Agriculture In Transition: Farmers' Use of Risk Management Strategies
(Letter Report, 04/07/99, GAO/RCED-99-90).

Pursuant to a congressional request, GAO reviewed the Department of
Agriculture's (USDA) efforts to educate farmers about risk management,
focusing on: (1) the extent of farmers' use of risk management tools;
and (2) educational programs and projects USDA has directed or initiated
to prepare farmers for managing risks and determining the groups or
individuals who have participated in or been served by these programs.

GAO noted that: (1) in 1996, about 42 percent of the nation's 2 million
farmers used one or more risk management tools to limit potential income
losses resulting from falling market prices or production failures,
according to USDA estimates; (2) the use of these tools varied by
farmers' level of sales and primary commodity (crop or livestock); (3)
the use of crop insurance and forward contracts to reduce risk was more
prevalent among farmers: (a) with at least $100,000 in annual sales of
agricultural products than among those with annual sales under $100,000;
and (b) whose primary crops were corn, wheat, and cotton than among
those who primarily grew other crops; (4) of those farmers who received
USDA transition payments and had sales of at least $100,000, at least 70
percent purchased crop insurance, at least 66 percent used forward
contracts, and at least 34 percent engaged in hedging in 1996; (5) in
fiscal year 1998, USDA obligated $5 million for four educational
initiatives to prepare farmers for managing risk; (6) to develop
government and private sector partnerships to foster risk management
education, USDA sponsored a series of risk management conferences
targeted at bankers, agricultural educators, crop insurance agents,
commodity brokers, and grain elevator operators; (7) however, these
initial conferences reached only a relatively small percentage of these
target groups' members; (8) USDA intends to use partnerships with
private- sector organizations to further expand its educational outreach
activities; (9) USDA awarded 17 risk management education and research
grants that are primarily designed to develop risk management education
curriculums for training such diverse groups as farmers with less than
$20,000 in annual income, farmers who grow specific crops in individual
states or regions, crop insurance agents, and grain elevator operators
across the country; (10) the expected completion dates for these
projects range from the summer of 1999 through the fall of 2001; (11)
USDA provided funding to supplement land grant universities' risk
management education efforts; and (12) USDA contracted with the
University of Minnesota to develop an Internet library that, as of
January 1999, contained over 700 risk management publications and other
education materials for farmers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-90
     TITLE:  Agriculture In Transition: Farmers' Use of Risk Management 
             Strategies
      DATE:  04/07/99
   SUBJECT:  Risk management
             Agricultural industry
             Agricultural programs
             Commodity futures
             Agricultural products
             Education or training
             Hedging
             Educational grants
             Farm income stabilization programs
IDENTIFIER:  USDA Agricultural Resource Management Study (Phase 3)

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rc99090.book GAO United States General Accounting Office

Report to the Ranking Minority Member, Committee on Agriculture,
House of Representatives

April 1999 AGRICULTURE IN TRANSITION

Farmers' Use of Risk Management Strategies




GAO/RCED-99-90

  GAO/RCED-99-90

United States General Accounting Office Washington, D. C. 20548
Lett er

Page 1 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

GAO

Resources, Community, and Economic Development Division

B-282045 Letter April 7, 1999 The Honorable Charles W. Stenholm
Ranking Minority Member Committee on Agriculture House of
Representatives

Dear Mr. Stenholm: Recent changes in both federal agricultural
programs and international agricultural markets have increased the
potential economic risks faced by the nation's farmers. The
Federal Agriculture Improvement and Reform Act of 1996, commonly
known as the 1996 farm bill, encouraged farmers to make production
decisions in response to market forces. It also helped

farmers who were eligible for payments through federal commodity
programs to reduce their reliance on federal support by providing
transition payments, which are gradually declining over a 7- year
period. At the same time, U. S. farmers have faced increased
global competition, new technology, and volatile weather patterns.
In light of these changes, the 1996 farm bill required the U. S.
Department of Agriculture (USDA), in consultation with the
Commodity Futures Trading Commission, to educate farmers about the
tools available for managing risks. These risk management tools
primarily include crop insurance to provide compensation if crop
yields are substantially lower than expected and

forward contracts to enable farmers to lock in a price for their
crop or livestock production prior to harvest or slaughter.
Farmers can also engage in hedging by buying or selling futures or
options contracts on a

commodity exchange, such as the Chicago Board of Trade, to reduce
the risk of receiving lower prices for crops or livestock. (App. I
describes each of these risk management tools in more detail.)

Concerned about the level of knowledge farmers have about
available federal and private- sector tools for managing risk and
the adequacy of USDA's initiatives to prepare farmers to use these
tools, you requested that we examine USDA's efforts to educate
farmers about risk management. Specifically, you asked us to (1)
provide information on the extent of

farmers' use of risk management tools and (2) identify educational
programs and projects USDA has directed or initiated to prepare
farmers for managing risks and to determine the groups or
individuals who have participated in or been served by these
programs. To address the first objective, we obtained data from
USDA's Agricultural Resource

B-282045 Page 2 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Management Study for 1996, the most current year in which USDA
surveyed farmers about their use of risk management tools. 1

Results in Brief In 1996, about 42 percent of the nation's 2
million farmers used one or more risk management tools to limit
potential income losses resulting from falling market prices or
production failures, according to USDA estimates.

The use of these tools varied by farmers' level of sales and
primary commodity (crop or livestock). In particular, the use of
crop insurance and forward contracts to reduce risk was more
prevalent among farmers (1) with at least $100,000 in annual sales
of agricultural products than among those with annual sales under
$100,000 and (2) whose primary

crops were corn, wheat, and cotton than among those who primarily
grew other crops. Furthermore, of those farmers who received USDA
transition payments-- a key population affected by the 1996 farm
bill's shift away from

federal commodity programs-- and had sales of at least $100,000,
at least 70 percent purchased crop insurance, at least 66 percent
used forward contracts, and at least 34 percent engaged in hedging
in 1996. In fiscal year 1998, USDA obligated $5 million for four
educational initiatives to prepare farmers for managing risk.
First, to develop government and private sector partnerships to
foster risk management education, USDA sponsored a series of risk
management conferences

targeted at bankers, agricultural educators, crop insurance
agents, commodity brokers, and grain elevator operators-- people
in a position to influence and/ or educate farmers. However, these
initial conferences reached only a relatively small percentage of
these target groups' members; for example, only about 2 percent of
all U. S. crop insurance agents attended. USDA intends to use
partnerships with private sector organizations to further expand
its educational outreach activities. Second, USDA awarded 17 risk
management education and research grants that are primarily
designed to develop risk management education curriculums for
training such diverse groups as farmers with less than $20,000 in
annual income, farmers who grow specific crops in individual
states or regions, crop insurance agents, and grain elevator
operators across the country. The expected completion dates for
these projects range from the summer of 1999 through the fall of
2001. Third, USDA

provided funding to supplement land grant universities' risk
management 1 While USDA's National Agricultural Statistics Service
conducts this survey each year, it did not include risk management
questions in its 1997 survey.

B-282045 Page 3 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

education efforts. Finally, USDA contracted with the University of
Minnesota to develop an Internet website library that, as of
January 1999, contained over 700 risk management publications and
other education materials for farmers.

