information on weather index insurance products; describes requirements for the implementation of weather index insurance and possible roles for governments, donors, and international financial institutions in facilitating implementation; and briefly reviews recent efforts to provide weather index insurance products in rural areas of some middle- and lower-income countries. Weather Risk and Poverty Approximately 1 billion people live on less than $1 per day. Three-quarters of those live in rural areas (Chen and Ravallion 2007), and over one-half depend on agriculture or agricultural labor as their primary source of livelihood (International Fund for Agricultural Development 2001). Thus, poor rural households are particularly susceptible to the financial consequences of weather-related natural disasters. Even if they are not directly involved in agricultural production, many of the rural poor have income sources that are tied to the success of agricultural production or are otherwise highly susceptible to extreme weather events. While health problems are often cited as the greatest risk facing many rural households, uninsured weather risks also contribute both directly and indirectly to the existence of chronic poverty. Extreme weather events, such as droughts and floods, can directly destroy productive assets that have accumulated at high opportunity cost through years of foregone consumption. Households that are thrust into poverty by such shocks often find it difficult to recover and restart the long process of accumulating productive assets (Carter et al. 2007). The risk of extreme weather events also contributes indirectly to the existence of chronic poverty. Households that recognize the potential for weather-related shocks are often reluctant to forego short-term consumption to invest in risky productive assets. Instead, they adopt low-risk, low-return investment strategies that reduce their exposure to extreme weather events but also keep the household trapped in chronic poverty (Rosenzweig and Binswanger 1993; Carter and Barrett 2006). In some areas the rural poor protect themselves from weather-related losses using various structural mitigation measures. Examples would include supplemental irrigation to offset the risk of insufficient rainfall or dams and levies to control flooding. However, these structural mitigation strategies are not always feasible, reliable, or cost-effective. Households can also mitigate the financial effects of risk through savings, diversification, share tenancy, producing lower risk outputs, or producing outputs that require less investment in risky productive assets. However, these strategies may not be available to all households. Further, the implied risk premium on such risk mitigation strategies can be very high. Rosenzweig and Binswanger (1993) estimated the implied risk premium for risk mitigation strategies employed by some households in rural India at 35%. In principle, traditional insurance instruments, including crop insurance, can be used to transfer the risk of extreme weather events. However, insurance markets are underdeveloped and often nonexistent in rural areas of lower income countries due to poor contract enforcement, asymmetric information, high transaction costs, and high exposure to spatially covariate risks (Skees and Barnett 2006). These problems are particularly acute for crop insurance. Weather Index Insurance In recent years, researchers and development organizations have been exploring the potential for using weather index insurance to provide risk management opportunities for the rural poor. Weather index insurance pays indemnities based not on actual losses experienced by the policyholder but rather on realizations of a weather index that is highly correlated with actual losses. In its simplest form a weather index measures a specific weather variable (e.g., rainfall or temperature) at a specific weather station over a defined period of time. Weather index insurance policies specify a threshold and a limit that establish the range of values over which indemnity payments will be made. If the insurance policy is protecting against unusually high realizations of the weather variable (e.g., excess rainfall or extremely hot temperatures), an indemnity is paid whenever the realized value of the index exceeds the threshold. The limit is set higher than the threshold, and the indemnity increases as the realized value of the index approaches the limit. No additional indemnity is paid for realized values of the index that exceed the limit. Conversely, if the policy is protecting against unusually low realizations of the weather variable (e.g., drought or extremely cold temperatures) an indemnity is made whenever the realized value of the index is less than the threshold, and the limit is set lower than the threshold. To illustrate how weather index insurance works, consider the following example of an index insurance policy that protects against insufficient rainfall over a three-month period, with rainfall being measured at a specific weather station. The threshold is set at 100 millimeters of rainfall and the limit at 50 millimeters. Assume the policyholder purchases $1,000 of insurance protection. If the realized rainfall at the weather station is less than 100 millimeters, the policyholder will receive an indemnity equal to $20 for each millimeter less than 100 millimeters, up to a maximum of $1,000 for rainfall realizations of 50 millimeters or less. The indemnity does not depend on losses incurred by the policyholder but is based strictly on rainfall measured at the weather station. Relative to traditional insurance products, weather index insurance has several advantages: * The insurance contract is relatively straightforward, simplifying the sales process. * Indemnities are paid based solely on the realized value of the underlying index. There is no need to estimate the actual loss experienced by the policyholder. * Unlike traditional insurance products, there is no need to classify individual policyholders according to their risk exposure. * There is little reason to believe that the policyholder has better information than the insurer about the underlying index. Thus, there is little potential for adverse selection. Also, there is little potential for ex ante moral hazard since the policyholder cannot influence the realization of the underlying weather index. * Operating costs are low relative to traditional insurance products due to the simplicity of sales and loss adjustment; the fact that policyholders do not have to be classified according to their risk exposure; and the lack of asymmetric information. However, start-up costs can be quite significant. Reliable weather and agricultural production data and highly skilled agro-meteorological expertise are all critical for the successful design and pricing of weather index insurance products. * Since no farm-level risk assessment or loss adjustment is required, the insurance products can be sold and serviced by insurance companies that do not have extensive agricultural expertise. An important limitation of index insurance is that policyholders are exposed to basis risk. In this context basis risk refers to the imperfect correlation between the index and the losses experienced by the policyholder. It is possible for the policyholder to experience a loss and yet receive no index insurance indemnity. Likewise, it is possible for the policyholder to receive an index insurance indemnity and experience no loss. There are two potential sources of basis risk. First, losses may be caused by disease, insect infestation, or any number of factors other than the weather variable on which the index is based. Unless the index is based on a weather variable that is the dominant cause of loss in the region, basis risk will be unacceptably high. Second, the weather variable used to drive the index may not be highly spatially covariate. Thus, the measure of the weather variable at the farm or household may be quite different than the measure at the weather station. Basis risk can be reduced by offering weather index insurance only in areas where a particular, highly covariate weather variable (e.g., drought or extreme temperatures) is the dominant cause of loss. Finally, it is important to recognize that in many cases the appropriate target market for weather index insurance may not be individual households. Instead, the appropriate markets may be various local-level risk aggregators--that is, organizations that do business with many households in the local area and thus are highly exposed to covariate weather risks. Examples would include microfinance entities and other formal or informal lenders, mutual-aid associations, farmers' cooperatives, input suppliers, output processors, and even local governments or disaster relief providers (Skees and Barnett 2006). Since these organizations aggregate risks from multiple households, they can effectively pool idiosyncratic risks; however, they remain highly vulnerable to extreme covariate weather events. Requirements for Weather Index Insurance While the basic concept is simple, effective implementation of weather index insurance is not at all simple. The continuing availability of accurate historical weather data is critical. It is also necessary to determine whether any of the available weather variables are in fact highly correlated with realized losses and if so, the time periods in which losses are most likely to occur. International experience has also shown that effective implementation requires careful attention to the services currently being provided by local risk aggregators as well as legal and regulatory constraints. Governments, donors, and international financial institutions can facilitate the offering of weather index insurance by assisting with demand assessment; establishing an appropriate legal and regulatory framework; collecting and managing the required data; training insurance suppliers and providing objective information to potential users of weather index insurance; developing and pilot-testing potential weather index insurance products; and possibly providing some level of catastrophic risk-sharing. Each of these is discussed below. Demand Assessment Before investing in data collection and product development, it is important to assess the potential demand for weather index insurance in a particular area. Personal interviews, focus groups, and surveys can be used to determine answers to the following questions: What are the key weather perils of concern? How frequently do the perils occur and how significant is the impact? Who is affected by these perils? What mitigation or informal risk transfer strategies are currently being employed? What is the (opportunity) cost of those strategies? How much are end users willing and able to pay for an insurance product? Legal and Regulatory Framework To facilitate the offer of weather index insurance, governments must establish an appropriate legal and regulatory framework. The legal framework should address not only the proper regulation of insurance sales but also contract enforcement. In many lower-income countries insurance is so poorly understood that courts often force insurance providers to pay indemnities for losses that were clearly not covered under the contract provisions. Conversely, insurance providers may refuse to pay claims to poor policyholders because they know that the policyholders cannot afford to have an attorney represent them in court. Thus, to protect the interests of small-scale policyholders, some sort of binding arbitration procedure is typically desirable. Even in countries where the legal and regulatory system is more highly developed, the existing regulatory standards for traditional insurance products may not be appropriate for index insurance products. Index insurance creates unique regulatory challenges because the indemnities are not based on the actual loss incurred. Also, index insurance is highly exposed to spatially covariate losses; so the minimum capital (or contingent capital) requirements need to be higher than those for traditional insurance. Data Collection and Management For weather index insurance to be successful, both the insurer and the policyholder must have confidence that the index is being measured accurately and the data are secure from tampering. To build this confidence, the underlying index should be measured by a trusted government or private source of publicly available weather data. In addition, a sufficient amount of historical (normally daily) data on the underlying weather variable must be available for the insurer to estimate premium rates. The amount of historical data required depends on the frequency of occurrence of the risk. Twenty years of data may be sufficient to set initial premium rates for relatively frequent weather events. Thirty or forty years of data may not be sufficient for infrequent but potentially catastrophic weather events. Without sufficient data on which to base premium rates, the insurer will either refuse to sell the insurance or add a large premium load to account for uncertainty. Since weather data have public goods characteristics, they are unlikely to be collected, cleaned, archived, and made publicly available by private-sector companies. Government meteorological bureaus usually provide these services. However, many lower-income countries find it difficult to adequately fund meteorological bureaus or sustain a sufficient network of weather stations. To facilitate the availability of weather index insurance, some donor organizations have provided funding for expanded meteorological services in lower-income countries. Training of Insurance Suppliers and Consumer Education Insurance suppliers in lower-income countries are unlikely to be familiar with weather index insurance. Thus, they require training and capacity building opportunities to build the expertise needed to offer these unique insurance instruments. Similarly, in rural areas of many lower-income countries, insurance products are not widely available. Even if potential policyholders are familiar with other types of insurance products, they will almost certainly not be familiar with weather index insurance. To make an informed purchase decision, it is critically important that potential policyholders understand the basis risk inherent with weather index insurance. That is, they need to understand that they may experience a loss but not receive an indemnity. Thus, the successful introduction of weather index insurance will require a significant educational effort. While insurance suppliers will provide some information as part of their sales efforts, potential policyholders also need information from objective sources. Government entities and donor organizations can provide training on weather index insurance to insurance suppliers. They can also serve as an objective source of information and educational materials for potential policyholders. Product Development Once a weather index insurance product is developed and offered for sale by an insurance supplier, it can easily be copied by competitors, since the underlying index is based on publicly available data. This "free rider" problem makes it very unlikely that private-sector insurance suppliers will invest in the research and development required to bring a weather index insurance product to the market. For this reason governments and donors have tended to fund feasibility studies and pilot tests of new weather index insurance products. Catastrophic Risk-Sharing Local suppliers of weather index insurance policies must be able to transfer their loss exposure outside of the local area. Traditional lines of insurance (e.g., automobile, life, property and casualty) are offered on loss events that are largely uncorrelated, so the law of large numbers reduces the variance in indemnities for local insurance providers. But weather index insurance protects against spatially covariate loss events. When a policyholder collects an indemnity on a weather index insurance product, all other holders of that same policy will be collecting indemnities as well. This implies that, in any given year, indemnities can be very high relative to premiums collected. While in principle it may be possible for insurance suppliers to set aside adequate liquid reserves to cover the potential for large indemnities, in practice this is highly unlikely. There is a high opportunity cost associated with keeping such large amounts of capital in investments that can be readily liquidated. Further, in many countries there are tax disincentives for holding large reserves. Thus, index insurance suppliers generally obtain contingent capital via reinsurance. Catastrophe bonds and contingent loan mechanisms can also be used as sources of contingent capital. Governments and donors may also assist with providing contingent capital to suppliers of weather index insurance. Some evidence suggests that those at risk tend to ignore the probability of the most extreme and infrequent loss events (Kunreuther 1996; Kunreuther and Slovic 1978). But insurers and reinsurers of weather index insurance cannot afford to ignore the potential for such events. They must load premium rates to reflect the potential for highly infrequent weather events, including events that are more extreme than any in the available historical data. Since there are no data from which to calculate the frequency and magnitude of such extreme events, insurers and reinsurers tend to be extremely conservative when calculating the premium load. This creates a gap between what buyers are willing to pay and what sellers are willing to accept for protection against extreme weather events. To address this market failure, governments or donors can provide contingent financing (e.g., reinsurance or contingent loans) for extreme realizations of the weather variable underlying the weather index insurance product. To keep from crowding-out private sector risk transfer markets, any government or donor contingent financing should be carefully structured so that it covers only the most extreme weather events. If insurance suppliers can obtain contingent financing for this extreme tail risk at a reasonable cost, they can pass along the benefits in lower premium costs to policyholders. This will increase the number of policies sold, thus increasing market opportunities for reinsurers to provide contingent financing against all but the most extreme weather events. International Experience Experience with weather index insurance in middle and lower income countries is both too limited and too recent to draw conclusions about its long-run sustainability. Table 1 lists some middle- and lower-income countries where weather index insurance has been sold to date. However, except for Mexico and India, sales have occurred within pilot programs; so the volume of business has been marginal. In addition, weather index insurance products are currently being developed in several countries (table 2). Among middle- and lower-income countries, Mexico and India currently have the most developed weather index insurance programs. In both countries the products offered focus primarily on rainfall deficiency (drought). Also, in both countries technical support, provided by international organizations, facilitated the offering of weather index insurance products. Mexico The Mexican public reinsurance company Agroasemex has been providing weather index insurance since 2001. Most of the policies are based on rainfall, but some have been based on temperature and wind speed. The policies are marketed primarily to state governments in Mexico to protect against calamities (mainly drought) in the states and are linked to the social program Fondo Nacional para Desastres Naturales (Natural Disasters Fund--FONDEN). In 2005, 1.16 million hectares in eighteen states were covered by the contracts. In 2006, 2.3 million hectares were covered. This represents 28% of the dry-land (nonirrigated) crop area in Mexico. The main limiting factor to providing wider coverage is a lack of rainfall data and weather stations. India Agriculture accounts for around 23% of India's gross domestic product. An estimated 65 % of the population is engaged in agriculture and associated activities. Most of the agricultural production is small-scale. Of the more than 120 million landowners, 80 % own parcels of less than 2 hectares. Weather risk is a major concern to agricultural producers and agribusinesses alike. It is estimated that rainfall variability accounts for more than 50% of the variability in crop yields. Weather index insurance was first introduced in India in 2003. In collaboration with the microfinance institution BASIX, ICICI Lombard General Insurance Company began selling a rainfall index insurance product. BASIX holds no risk on the insurance policies but instead acts as an intermediary that receives commissions from selling the index insurance to its customers. Between June 2003 and March 2006, BASIX sold a total of 7,653 rainfall index insurance policies in six Indian states. The parastatal agriculture insurance company AICI introduced a weather index insurance product in 2004. In 2005-06, AICI sold weather index insurance policies to more than 125,000 farmers. Most (98%) were sold to farmers in the State of Maharashtra. The World Bank has provided technical assistance to the Government of India and AICI in the development of weather index insurance. This assistance has focused on product design, rating, and large scale implementation. Conclusion Effective mechanisms for transferring risk can catalyze investment and economic growth, thus contributing to poverty reduction in rural areas of lower income countries. Weather index insurance is a relatively simple concept that under certain circumstances can effectively transfer spatially covariate weather risks. While experience to date is too limited and too recent to draw general conclusions about the long-run sustainability of weather index insurance, the experience in Mexico and India suggests that at least in some areas, these products may prove to be a valuable risk transfer mechanism for the rural poor. Innovations in Risk Transfer for Natural Disasters in Lower-Income Countries (Jerry Skees, University of Kentucky and Barry Barnett, University of Georgia, Organizers) References Carter, M.R., and C.B. Barrett. 2006. "The Economics of Poverty Traps and Persistent Poverty: An Asset Based Approach." Journal of Development Studies 42:178-99. Carter, M.R., P.D. Little, T. Mogues, and W. Negatu. 2007. "Poverty Traps and Natural Disasters in Ethiopia and Honduras." World Development 35:835-56. Chen, S., and M. Ravallion. 2007. "Absolute Poverty Measures for the Developing World, 1981-2004." Development Research Group, The World Bank: Washington, DC International Fund for Agricultural Development. 2001. Rural Poverty Report 2001. Oxford: Oxford University Press. Kunreuther, H. 1996. "Mitigating Disaster Losses through Insurance." Journal of Risk and Uncertainty 12:171-87. Kunreuther, H., and P. Slovic. 1978. "Economics, Psychology, and Protective Behavior." American Economic Review 68:64-69. Rosenzweig, M.R., and H.P. Binswanger. 1993. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments." Economic Journal 103:56-78. Skees, J.R., and B.J. Barnett. 2006. "Enhancing Microfinance Using Index Based Risk-Transfer Products." Agricultural Finance Review 66:235-50. Barry Barnett is Associate Professor in the Department of Agricultural Economics at Mississippi State University. Olivier Mahul is Senior Insurance Specialist and Program Manager, Insurance for the Poor Unit, Financial and Private Development Vice Presidency of the World Bank. This article was written when Barnett was Associate Professor in the Department of Agricultural and Applied Economics at the University of Georgia. This article was presented in a principal paper session at the AAEA annual meeting (Portland, OR, July 2007). The articles in these sessions are not subjected to the journal's standard refereeing process. Barnett, Barry J.^Mahul, Olivier


