As Congress debates the future of the farm bill on Capitol Hill, I have been thinking about how the new legislation will affect how farmers choose their insurance.

Naturally, not all farmers agree on what they would like to see in the next bill, though many are opposed to a program offering price supports when they continue to have low yields on their farm.

It is really interesting to read about how crop insurance actually works because I hear quite a bit from farmers about meeting their thresholds to receive insurance payments, but the numbers and the actual type of insurance being used just get thrown around like it is all the same thing.

A recent paper, entitled “The Potential Impact of Proposed 2012 Farm Bill Commodity Programs on Developing Countries,” written by Bruce Babcock of Iowa State University and Nick Paulson of the University of Illinois and published by the International Centre for Trade and Sustainable Development, a nonpartisan think tank based in Geneva, got me thinking even further about what the new farm bill could mean to farmers and also challenged me to understand insurance.

The Congressional Budget Office estimates crop insurance costs taxpayers more than $8 billion per year over the period covered by the 2012 farm bill — a significant amount of money.

Crop insurance is quite complicated and can be hard for farmers to use effectively. Shortfalls in the way they collect insurance mean they could have to pay their insurance deductible before their insurance is triggered, so they will be hard up for money.

One thing I have learned is that not all farmers use county yields to collect crop insurance. If they choose insurance based on their own yields, they can insure up to 85 percent of the value of their crop. Their coverage can increase to 90 percent for insurance based on county yields.

Both the passed Senate and the proposed House agricultural bills eliminate decoupled “Green Box” direct payments in favor of coupled programs that make payments based on actual acres and actual yields.

The House Agriculture Committee plans to replace direct payments with a new program called Revenue Loss Coverage for crops other than cotton. The House version of the bill plans to keep the counter-cyclical program, raise the program’s trigger prices and update program yields and base payments on planted acres instead of base acres.

The overarching idea of these new programs is to provide farmers with an improved safety net — with the exception of PLC, “shallow loss” programs designed to make payments supplemental to the “deep loss” payments from existing crop insurance products.

Babcock and Paulson argue that while direct and counter-cyclical payments historically have used fixed base acres and program yields to calculate payments, the new payment plans are coupled with farmers’ planting decisions and could influence what they plant, leading them to be more reliant on government prices and programs rather than market prices.

The new programs being proposed by the House and Senate are:

* Agricultural Revenue Coverage — Revenue insurance that covers a portion of a farmer’s crop insurance deductible to be administered as an optional commodity title program under the Farm Services Agency. No premium.

Farmers choose between county-based coverage and farm-based coverage. They will need to opt out of ARC completely if they want to buy expanded coverage under SCO.

Payments under individual ARC cover 65 percent of planted acres for per-acre whereas county-ARC covers 80 percent of planted acres. Revenue shortfalls between 79 percent and 89 percent of the program guarantee are covered;

* Price Loss Coverage — Target price program that makes payments based on planted acres. Farmers can choose to update their program yields used to calculate payments to 90 percent of the average yield from 2008 to 2012. The payments are made on 85 percent of planted acres;

* Supplemental Coverage Option — RMA-administered. Farmers pay 30 percent of the amount needed to cover expected program payments to receive a 70-percent premium subsidy. Covers losses between the farmer’s crop insurance level and the 79 percent coverage level floor provided by ARC.

For a farmer who does not select ARC, SCO is designed to cover losses above the farmer’s coverage level. Before an SCO payment can be made, however, the county must suffer a 10-percent loss; and

* Revenue Loss Coverage — A version of the shallow loss revenue insurance program. Under the House Ag Committee bill, farmers would choose between RLC and PLC.

A farmer that chooses RLC could not participate in SCO. Only provides county based revenue insurance and in the calculation of the price used to set the revenue guarantee, RLC replaces a year’s market price with the PLC ? xed target prices in the calculation of the Olympic average of the average price used to set the RLC revenue guarantee if the market price falls below the target price level in any year.

Farmers will have a hard time choosing which type of coverage they should buy because ARC and RLC use prices to set guarantee levels based on a five-year average price, the professors argue.

They write that though the proposed farm bill programs would have little impact on farmers’ planting decisions regarding corn and soybeans at high prices, farmers would be incentivized to move acreage away from these commodities and into wheat in a low price scenario because the target price for wheat is higher relative to market price than the other two crops.

They stress that weakened ARC, RLC and PLC prices in the future could distort the market since insurance payments will increase significantly.

If commodity prices remain high, but target prices increase too much, this also could affect market prices. Overall price declines will favor movement of acreage into wheat in the Midwest.

The professors also speculate as to whether the proposed farm bill programs will negatively impact farmers in developing countries. Prices would only fall below CBO levels if ethanol plants cease operation or if the U.S. government relaxes ethanol mandates, and even if this happened, prices could not negatively impact farmers in developing countries until the last three of the five years covered in the bill.

I didn’t realize until reading the article that the Average Crop Revenue Election program introduced in the 2008 farm bill, which combined revenue insurance with a commodity program that increased support levels in response to actual market price, is not actually being phased out this year, but is part of both the Senate and the House’s proposed bills. I have heard other people say lawmakers were choosing to end the ACRE program.