Background Farming has always been a risky endeavor, and farmers
have always had to manage risk as a part of doing business. Over
the years, the federal government has played an active role in
several ways to help mitigate the

effects of production losses and low prices on farm income. For
example, USDA's Risk Management Agency (RMA) administers the
federal crop insurance program to protect farmers against major
production losses. Under this program, RMA subsidizes the federal
multiple- peril crop insurance program, which allows insured
farmers to receive an indemnity

payment if production falls below a certain level. In addition, to
help protect farmers against the risk of low crop prices, USDA's
Farm Service Agency administered price- and income- support
programs for farmers who grew certain crops-- corn, wheat, grain
sorghum, barley, oats, cotton, and rice. The 1996 farm bill
changed the government's role. It replaced the incomesupport
programs with production flexibility contracts that provide for
fixed but declining annual payments to participating farmers from
1996 through 2002. 2 These government payments-- known as
transition payments-- are not tied to market prices, and
participating farmers are not restricted with regard to the type
or amount of crops that they plant, as they were in the earlier
programs. Furthermore, unlike the deficiency

payments of the last 6 decades, the transition payments do not
rise in years when crop prices are low, nor do they fall in years
when prices are high. As shown in table 1, the 1996 farm bill
specified that transition payments would total about $36 billion
over the 7- year period, declining from about

$5. 6 billion in 1996 to about $4 billion in 2002. 2 Only land
enrolled in the federal commodity programs at the time the 1996
farm bill was enacted is eligible to receive transition payments.

B-282045 Page 4 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Table 1: Transition Payments by Commodity, Fiscal Years 1996- 2002

Note: Figures may not add to total due to rounding. a Upland
cotton constituted 98 percent of all U. S. cotton production in
1995.

b Excludes about $3 billion in emergency agricultural assistance
enacted in Oct. 1998. Source: USDA.

By giving farmers increased flexibility in deciding which crops to
plant, the 1996 farm bill allows them to choose the particular
crop or combination of crops that they believe offers the best
chance to maximize their profits and

offset the decline in income resulting from lower government
payments. However, the increased flexibility in planting decisions
brings other risks. For example, small increases in expected
profits may lead many farmers to decide to increase the acreage
devoted to a particular crop. This, in turn,

could result in the increased production of the crop nationwide
and ultimately in lower prices as a result of the greater supply.

Section 192 of the 1996 farm bill required that USDA, in
consultation with the Commodity Futures Trading Commission (CFTC),
educate farmers in managing the financial risks inherent in
producing and marketing

agricultural commodities. The act specified that, as a part of
such education activities, USDA may develop and implement programs
to assist and train farmers in using (1) forward contracts, which
enable farmers to lock in a price for their crop or livestock
production prior to harvest or slaughter, (2) crop insurance,
which ensures compensation if crop yields are substantially lower
than expected, and (3) hedging-- buying or selling futures or
options contracts on a commodity exchange, such as the Chicago
Board of Trade-- which reduces the risk of receiving lower prices
for crops or livestock. The act authorized USDA to use its
existing

Dollars in millions

Commodity FY 1996 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002
Total

Corn $2, 574. 5 $2, 488. 9 $2, 680. 8 $2, 589.7 $2,371. 1 $1, 908.
9 $1, 852. 5 $16, 466.4

Wheat 1, 462. 7 1,414.1 1, 523. 1 1,471. 3 1, 347. 1 1, 084.5 1,
052. 5 9, 355.3

Upland cotton a 647.8 626.3 674. 5 651. 6 596. 6 480.3 466. 1 4,
143.2

Rice 471.8 456.1 491. 3 474. 6 434. 5 349.8 339. 5 3, 017.6

Grain sorghum 284. 6 275.2 296. 4 286. 3 262. 1 211.0 204. 8 1,
820.4

Barley 120.3 116.3 125. 3 121. 0 110. 8 89. 2 86. 6 769.5

Oats 8. 4 8. 1 8.7 8. 4 7.7 6. 2 6. 0 53. 5 Total $5,570.0
$5,385.0 $5,800. 0 $5, 603. 0 b $5, 130. 0 $4, 130. 0 $4, 008. 0
$35,626. 0

B-282045 Page 5 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

research and extension authorities and resources to implement this
provision. In March 1997, the Secretary of Agriculture organized a
steering committee to direct the government's education activities
for managing agricultural risk. The steering committee is chaired
by RMA's administrator and

includes a CFTC commissioner; the administrator of USDA's
Cooperative State Research, Education, and Extension Service
(CSREES); and the director of USDA's National Office of Outreach.
These agencies have different responsibilities. RMA primarily
administers the federal crop insurance program; the 1996 farm bill
expanded its authority to include a broader risk management
perspective. CFTC, which regulates commodity futures and options
trading in the United States, also develops and maintains research
and informational programs concerning futures and options trading
for farmers, commodity market users, and the general public.
CSREES develops and conducts agricultural research, higher

education, and extension programs to provide education and
technical assistance to farmers and the general public. USDA's
National Office of Outreach is responsible for ensuring that
information, technical assistance, and training are available to
all USDA customers, with an emphasis on underserved populations.

Farmers' Use of Risk Management Tools Varied by Size of Farming
Operation and Commodity

USDA's 1996 Agricultural Resource Management Study (Phase 3),
based on a statistical sample of farmers, found that about 42
percent of the nation's 2 million farmers used at least one of the
risk management tools-- forward contracts, crop insurance, or
hedging-- to manage their income risk. In 1996, a substantially
greater percentage of farmers with agricultural sales of at least
$100, 000 (large- scale farmers) used each risk management tool
than did farmers whose agricultural sales were less than $100,000
(smallscale

farmers). 3 Similarly, a greater percentage of farmers whose
primary crops were corn, wheat, or cotton purchased crop insurance
and used forward contracts than did farmers who grew other field
crops. (App. II provides detailed data on farmers' use of risk
management tools by sales level, commodity, geographic region, and
the receipt of USDA transition payments.)

3 In analyzing farmers' use of risk management tools on the basis
of farm sales, we included farmers with sales between $100,000 and
$250, 000 in the large- scale farmer category because these
farmers behaved like other large- scale farmers in using risk
management tools. We also established a separate category for
farms operated by nonfamily corporations, cooperatives, or hired
managers because specific level- of- sales data were not readily
available for these farms.

B-282045 Page 6 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

A Greater Percentage of Large- Scale Farmers Used Risk Management
Tools Than Did Small- Scale Farmers

Table 2 shows that, among all U. S. farmers, a substantially
greater percentage of large- scale farmers used each risk
management tool than did small- scale farmers in 1996. Among
large- scale farmers, at least 52 percent purchased crop
insurance, at least 55 percent used forward contracts, and

at least 32 percent engaged in hedging. 4 In contrast, no more
than 16 percent of small- scale farmers purchased crop insurance,
no more than 29 percent used forward contracts, and no more than
22 percent engaged in

hedging. Available data were insufficient to determine whether
large- scale farmers hedged with futures or options contracts to a
greater extent than small- scale farmers in 1996.

Table 2: Percentage of Farmers Who Used Each Risk Management Tool,
by Farm Sales Level, 1996

Note: Exact percentages are not known because only a sample of
farmers was surveyed. As a result, we provide a range based on 95-
percent confidence intervals for the use of risk management tools.
For example, we estimate that between 41 percent and 67 percent of
farmers with sales of at least $500,000 purchased crop insurance.
See table II. 2 in app. II for more detailed information about
farmers' use of each risk management tool. a See table II. 1 in
app. II for confidence intervals for each category's number of
farmers and sales.

4 An exact percentage of farmers who used each risk management
tool is not known because only a sample of farmers was surveyed.
To provide a conservative estimate of usage, we have used the
lower bound of the range of usage based on 95- percent confidence
intervals.