On The Revelation Of Private Information In The U.S. Crop Insurance Program

On The Revelation Of Private Information In The U.S. Crop Insurance Program Ergun, A Tolga; Ker, AlanThe crop insurance program is a prominent facet of U.S. farm policy. The participation of private insurance companies as intermediaries is justified on the basis of efficiency gains. These gains may arise from either decreased transaction costs through better established delivery channels and/or the revelation of private information. We find empirical evidence suggesting that private information is revealed by insurance companies via their reinsurance decisions. However, it is unlikely that such information will be incorporated into subsequent premium rates by the government. The crop insurance program is a prominent facet of U.S. farm policy. The participation of private insurance companies as intermediaries is justified on the basis of efficiency gains. These gains may arise from either decreased transaction costs through better established delivery channels and/or the revelation of private information. We find empirical evidence suggesting that private information is revealed by insurance companies via their reinsurance decisions. However, it is unlikely that such information will be incorporated into subsequent premium rates by the government.INTRODUCTIONFederally regulated crop insurance programs have been a prominent part of U.S. agricultural policy since the 1930s. In 2004, the estimated number of crop insurance policies exceeded 1.24 million with total liabilities exceeding $45 billion. Traditional crop insurance schemes offer farmers the opportunity to insure against yield losses resulting from nearly all risks, including such things as drought, fire, flood, hail, and pests. A variety of crop insurance plans and a number of new pilot programs are currently under development. In the crop insurance program three economic interests are served: the federal government through the United States Department of Agriculture's Risk Management Agency (RMA), the producers or farmers, and the private insurance companies. In 1980, insurance companies were solicited by the federal government to increase farmer participation. Intermediaries are often used in public policy if efficiency gains are expected. In the crop insurance program, efficiency gains could be expected through two avenues. First, the better established delivery channels of insurance companies could reach a greater number of producers at a given cost. Second, the exploitation of private information (if it exists with the insurance companies) can increase the accuracy of premium rates, thereby decreasing adverse selection losses.1 In this article, we empirically test if insurance companies reveal private information about risk profiles to the RMA via their reinsurance decisions. Not only is this of economic interest, it is a timely empirical question given the sizeable public funds needed to operate the crop insurance program and that a significant share of those funds-rivaling that of producers-resides with the insurance companies (see Figure 1).We use semiparametric as well as parametric methods to determine whether a set of policies returns a profit or not using a data set aggregated to the crop-county-year combination. We consider models with and without explanatory variables depicting the allocation decisions of insurance companies. The use of semiparametric methods, which avoid strong distributional assumptions, proves useful as we reject the parametric method.The remainder of the article proceeds as follows. The second section "Insurance Companies and the Standard Reinsurance Agreement" provides a terse review of the involvement of insurance companies in the U.S. crop insurance program. The third section "Data and Methodology" discusses the data and outlines the econometric methods. The fourth section "Estimation Results" presents the results, while the final section focuses on the corresponding policy implications.INSURANCE COMPANIES AND THE STANDARD REINSURANCE AGREEMENTThere is a surprisingly small literature on the role of insurance companies in the U.S. crop insurance program (see Miranda and Glauber, 1997; Ker, 2001). Figure 1 illustrates the breakdown of government program outlays into producer subsidies, indemnities less premiums, administrative and operating reimbursement for insurance companies, and underwriting gains/losses accrued by insurance companies.2 There are a number of interesting features: (1) producer subsidies increased dramatically in 1995 (a result of the 1994 Federal Crop Insurance Act) and again in 2001 (a result of the 2000 Agricultural Risk Protection Act (ARPA)), (2) indemnities less premiums are quite volatile, (3) insurance companies' administrative and operating expenses have risen with increases in total premiums, and (4) underwriting gains accruing to insurance companies have increased dramatically since 1994. Given the significant underwriting gains realized by insurance companies, it is of economic interest to determine if they reveal private information through their reinsurance decisions.The involvement of insurance companies in the U.S. crop insurance program is defined by the Standard Reinsurance Agreement (SRA). Insurance companies sell policies and conduct claim adjustments. In return/the RMA compensates them for the corresponding aclrninistrative and operating expenses. The underwriting gains/losses are shared asymmetrically, between the insurance companies and the RMA. Both the provisions by which the underwriting gains and losses are shared and the reimbursement for administrative and operating expenses are set out in the SRA.Section II.A.2 of the 2005 SRA states that an insurance company ". . . must offer and market all plans of insurance for all crops in any State where actuarial documents are available in which it writes an eligible crop insurance contract and must accept and approve all applications from all eligible producers." An eligible farmer will not be denied access to an available, federally subsidized, crop insurance product. Therefore, an insurance company conducting business in a state cannot discriminate among farmers, crops, or insurance products in that state. This is unusual in that the responsibility for pricing the crop policies lies with the RMA but the insurance companies must accept some liability for each policy they write and cannot choose which policy they will or will not write.Two mechanisms are provided to entice insurance companies to participate. First, given that insurance companies do not set premium rates, there is a mechanism in the SRA by which they can cede the majority of the liability of an undesirable policy. In a private market, the insurance company would not write a policy deemed undesirable. second, given that RMA premium rates do not reflect a return to the insurance company's capital, the SRA provides asymmetric sharing of underwriting gains/losses. Essentially, the SRA provides two mechanisms that emulate a private market from the perspective of the insurance company. In so doing, it also provides a vehicle by which an insurance company uses its information regarding farmer risk profiles to transfer unwanted policies to the RMA.The first parameter, ^sup k^^sub 1^, is fixed at 0.2 for the assigned risk fund but represents an ex ante choice variable for the insurance company with respect to the commercial and developmental funds. For the development fund ^sup k^^sub 1^ [0.35,1.0], while for the commercial fund ^sup k^^sub 1^ [0.5,1.0]. The insurance company must choose ^sup k^^sub 1^ by July 1 of the preceding crop year.The second parameter, ^sup k^^sub 2^, is not a fixed scalar, but a function of the fund loss ratio. Figure 2 illustrates the relationship between the fund loss ratio and the percentage of premiums retained by the insurance company. For example, if the percentage of premiums retained is -20 percent and the total premiums were $1 million, the insurance company would incur a loss of $200,000. The fund loss ratio is defined as the ratio of total indemnities to total premiums.Note the differences between the percentage of premiums retained for each of the three funds. Consider, for example, if the assigned risk fund has $2 million in premiums and $3 million in indemnities. The loss ratio would be 1.5 and the underwriting loss would be $1 million. For the assigned risk fund, the insurance company would be liable for 0.92 percent or only $9,200 of the $1 million underwriting loss. Given total premiums of $2 million the percentage of premiums retained by the insurance company would be only -0.46 percent. If, on the other hand, this underwriting loss occurred in the commercial fund with ^sub 1^ = 1, the insurance company would be liable for 46 percent or $460,000 of the $1 rnillion underwriting loss, resulting in a percentage of premiums retained of -23 percent. Consider a second example: if premiums were $2 million and indemnities were only $1 million, the loss ratio would be 0.5 and the underwriting gain would be $1 million. For the assigned risk fund, the insurance company would retain 2.64 percent ($26,400) of the underwriting gain and, as such, the percentage of premiums retained would be 1.32 percent. If, on the other hand, this underwriting gain occurred in the commercial fund with ^sub 1^ = 1, the insurance company would retain 86.8 percent ($868,000) of the underwriting gain and, as such, the percentage of premiums retained would be 43.4 percent. It is apparent from these examples that policies that a profit-maximizing insurance company expects to be profitable would be placed in the commercial fund where they share a high percentage of any underwriting gains and losses. Conversely, policies that a profit-maximizing insurance company expects to be unprofitable would be placed in the assigned risk fund where they share a low percentage of any underwriting gains and losses.The expected profit-maximizing optimal reinsurance of policies across the three funds is extremely complicated. Given that there exist three possible funds for which any policy may be allocated, and, assuming N policies, there are 3^sup N^ possible reinsurance allocations. For example, if N = 500 there exist 3.636E + 238 possible reinsurance allocations, all of which need to be evaluated in terms of expected profit. Not only is it untenable for the insurance company to undertake this, but to do so requires an estimate of the joint density of yields for the N policies-impossible, given the scarce data.3 Fortunately, our empirical analysis only requires that insurance companies allocate policies that they expect to be relatively more profitable to the commercial fund as opposed to the assigned risk fund. It is apparent from the above examples that this requirement is consistent with profit-maximizing behavior.Two final points regarding the SRA require discussion. First, there exist separate developmental and commercial funds for "catastrophic policies," "revenue policies," and "other policies" that comprise multiple peril crop insurance policies and Group Risk Plan policies (Group Risk Plan policies make up a negligible fraction of the total policies). We focus our attention on the three fund allocations for the "other policies" because insurance companies have significantly less experience and historical information with the "revenue policies" and "catastrophic policies" and thus their reinsurance decisions may not be as efficient. Also note, that while these funds (except assigned risk) are not aggregated across types of policies, they are aggregated across crops. second, insurance companies face a constraint, at the state level, on the maximum percentage of premiums in their book of business that can be placed in the assigned risk fund. These maximums vary quite significantly by state. While this may inhibit the insurance companies' ability to cede unwanted policies, by choosing fxi = 0.35 for the developmental fund they can make it resemble the assigned risk fund (see Figure 2) and there are no such percentages of premium restrictions for the development fund.DATA AND METHODOLOGYRecall that we wish to test whether relevant private information is revealed in the reinsurance decisions of insurance companies. This hypothesis can be tested by predicting whether policies are profitable or not using two models. The first model uses public information as explanatory variables. The second model nests the first and includes the additional variables representing the reinsurance decisions of the insurance companies. Specifically, we test whether the percentage of correct predictions increases significantly with the inclusion of these reinsurance variables.The data comprise the premiums, indemnities, liability, and number of policies in each of the three funds by crop-county-year combination. We have data on corn, cotton, soybeans, and wheat for the reinsurance years 1998,1999,2000, and 2001. We remove combinations with less than $500,000 in liability leaving 7,602 crop-countyyear combinations.Two caveats regarding our data need noting. First, our data are aggregated to the county level; we do not have policy-specific reinsurance decisions. second, our data are aggregated across insurance companies. While we would prefer policy and company-specific reinsurance decisions and requested such, we were only able to obtain aggregated data from RMA. This lack of precision will reduce the power of our tests.The explanatory variables used in our analysis are crop dummies for cotton, soybeans, and wheat, historical loss ratio, ratio of current liability to the previous year liability (denoted liability ratio), the maximum percentage of premiums allowed in the assigned risk fund for that state (denoted state risk), percentage of premiums placed in the commercial fund, and the percentage of premiums placed in the assigned risk fund.5 We do not include the percentage of premiums placed in the developmental fund since that would result in a singularity problem as the sum of the three percentages in the three funds equals one for each crop-county combination.Econometric MethodologyOptimization-based estimation methods have been developed for single-index models without making distributional assumptions and thus avoiding