2.3: Risk Management and Financial Tools

PROVIDE RISK MANAGEMENT AND FINANCIAL TOOLS TO FARMERS AND RANCHERS

Other Information:

Agricultural producers are subject to a wide array of natural, financial and market risks. Like other business owners, agricultural producers use a variety of tools to manage these risks, including crop insurance, non-insured crop disaster assistance, credit and direct payments. USDA works diligently to provide financial tools to producers. The Department strives to provide prompt and equitable assistance, direct income payments, disaster assistance and marketing assistance loans to farmers, ranchers and eligible landowners. This assistance helps maintain economic stability in the agricultural sector. When natural disasters strike, USDA reacts quickly to help affected producers recover from losses and restore their lands to pre-disaster productivity levels. Additionally, the Department partners with commercial lenders to guarantee farm ownership and operating loans, and makes direct loans to producers to purchase properties or finance farm expenses. USDA provides agricultural credit to beginning farmers and ranchers, and those producers who traditionally have difficulty obtaining commercial credit. USDA also provides necessary capital to producers to help them recover from emergencies. USDA Federal crop insurance provides an actuarially sound risk management program to reduce agricultural producers’ economic losses due to natural disasters. Recently, USDA has seen dramatic growth in this program. In FY 2005, the Department insured 48.7 million acres more than it did in 1999, and approximately16 percent or 39.2 million acres more than it did 5 years ago. Federal crop insurance is available to producers solely through private insurance companies that market and provide full service on policies upon which they share the risk with USDA. Producers participating in the Federal crop insurance program determine the level of coverage they need to manage risks for their particular situations. This allows them to mitigate revenue losses from price or yield fluctuations. It also allows producers to reduce their cash flow difficulties arising from production misfortune by receiving timely claim payment. Additionally, they can even use their crop insurance as collateral to qualify for commercial loans. This program, along with diversified production and marketing techniques, the use of futures and options contracts, and other tools allow producers to customize their respective risk management strategies. Due to commodity price fluctuations, USDA designed a “normalized” value for data submission that averages prices.

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