Range Farm sales level

Percent of all farmers a

Percent of agricultural

sales a Percent

using crop insurance

Percent using forward

contracts Percent

using hedging

Large- scale farmers 17.3 76.3 52- 64 55- 67 32- 44

$500, 000 and over 2.9 37.2 41- 67 52- 74 34- 54 $250, 000-$
499,999 4.8 19.5 56- 76 49- 71 32- 52 $100, 000-$ 249,999 9.6 19.6
47- 63 55- 67 23- 45

Small- scale farmers 80.3 15.5 10- 16 21- 29 16- 22

Less than $100,000 26.1 9. 5 19- 29 33- 45 21- 33 Limited
resources b 14.5 1. 0 c 8- 26 6- 20 Retirement d 13.0 1. 2 2- 10
13- 33 6- 32 Residential lifestyle e 26.7 3. 8 5- 13 13- 23 8- 18

Corporate farmers f 2.4 8. 2 0- 74 4- 56 3- 39 All farmers 100.0
100.0 19- 24 28- 35 19- 25

B-282045 Page 7 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

b An operator who has household income under $20,000, farm assets
under $150,000, and gross farm sales under $100,000. c A reliable
estimate was unavailable from USDA's study data. d The operator's
primary occupation is retired. e The operator's primary occupation
is other-- neither farming nor retired. f Operated by nonfamily
corporations, cooperatives, or hired managers.

Source: USDA's Economic Research Service. Table 3 shows that at
least 70 percent of those large- scale farmers who received
transition payments purchased crop insurance, at least 66 percent
used forward contracts, and at least 34 percent engaged in hedging
in 1996. However, the minimum extent of usage was even greater
among farmers who had more than $500,000 in sales and received
transition payments-- at least 73 percent purchased crop
insurance, at least 78 percent used forward

contracts, and at least 50 percent engaged in hedging in 1996.

Table 3: Percentage of Farmers Who Used Each Risk Management Tool
Among Those Who Received Transition Payments, by Farm Sales Level,
1996

Notes: Exact percentages are not known because only a sample of
farmers was surveyed. As a result, we provide a range based on 95-
percent confidence intervals for the use of risk management tools.
For example, we estimate that crop insurance was purchased by
between 73 percent and 87

percent of farmers with sales of at least $500,000 who received
transition payments. See table II. 4 in app. II for more detailed
information about farmers' use of each risk management tool. a
Percentages do not add up to 100 percent because farmers who
receive transition payments are a subset of all U. S. farmers. See
table II. 3 in app. II for the confidence intervals for each
category's number of farmers and sales.

Range Farm sales level

Percent of all farmers a

Percent of agricultural

sales a Percent

using crop insurance

Percent using forward

contracts Percent

using hedging

Large- scale farmers 11. 1 44.3 70- 84 66- 78 34- 50

$500, 000 and over 1.6 17. 9 73- 87 78- 86 50- 66 $250, 000-$
499,999 3.3 13. 1 80- 92 57- 83 33- 57 $100, 000-$ 249,999 6.2 13.
3 61- 83 64- 78 23- 51

Small- scale farmers 12.8 5. 8 42- 68 37- 55 18- 40

Less than $100,000 6.7 3. 8 49- 73 36- 56 18- 42 Limited resources
b 1.2 0. 4 c d d Retirement e 2.1 0. 4 d c c Residential lifestyle
f 2.8 1. 2 32- 72 34- 60 6- 40

Corporate farmers g 0.5 2. 2 85- 97 66- 86 28- 68

B-282045 Page 8 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

b The operator has household income under $20,000, farm assets
under $150,000, and gross farm sales under $100,000. c USDA is
required to protect the privacy of respondents by withholding data
if it receives too few responses in a particular category. d A
reliable estimate was unavailable from USDA's study data.

e The operator's primary occupation is retired. f The operator's
primary occupation is other-- neither farming nor retired. g
Defined as operated by nonfamily corporations, cooperatives, or
hired managers. Source: USDA's Economic Research Service.

A Larger Proportion of Farmers Who Primarily Grew Major Field
Crops Used Crop Insurance and Forward Contracts Than Did Other
Farmers

As table 4 shows, among all U. S. farmers, a greater percentage of
those whose primary crop was corn, wheat, or cotton purchased crop
insurance and engaged in forward contracting than did farmers who
grew other field crops or raised livestock in 1996. Among farmers
who primarily grew corn,

wheat, and cotton, at least 54 percent purchased crop insurance
and at least 50 percent used forward contracts. 5 In contrast,
among farmers who primarily raised other field crops, 43 percent
at most purchased crop insurance and 45 percent at most used
forward contracts. In addition, hedging was used by at least 35
percent of cotton farmers, which was a higher percentage than for
farmers who grew other field crops in 1996.

However, available data were insufficient to determine whether
corn and wheat farmers engaged in hedging with futures or options
contracts to a greater extent than did farmers who primarily
raised other crops or livestock.

5 An exact percentage of farmers who used each risk management
tool is not known because only a sample of farmers was surveyed.
To provide a conservative estimate of usage, we used the lower
bound of the range of usage based on 95- percent confidence
intervals.

B-282045 Page 9 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Table 4: Percentage of Farmers Who Used Each Risk Management Tool,
by Principal Commodity, 1996

Note: Exact percentages are not known because only a sample of
farmers was surveyed. As a result, we provide a range based on 95-
percent confidence intervals for the use of risk management tools.
For example, we estimate that between 54 percent and 82 percent of
the farmers who primarily grew corn purchased crop insurance. a
Excludes data on farmers who primarily grew vegetables, fruit,
nuts, greenhouse, and nursery crops or who raised other livestock.
See table II. 6 in app. II for more detailed information about
these farmers' use of each risk management tool. b Percentages do
not add to 100 percent because certain specialty commodities are
excluded. See table II. 5 in app. II for confidence intervals for
each commodity's number of farmers and sales. c Includes soybeans,
rice, grain sorghum, barley, and oats.

Source: USDA's Economic Research Service. Table 5 shows that,
among corn farmers who received transition payments, at least 54
percent purchased crop insurance, at least 61 percent used forward
contracts, and at least 31 percent engaged in hedging in 1996.
Among wheat farmers who received transition payments, at least 81
percent purchased crop insurance, at least 46 percent used forward
contracts, and at least 15 percent engaged in hedging. Among
cotton farmers who received transition payments, at least 88
percent purchased crop insurance, at least 59 percent used forward
contracts, and at least 25 percent engaged in hedging.

Range Commodity a

Percent of all farmers b

Percent of agricultural

sales b Percent

using crop insurance

Percent using forward

contracts Percent

using hedging

Corn 5.7 11.2 54- 82 53- 77 29- 55 Wheat 2. 0 3.1 76- 98 50- 64
14- 32 Cotton 0. 8 3.3 73- 97 63- 89 35- 57 Other field crops c
27.8 25.9 29- 43 29- 45 18- 30 Beef and hogs 38.6 14.6 4- 6 20- 30
15- 25 Dairy 4. 6 14.5 26- 44 15- 35 10- 26 Poultry 1. 3 9.0 3- 7
11- 43 7- 33

B-282045 Page 10 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Table 5: Percentage of Farmers Who Used Each Risk Management Tool
Among Those Who Received Transition Payments, by Principal
Commodity, 1996

Note: Exact percentages are not known because only a sample of
farmers was surveyed. As a result, we provide a range based on 95-
percent confidence intervals for the use of risk management tools.
For example, we estimate that between 54 percent and 88 percent of
the corn farmers who received transition payments purchased crop
insurance. a Excludes data on farmers who primarily grew
vegetables, fruit, nuts, nursery, and greenhouse crops or who
raised other livestock. See table II. 8 in app. II for more
detailed information about these farmers' use of each risk
management tool. b Percentages do not add up to 100 percent
because farmers who receive transition payments are a subset of
all U. S. farmers. See table II. 7 in app. II for confidence
intervals for each commodity's number of farmers and sales. c
Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
d Includes soybeans, rice, grain sorghum, barley, and oats.