misspecification. These include Ichimura (1993) and Klein and Spady (1993). The first of these estimators is based on minimizing a nonlinear least squares loss function and the latter is based on maximizing a profile likelihood function. The latter estimator is developed specifically for binary-choice model estimation. Ichimura and Klein and Spady show yfh convergence and asymptotic normality of their estimators and give a consistent covariance estimator. Since the estimators (and results) are almost identical we only present the results from the Ichimura estimator.Note that we need a location-scale normalization for identification purposes in singleindex models. Since the link function F is assumed to be completely unknown, the intercept term cannot be identified as is subsumed in the definition of F. Also, a scale normalization is needed for the same reason that it is imposed in parametric models (assuming the error term has unit variance). This scale normalization in the semiparametric models can be achieved by setting the coefficient of one continuous regressor equal to a constant.7In single-index models, the asymptotic distribution of the normalized and centered estimator does not depend on the smoothing parameter, so asymptotically, any sequence of smoothing parameters is going to give the same estimate as long as it satisfies certain conditions.9 For this reason, in semiparametric single-index models, selection of the smoothing parameter has not been well studied. One exception is Hardle, Hall, and Ichimura (1993) who show the SLS estimator of Ichimura (1993) can be expanded as A(b) + B(h) and can be minimized simultaneously with respect to both b and h. This is like separately minimizing A(b) with respect to b and B(h) with respect to h. The end result is a [the square root of]n-consistent estimator of b and an asymptotically optimal estimator of h, in the sense that h/ho -+ 1 as n -? oo where ho is the optimal bandwidth for estimating F when b is known and is proportional to n-1/5 as usual in nonparametrics (see Hardle, Hall, and Ichimura 1993, for technical details). We apply this idea to the SLS objective function and hence we optimize with respect to both b and h. To our knowledge, this is the first article that uses this idea in practice other than the original Handle, Hall, and Ichimura (1993) article. Note that in estimating F, we are excluding observation i so that we are "cross-validating" the objective functions. In the estimations we use a normal density function truncated at plus and minus three standard deviations as the kernel.ESTIMATION RESULTSTo test our hypothesis, we randomly partition our sample into an estimation sample (3,801 observations) and a prediction sample (3,801 observations). We evaluate our hypothesis using out-of-sample methods rather than within-sample methods because insurance companies must make reinsurance decisions out-of-sample and out-ofsample tests minimize spurious results from over-fitting the data (particularly for semiparametric methods which, if applied inappropriately, can be made to over-fit the data). We also conducted three tests for the appropriateness of the probit model and all rejected it (see the Appendix for details and test results).The estimation results and predictive performances for the models without and with the reinsurance variables are located in Table 1 (standard errors are in parentheses). For the semiparametric estimator we restrict the intercept to 0 and the parameter estimate on the historical loss ratio to the probit estimate as is commonly done.10We have no expectations about the signs of the crop dummy variables although we do have expectations about the signs of the other parameter estimates. First, the sign of liability ratio is negative as expected. If liability increases (decreases) significantly from one year to the next, this may suggest that producers perceive their return to that insurance policy to have increased (decreased), and thus the expected return for the insurance company may decrease (increase). The parameter estimate on state risk is negative (as expected) and significant. This indicates, quite interestingly, that policies in those states with higher bounds on the percentage of premiums allowed in the assigned risk fund are less likely to be profitable. The parameter estimates on the historical loss ratio in the probit models are negative and significant as expected; the higher the loss ratio, the less likely the policies are profitable. The parameter on the percentage of premiums in the commercial fund is positive as expected. This suggests that policies the insurance company places in the commercial fund are more likely to be profitable. This is statistically significant in both the probit and semiparametric models. Finally, the parameter on the assigned variable is negative as expected suggesting that policies the insurance company places in the assigned risk fund are less likely to be profitable. The out-of-sample tests show that predictive performance increases significantly when the reinsurance variables are included, indicating that there exists relevant private information revealed through the allocation decisions of the insurance companies.12 This coincides with the in-sample results that suggested that the explanatory variables depicting the reinsurance decisions were significant in explaining profitable and nonprofitable sets of policies. Therefore, we reject the null that no relevant private information is revealed in the reinsurance data.CONCLUSIONS AND POLICY IMPLICATIONSAlthough the crop insurance program has garnered significant attention in the academic literature, surprisingly little has focused on the involvement of insurance companies. However, the public rents obtained by the insurance companies in return for their involvement are close to rivaling those obtained by producers (see Figure 1). Consequently, more research is needed, both theoretically and empirically, focusing on the involvement of insurance companies as intermediaries.This article considered whether insurance companies reveal private information through their reinsurance decisions. We conducted out-of-sample tests and showed that the insurance companies do possess statistically significant private information that may warrant their involvement in the crop insurance program in addition to program delivery efficiencies. Although RMA can adjust their rates over time, they face many political and legal constraints in doing so. Therefore, it is unknown whether RMA could in fact adjust their rates to reflect the revelation of private information. A review of the rating methodologies for all RMA insurance products reveals that the reinsurance behavior of insurance companies is not currently part of any RMA rate-setting formulas.The policy implications of our results do not call into question the use of insurance companies as intermediaries in the U.S. crop insurance program. The reality is that the program is simply too large to operate without private insurance companies. The results may call into question whether RMA should share the underwriting gains/losses with insurance companies.13 If risk sharing were eliminated, the administrative and operating expense reimbursement may need to be increased to maintain the participation of insurance companies that do so with the expectation of realizing underwriting gains. Removal of these without compensation could dramatically alter the level of insurance company involvement and hence the delivery of the program. Certainly, there is much room for future research on the role of insurance companies in the U.S. crop insurance program. FOOTNOTE1 Although the revelation of private information is of economic interest, this rationale was not considered by legislators in any deliberations leading to the passage of the Federal Crop Insurance Act of 1980; the Act that established private sector delivery.2 Underwriting gains/losses are defined as total premiums less total indemnities. However, because insurance companies and the government share the underwriting gains /losses asymmetrically by state and certain insurance programs, it is possible that the insurance program as a whole experiences an underwriting loss while the insurance companies experience em underwriting gain. Similarly, the reverse is also possible.3 The reader is directed to Ker and McGowan (2000) for a detailed investigation of a profit-maximizing insurance company's optimal allocation strategy of policies across the three types of funds.4 Our dependent variable is based on whether a set of policies returned a profit or not rather than the level of profit. Consider the reinsurance decision of the insurance company. Whether a policy is expected to be marginally or significantly above a specific profit level, it is reinsured with the commercial fund. All that RMA can ascertain about a policy that has been allocated to the commercial fund is that expected profit is above a specific and unknown level. Therefore, our dependent variable is restricted to whether a set of policies returned a profit or not. However, we did repeat the analysis using the loss ratio and the results remained unchanged. FOOTNOTE5 The historical loss ratio is calculated using data from 1981 to the year prior to the crop year. That is, the historical loss ratio for policies in crop year 1999 comprises data from 1981 to 1998.6 See the maximum score estimator of Manski (1975) and its smoothed version by Horowitz (1992) for estimators that can accommodate arbitrary forms of heteroskedasticity although at the cost of a rate of convergence slower than [the square root of]n. FOOTNOTE7 An alternative scale normalization would be 11 = 1 where ois the Euclidean norm.8 Note that in these semiparametric estimators, asymptotic theory requires trimming those observations for which the index is arbitrarily close to the boundary of its support. For the Ichimura estimator, knowledge of the distribution of the index is required, which is unknown in practice. Other applied papers (Horowitz, 1993; Gerfin, 19%; Fernandez and RodriguezPoo, 1997) do not consider trimming. As Horowitz (1993, p. 53) explains "This amounts to assuming that the support of [index] is larger than that observed in the data."9 But in finite samples the performance of the estimators can be very sensitive to the choice of this smoothing parameter.10 This parameter can be set to any finite constant.11 RMA faces legal and political constraints in setting rates and subsequently they do not reflect all public information. We were unable to obtain unconstrained or target rates from RMA in hopes of including the ratio of constrained to unconstrained rates as an explanatory variable in our regressions. However, the target rates are generally derived from the historical loss ratio that is included in our analyses. Therefore, we are jointly testing the significance of private information and the residual rate-setting constraints not captured by the historical loss ratio variable.12 A LR test confirms this result for the probit models. FOOTNOTE13 The only economic rationale would be to ensure that the government and insurance companies are incentive compatible with respect to fraud. However, given the existence of the assigned risk and developmental funds that enable insurance companies to cede the vast majority of the liability of unwanted policies, this goal is not necessarily attainable under the current SRA.14 As the number of regressors increases, estimation precision declines rapidly. This phenomenon is known as the curse of dimensionality.15 Härdle, Mammen, Proença (2000) suggest using bootstrap methods instead of a normal approximation to calculate critical values and show that bootstrap yields better approximations to the critical values in a simulation study with n = 200. We, however, feel more comfortable using normal approximation as we have a relatively large sample (n = 3,801).The second test calculates the difference in the predictive performance of the semiparametric method versus the probit for the two models. For models without reinsurance variables, the difference in the percentage correctly predicted is 3.18 percent with a standard error of 0.557 percent. For models with the reinsurance variables, the difference in the percentage correctly predicted is 4.39 percent percent with a standard error of 0.504 percent. Standard errors are calculated by bootstrapping the prediction sample and recovering the difference in the percentage of correct predictions (500 bootstraps are used). These test results strongly reject the probit model in favor of the semiparametric method.A third test follows the graphical approach of Horowitz (1998, p. 53). Figures Al and A2 show the nonparametric kernel estimates of d F /dz, pointwise 95 percent bootstrap confidence interval, and the normal density function. Note that for a probit model, dF/dz would be the normal density function. In these nonparametric estimations, we used the standard normal density as our kernel. For bandwidth selection, we initially tried cross-validation for derivative estimation (see Härdle, 1990, pp. 160-161). Numerical minimization of this objective function was not successful for the most part so after experimenting with cross validation, we chose the bandwidths accordingly. The derivative of the link functions is clearly left skewed and hence cannot be accommodated by the symmetric normal density. Pointwise confidence intervals are represented by the dotted lines. The derivatives are bimodal, which suggests that the true data-generating processes may possibly be a mixture of two populations. Using a parametric probit model clearly misses these features of the data. ReferencesFernandez, A. I., and J. M. Rodriguez-Poo, 1997, Estimation and Specification Testing in Female Labor Participation Models: Parametric and Semiparametric Methods, Econometric Reviews, 16:229-247.Gerfin, M., 1996, Parametric and Semiparametric Estimation of the Binary Response Model of Labour Market Participation, Journal of Applied Econometrics, 11:321-339.Hardle, W., 1990, Applied Nonparametric Regression (Cambridge, UK: Cambridge University Press).Härdle, W., P. Hall, and H. Ichimura, 1993, Optimal Smoothing in Single-Index Models, The Annals of Statistics, 21:157-178.