Source: USDA's Economic Research Service.

USDA Focused Risk Management Education Efforts on Developing
Public and Private Partnerships

To prepare farmers for managing their risks, USDA has focused
primarily on developing regional or state partnerships of
government, university, and private organizations to foster a risk
management educational program. The university partners developed
and implemented a series of regional and local risk management
conferences targeted initially at groups that influence farmers--
bankers, crop insurance agents, grain elevator operators, and
agricultural educators. USDA expects that these individuals will
provide farmers with specific information for using risk
management

tools as the program continues. During fiscal year 1998, USDA also
awarded 17 grants for risk management education projects, provided
funding to land grant universities to promote additional risk
management

Range Commodity a

Percent of all farmers b

Percent of agricultural

sales b Percent

using crop insurance

Percent using forward

contracts Percent

using hedging

Corn 4. 4 10. 0 54- 88 61- 85 31- 63 Wheat 1. 7 2. 8 81- 101 c 46-
60 15- 29 Cotton 0. 6 2. 8 88- 100 59- 91 25- 61 Other field crops
d 9. 9 20. 4 65- 85 49- 77 21- 43 Beef and hogs 4. 3 6. 6 16- 54
29- 75 23- 73 Dairy 1. 9 5. 2 58- 78 15- 51 14- 46 Poultry 0. 1 0.
7 17- 77 11- 59 2- 32

B-282045 Page 11 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

education efforts, and funded the development of an electronic
risk management education library. In fiscal year 1998, USDA
obligated $5 million of RMA's $10 million for crop insurance
research to RMA's risk management education initiatives-
amounting to about $2.50 per U. S. farmer. These funds were the
predominant source of risk management education funding within
USDA.

In comparison, a CSREES official told us that CSREES typically
obligates only about $100,000 per year, primarily for specific
risk management education projects. The official noted that land
grant universities may also use a portion of their general CSREES
education funding to support risk management education projects;
however, the amount that universities spent in fiscal year 1998 is
not known. For fiscal year 1999, USDA has

allocated $1 million of RMA's $3. 5 million for crop insurance
research to risk management education. USDA's Conferences and
Regional Partnerships

In response to the 1996 farm bill's requirement that it educate
farmers about managing their production and marketing risks, USDA
used a September 1997 national risk management education summit to
initiate a

series of 20 national and regional risk management education
conferences. USDA's conferences focused on developing partnerships
with third- party influencers in an effort to leverage the
available government funds to train

those who are in a position to educate farmers on risk management
tools. According to USDA's director of risk management education,
the training would enable third- party influencers to demonstrate
to farmers how the various tools fit together in an overall risk
management and marketing plan. These individuals interact
frequently with farmers and are in a position to influence the
risk management decisions farmers make. For example, land grant
college or extension service educators provide various

training and advisory services to farmers on both the production
and business aspects of farming. Crop insurance agents meet with
farmers several times during the year as the farmers decide on
insurance coverage

levels and provide the agents with information on acres planted
and final crop production levels. The bank or farm credit services
loan officers meet with farmers to discuss business plans and
arrange for operating loans.

Commodity brokers interact with farmers who choose to engage in
hedging with futures or options. Farmers interact with grain
elevator operators when they sell their crops on either a cash or
forward contract basis. According to RMA, the conferences helped
participants to gain information and knowledge about areas outside
their own expertise. For example,

B-282045 Page 12 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

commodity brokers learned more about crop insurance, and crop
insurance agents learned more about the futures market. As of
December 1998, USDA's major conferences had reached a relatively
small percentage of the target groups' members. Table 6 shows that
335 (2 percent) of about 15, 000 crop insurance agents in the
United States had attended a USDA- sponsored risk management
conference. Similarly, only 251 bankers and 96 grain elevator
operators had attended the conferences, although there are about
3,200 agricultural banks and about 10,000 grain elevators in the
United States. About 20 percent of the conference attendees were
USDA or other government agency employees, rather than

members of the groups influencing farmers.

Table 6: USDA Risk Management Education Conference Attendance,
September 1997 through December 1998

a Figures do not add to total because of rounding. Source: USDA.

Target group Number attending Percent of attendees

Farmers 528 19. 6 Bankers 251 9. 3 Crop insurance agents 335 12. 5
Grain elevator operators 96 3. 6 Commodity brokers 119 4. 4
Agricultural extension educators 410 15. 3 USDA and other
government employees 542 20. 2 Other 408 15. 2

Total 2, 689 100. 0 a

B-282045 Page 13 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Conference speakers generally presented broad, overview
information about a number of farm management areas without
providing detailed information addressing specific problems in any
single area. According to RMA officials, providing overview
information was appropriate because it enabled participants to
appreciate how their specialty area interacts with other areas for
the benefit of farmers. USDA also expanded the scope of

the conferences to discuss more than the two risk areas that the
1996 farm bill had identified-- producing and marketing
agricultural commodities. Sections of the conferences also
addressed tools for reducing financial risks, legal risks, and
human resource risks, 6 in addition to tools for reducing
production and marketing risks. RMA officials noted that
financial, legal, and human resource risks are also significant
concerns for

farmers. RMA officials consider the risk management conferences to
be a first step in developing regional and state partnerships with
USDA, universities, and private organizations to provide risk
management education to farmers. USDA has designated five land
grant university educators as regional

coordinators of its risk management education program. (App. III
identifies, for each region, the coordinator's university
affiliation, the associated RMA regional service offices, and the
states covered.) The regional coordinators are responsible for (1)
working with private sector partners, including bankers, crop
insurance company representatives, and

farmer organizations, to develop regional and local conferences,
meetings and other training efforts and (2) serving as a focal
point for providing information about the risk management
education opportunities in each region. State and local
educational activities, training sessions, and events sponsored by
these partnerships have begun to reach additional farmers

and individuals who influence farmers' decisions. In fiscal year
1998, USDA spent $1.5 million to support the risk management
conferences and initiate regional partnerships, including about
$300,000 for the conferences, $250,000 for publications and

materials, $133,000 for the regional coordinating offices, and
$45,000 for an evaluation project. USDA also spent about $350,000
for special outreach projects designed to enhance the risk
management skills of small and

6 Farmers' financial risks include the risk that affordable credit
will not be available or that cash flow will be inadequate.
Farmers' legal risks include liability arising from their farming
activities, the need to choose an appropriate business structure,
and the need for estate planning. Finally, farmers' human resource
risks include various challenges arising from hiring, training,
compensating, and supervising workers.

B-282045 Page 14 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

minority producers in areas described as underserved by
traditional risk management tools and $50,000 to sponsor a Future
Farmers of America essay contest on risk management.

Risk Management Education Grants In addition to sponsoring
conferences and developing regional

partnerships, USDA awarded a series of risk management education
and research grants totaling $3 million. In February 1998, USDA
issued a request for proposals in the Federal Register.
Subsequently, a peer review team, working under the risk
management education steering committee, evaluated 107 proposals
requesting over $19 million. In June 1998, USDA awarded 17 risk
management education grants, ranging from $19,172 to $250,000, and
averaging about $178,000. USDA awarded 12 grants to land

grant colleges and universities, 3 to other educational entities,
1 to a crop insurance industry organization, and 1 to a grain
elevator industry organization. Most of the grants included
additional public and private sector partners who agreed to
participate in the projects with the primary grantees. With
expected project completion dates ranging from the summer of 1999
through the fall of 2001, the projects are currently ongoing, and
thus, in many cases, the training phase has not begun.

The grant projects target diverse audiences-- ranging from farmers
with limited resources, 7 farmers growing specific commodities in
individual states or regions, and dairy farmers to crop insurance
agents and grain elevator operators across the country-- and were
for diverse purposes. For example, the grantees focused on
different geographic coverages: seven planned national coverage,
four targeted regional audiences, and six directed their efforts
in a single state. Similarly, some of the grantees focused on
particular groups: four targeted limited resource or minority

farmers, one focused on the risk management needs of citrus
farmers, and one focused on dairy farmers. Typically, the projects
focused on training, including a curriculum development phase, a
"train the trainer" phase, and a series of seminars or workshops.
However, two grants provided for research about farmers' use of
and need for risk management tools. (App. IV provides information
about the grantees, grant amount, and objectives for each of the
17 grants.)

7 Limited resource farmers are those with household income under
$20,000, farm assets under $150,000, and gross farm sales under
$100,000.

B-282045 Page 15 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Funding Risk Management Education at Land Grant Universities

As a third element of its risk management education initiative in
fiscal year 1998, USDA provided $362,000, divided among 96 land
grant colleges and universities, to promote and augment their risk
management education programs. According to USDA, these funds
enabled the cooperative extension system to reach farmers during
the winter of 1998- 99 with a

substantial risk management curriculum, including (1) regional
video teleconferences, (2) small producer workshops at the local
level, and (3) fact sheets, teaching guides, and classroom visual
aids adapted to agricultural conditions in a particular state.

Electronic Library In the fourth part of its response to the
legislative mandate, USDA entered into a $200,000 contract with
the University of Minnesota to develop an Internet website that
provides an electronic library of risk management education
materials. As of January 1999, the website contained over 700

risk management publications, presentations, decision aids, and
other materials either resident on the site or linked to it. This
information is useful to farmers as well as to the groups that
influence them. On average,

about 60 individuals per day made use of the website in January
1999. Agency Comments We provided the U. S. Department of
Agriculture with a draft of this report

for review and comment. We met with Agriculture officials,
including the Administrator of the Risk Management Agency, who
stated that the agency agreed with the report and that the report
was balanced and accurate.

However, the Department believed that the report should (1)
provide more detailed information on how the $5 million for risk
management education initiatives was spent, (2) discuss the Risk
Management Agency's regional and local risk management conferences
in the context of its broader effort to establish public and
private partnerships, and (3) discuss the Risk Management Agency's
efforts to provide risk management education

through land grant universities as a separate initiative. We
revised the report to more fully identify the various education
initiatives that the Risk Management Agency has funded, explain
that one of the purposes of the agency's conferences was to foster
public- private partnerships, and identify the support for the
outreach efforts of land grant universities as a separate

initiative. In addition, the Department provided comments to
improve the report's technical accuracy, which we incorporated as
appropriate.

B-282045 Page 16 GAO/RCED-99-90 Farmers' Use of Risk Management
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Scope and Methodology To determine the extent to which various
groups of farmers have used risk management tools, we obtained
national agricultural survey data from

USDA's Agricultural Resource Management Study (Phase 3) for 1996-
formerly called the Farm Costs and Returns Survey. The 1996
survey, based on a statistical sample, provides the most current,
comprehensive

data on farmers' use of risk management tools. About 7, 300
farmers responded to the risk management questions. The 1997 study
did not include specific questions about risk management
strategies because it was

designed to accommodate questions required by the 1997
agricultural census. USDA's Economic Research Service, which
recently published an analysis of the 1996 survey data, 8 provided
the statistical data for this report. To identify education
programs and projects USDA has directed or initiated

to prepare farmers for managing risk, we interviewed and obtained
documentation from USDA headquarters and regional officials, as
well as from regional risk management coordinators. To determine
the groups or individuals who have participated in or been served
by these programs, we

interviewed and obtained documentation from cognizant USDA
officials, academicians, and other private sector organizations
involved in planning and carrying out risk management seminars and
other educational and research efforts. We also interviewed
representatives of farmer organizations about RMA's approach.

8 Managing Risk in Farming: Concepts, Research, and Analysis,
Economic Research Service, Agricultural Economic Report Number
774, March 1999.

B-282045 Page 17 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

We performed our work from June 1998 through February 1999 in
accordance with generally accepted government auditing standards.
We did not, however, independently verify data obtained from USDA
officials and documents. USDA's Agricultural Resource Management
Study data are the only comprehensive data available that examine
farmers' use of risk management tools.

We are sending copies of this report to Representative Larry
Combest, Chairman, House Committee on Agriculture, and appropriate
congressional committees. We are also sending copies to the
Honorable Dan Glickman, the Secretary of Agriculture; the
Honorable Jacob Lew, Director, Office of Management and Budget;
and other interested parties. We will also make copies available
upon request. Please contact me at (202) 512- 5138 if you or your
staff have any questions about this report. Major contributors to
this report are Richard Cheston, Mary Kenney, Renee McGhee-
Lenart, and Robert R. Seely, Jr.

Sincerely yours, Robert E. Robertson Associate Director, Food

and Agriculture Issues

Page 18 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Contents Letter 1 Appendix I Descriptions of Risk Management Tools

22 Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

23 Appendix III Regional Coordinators for Risk Management
Education

35 Appendix IV Project Descriptions of the Risk Management
Education Grants

36 Tables Table 1: Transition Payments by Commodity, Fiscal Years
1996- 2002 4

Table 2: Percentage of Farmers Who Used Each Risk Management Tool,
by Farm Sales Level, 1996 6 Table 3: Percentage of Farmers Who
Used Each Risk Management

Tool Among Those Who Received Transition Payments, by Farm Sales
Level, 1996 7 Table 4: Percentage of Farmers Who Used Each Risk
Management

Tool, by Principal Commodity, 1996 9

Contents Page 19 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies

Table 5: Percentage of Farmers Who Used Each Risk Management Tool
Among Those Who Received Transition Payments, by Principal
Commodity, 1996 10

Table 6: USDA Risk Management Education Conference Attendance,
September 1997 through December 1998 12 Table II. 1: Number of U.
S. Farmers and the Value of Their

Agricultural Sales, by Farm Sales Level, 1996 23 Table II. 2:
Percentage of Farmers Who Used Each Risk

Management Tool, by Farm Sales Level, 1996 24 Table II. 3: Number
of Farmers Who Received Transition Payments

and the Value of Their Agricultural Sales, by Farm Sales Level,
1996 25 Table II. 4: Percentage of Farmers Who Used Each Risk
Management Tool Among Those Who Received Transition

Payments, by Farm Sales Level, 1996 26 Table II. 5: Number of U.
S. Farmers and the Value of Their

Agricultural Sales, by Principal Commodity, 1996 27 Table II. 6:
Percentage of Farmers Who Used Each Risk Management Tool, by
Principal Commodity, 1996 28

Table II. 7: Number of Farmers Who Received Transition Payments
and the Value of Their Agricultural Sales, by Principal Commodity,
1996 29

Table II. 8: Percentage of Farmers Who Used Each Risk Management
Tool Among Those Who Received Transition Payments, by Principal
Commodity, 1996 30 Table II. 9: Number of U. S. Farmers and the
Value of Their

Agricultural Sales, by Geographic Region, 1996 31 Table II. 10:
Percentage of Farmers Who Used Each Risk

Management Tool, by Geographic Region, 1996 32 Table II. 11:
Number of Farmers Who Received Transition Payments and the Value
of Their Agricultural Sales, by Geographic