Potential Wider Role for the Co-operative Enterprise Model in Ireland

Forfás published a profile of the co-operative enterprise sector in Ireland and internationally. The report, Ireland’s Co-operative Sector, forms part of a review of the legislative and organisational framework for co-operatives in Ireland being undertaken by the Department of Enterprise, Trade and Employment. The report identifies some of the key challenges and opportunities for Irish co-operatives for the future. Speaking at the launch of the report, the Minister for Trade and Commerce, Mr John McGuinness, TD commented, “The co-operative movement has played an important role in key areas of economic and social development in Ireland to date, most notably in the development of the agricultural sector and the credit union movement. Internationally, co-operatives operate very successfully in a wide range of sectors including banking, insurance, retailing and agriculture. International evidence suggests that there is further potential for the development of the co-operative approach in Ireland based on an up-to-date and supportive regulatory framework”. Irish co-operatives vary in size, structure and range of activities. In 2006, there were 1,040 co-operatives registered in Ireland with over 270,000 members. The sector generated approximately ?3.8 billion in sales revenue1 and employed over 38,000 people. The vast majority of co-operatives in Ireland are agricultural and account for 98% of the total turnover of co-operative sector. Globally, it is estimated that there are over 800 million members of co-operatives, with co-operatives providing jobs for over 100 million people. However, in comparison to other countries, the role of the co-operative model in Ireland is limited. Martin Cronin, Forfás Chief Executive said, “While the co-operative movement is confined largely to the agricultural sector in Ireland, its significance internationally suggests that the co-operative model could play a greater role here, particularly in a social context. In other countries new co-operatives have emerged and are meeting social needs in important areas such as healthcare, childcare, housing and environmental protection. For example, childcare co-operatives currently account for two thirds of day care centres in New Zealand, Canada and Sweden and housing co-operatives were responsible for 16% of all housing units in Sweden in 2002.” The Forfás report identifies a number of issues to be considered in the forthcoming review of regulation of the sector including: providing a conducive framework for the full potential of the co-operative model to be realised, including in areas such as childcare, education, housing and healthcare; ensuring a level playing field between co-operatives and the other legal options for structuring enterprise activities; and, promoting a greater appreciation of the co-operative model as a distinct form of organisation. Minister McGuinness concluded, “Co-operatives are the expression of the idea that people can agree to work together on an equal basis and share equally in the results of their work. This concept fits well with wider societal objectives, such as those of social cohesion and of increasing the stock of social capital. The continued development of the co-operative model could be valuable in providing an additional dimension to social partnership in Ireland. For example, co-operatives may have the potential to play a role in addressing social policy and quality of life issues such as those arising from long working days, commuting, isolation and lack of community facilities, by filling market gaps, providing public and community services, and developing community assets.” 2005 data – does not include Credit Unions which are registered with IFSRA


An Evaluation of the Demand for a National Accreditation Scheme for Professionals in the Natural Resources, Agriculture and Related Sectors

An Evaluation of the Demand for a National Accreditation Scheme for Professionals in the Natural Resources, Agriculture and Related Sectors Michael Young & Associates for the Australian Institute of Agricultural Science & Technology This report presents the outcomes from a study to assess the demand for a National Accreditation Scheme (NAS) for Professionals (consultants and advisers) in the Natural Resources, Agricultural and related sectors. It builds on a report to the Cooperative Venture for Capacity Building and Innovation in Rural Industries1 by Toohey, DE, (Dec, 2002) that recommended the formation of a National Accreditation Scheme aimed at lifting the national standards of those who provide advice or consulting services to those who manage the land and water resources in Australia, both for production purposes and the protection and enhancement of our natural assets. The Toohey report established the need for accreditation of professional advisers and consultants, as evidenced by the growing activity of relevant professional organisations and industry groups developing certification programs for their sectors. Primary production and natural resource management continues to increase in complexity. No manager can therefore expect to be fully conversant with markets, production technology, legislation changes, environmental and other related issues. Executive Summary This report presents the outcomes from a study to assess the demand for a National Accreditation Scheme (NAS) for Professionals (consultants and advisers) in the Natural Resources, Agricultural and related sectors. It builds on a report to the Cooperative Venture for Capacity Building and Innovation in Rural Industries1 by Toohey, DE, (Dec, 2002) that recommended the formation of a National Accreditation Scheme aimed at lifting the national standards of those who provide advice or consulting services to those who manage the land and water resources in Australia, both for production purposes and the protection and enhancement of our natural assets. The Toohey report established the need for accreditation of professional advisers and consultants, as evidenced by the growing activity of relevant professional organisations and industry groups developing certification programs for their sectors. Primary production and natural resource management continues to increase in complexity. No manager can therefore expect to be fully conversant with markets, production technology, legislation changes, environmental and other related issues. There is a growing demand for specialist inputs from advisers and consultants in all fields. The critical issue then becomes the quality of these specialist inputs, with quality related to the competency and performance of advisors and consultants. At present there are no prescribed qualifications, no peer assessment, no requirement for ongoing professional development to drive the provision of quality specialist input from consultants and advisers in most primary industry and environment sectors. The market depends almost entirely on wordof- mouth and reputation of individual advisers or consultants when selecting an adviser or consultant. This suits the larger, well established consulting firms. The market can fail from time to time, especially when consultants are tempted to operate outside their area of expertise. The Cooperative Venture responded to Toohey’s report by requesting a more thorough evaluation of the demand for a NAS, with particular emphasis on seeking greater consultation with the Natural Resource Management Sector. The Australian Association of Agricultural Consultants (a Section of the Australian Institute of Agricultural Science and Technology) and the Australasia-Pacific Extension Network submitted a proposal to the Cooperative Venture that a three (3) Stage process be undertaken, as follows: Stage 1 – Assess the demand for a NAS – This Study; Stage 2 – If demand established, establish some Pilot Studies to define the relevant competencies and test the operation of a NAS across several sectors with differing characteristics; Stage 3 – Implement a self-funded NAS nationally. This Report represents the outcomes from Stage 1 and the recommendations from it. The Framework A Discussion Paper, outlining a possible Framework for a National Accreditation Scheme was developed by the Project Advisory Committee and widely distributed to interest groups and individuals aroundAustralia. Consultation was undertaken with these individuals and groups to assess their support for the Scheme. The proposed framework is shown below. The (8) core national consultant competencies2 are those that all consultants or advisers must have to be effective in their delivery of advice in a relevant context whilst minimising the risks to the relationships and overall environment (social, economic and environmental) that the client operates in. The detail of these competencies and standards can be found within existing National Training Packages for a variety of industry sectors (eg. Agriculture, Conservation and Land Management, Seafood Industry, Business Facilitation), as well as within programs in the tertiary sector. The standards for the "consultant" competencies will be determined by the NAS certifying entity, in consultation with participating industries and sectors. The industry-specific competencies will be determined by the relevant industries, with an expectation that the rigour of the industry processes will ensure their standards will deliver the required workplace outcomes, i.e. that the individuals are technically competent in their chosen field of expertise. The Demand When assessing the demand for a National Accreditation Scheme (NAS), it is necessary to define the standards of the scheme being evaluated. In this Study, the consensus is that the scheme is aimed at maximising the national impact by being accessible to the widest range of consultants and advisers and, through on-going professional development, build the competencies of those individuals as consultants and as industry or sector specialists. For that reason, it is likely that a NAS will have an entry level standard of overall competency with the opportunity to achieve advanced and then elite standing as consultants and advisers. The demand is therefore being assessed across the whole spectrum from beginners to ‘gurus’ because, if the scheme has the desired outcomes, the beginners of to-day will become the ‘gurus’ of the future. The scheme has to be inclusive, with clear direction as to how individuals can progress their professional standing as a consultant or adviser. The consultation process has identified the demand for a NAS from a number of sectors, as follows: The list of people and organisations consulted is at Appendix 4 (See full report).. In addition to all of the above, there are the existing or proposed schemes being implemented or developed by the various professional societies (eg Agriculture, Ag. Engineers, Forestry, Soils, Environment) which have established competencies for their specific industry sectors. The extent to which these organisations participate positively will depend on their perception of the NAS’s impact on their members and programs and the role they can play in a national scheme. Conclusions 1.There is a significant demand for a National Accreditation Scheme for professional advisers and consultants to the Agricultural, Natural Resource Management and Related Sectors. This report supports the findings of the Toohey (Dec. 2002) report and confirms the demand for the scheme in the NRM sector, particularly in the communitybased Landcare sector (facilitators and coordinators) and compliance auditing of Property Resource Management Plans (in Queensland), Vegetation Management Planning and Property Management Planning in general. 2.The National Accreditation Scheme Framework includes two components of certification with respective competencies: i. Consultant - those core competencies (eight in the NAS) that define and distinguish consultancy skills, knowledge and standards; ii. Industry/sector specific specialist – those specialist competencies that define the disciplines or areas where an individual is claiming expertise as an adviser or consultant. 3.The industry/sector specialist accrediting bodies should be determined by the relevant industries, eg. Cotton Consultants Association, Ricegrowers Association, Australian Landcare Council, TOPCROP or whoever is most capable of defining the industry specific competencies. 4.The demand for certification of professional advisers and consultants to the Agricultural, Natural Resource Management and related sectors is being driven by: i. Specific industries working closely with advisers/consultants to ensure they remain at the forefront of innovation and best management practices; ii. Professionals wanting to maximise the quality of advice, continuous improvement and relevance of their profession; iii. Commercial companies wanting to provide evidence of the marketable competencies and credibility of their commercial agronomists/advisers; iv. The desire for various groups of professionals to gain recognition for the roles they play – eg Landcare coordinators and facilitators and rural financial counsellors; v. A desire, across the board, for targeted professional development programs that maintains currency of competencies based on industry/sector standards; vi. A growing requirement for auditable evidence of compliance supplied by certified auditors of industry and NRM activities; vii. A demand for training organisations to deliver industry-relevant programs. 5.The benefits of a NAS are: i. Individuals would be nationally recognised as having the competencies of an effective and responsible consultant or adviser, i.e. those competencies that distinguish between someone who facilitates change by providing solutions that meet another’s needs in a specific context compared to another who may only provide information or products; ii. Capacity to link with industry-specific competency-based certification programs; iii. Professional development that fits within the Australian Qualifications Framework and focuses on maintaining relevance and building professional capability; iv. Individual does not have to be a member of a professional society to attain NAS certification, although professional or industry organisations are most likely to provide the best guidance regarding industry or sector competencies, standards, guidelines and best management practices; v. Provides flexibility for an individual to move between speciality disciplines/industries, i.e. not constrained by membership of professional organisations, making job change easier; vi. There will be extensive marketing of the value of nationally accredited professional consultants and advisers to raise their profile in the public eye. Note:Access to cheaper Professional Indemnity insurance is not a claimed benefit of being in the NAS as there is no way of predicting future developments in the Insurance Industry. It may help but it is not predictable. 6.To attract interested groups, the cost of national certification/certification should be minimised by not requiring obligatory membership of a professional organisation in order to demonstrate the core consulting competencies, i.e. no duplication of services or fees. 7.The NAS must therefore be independent of existing or proposed schemes but recognise the roles that other organisations play in setting industry/sector specific competencies and standards; 8.Assessment of competencies should be evidence-based and must include recognition of prior learning (RPL) and recognition of current competencies (RCC). The assessment methods should be flexible and should not in themselves be a barrier to certification eg. all exam-based. Competencies can be demonstrated without having to complete a formal training course. The Institute of Engineers (Aust), for example, require new graduates, over a three years period, to prepare verifiable "Career Episode Summaries" that demonstrate that professional competency levels have been attained across a range of specified disciplines or competency areas. 9.The readiness of groups, interested in participating in a NAS, varies from being: i. capable of starting now – Cotton, Seafood Industry, Rural Solutions, Commercial Agronomists/Consultants; ii. interested but need to define detail of specific sector competencies – Rice, Grains (Topcrop), Irrigation Industry, Property Resource Management Plan Auditors (Qld DNR&M, DPI and EPA), Property Management Planners; iii. Sector competencies are well defined in existing National Training Packages but dependent on institutional and community support – Landcare, Rivercare, Bushcare… etc coordinators and facilitators, Rural Financial Counsellors; iv. The financial capacity of groups to move forward with certification varies. The private sector can build in certification or commitment to achieve certification as a condition of employment whereas the community-based sector (eg. Landcare or Rural Financial Counsellors) will always have budget problems and may need support to establish the value of certification to their funding sources. v. Extension/advisory staff within various agencies and organisations who would independently seek national certification to broaden their professional skills and take advantage of focused professional development opportunities. They may have organisational support. 10.There is a need to consider more than the 3 Pilot Studies on the basis of the above discussion, as well as the adequacy of the budget proposed for Phase 11. 11.That an Interim National Accreditation Council will be needed to oversee the proposed Pilot Studies in Phase 11 of this Project. The current Advisory Committee could take on this interim role. Recommendations to the Cooperative Venture 4.That the Cooperative Venture recognises the need and demand, as identified in this Project, for a National Accreditation Scheme for professional advisers and consultants to the agricultural, natural resource management and related service sectors. 5.That the Cooperative Venture supports the move forward to Phase 11 by conducting a Workshop in early December, 2003 to examine the findings of this report with respect to the purpose, outcomes and number of Pilots. 6.That the Cooperative Venture supports the formation of a National Accreditation Scheme Steering Committee and Project Manager to finalise the detail of the eight core competencies for "consultants" that fit in with competency units within the Australian Qualifications Framework. 7.That the Cooperative Venture supports the Steering Committee and Project Manager’s negotiation with prospective Pilot Study Groups to gain agreement on the processes for applying the NAS to their industry/sector. 8.That the Cooperative Venture supports the appointment of industry/sector-specific Project Officers to manage the implementation of the Pilot Studies within each of the groups, under supervision of the Project Manager. 9.That the Cooperative Venture supports a vigorous extension/publicity campaign to raise the profile of the NAS across all relevant sectors including political leaders, farmer organisations, professional organisations, marketing organisations and regulatory authorities. 10.That the Cooperative Venture support the formation of an Interim National Accreditation Council as the body responsible for accrediting during the Pilot Studies in Phase 11. 11.That January 2004 be the target for the commencement of Phase 11 of the Project – The Pilot Studies. Footnotes 1. The Cooperative Venture forCapacityBuilding and Innovation in Rural Industries includes RIRDC, Dept. Agriculture, Fisheries & ForestryAustralia, Dairy RDC, Meat and LivestockAustralia, Grains RDC, Land and WaterAustralia, Sugar RDC, Grape and Wine RDC and theMurrayDarlingBasin Commission. 2.A competency is the skills, knowledge, standards required to produce a desired workplace outcome


A review of microinsurance for natural disaster risks in developing countries

This study provides an in-depth review of microinsurance by analysing a range of case studies and examining the benefits and limitations of microinsurance. It provides clear evidence of the value and potential of microinsurance in transferring risk and protecting low-income households and businesses against disaster losses. Microinsurance can provide access to post-disaster finance, protecting assets and livelihoods as well as providing funds for reconstruction. Because insured households are more creditworthy, insurance can also promote investments in productive assets. Moreover, insurance can encourage investment in disaster prevention if insurers offer lower premiums to reward risk-reducing behaviour. The study suggests microinsurance can be considered as an effective risk-transfer mechanism and an integral part of an overall disaster risk management strategy. Key challenges and next steps for the evolving microinsurance agenda include: ensuring the financial sustainability of microinsurance providers, while at the same time providing affordable premiums to poor and high-risk communities there is a lack of direct links and incentives on the part of current microinsurance programmes to reduce the direct losses from disasters  insurers must guard against insolvency by diversifying their portfolios geographically, limiting exposure and/or transferring their risks to the global reinsurance and financial markets  there is a need for partnerships and institutional frameworks that contribute to credible and trusted microinsurance systems. Safety nets for high-risk poor communities cannot be put into place without public–private alliances an emerging new role for donors in supporting these schemes is the Global Index Insurance Facility, shifting donor focus from reaction to risk pooling current pilot programs need to be “scaled up” to cover the large number of low-income households and farms facing risks from natural disasters to bridge the gap between microinsurance opportunities an the disaster risk management community, an international task force on risk transfer could be established. This could contribute to better assessing the scope and potential for microinsurance in exposed developing countries. R. Mechler; J. Linnerooth-Bayer; D. Peppiatt, ProVention Consortium, 2006