Region, 1996 33 Table II. 12: Percentage of Farmers Who Used Each
Risk

Management Tool Among Those Who Received Transition Payments, by
Geographic Region, 1996 34

Contents Page 20 GAO/RCED-99-90 Farmers' Use of Risk Management
Strategies Abbreviations

CFTC Commodity Futures Trading Commission CSREES Cooperative State
Research, Education, and Extension Service RMA Risk Management
Agency USDA U. S. Department of Agriculture

Page 21 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Page 22 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Appendix I Descriptions of Risk Management Tools Appendi x I

The following are brief explanations of the three risk management
tools discussed in our report:

 Crop insurance: Protects participating farmers against the
financial losses caused by events such as droughts, floods,
hurricanes, and other natural disasters. Federal crop insurance
offers farmers two primary

types of insurance coverage. The first-- called catastrophic
insurance- provides protection against the extreme losses of crops
for the payment of a $60 processing fee, whereas the second--
called buyup insurance- provides protection against the more
typical smaller losses of crops in exchange for a premium paid by
the farmer.  Forward contract: A cash market transaction in which
two parties agree

to buy or sell a commodity or asset under agreed- upon conditions.
For example, a farmer or rancher agrees to sell, and a local grain
elevator or packing plant agrees to buy, the commodity or
livestock at a specific future time for an agreed- upon price or
on the basis of an agreed on pricing mechanism. With this
agreement, a farmer locks in a final price for a commodity prior
to harvest or slaughter. Hedging: The purchase or sale of a
futures contract or an option on an

organized exchange, such as the Chicago Board of Trade. A hedge is
a temporary substitute for an intended subsequent transaction in
the cash market to minimize the risk of an adverse price change.
For example, corn farmers interested in locking in the sale price
of all or part of their crops would sell corn futures as a
temporary substitute for the cash

market sale they intend to make at a later date. The sales
transaction is carried out through a commodity broker. More
specifically:  Futures contract: An agreement for the purchase or
sale of a

standardized amount of a commodity, of standardized quality
grades, during a specific month, on an organized exchange and
subject to all terms and conditions included in the rules of that
exchange.

Option: The right, but not the obligation, to buy or sell a
specified number of underlying futures contracts or a specified
amount of a commodity, currency, index, or financial instrument at
an agreedupon price on or before a given future date.

Other tools are also available to help farmers manage their risks.
For a brief discussion of these tools, see Risk Management:
Farmers Sharpen Tools to Confront Business Risks, Agricultural
Outlook, March 1999.

Page 23 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments Appendi x I I

This appendix provides detailed information that we obtained from
the U. S. Department of Agriculture's (USDA) Economic Research
Service concerning farmers' use of risk management strategies.
This information is based on the 1996 Agricultural Resource
Management Study; about 7,300 farm operators responded to the risk
management questions. Using the

data the Service provided, we calculated confidence intervals. 1
The Economic Research Service's estimates and associated
confidence intervals are presented in tables II. 1 through II. 12.

Table II. 1: Number of U. S. Farmers and the Value of Their
Agricultural Sales, by Farm Sales Level, 1996

a The numbers in this column are point estimates. b Defined as
operator has household income under $20,000, farm assets under
$150,000, and gross farm sales under $100,000.

c Defined as operator's primary occupation is retired. d Defined
as operator's primary occupation is other-- neither farming nor
retired.

1 Since a sample (called a probability sample) was used to develop
our estimates, each estimate has a measurable precision, or
sampling error, which may be expressed as a plus/ minus figure. A
sampling error indicates how closely we can reproduce from a
sample the results that we would obtain if we were to take a
complete count of the universe using the same measurement methods.
By adding the sampling error to and subtracting it from the
estimate, we can develop upper and lower bounds for each estimate.
This range is called a confidence interval. Sampling errors and
confidence intervals are stated at a certain confidence level in
this case, 95 percent. For example, a confidence interval at the
95- percent confidence level, means that in 95 out of 100
instances, the sampling procedure used would produce a confidence
interval containing the universe value we are estimating.
Confidence interval Confidence interval

(Dollars in millions) Farm sales level Number of

farmers a From To Agricultural sales a (Dollars in millions) From
To

Large- scale farmers 346, 577 $137,155. 2

$500, 000 and over 58, 823 43, 489 74, 157 $66,913. 4 $51,970. 3
$81,856. 6 $250, 000-$ 499,999 95, 485 74, 337 116, 633 $35,042. 1
$27,613. 8 $42,470. 3 $100, 000-$ 249,999 192, 269 150,062 234,
476 $35,199. 7 $27,981. 4 $42,418. 0

Small- scale farmers 1, 615, 087 $27,882. 5

Less than $100,000 524, 820 441,500 608, 140 $17,070. 6 $13,754. 6
$20,386. 5 Limited resources b 291, 659 208,770 374, 548 $1,857. 7
$984. 4 $2,731. 1 Retirement c 261, 428 199,428 323, 428 $2,166. 2
$1,361. 3 $2,971. 1 Residential lifestyle d 537, 180 418,206 656,
156 $6,788. 0 $4,926. 1 $8,649. 8

Corporate e 47, 238 18, 536 75, 940 $14,696. 7 $10,333. 2 $19,060.
2 All farmers 2, 008, 902 1,780,530 2, 237, 274 $179,734. 4
$152,055. 2 $207,413. 5

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 24 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

e Defined as operated by nonfamily corporations, cooperatives, or
hired managers. Source: USDA's Economic Research Service. Table
II. 2: Percentage of Farmers Who Used Each Risk Management Tool,
by Farm Sales Level, 1996

a The numbers in this column are point estimates. b Defined as
operator has household income under $20,000, farm assets under
$150,000, and gross farm sales under $100,000.

c Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
d The operator's primary occupation is retired.

e The operator's primary occupation is other-- neither farming nor
retired. f Operated by nonfamily corporations, cooperatives, or
hired managers. Source: USDA's Economic Research Service. Farm
sales level Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Large- scale farmers 58 52- 64 61 55- 67 38 32- 44

$500, 000 and over 54 41- 67 63 52- 74 44 34- 54 $250, 000-$
499,999 66 56- 76 60 49- 71 42 32- 52 $100, 000-$ 249,999 55 47-
63 61 55- 67 34 23- 45

Small- scale farmers 13 10- 16 25 21- 29 19 16- 22

Less than $100,000 24 19- 29 39 33- 45 27 21- 33 Limited resources
b 9 (1)- 19 c 17 8- 26 13 6- 20 Retirement d 6 2- 10 23 13- 33 19
6- 32 Residential lifestyle e 9 5- 13 18 13- 23 13 8- 18

Corporate f 37 0- 74 30 4- 56 21 3- 39 All farmers 22 19- 24 32
28- 35 22 19- 25

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 25 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 3: Number of Farmers Who Received Transition Payments
and the Value of Their Agricultural Sales, by Farm Sales Level,
1996

a The numbers in this column are point estimates. b Defined as
operator has household income under $20,000, farm assets under
$150,000, and gross farm sales under $100,000.

c Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
d Defined as operator's primary occupation is retired.

e Defined as operator's primary occupation is other-- neither
farming nor retired. f Defined as operated by nonfamily
corporations, cooperatives, or hired managers.

Source: USDA's Economic Research Service.