Agricultural insurance revisited: new developments and perspectives in Latin America and the Caribbean

Agricultural insurance revisited: new developments and perspectives in Latin America and the CaribbeanM. Wenner, Sustainable Development Department, Inter-American Development Bank , 2005 This paper focuses on agricultural production risk management, explaining key concepts, understanding why crop insurance markets have been slow to develop, and making recommendations about how to build sustainable markets in developing country contexts, with information drawn from Latin America and the Caribbean. The paper identifies three types of natural phenomena as the dominant risks to agicultural yield. This paper focuses on agricultural production risk management, explaining key concepts, understanding why crop insurance markets have been slow to develop, and making recommendations about how to build sustainable markets in developing country contexts, with information drawn from Latin America and the Caribbean. The paper identifies three types of natural phenomena as the dominant risks to agicultural yield. They are: hydro-meteorological (rain, floods, droughts, high winds, tornados, hurricanes) geological (including earthquakes, volcanic eruptions, and tsunamis) biological (including include diseases and insect infestations). It further classifies these risks as either catastrophic or non-catastrophic, depending on frequency, scale, intensity, and duration and notes that over the last decade the occurrence of natural disasters has been trending upward. The paper notes that farmers in most developing countries have little access to formal agricultural insurance products that would allow them to transfer production risk to other parties. However, it also notes that agricultural insurance is reemerging as a topic of interest, especially in light of the need to improve agricultural competitiveness in increasingly integrated commodity markets. The paper presents challenges in providing this service, including lack of information, inability to pay high premiums and the the tendency of governments to undermine market development through inappropriate use of subsidies and disaster relief funds. It recommends that: farm insurance should not be not be seen as a panacea for unprofitable farms, management failures governments have a vital role to play in providing the necessary information needed to measure, evaluate, and monitor risk, but also need to put public funds into creating favourable market conditions for the development of the industry farmers should be trained how to reduce and cope effectively with some of the production risks on-farm through better management practices and diversification strategies rules for accessing governmental disaster relief should not remove or undercut incentives for the adoption of better on-farm management techniques, the purchase of private agricultural insurance, or the accumulation of personal savings. Agriculture is an inherently risky business. It is subject to a number of random price, climatic, biological, and geological shocks that require coping strategies and financial management instruments to deal with the implications. Traditional risk management strategies and ex post government provided emergency relief have often not proven to be sufficiently effective and robust in preventing serious economic loss or permitting a speedy recovery. This paper focuses on production risk management, explaining key concepts, understanding why crop insurance markets have been slow to develop, and making recommendations about how to build sustainable markets in developing country contexts. For the most part, producers in developing countries are quite exposed to weather vagaries and have little access to formal agricultural insurance products that would allow them to transfer production risk to other parties. Agricultural insurance was more widespread in Latin America and other developing regions of the world during the 1960s and 1970s. However, most of the comprehensive, multiple peril programs common then, encountered financial difficulties and were either scaled back or completely closed. At present in Latin America, the volume of agricultural insurance premiums is a miniscule share of total insurance premiums. Nonetheless, agricultural insurance is reemerging as a topic of interest, especially in light of the need to improve agricultural competitiveness in increasingly integrated commodity markets. The challenge is how to overcome obstacles and deliver efficient and sustainable agricultural insurance products. The principal obstacles—lack of high quality information, inadequate regulatory frameworks, weak supervision, lack of actuarial expertise, lack of professional expertise in designing and monitoring agricultural insurance products, a mass of low-income, dispersed clients, who may not be willing or able to pay actuarially sound premiums for multiple peril products, and the tendency of governments to undermine market development through inappropriate use of subsidies and disaster relief funds--are highlighted and discussed. Case studies on Uruguay, the Dominican Republic, and Peru reveal how crop insurance products are evolving and/or what government-supported initiatives are under the way to expand coverage. Recommendations of how to build markets step-by-step and the importance of applying new technology to lower costs are made. Agricultural insurance is presented as important financial risk management tool but not as a panacea for unprofitable farms, management failures, underinvestment in public infrastructure, or compensation for other poorly functioning factor markets. Different types of agricultural insurance products—single peril, multiple peril, parametric, and revenue—each have a niche but should adhere to basic principles of actuarial fairness, seek to minimize problems with adverse selection, moral hazard, and administrative costs. Governments have a vital role to play in providing the necessary information needed to measure, evaluate, and monitor risk, in maintaining an auspicious but sound regulatory and supervisory framework, in helping with reinsurance and catastrophic disaster relief, and supporting private insurance providers with technical assistance and training. Often time, the argument is made that “public subsidies for premiums” are necessary in order to make premiums more affordable for the majority of farmers. The argument presented here is that scarce pubic monies may be better spent on creating favorable market conditions for the development of the industry ( i.e. the maintenance of databases, training, and pilots) than on making transfers to private individuals. In the context of developing countries, with large rural populations (often exceeding 20%), sizeable agrarian sectors (agricultural share of GDP >10 %, agricultural exports as a share of total exports > 30%), and severe fiscal constraints, agricultural insurance systems should be cost effective and operate as part of a larger, layered risk management framework. Installing comprehensive and universal systems, as is the case for several industrialized countries, may be an inefficient use of scarce public monies for developing countries. In a layered framework, farmers should be trained how to reduce and cope effectively with some of the production risks on-farm through better management practices and diversification strategies; how to transfer some of the production risks to financial markets through efficient and sustainable instruments (insurance, savings, and credit); and how to rely on the government assistance for catastrophic events. In the latter case, rules for accessing disaster relief should be clear ex ante and not remove or undercut incentives for the adoption of better on-farm management techniques (moral hazard), the purchase of private agricultural insurance, or the accumulation of personal savings.


Southern Africa: Cutting Edge Farming Methods Boost Production

While increasingly grim forecasts predict agricultural declines in southern Africa due to climate change, a farming method called Conservation Agriculture (CA) is showing promise for subsistence farmers who are already struggling with poor food security. A recent study by economist William R. Cline, 'Global Warming and Agriculture: Impact Estimates by Country,' predicts a 39-47 percent decline in agriculture in southern Africa by 2080 if greenhouse gases escalate at their current pace. That is potentially deadly news for farmers in southern Africa where the population threatened by food shortages almost doubled from 3.1 million in 2006 to nearly 6.1 million in 2007. "We're losing 400 million tons of soil every year," said James Breen, the regional emergency agronomist for the UN's Food and Agriculture Organization (FAO). "The production of this year's food crop is shockingly low and it's going to get worse with global warming. We really are facing a meltdown," he added. The FAO and an increasing number of NGOs and regional governments have started promoting CA as an answer to years of conventional farming methods that have left vast areas of soil utterly depleted. CA is a method of farming that minimises soil disturbance, applies more precise timing for planting and utilises crop residue to retain moisture and enrich the soil. Over the past 50 years in southern Africa, overall soil fertility has dropped while erosion has increased. Heavy ploughing and repeatedly growing the same crop on the same plot eventually strips the soil of nutrients and allows wind and water to wash away nutrient-rich topsoil. A downward spiral in food production follows. Conservation agriculture (CA) aims to achieve sustainable and profitable agriculture. The basics: Minimal soil disturbance - Farmers either use a method called basin tillage in which they dig basins that capture water and plant nutrients or they use an ox-pulled plough-like "ripper". They can also use hand planters. The ripper opens just a very small furrow in the soil's surface instead of upturning an entire field which increases moisture loss and erosion. Exact timing for planting and effective weeding - Generally, farmers are taught to dig their basins, fertilise them with manure or manufactured fertilizer, allow the first rains to fall and collect in the basin's soils and then plant. This is a shift from the conventional methods of rushing to plant when the rains begin. Ground cover - Instead of burning off the previous year's crop residues, farmers are encouraged to keep the soil covered which preserves moisture and serves as a mulch that enriches the soil while decreasing presence of weeds. Crop rotation and inter-cropping - Mixing and rotating crops even within one field so that one year's maize patch will be legumes the next. Other plants can be grown in between the maize rows to provide additional ground cover. But Breen sees conservation farming as a way to improve food security, and early harvest statistics are promising. "We're pushing CA as hard as we can... It's one of the ways we can scratch back from some of these losses." "It's simple," John Weatherson, emergency coordinator for FAO in Swaziland, told IRIN. "And it has to be simple to work here. In certain areas this year, it was very, very evident that crops produced using CA inter-cropping methods were much more successful than crops produced using conventional methods." Weatherson said the most effective way to spread the CA message was to have farmers look at the results elsewhere. He recalls a recent visit to a farmer in Tanzania who had been using conservation techniques for 10 years. When the farmer began, he was harvesting three bags of maize per acre. Two years later, three became five and today, Weatherson said, the man was reaping an average of 25 bags from his dark, fertile soil. "What we need here [in Swaziland] is a 10-year programme with funding and it will take off," he said. The funding would go toward the basic tools - hand planters or plough-like implements called rippers - and enough personnel to train farmers. Ideally, more drought-resistant seeds and fertiliser to revive and enrich the soil would be available for the first few years. Growing Harvests In southern Africa the conservation farming techniques have best taken root in Zambia and Zimbabwe. At Zambia's Golden Valley Agricultural Research Trust, a joint research and training programme with the government and the national farmers union, researchers designed the 'Magoye Ripper', similar to a plough but causing minimal soil disruption. In Zimbabwe, the International Crops Research Institute for the Semi-Arid Tropics recorded harvest figures for the 2004-5 and 2005-6 seasons from farmers using conventional methods and a basin tillage CA method that involves digging basins that capture water. In seven out of eight districts it was tested in during the first year the basin tillage system provided a higher yield. By the 2005-6 season, 11 districts were being monitored and every one reported larger harvests from basin tillage methods. In 2005-6 in the Hwange district in the North West of Zimbabwe, maize yields were 1,700 per hectare with conventional farming methods compared to 2,500 kg per hectare when CA methods were applied. In 2004-5, farmers yielded approximately 790 kilograms per hectare with conventional farming and 1,100 kg per hectare with basin tillage. CARE, a humanitarian NGO, has been conducting CA training in Zimbabwe and reported that 154 farmers began using conservation techniques in 2004 in the South Eastern Masvingo district. Their substantially improved yields have convinced others to try and now there are 1,081 farmers using CA in Masvingo. Tafadzwa Choto, press officer for CARE Zimbabwe, said the number of people needing emergency food assistance in the area has dropped dramatically in two years. "We'd like to see more farmers getting involved," said James Bedell, a UN World Food Programme (WFP) field officer in Lesotho. "Some are still sceptical because it's a different way and digging the holes for the first time is labour intensive because the ground is so hard. So we try to provide food assistance while they are preparing the fields." Bedell said WFP is also considering a 'crop insurance' program for next year where the organisation will guarantee a minimum amount of maize that will be grown if a farmer agrees to try CA methods. Taking CA forward According to Breen there is an effort to establish a regional committee to promote CA. "We're trying to make people aware of the benefits of it," he said. "I believe we're living in a period of extreme complacency about food security in the world. We have to go and increase conservation agriculture practices not just here but across the world." FAO is currently training farmers in Zambia, Malawi, Zimbabwe, Mozambique, Swaziland, Lesotho, Angola and Namibia. CARE and other NGOs are also teaching CA methods throughout southern Africa. "Those people who've been at it for a few years are doing well," said Weatherson. "There is light at the end of the tunnel." Source -