Confidence interval Confidence interval (Dollars in millions) Farm
sales level Number of

farmers a From To Agricultural sales a (Dollars in millions) From
To

Large- scale farmers 223, 336 $79,665. 4

$500, 000 and over 32, 166 25,546 38, 786 $32,214. 3 $25,142. 6
$39,285. 9 $250, 000-$ 499,999 66, 072 50,920 81, 224 $23,470. 2
$18,548. 0 $28,392. 3 $100, 000-$ 249,999 125, 098 92,733 157, 463
$23,980. 9 $17,870. 6 $30,091. 2

Small- scale farmers 256, 460 $10,519. 6

Less than $100,000 134, 238 100,034 168, 442 $6,886. 2 $4,510. 8
$9,261. 7 Limited resources b 25, 000 (1,117) c 51, 117 $735. 8 ($
63.2) c $1, 534.9 Retirement d 41, 803 8,620 74, 986 $785. 1 $131.
1 $1,439. 0 Residential lifestyle e 55, 419 31,522 79, 316 $2,112.
5 $1,164. 3 $3,060. 7

Corporate f 9, 826 5, 608 14, 044 $3,912. 4 $2,202. 4 $5,622. 5

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 26 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 4: Percentage of Farmers Who Used Each Risk Management
Tool Among Those Who Received Transition Payments, by Farm Sales
Level, 1996

a The numbers in this column are point estimates. b Defined as
operator has household income under $20,000, farm assets under
$150,000, and gross farm sales under $100,000.

c USDA is required to protect the privacy of respondents by
withholding data if it receives too few responses in a particular
category. d Confidence interval calculations are not exact because
of the small sample size or other characteristics of the sample
results. e Defined as operator's primary occupation is retired.

f Defined as operator's primary occupation is other-- neither
farming nor retired. g Defined as operated by nonfamily
corporations, cooperatives, or hired managers.

Source: USDA's Economic Research Service. Farm sales level Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Large- scale farmers 77 70- 84 72 66- 78 42 34- 50

$500, 000 and over 80 73- 87 82 78- 86 58 50- 66 $250, 000-$
499,999 86 80- 92 70 57- 83 45 33- 57 $100, 000-$ 249,999 72 61-
83 71 64- 78 37 23- 51

Small- scale farmers 55 42- 68 46 37- 55 29 18- 40

Less than $100,000 61 49- 73 46 36- 56 30 18- 42 Limited resources
b c c 15 (14)- 44 d 11 (9)- 31 d Retirement e 30 (14)- 74 d c c c
c Residential lifestyle f 52 32- 72 47 34- 60 23 6- 40

Corporate g 91 85- 97 76 66- 86 48 28- 68

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 27 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 5: Number of U. S. Farmers and the Value of Their
Agricultural Sales, by Principal Commodity, 1996

a The numbers in this column are point estimates. Source: USDA's
Economic Research Service. Confidence interval Confidence interval

(Dollars in millions) Commodity Number

of farmers a From To Agricultural sales a (Dollars in millions)
From To

Corn 113,710 86, 520 140,900 $20,218.5 $15, 502. 8 $24, 934. 3
Wheat 40,062 24, 515 55,609 $5, 496.6 $3, 460.5 $7, 532. 8 Cotton
16,719 10, 755 22,683 $5, 936.2 $3, 853.5 $8, 018. 9 Other field
crops 558,805 468, 994 648,616 $46,612.6 $38, 116. 0 $55, 109. 1
Fruits/ nuts/ greenhouse/ nursery 117,309 80, 061 154,557
$17,891.9 $11, 895. 2 $23, 888. 5

Vegetables 33,261 16, 702 49,820 $10,004.7 $6, 906.4 $13, 102. 9
Beef and hogs 774,893 636, 683 913,103 $26,276.1 $21, 126. 0 $31,
426. 2 Dairy 92,806 58, 063 127,549 $25,980.5 $15, 898. 0 $36,
063. 1 Poultry 26,696 18, 533 34,859 $16,215.6 $12, 814. 8 $19,
616. 3 Other livestock 234,641 177, 154 292,128 $5, 101.7 $3,
431.8 $6, 771. 6

All farmers 2, 008,902 1, 780, 530 2,237,274 $179,734.4 $152, 055.
2 $207, 413. 5

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 28 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 6: Percentage of Farmers Who Used Each Risk Management
Tool, by Principal Commodity, 1996

a The numbers in this column are point estimates. Source: USDA's
Economic Research Service

Commodity Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Corn 68 54- 82 65 53- 77 42 29- 55 Wheat 87 76- 98 57 50- 64 23
14- 32 Cotton 85 73- 97 76 63- 89 46 35- 57 Other field crops 36
29- 43 37 29- 45 24 18- 30 Fruits/ nuts/ greenhouse/ nursery 19
11- 27 34 19- 49 23 9- 37

Vegetables 13 4- 22 26 9- 43 20 4- 36 Beef and hogs 5 4- 6 25 20-
30 20 15- 25 Dairy 35 26- 44 25 15- 35 18 10- 26 Poultry 5 3- 7 27
11- 43 20 7- 33 Other livestock 3 1- 5 20 11- 29 15 7- 23

All farmers 22 19- 24 32 28- 35 22 19- 25

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 29 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 7: Number of Farmers Who Received Transition Payments
and the Value of Their Agricultural Sales, by Principal Commodity,
1996

a The numbers in this column are point estimates. b USDA is
required to protect the privacy of respondents by withholding data
if it receives too few responses in a particular category. c
Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
Source: USDA's Economic Research Service.

Confidence interval Confidence interval (Dollars in millions)
Commodity Number of

farmers a From To Agricultural sales a (Dollars in millions) From
To

Corn 89,184 66, 110 112,258 $18, 029. 8 $13,294.5 $22,765. 2 Wheat
33,619 20, 836 46,402 $4,959.0 $2,917.9 $7,000. 1 Cotton 12,449
7,764 17,134 $4,987.1 $3,110.3 $6,863. 8 Other field crops 198,856
151,695 246,017 $36, 638. 5 $29,888.2 $43,388. 8 Fruits/ nuts/
greenhouse/ nursery

b b b b b b Vegetables 10,803 (1, 605) c 23,211 $2,774.3 $1,866.2
$3,682. 3 Beef and hogs 85, 571 42, 132 129, 010 $11, 937. 4 $9,
363. 7 $14, 511.1 Dairy 37,975 24, 429 51,521 $9,294.2 $6,051.7
$12,536. 8 Poultry 1, 810 746 2, 874 $1, 330. 4 $712.4 $1,948. 3
Other livestock 16,391 7,878 24,904 $2,927.2 $1,383.9 $4,470. 5

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 30 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 8: Percentage of Farmers Who Used Each Risk Management
Tool Among Those Who Received Transition Payments, by Principal
Commodity, 1996

a The numbers in this column are point estimates. b Confidence
interval calculations are not exact because of the small sample
size or other characteristics of the sample results. c USDA is
required to protect the privacy of respondents by withholding data
if it receives too few responses in a particular category. Source:
USDA's Economic Research Service.

Commodity Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Corn 71 54- 88 73 61- 85 47 31- 63 Wheat 91 81- 101 b 53 46- 60 22
15- 29 Cotton 94 88- 100 75 59- 91 43 25- 61 Other field crops 75
65- 85 63 49- 77 32 21- 43 Fruits/ nuts/ greenhouse/ nursery c c c
c c c

Vegetables 22 (38)- 82 b 26 (49)- 101 b 18 (33)- 69 b Beef and
hogs 35 16- 54 52 29- 75 48 23- 73 Dairy 68 58- 78 33 15- 51 30
14- 46 Poultry 47 17- 77 35 11- 59 17 2- 32 Other livestock 32 11-
53 47 8- 86 10 3- 17

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 31 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 9: Number of U. S. Farmers and the Value of Their
Agricultural Sales, by Geographic Region, 1996

Note: Does not include Alaska and Hawaii. a The numbers in this
column are point estimates.

b Includes Kansas, Nebraska, North Dakota, and South Dakota. c
Includes Illinois, Indiana, Iowa, Missouri, and Ohio. d Includes
Michigan, Minnesota, and Wisconsin. e Includes Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. f Includes
California, Oregon, and Washington. g Includes Kentucky, North
Carolina, Tennessee, Virginia, and West Virginia. h Includes
Alabama, Florida, Georgia, and South Carolina. i Includes
Arkansas, Louisiana, and Mississippi. j Includes Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, and Vermont. k
Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
l Includes Oklahoma and Texas. Source: USDA's Economic Research
Service.