Making Development Less Risky

Life at the bottom of the world's income distribution is massively risky. Households lack basic buffers-saving accounts, health insurance, water tanks, diversified income sources and so on-against droughts, pests and other hazards. The bodies of the poor often lack enough nutrients to rebuff diseases. Even modest shocks, such as a temporary dry spell or a routine infection, can be devastating. These risks have knock-on effects. To take one prime example, the expected economic return on the use of fertilizer use very high in Africa, yet impoverished farmers cannot obtain it on credit, because of the potential for a catastrophic loss in the event of a crop failure. Their households cannot bear the risk of a loan, and so-with no access to better agricultural inputs--they remain destitute. Managing risk is therefore important not only for smoothing out the well-being of these farmers over the good and the bad years, but also for enabling their escape from extreme poverty. If the risks facing poor farm households can be reduced, their creditworthiness can be increased. And increased creditworthiness permits them to invest in higher-yield activities, including higher value-added farming. For these reasons and others, including a probable rise in the volatility of climate shocks accompanying human-induced climate change, financial risk management is likely to come to the forefront of strategies for poverty reduction. Micro-finance has already introduced financial markets for the poor. Now micro-insurance and other kinds of financial risk management will likewise yield important tools. Traditional crop insurance is almost nonexistent in Africa. Considerable financial innovation is needed. Traditional crop insurance is almost non-existent in Africa for several reasons. Suppose an insurance company tried to sell a crop insurance policy to a peasant farmer with a one-acre farm. A traditional policy would specify payments in the event of measured crop losses from specified hazards (such as drought, pests and temperature extremes), and would require an actuarial model of applicable risks and the completion of a contract. Payments would occur only after the verification of losses and (usually) of the underlying adverse events. But in impoverished Africa, multiple problems would routinely be fatal to such a policy: the absence of an actuarial risk model; adverse selection (farmers with especially risky conditions would seek the contracts); moral hazard (farmers covered by insurance might fail to take other protective measures) and enormously high costs of marketing, signing and assessing losses relative to the value of the policy. Two huge innovations are correcting these weaknesses. First, instead of insuring a farmer's actual crop losses, a policy can diversify much of a farmer's risk by creating a financial derivative, such as a weather-linked bond that pays the farmer in the event of a seasonal drought, dry spell or other adverse weather shock. A weather station or satellite can observe a drought objectively, eliminating any to examine the outcomes on individual farms. Moral hazard and adverse selection are irrelevant, because the price of the "drought bond" depends on the objective probabilities of measurable weather shocks, not on the characteristics or the behavior of an individual farmer. The second key strategy is to combine the weather-linked bonds with other financial services to the farmer. Indeed, these services are best bundled to an entire farm cooperative that includes hundreds or thousands of farmers. For example, a bank would make a seasonal loan to a farm cooperative for the mass purchase of fertilizers and high-yield seeds, with the loan repayment due to be reduced or waived entirely in the event of a drought, and the repayment schedule calibrated to the extent of the drought. The bank, in turn, would buy a weather-linked bond to ensure itself against the drought. Smallholder farmers can thus obtain the fertilizer and other crucial inputs they need, and neither the farmers nor the bank must bear unmanageable risks in a loan contract. Contract farming, in which the inputs are financed not by a bank but by a buyer of the farm output (for example, a purchaser for supermarkets), can provide the same bundle of financing with insurance. These financial arrangements may seem like dry, technical adjustments of modest import, but our experience at the Earth Institute at Columbia University suggests that financial engineering and clever contract design will allow a breakthrough in the modernization of agriculture in Africa, the Philippines and other highly risky places. Earlier this year, the Earth Institute and the reinsurer Swiss Re designed and implemented a rainfall-index contract for the Sauri Millennium Village in Western Kenya. The experience was heartening. Climatologists demonstrated, for instance, how satellite data could be used in a novel way to design a relevant financial instrument to defray the high climate risks facing the village. Other institutions, such as the World Bank, the World Food Program, the Government of Ethiopia and other insurance companies, are striving to mitigate climate risks in other impoverished regions. The importance of-and potential for-an agricultural breakthrough is critical for Africa's escape from poverty. Its farmers do not produce enough food to feed a hungry continent. Yet existing technologies could enable them to do so, if the financing could be arranged. Africa's green revolution is therefore likely to be accompanied by a supportive African financial revolution that brings state-of-the-art risk management techniques to bear on behalf of the world's poorest people. Jeffrey D. Sachs


Ukraine: combined animal fodders market

Having achieved by 1990 the peak of its development, after the USSR collapse, the compound feed industry in Ukraine began to give up its positions and in 2000 found itself nearly on the eve of depression. Among the reasons that caused negative dynamics in this segment in late XX century one can name the following: Decreased demand for compound feed from the animal husbandry industry as a result of reduction of cattle population; Low profitability of production; Low purchasing capacity of population caused by the economic crisis of the last decade and growth of prices for animal husbandry products that changed the structure of consumers’ demand pushing it toward cheaper food products whereas meat and dairy products manufactured with the use of compound feed were consumed in much smaller quantities; Lack of consumers’ trust in quality of manufactured products. Second, liberalization of prices and destruction of the system of governmental procurement of feedstock and sales of its by-products led to a formation of numerous intermediate agencies and disparity of prices. As a result, animal husbandry enterprises had to cut the volumes of procured feed for profits they received from selling their products failed to cover the costs of compound feed. Consequently, large animal husbandry complexes and poultry plants cardinally reduced the volume of production or altogether seized to exist. At the same time, agricultural production became unprofitable and caused a sharp decrease of cattle and poultry population. A stimulus for development of compound feed industry was coming of considerable investment in poultry farming in 2000 and following years, which led to a qualitative breakthrough in its development and growing demand for full-value feed. Dynamics of production of compound feed in the recent years has demonstrated sustainable growth trend although production volumes remain insignificant when compared to 1990 (3.2 mln t in 2005 and 16.5 mln t in 1990). The segment of compound feed for cattle and swine is not in the best situation; as before, production of vitamin and protein containing feed supplements is very low: whereas in 1990 for production of 16.5 mln t compound feed 827, 000 vitamin and protein containing feed supplements were manufactured, in 2005 this figure, according to some estimations, decreased to about 18-20 thousand t (1995 – 2, 000 t). Despite difficulties, compound feed industry is increasing its production volumes. Ready animal feed is manufactured in all Ukrainian regions in larger or smaller volumes. The most important factor of efficient feed production is reliable supply of feedstock, including forage grain and oilseed mill, especially soybean mill. Sustainable yield of grains and oilseeds in recent years created favorable conditions for compound feed production. Simultaneously, one has to admit that such dependence on forage grain to a large extent determines trends not only in the animal husbandry sector but also has an adequate impact on selling prices of animal husbandry products. For instance, high prices for forage grain in 2003/04 MY because of an extremely low harvest in 2003, first of all – of fall-planted crops, was one of the main important factors that determined the growth of prices for meat and reduction of cattle population. Except for the main factors that directly influence the situation on compound feed market, it also experience impact of indirect factors, one of which still remains the population’s buying capacity that led to a decrease of an actual consumption of animal husbandry products. In 2005, according to the GfK information, an average Ukrainian annually consumed 39 kg meat. This figure is significantly lower than meat consumption in European states and in the USA (Poland – 63.5 kg, Germany – 83.2 kg, USA – 119.7 kg, Hungary – 120 kg, Germany – 86 kg, Netherlands – 180 kg, Poland – 78 kg, etc. According to the forecasts of UN Food and Agriculture Organization (FAO), average annual consumption of meat in the world will increase to 41.7 kg per capita. The growth of consumption of meat in Ukraine directly depends on the growth of population’s incomes; at the same time, growing inflation prevents people from eating the recommended amount of meat, fish and other food products. The main growth of meat consumption over the recent years occurred due to the growth of consumption of poultry meat. Compound feed products occupy a unique position in the market of agricultural feedstock resources that can be characterized as dubious. On the one hand, the main component of compound feed is grain, one the other – it is itself used for production of animal husbandry products. Unlike other grain products, compound feed is characterized by elastic demand that depends on the capacity and elasticity of demand for animal husbandry products and changes depending on a number of macro- and micro- economic conditions. The prospects for development of compound feed industry are directly dependent on development of animal husbandry and poultry farming. Rhythmical stable sales of products are characteristics of those compound feed plants that manufacture compound feed with necessary range and quality that ensure maximum weight gain and productivity, which makes it possible for poultry plants and animal husbandry complexes to manufacture competitive high-quality products. As to the dynamics of production of animal husbandry sectors, one has to say it is not unanimous. Cattle livestock in Ukraine recently has been constantly decreasing. In the first place, this is true of the public sector farms. For the first nine months of 2006, cattle livestock in these farms decreased by 5.8% when compared to the same period in 2005. Such rate of decrease of cattle livestock has been observed already for several years. Situation in the private sector is somehow better. The rate of cattle livestock decrease is insignificant and is mainly season-dependent. For the nearest future, it is hard to forecast any stabilization and growth of cattle population. First of all, this can be explained by a low level of profitability of production and relatively low purchase prices for cattle and milk. If the current rate of decrease of cattle livestock is preserved by the end of year the total number can be lower than 6.5 mln beasts, including public sector – 2.2 mln. As of early 2006, it was 6.7 and 2.5 mln beasts, respectively. One also has to mention that in this sector, according to the world practice, there is observed decrease of cattle livestock due to the growth of the number of highly productive beasts which consequently requires higher quality of compound feed to ensure high milk and meat yield. As to swine population, the situation considerably improved over the last year. Over 9 months of the current year, the rate of livestock growth in all categories of farms was 11%, and in the public sector – 27.1%. Respectively, swine livestock is 8.1 and 3.2 mln beasts. This segment is more profitable and herd replacement requires significantly shorter time. Another important factor is a considerable inflow of investments into this branch during the last year, into construction and reconstruction of swine farms using alternative methods of swine growing. In poultry farming, there is also registered a constant growth of livestock and profitability of production of poultry meat and eggs especially in the public sector. Decrease of livestock is mainly season-dependent and is observed predominantly in private households. When compared to September 2005, increase of livestock in the public sector in 2006 was 13.1% and the livestock amounted to 73 mln birds. Thus, the trends observed in the animal husbandry segment at present (increase of livestock of cattle, swine and poultry in general and strengthening of demand for high-quality feed) give grounds to expect the growth of demand for feed in 2006 equal to about 20%. ... ProAgro Information Company


How Farm Subsidies Harm Taxpayers, Consumers, and Farmers, Too

This year's expiration of federal agriculture policies gives Congress an important opportunity to take a fresh look at the $25 billion spent annually on farm subsidies. Current farm policies are so poorly designed that they actually worsen the conditions they claim to solve. For example: Farm subsidies are intended to alleviate farmer poverty, but the majority of subsidies go to com­mercial farms with average incomes of $200,000 and net worths of nearly $2 million. Farm subsidies are intended to raise farmer incomes by remedying low crop prices. Instead, they promote overproduction and therefore lower prices further. Farm subsidies are intended to help struggling family farmers. Instead, they harm them by exclud­ing them from most subsidies, financing the con­solidation of family farms, and raising land values to levels that prevent young people from entering farming. Farm subsidies are intended to be consumer-friendly and taxpayer-friendly. Instead, they cost Americans billions each year in higher taxes and higher food costs. Lawmakers would be hard-pressed to enact a set of policies that are more destructive to farmers, taxpay­ers, and consumers than the current farm policies. For these and other reasons, organizations represent­ing taxpayers, consumers, environmentalists, inter­national trade, Third World countries, and even farmers themselves have united around the shared conclusion that the current farm subsidy system is failing and in dire need of reform during this year's reauthorization. A Solution Seeking a Problem Before delving into the minutiae of farm policy, lawmakers should first determine what subsidies are intended to accomplish. When President Frank­lin D. Roosevelt introduced farm subsidies in the 1930s, Secretary of Agriculture Henry Wallace called them "a temporary solution to deal with an emergency."[1] That emergency was the collapsing farm incomes that afflicted the 25 percent of the population living on farms. Today, farmers account for just 1 percent of the population, and farm household incomes are well above the national average, making the orig­inal justification irrelevant. What modern market failure or social problem is solved by farm pro­grams today? Subsidy advocates offer five flawed justifications. Myth #1: Farmer poverty. This is the most common—and provably incor­rect—justification. The average farm household earns $81,420 annually (29 percent above the national average); has a net worth of $838,875 (more than eight times the national average); and is located in a rural area with a low cost of living.[2] The farm industry's current 11.4 percent debt-to-asset ratio is the lowest ever measured and helps to explain why farms fail at only one-sixth the rate of non-farm businesses.[3] Overall, net farm income totaled $279 billion between 2003 and 2006—the highest four-year total ever.[4] The farm economy is thriving, and farmer incomes are soaring. Furthermore, farm subsidy formulas are designed to benefit large agribusinesses rather than family farmers. Most farm subsidies are distributed to commercial farmers, who have an average income of $199,975 and an average net worth of just under $2 million.[5] If farm subsidies were really about alleviating farmer poverty, lawmakers could guarantee every full-time farmer an income of 185 percent of the federal level ($38,203 for a family of four) for just over $4 billion annually—one-sixth of the current cost of farm subsidies.[6] Myth #2: Crop disaster compensation. While farming can be very profitable, farmers are always one weather disaster away from losing their crops, but this risk can be handled with basic crop insurance rather than with expensive annual gov­ernment subsidies. Washington does not address homeowners' risks by writing each family an annual check regardless of whether or not their homes have been damaged. Giving farmers $25 billion in annual subsidies regardless of whether or not their crops have been damaged is no more logical. Crop insurance mar­kets, as well as futures and options markets, can bal­ance good and bad years in a way that is cost-neutral over the long run. Myth #3: Maintaining a cheap and stable food supply. Some contend that food markets would fluctu­ate wildly without farm subsidies. In reality, food prices of both subsidized and unsubsidized crops are relatively stable. Given that the percentage of family budgets spent on food has dropped from 25 percent to 10 percent since 1933, any potential price instability would have an increasingly small impact on family budgets.[7] Even if price stabiliza­tion was necessary, price support programs have largely been replaced by commodity subsidies that stimulate overproduction rather than stabi­lize prices. Nor do farm subsidies contribute to lower food costs. Two-thirds of food production is unsubsi­dized and thus relatively unaffected by subsidies. Of the remaining one-third, price reductions caused by crop subsidies are balanced by conservation pro­grams that raise prices. Furthermore, food prices are based not only on crop prices, but also on food processing, transportation, and marketing costs. Bruce Babcock, professor of economics at Iowa State University, has calculated that eliminating farm subsidies would have virtually no effect on food prices.[8] Myth #4: National security. Proponents contend that without subsidies, American farm products would be replaced by imports, leaving the United States dangerously dependent on foreigners for food. However, the United States currently grows more food than it needs to feed itself and exports a quarter of its pro­duction.[9] The lack of subsidies has not driven all beef, poultry, pork, fruit, and vegetable production out of America, nor would it drive away production of currently subsidized crops. Myth #5: Other countries' agricultural policies. Europe and Japan's farm subsidies bring Ameri­can consumers food at below-market prices. Rather than enact trade barriers to prevent this, Americans should welcome the cheap imports and allow farm­ers to focus on producing the crops in which the United States has a comparative advantage. Responding with U.S. subsidies and trade barriers has the net effect of raising prices for American con­sumers and thereby limiting any progress in free-trade negotiations. Australia largely eliminated its farm subsidies in the 1970s, and after a brief adjust­ment, its farm economy flourished. New Zealand implemented a similar policy in the 1980s with the same result.[10] —— Two-thirds of all farm production—including fruit, vegetables, beef, and poultry—thrives despite being ineligible for farm subsidies.[11] If any of the five justifications were valid, these farmers would be impoverished, near bankruptcy, or replaced by imports, and both the supplies and prices of fruit, vegetables, beef, and poultry would fluctuate wildly. Clearly, this has not happened. In this controlled experiment comparing subsidized and unsubsi­dized crops, the doomsday scenarios described above have not occurred for unsubsidized crops. The most logical explanation for the persistence of farm subsidies is simple politics. Eliminating a government program is nearly impossible because recipients form interest groups that relentlessly defend their handouts. The public paying the costs is too busy going about their lives to challenge each wasteful program. Furthermore, supporters of farm subsidies often repeat the five justifications, espe­cially the myth that these policies aid struggling family farmers. The difference between perception and reality in farm policy is large. How Farm Subsidies Lack Economic Sense Farm subsidies serve no legitimate public pur­pose. Worse, they harm the farm economy. This section explains both how farm subsidies work and the economic incoherence embedded in U.S. farm policy. (See also the accompanying text box, "How Farm Subsidies Are Calculated.") The Main Commodity Programs. Farm policy is extraordinarily complex. This complexity conve­niently insulates the farm policymaking process within a small group of lawmakers and interest groups who specialize in the details. Subsidy eligibility is based on the crop. More than 90 percent of all subsidies go to just five crops—wheat, cotton, corn, soybeans, and rice— while the vast majority of crops are ineligible for subsidies. Once eligibility is established, subsidies are paid per amount of the crop produced, so the largest farms automatically receive the largest checks. Subsidies are also quite duplicative. The names of the three different commodity subsidies do not adequately describe their purposes: Marketing loan program. Despite being called a "loan," this program has the net effect of reim­bursing farmers for the difference between a crop's market price and the minimum level that Congress sets every five to six years.[12] Fixed payments. Fixed payments are given to farmers based on their farms' historical produc­tion and are unrelated to actual production. Countercyclical payments. This program func­tions somewhat similarly to the marketing loan program by subsidizing farmers up to a govern­ment-set target price. This rate is higher than the marketing loan rate and therefore represents an additional subsidy. For farmers who grow the subsidized crop, these policies have the net effect of subsidizing them up from their crop's market price to its countercyclical price rate, or even higher when the market price is above the countercyclical rate and they receive fixed payments. Remedying Low Prices with Lower Prices. Farm policy is supposed to help farmers recover income lost because of low crop prices. However, farmers can increase their subsidies by planting additional acres, which increases production and drives prices down further, thereby spurring demands for even greater subsidies. In other words, subsidies merely lower prices. This is the policy equivalent of trying to use gasoline to extin­guish a fire. When the 1996 farm bill increased the market­ing loan rate of soybeans from $4.92 to $5.26 per bushel (which meant larger subsidies), farmers responded by planting an additional 8 million acres of soybeans, which contributed to the 33 percent decline in soybean prices over the next two years.[13] Instead of alleviating low soybean prices, the new subsidies accelerated their fall at considerable tax­payer expense. Even the U.S. Department of Agri­culture (USDA) admits that subsidy increases have induced farmers to plant millions of new acres of wheat, soybeans, cotton, and corn.[14] In a free market, low prices serve as an important signal that supply has exceeded consumer demand and that production should shift accordingly. By shielding farmers from low market prices, farm sub­sidies induce farmers to grow whatever government will subsidize, not what consumers really want. Stephen Houston Jr., a Georgia cotton farmer, recently told The Atlanta Journal–Constitution, "We're just playing a game. [Market] prices don't have anything to do with what we're doing. We're just looking at the government payments."[15] Contradictory Policies. After handing out com­modity subsidies that pay farmers to plant more crops, Washington then turns around and pays other farmers not to farm 40 million acres of crop­land each year—the equivalent of idling every farm in Wisconsin, Michigan, Indiana, and Ohio. The Conservation Reserve Program, which pays farmers to sign 10-year contracts pledging not to farm their land, is often promoted as supporting environmen­tal stewardship. In reality, removing farmland to raise crop prices has been the program's central long-term justification. Paying some farmers to plant more crops and others to plant fewer crops simply makes no sense. Ignoring Yields. The illogic does not end there. Businesses calculate their revenues by multiplying the product's price by the quantity sold. Similarly, farmers calculate per-acre revenues by multiplying the crop price by the yield (crop volume per acre). However, farm subsidy formulas focus only on crop prices and simply plug in a historical yield measure for the quantity. This makes little sense. Revenues depend as much on the quantity sold as on the price, and these two variables often move in opposite direc­tions. In agriculture, this leads to one of two com­mon scenarios: Surging yields flood the market with crops and cause prices to drop. Total revenues may increase, yet farmers still receive large subsidies simply because the price fell. Falling yields lead to crop shortages, pushing up prices. Total revenues may decline sharply, but farmers do not receive subsidies because Wash­ington focuses only on the price increase and assumes that farmers are thriving. These scenarios are not merely theoretical. The American Farmland Trust has observed that a large drought in 2002 cut many Midwest corn farmers' yields in half, but many farmers did not receive sub­sidies because prices did not fall. The opposite situ­ation occurred in 2005 when very large corn yields flooded the market, driving down corn prices and inducing large corn subsidies despite healthy farm revenues.[16] Consequently, Washington often wastes taxpayer dollars by subsidizing farmers when they need it the least. Subsidizing Both Crop Insurance and Disaster Aid. In 2000, Washington tripled crop insurance subsidies in an effort to eliminate the need for farm disaster payments. The budget-busting 2002 farm bill was also promoted as being large enough to reduce the need for disaster payments. Yet even with generous farm programs and sub­sidized crop insurance, Congress has passed a disas­ter aid bill every year since 2000 at a total cost of $40 billion.[17] Congress has even drafted legislation offering disaster aid to farmers who refuse to pur­chase crop insurance at taxpayer-financed dis­counts. With Congress continuing to pass large disaster aid packages, what crop insurance subsi­dies are really funding is unclear. The federal crop insurance program currently subsidizes 60 percent of all premiums for the 242 million acres that farmers have enrolled in the pro­gram. It is run by 16 private firms that accept fed­eral subsidies but must charge the prices set by Washington. Recently, an insurer that dared to offer farmers a discount was upbraided at a congressional hearing, and Representative Jack Kingston (R–GA) successfully authored legislation to prohibit federal subsidies for that plan.[18] The program seems to have been designed to aid insurance companies and harm taxpayers. Insurers are allowed to pass high-risk policies on to the gov­ernment while keeping for themselves the low-risk policies that are likely to be profitable. Conse­quently, since 1998, the participating companies have earned $3.1 billion in profits, while Washing­ton has lost $1.5 billion. Additionally, since 1998, Washington has paid nearly $20 billion in premium subsidies and more than $6 billion to cover the insurance companies' administrative costs. All in all, the crop insurance program spends $3.34 for every $1 in paid claims—and it still has not prevented $40 billion in disaster aid.[19] Driving Small Farmers out of Business. Farm subsidies are promoted as assistance to family farm­ers. In reality, they finance the demise of family farms and prevent young people from entering farming. Economists estimate that subsidies inflate the value of farmland by 30 percent. High farmland prices make starting a farm prohibitively expensive for younger people, who would also have other expenses, including buying expensive equipment, seeds, and pesticides. With young farmers unable to enter the industry, the average age of farmers has increased to 55.[20] Because agribusinesses are already the most profitable, they often use their enormous farm sub­sidies to buy out smaller family farms. In what has been called the "plantation effect," family farms with less than 100 acres are being bought out by larger agribusinesses, which then convert them into tenant farms. Three-quarters of rice farms have already become tenant farms, and other types of farms are trending in that same direction.[21] Since 1945, the number of farms has dropped by two-thirds, and the average farm size has more than doubled to 441 acres.[22] This consolidation is not necessarily harmful and may improve efficiency. Large agribusinesses are not villainous. They often succeed because they can produce large quantities of food at low prices. Fur­thermore, the blame for the tilted distribution of farm subsidies lies with Congress, which writes the laws, rather than with the agribusinesses that cash the checks that they receive because of those laws. Nevertheless, taxpayers should not be required to finance this consolidation through farm subsi­dies. By raising land values and financing consolida­tion, farm subsidies drive out existing small farmers and prevent new farmers from entering the industry. The Scandalous Distribution of Farm Subsidies One can imagine the result if Washington tried to solve poverty by creating a welfare program that applied only to workers in the fast food, cleaning, and retail industries. Everyone in those occupations would receive a government check, with the richest executives receiving the largest checks and the poorest workers receiving the smallest. Workers in other industries would receive nothing, no matter how poor they were. Obviously, such a policy would be nonsense, yet this exemplifies how farm subsidies are distributed. The government's solution to alleged farmer poverty is to subsidize growers of wheat, cotton, corn, soy­beans, and rice while giving no subsidies to produc­ers of fruit, vegetables, beef, poultry, and livestock. Because subsidies are paid per acre, the largest and most profitable farms receive the largest subsidies, while family farms receive next to nothing. Thus, a large, profitable rice corporation can receive millions while a family vegetable farmer receives nothing. Overall, farm subsidies are distrib­uted with little regard to merit or need. Corporate Welfare. Farm subsidies are pro­moted as helping struggling farmers, but Washing­ton could guarantee every full-time farmer an income of nearly $40,000 for just $4 billion annu­ally. Instead, farm policy is designed to aid corpo­rate agribusinesses. Among farmers eligible for subsidies, just 10 percent of recipients collect 73 percent of the subsidies—an average of $91,000 per farm. (See Chart 3.) By contrast, the average subsidy granted to the bottom 80 percent of recipients is less than $3,000 annually.[23] According to the USDA, the majority of farm subsidies are distributed to commercial farms, which have an average household income of $199,975 and a net worth of just under $2 mil­lion.[24] Commercial farms are also among those that need subsidies the least because they are the most efficient. Former U.S. Farm Bureau President Dean Kleckner writes that the top quarter of corn farmers (usually agribusinesses with economies of scale) can produce a bushel of corn 68 percent cheaper than the bottom quarter of farms can.[25] Multiplying this larger profit margin by their substantially larger production volume shows how large agribusinesses can be enormously profitable. Yet these agribusinesses, not small family farms, receive most of the subsidies, making farm subsi­dies America's largest corporate welfare program. (See Table 1.) That is not all. Farm subsidies over the past decade have also been distributed to: Fortune 500 companies, such as John Hancock Life Insurance ($2,849,799); International Paper ($1,183,893); Westvaco ($534,210); and ChevronTexaco ($446,914). Celebrity "hobby farmers" such as David Rock­efeller ($553,782); Ted Turner ($206,948); and Scottie Pippen ($210,520). Members of Congress, who vote on farm subsidies, such as Senator Charles Grassley (R– IA, $225,041); Senator Gordon Smith (R–OR, $45,400, plus a 25 percent ownership in three firms that received $2,114,622); and Represen­tative John Salazar (D–CO, $161,084).[26] Payment limits do exist on paper. Subsidies are restricted to farmers with incomes below $2.5 mil­lion, and an individual's subsidy may not exceed $180,000 per farm or $360,000 for up to three farms. However, an entire industry of lawyers exploits loop­holes, rendering these limits meaningless. Farmers can simply divide their farms into numerous separate entities and then collect subsi­dies for each farm. For example, Tyler Farms in Arkansas has collected $37 million in farm subsi­dies since 1996 by dividing itself into 66 legally separate corporations to maximize its farm subsidies.[27] Other farmers evade payment limits by sign­ing up family members, such as the Georgia farmer who reportedly col­lected thousands in additional subsi­dies by signing up his two-year-old daughter as an additional farmer, making her eligible for up to $180,000. As Chuck Hassebrook of the Center for Rural Affairs has con­cluded, "We have no [payment] limits today."[28] Eligibility Restricted to a Few Crops. Only one-third of the $240 billion in annual farm production is eligible for farm subsidies. Five crops—wheat, cotton, corn, soy­beans, and rice—receive more than 90 percent of all farm subsidies. Fruits, vegetables, livestock, and poultry, which comprise two-thirds of all farm pro­duction, are generally not subsidized at all.[29] This is important for two reasons. First, those who assert that the absence of farm subsidies would cause massive poverty, rapid price fluctuations, and the eventual demise of the agricul­tural industry have not persuasively explained why the two-thirds of the industry that operates without subsidies has experienced none of these problems. Second, those who assert that farm subsidies are necessary to alleviate farmer poverty have not explained why Washington should favor one crop over another. Farm Subsidies for Suburban Backyards. In 1996, lawmakers noticed that farm subsidies were only encouraging more planting and thereby fur­ther lowering prices, so they created a fixed pay­ments subsidy that would pay farmers based on what had been grown on the land historically with­out obligating them to continue planting that crop. While designed with positive intentions to reduce market distortions, these fixed payments have ended up subsidizing land that is no longer used for farming. In fact, some homeowners are now collect­ing subsidies for the grass in their backyards. A recent Washington Post investigation discovered 75 acres of Texas farmland that had been converted into a housing development. Today, the homeown­ers on these properties (which are worth well over $300,000 each) are eligible for fixed payments for the lawn in their backyards because of its "historical rice production." Residents never asked for these subsidies and have even stated that as non-farmers they do not want the government mailing them checks.[30] Over the past 25 years, rice plantings in Texas have plummeted from 600,000 acres to 200,000, in part because people can now collect generous rice subsidies without planting rice. If Washington insists on subsidizing farming, subsi­dizing actual farmland rather than residential neigh­borhoods that were once farmland would make more sense. Compensation Not Based on Actual Sale Prices. As explained in the text box, the marketing loan program (despite the "loan" misnomer) effec­tively pays farmers whenever crop prices fall below a government-set minimum. Amazingly, farmers are not compensated for the actual price at which they sell their crops. Instead, they can pick the market price on any day of the year and, even if they do not sell their crops at that market price, receive a sub­sidy based on it. For example, in 2005, the marketing loan rate for corn in DeKalb County, Illinois, was $1.98 per bushel. In September, the market price fell to $1.52 per bushel, and local farmers walked into the local USDA field office and received a payment of $0.46 per bushel. The following January, when they finally sold their corn, the price had risen to $2.60 per bushel, well above the government-set minimum. The federal policy allowed farmers to keep the sub­sidies as compensation for a low market price at which they never actually sold their crops. The amounts can be substantial: DeKalb County farmer Roger Richardson received an extra $75,000 sub­sidy for crops that grossed $500,000.[31] These are not isolated incidents. In 2006, national corn prices were only $0.05 below the $1.95 marketing loan rate. Nonetheless, corn farm­ers received an average marketing loan subsidy of $0.44 per bushel.[32] President Bush has proposed addressing this loophole by requiring that monthly average crop prices—rather than daily prices— become the basis for determining marketing loan subsidies. This would prevent a one-day drop in crop prices from causing a year-long surge in farm subsidies. Unless Congress acts, farmers will con­tinue to be compensated for low prices that never affect them. Aid for Questionable Disasters. Lawmakers often supplement generous farm subsidies and sub­sidized crop insurance with annual disaster assis­tance packages. The Washington Post discovered that the USDA encourages disaster declarations for coun­ties without disasters and distributes disaster aid to farmers without requiring proof of any disaster. Specifically, when the Livestock Compensation Program operated in 2002 and 2003 to compensate farmers for a drought, the majority of payments went to farmers in areas with either moderate drought or none at all. The USDA reportedly urged state and county officials to find anything that could be interpreted as a disaster and use it to qualify the county's farmers for disaster aid. Consequently, more than 2,000 of the nation's 3,141 counties were declared agriculture "disasters," including: Whatcom County, Washington, for a distant earthquake that registered only 3 on the local Richter scale and caused no reported damage. All 254 counties in Texas for "farm disasters," such as a storm two years earlier and the Space Shuttle Columbia explosion. This prompted a local farmer to tell reporters, "the livestock pro­gram is a joke, we had no losses, I don't know what Congress is thinking sometimes." Fifty-three of Wisconsin's 72 counties, many for a small storm that occurred two years earlier. This prompted local farmers to call the disaster aid an unjustified "waste of money." Nor were the individual farmers required to prove any losses. Washington simply sent them disaster assistance checks based on the number of livestock that they owned. In other words, disaster aid was almost completely disconnected from actual disasters.[33] Livestock disaster assistance is not the only example of misdirected disaster aid. When sweet potatoes became eligible for crop insurance, plant­ing quadrupled, but crop failures surged. Farmers were purposely growing sweet potato crops on unsuited land and skimping on all production costs simply to collect generous crop insurance and disas­ter aid—a practice known as "farming your insur­ance." Accordingly, the sweet potato insurance program was paying out $16 in insurance claims for every $1 paid in premiums before Congress fixed it in 2005.[34] It is reasonable to assume that this prac­tice continues to some degree in other crops. The Overall Impact of Farm Policy Although farm policies serve no legitimate pur­pose, they have profoundly negative effects on tax­payers, consumers, and small farmers, including: Higher prices. James Bovard once wrote, "For almost every farm program, there is another equal but opposite farm program or provi­sion."[35] Commodity subsidies encourage over­production and therefore lower prices. The Conservation Reserve Program encourages underproduction and thereby raises prices. Tar­iffs raise import prices. Export subsidies lower export prices. Price supports triple the price of sugar and raise the price of milk. Calculating the net effect of these contradictory programs, the Organisation for Economic Co-operation and Development estimates that U.S. farm policy raises food prices enough to cost consumers an extra $12 billion annually—in effect, an average annual food tax of $104 per household.[36] High taxes. As the farm economy booms, Con­gress is expanding farm subsidies. After averag­ing less than $14 billion per year during the 1990s, annual farm subsidies have topped $25 billion in the current decade since passage of the 2002 farm bill, the most expensive farm bill in American history. All federal spending must eventually be funded by taxes. Thus, these sub­sidies cost the average household $216 in annual taxes in addition to $104 in higher food prices. No added rural economic growth. A study by the Federal Reserve Bank of Kansas City con­cluded that farm subsidies do not promote rural economic growth. Between 1992 and 2002, the vast majority of the 783 "farm dependent" coun­ties experienced job growth below the national average. In fact, more of these counties suffered outright job losses than experienced job growth exceeding the national average.[37] While critics can argue that growth would have been worse without subsidies, these policies are clearly not creating new growth centers. Farm subsidies are likely funding farm consolidations, which in turn are reducing employment on farms and in related industries. Small farmers driven out of business. Small family farmers are generally not eligible for sig­nificant levels of farm subsidies. Furthermore, subsidies to large commercial farms harm small farmers by (1) reducing crop prices[38] and, there­fore, farmer incomes; (2) raising the prices of farmland, thereby preventing family farmers from expanding; and (3) subsidizing agribusi­ness buyouts of family farms. Small farmers receive virtually none of the subsidies, but they must endure the market distortions and financial pain caused by these policies. Less trade. Federal Reserve Chairman Ben Ber­nanke has stated that "the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household" and that "removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household." Yet massive tariffs and import restrictions raise food prices and make the American economy less productive. Bring­ing free trade to agriculture would also make free-trade agreements in other industries much more likely.[39] Conclusion If Congress takes the path of least resistance and extends current farm policies for another five years, it will have surrendered an enormous opportunity for reform. Most debates over federal programs force lawmakers to balance a program's social bene­fits with the costs of financing it, but current U.S. farm policies serve no legitimate purpose. They bur­den American families with higher taxes and higher food prices. They harm small farmers by excluding them from subsidies, raising land prices, and financing farm consolidation. They increase trade barriers that reduce incomes in America and in lesser-developed countries. They are falsely pro­moted as saving the family farm and protecting the food supply. In reality, they are America's largest cor­porate welfare program. This year's farm bill debate will test whether Congress is serious about reform or will continue business as usual by pandering to special-interest groups that are working to protect their federal lar­gesse. Congress and President Bush should take a more sensible approach to farm policy this year. Instead of rubberstamping the status quo, they should return to the market-based approach embodied in the 1996 Freedom to Farm Act. Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Ian Hinsdale, a former Heritage Foundation intern, contributed to this paper. ___________________________________________ [1] Henry Wallace, cited in Oxfam America, "A Vision for the 2007 Farm Bill," 2007, at   (June 4, 2007). [2 ]Ted Covey et al., "Agriculture Income and Finance Outlook," AIS–84, U.S. Department of Agriculture, Economic Research Service, November 2006, pp. 40 and 48, at  (June 4, 2007). [3] Jerome M. Stam, Daniel L. Milkove, and George B. Wallace, "Indicators of Financial Stress in Agriculture Reported by Agri­cultural Banks, 1982–99," AIS–74, U.S. Department of Agriculture, Economic Research Service, February 2000, p. 48, and Covey et al., "Agriculture Income and Finance Outlook," p. 38. [4] Council of Economic Advisers, Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 2007), p. 342, Table B-97, at   (June 4, 2007). [5] Covey et al., "Agriculture Income and Finance Outlook," pp. 40, 48, and 63. Net worth data consist of weighted averages of large and very large farms' net worths. [6] U.S. Department of Agriculture, "A Safety Net for Farm Households," Agriculture Outlook, January–February 2000, pp. 19–24. The authors estimated a cost of $7.8 billion when including everyone who reports any farm income, including "hobby farmers" who have other full-time jobs. Restricting their data to full-time farmers, defined as those working on lower-sales, higher-sales, and large family farms and the fraction of limited-resource farms that are also full-time, the total cost adds up to approximately $4 billion. The eligibility threshold for several federal income-assistance programs, such as the Women, Infants and Children (WIC) program, is 185 percent of the federal poverty level. [7] U.S. Department of Agriculture, Economic Research Service, "Food Expenditures by Families and Individuals as a Share of Disposable Personal Income data," Table 7, at   (June 4, 2007). [8] Bruce Babcock, "Money for Nothing: Acreage and Price Impacts of U.S. Commodity Policy for Corn, Soybeans, Wheat, Cotton, and Rice," in American Enterprise Institute, The 2007 Farm Bill and Beyond (Washington, D.C.: AEI Press, 2007), pp. 41–45, at (June 4, 2007). [9] The U.S. runs a trade surplus in agriculture. See Economic Research Service, "Value of U.S. Trade—Agricultural, Nonagricultural, and Total—and Trade Balance, by Fiscal Year," May 2007, at (June 4, 2007). [10] Julian Alston, "Lessons from Agricultural Policy Reform in Other Countries," in American Enterprise Institute, The 2007 Farm Bill and Beyond, pp. 83–86. [11] Economic Research Service, "Farm Income and Costs: Farm Sector Income Forecast," February 14, 2007, at  (June 4, 2007). [12] The marketing loan program can operate in different ways. It can be a loan that must be partially repaid later in the year (called a marketing loan gain), or the benefit can be paid in a lump sum as a subsidy (called a loan deficiency payment). Despite these distinctions, the net effect is to subsidize farmers up to the marketing loan rate level. [13] University of Tennessee, Agricultural Policy Analysis Center, "An Analytical Database of U.S. Agriculture, 1950–1999," 2001, Tables 7.1a and 7.2a. [14] Paul C. Westcott and C. Edwin Young, "U.S. Farm Program Benefits: Links to Planting Decisions and Agricultural Markets," U.S. Department of Agriculture, Agriculture Outlook, October 2000, pp. 12–13. [15] Dan Chapman, Ken Foskett, and Megan Clarke, "How Your Tax Dollars Prop Up Big Growers and Squeeze the Little Guy," The Atlanta Journal–Constitution, October 1, 2006. [16] American Farmland Trust, "Farm and Food Policy for All—Farmers, Citizens and Communities," 2007. [17] Ralph Chite, "Emergency Funding for Agriculture: A Brief History of Supplemental Appropriations, FY 1989–FY 2006," Congressional Research Service Report for Congress, updated July 3, 2006. Chite mentions a total of $36.5 billion, and approximately $3.5 billion was added in 2007. [18] Gilbert Gaul, Dan Morgan, and Sarah Cohen, "Crop Insurers Pile Up Record Profits," The Washington Post, October 16, 2006. [19] Ibid. The article includes a graphic showing gains and losses since 1998. The cost of premium subsidies and administrative costs since 1998 were calculated using the 1998–2005 totals listed in the article and then projecting forward for the 2006 and 2007 totals. [20] John Frydenlund, "Farm Subsidies: Myth and Reality," Citizens Against Government Waste Issue Brief No. 1, April 3, 2007, at  (June 4, 2007). [21] Elizabeth Becker, "Land Rich in Subsidies, and Poor in Much Else," The New York Times, January 22, 2002, p. A14. [22] Council of Economic Advisers, Economic Report of the President, p. 175. [23] See Environmental Working Group, Farm Subsidy Database, at (June 4, 2007). [24] Covey et al., "Agriculture Income and Finance Outlook," pp. 40, 48, and 63. [25] Dean Kleckner, "Farm Subsidies Are Not Saving the Family Farm," updated manuscript. Copy available upon request. [26] For a list of subsidy totals, see Environmental Working Group, Farm Subsidy Database. Corporate totals include subsidiaries. Subsidies for lawmakers are described in detail in Ronald D. Utt, Ph.D., "How to Discourage Conflicts of Interest in the Federal Agriculture Subsidy Programs," Heritage Foundation Backgrounder, forthcoming. [27] John Lancaster, "More Subsidy Money Going to Fewer Farms," The Washington Post, January 24, 2002, and Environmental Working Group, Farm Subsidy Database. [28] Dan Chapman, Ken Foskett, and Megan Clarke, "How Savvy Growers Can Double, or Triple, Subsidy Dollars," The Atlanta Journal–Constitution, October 2, 2006. [29] Economic Research Service, "Farm Income and Costs." [30] Dan Morgan, Gilbert Gaul, and Sarah Cohen, "Farm Program Pays $1.3 Billion to People Who Don't Farm," The Washington Post, July 2, 2006. [31] Dan Morgan, Sarah Cohen, and Gilbert Gaul, "Growers Reap Benefits Even in Good Years," The Washington Post, July 3, 2006. [32] Ibid. [33] Gilbert Gaul, Dan Morgan, and Sarah Cohen, "No Drought Required for Federal Drought Aid," The Washington Post, July 18, 2006. [34] Gilbert Gaul, "Farming Your Insurance," The Washington Post, October 15, 2006. [35] James Bovard, "Farm Bill Follies of 1990," Cato Institute Policy Analysis No. 135, July 12, 1990, at (June 8, 2007). [36] Organisation for Economic Co-operation and Development, Agricultural Policies in OECD Countries: At a Glance (Paris: OECD Publishing, 2006), p. 69, Table 2.12. The 2003–2005 average annual transfer from consumers was $12.285 billion. [37] Mark Drabenstott, "Do Farm Payments Promote Rural Economic Growth?" Federal Reserve Bank of Kansas City, Center for the Study of Rural America, The Main Street Economist, March 2005, at (June 4, 2007). [38] Although conservation programs raise prices, it is still clear that commodity subsidies reduce prices relative to what they would be with only conservation programs. [39] Ben S. Bernanke, Federal Reserve Chairman, "Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy," remarks at the Montana Economic Development Summit 2007, Butte, Montana, May 1, 2007, at  (June 4, 2007).

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