Confidence interval Confidence interval (Dollars in millions)
Region Number of

farmers a From To Agricultural sales (Dollars in millions) a From
To

Northern Plains b 189,484 128, 205 250,763 $22, 700. 0 $16,515.6
$28,884. 4 Corn Belt c 361,955 310, 167 413,745 $36, 863. 2
$30,360.5 $43,365. 8 Lake States d 191,563 150, 262 232,864 $15,
555. 0 $11,835.5 $19,274. 5 Mountain e 103,976 80, 947 127,005
$13, 368. 7 $8, 364. 0 $18,373. 4 Pacific f 131,155 112, 646
149,664 $27, 756. 1 $21,663.1 $33,849. 1 Appalachia g 315,386 253,
570 377,202 $14, 630. 2 $10,214.2 $19,046. 2 Southeast h 145,283
103, 709 186,857 $13, 597. 2 $8, 986. 6 $18,207. 7 Delta i 132,219
89, 978 174,460 $10, 103. 6 $7, 707. 4 $12,499. 8 Northeast j
114,539 47, 864 181,214 $11, 027. 6 ($ 38. 8) k $22, 093.9
Southern Plains l 323,342 230, 181 416,503 $14, 132. 9 $10,337.9
$17,927. 8

All farmers 2, 008,902 1,780, 530 2, 237,274 $179, 734. 4
$152,055.2 $207,413. 5

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 32 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 10: Percentage of Farmers Who Used Each Risk Management
Tool, by Geographic Region, 1996

Note: Does not include Alaska and Hawaii. a The numbers in this
column are point estimates.

b Includes Kansas, Nebraska, North Dakota, and South Dakota. c
Includes Illinois, Indiana, Iowa, Missouri, and Ohio. d Includes
Michigan, Minnesota, and Wisconsin. e Includes Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. f Includes
California, Oregon, and Washington. g Includes Kentucky, North
Carolina, Tennessee, Virginia, and West Virginia. h Includes
Alabama, Florida, Georgia, and South Carolina. i Includes
Arkansas, Louisiana, and Mississippi. j Includes Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, and Vermont. k
Includes Oklahoma and Texas. Source: USDA's Economic Research
Service.

Region Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Northern Plains b 45 33- 57 42 28- 56 27 16- 38 Corn Belt c 33 23-
43 42 36- 48 25 17- 33 Lake States d 30 22- 38 35 24- 46 25 15- 35
Mountain e 24 17- 31 28 21- 35 18 13- 23 Pacific f 16 10- 22 31
23- 39 25 18- 32 Appalachia g 14 10- 18 26 18- 34 19 10- 28
Southeast h 12 8- 16 32 23- 41 28 19- 37 Delta I 11 7- 15 33 15-
51 27 9- 45 Northeast j 11 2- 20 21 12- 30 17 11- 23 Southern
Plains k 11 4- 18 21 11- 31 14 8- 20

All farmers 22 19- 24 32 28- 35 22 19- 25

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 33 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 11: Number of Farmers Who Received Transition Payments
and the Value of Their Agricultural Sales, by Geographic Region,
1996

Note: Does not include Alaska and Hawaii. a The numbers in this
column are point estimates.

b Includes Kansas, Nebraska, North Dakota, and South Dakota. c
Includes Illinois, Indiana, Iowa, Missouri, and Ohio. d Includes
Michigan, Minnesota, and Wisconsin. e Includes Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. f Includes
California, Oregon, and Washington. g Includes Kentucky, North
Carolina, Tennessee, Virginia, and West Virginia. h Includes
Alabama, Florida, Georgia, and South Carolina. i Includes
Arkansas, Louisiana, and Mississippi. j Includes Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, and Vermont. k
Confidence interval calculations are not exact because of the
small sample size or other characteristics of the sample results.
l Includes Oklahoma and Texas. Source: USDA's Economic Research
Service.

Confidence interval Confidence interval (Dollars in millions)
Region Number of

farmers a From To Agricultural sales a (Dollars in millions) From
To

Northern Plains b 88,850 61,335 116,365 $19,344.4 $13,240.1
$25,448. 7 Corn Belt c 155,848 119,193 192,503 $29,060.7 $23,535.7
$34,585. 7 Lake States d 65,424 46,061 84,787 $10,689.5 $8,363.9
$13,015. 1 Mountain e 26,745 16,523 36,967 $6, 376. 7 $4,089.5
$8,663. 9 Pacific f 11,159 8,250 14,068 $5, 240. 5 $3,751.1
$6,729. 8 Appalachia g 52,344 15,718 88,970 $6, 434. 5 $3,937.4
$8,931. 6 Southeast h 18,539 6,294 30,784 $4, 095. 0 $1,719.2
$6,470. 7 Delta I 14,361 9,632 19,090 $4, 116. 0 $2,962.3 $5,269.
6 Northeast j 14,996 (2,845) k 32,837 $2, 396. 8 ($ 1,145.3) k $5,
939.0 Southern Plains l 41,354 21,172 61,536 $6, 343. 4 $2,874.6
$9,812. 2

Appendix II Use of Risk Management Tools by All Farmers and
Farmers Who Received Transition Payments

Page 34 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Table II. 12: Percentage of Farmers Who Used Each Risk Management
Tool Among Those Who Received Transition Payments, by Geographic
Region, 1996

Note: Does not include Alaska and Hawaii. a The numbers in this
column are point estimates.

b Includes Kansas, Nebraska, North Dakota, and South Dakota. c
Includes Illinois, Indiana, Iowa, Missouri, and Ohio. d Includes
Michigan, Minnesota, and Wisconsin. e Includes Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. f Includes
California, Oregon, and Washington. g Includes Kentucky, North
Carolina, Tennessee, Virginia, and West Virginia. h Confidence
interval calculations are not exact because of the small sample
size or other characteristics of the sample results. i Includes
Alabama, Florida, Georgia, and South Carolina.

j Includes Arkansas, Louisiana, and Mississippi. k Includes
Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and
Vermont. l Includes Oklahoma and Texas. Source: USDA's Economic
Research Service.

Region Percent

using crop insurance a

Confidence interval (Range)

Percent using forward contracts a

Confidence interval (Range)

Percent using hedging a

Confidence interval (Range)

Northern Plains b 84 75- 93 65 55- 75 39 26- 52 Corn Belt c 67 52-
82 64 47- 81 35 20- 50 Lake States d 70 57- 83 49 35- 63 30 14- 46
Mountain e 66 52- 80 41 21- 61 20 9- 31 Pacific f 63 42- 84 62 43-
81 41 24- 58 Appalachia g 32 (7)- 71 h 62 40- 84 52 18- 86
Southeast I 68 46- 90 58 40- 76 33 24- 42 Delta j 57 41- 73 77 67-
87 58 45- 71 Northeast k 29 (32)- 90 h 25 (32)- 82 h 16 11- 21
Southern Plains l 75 55- 95 48 29- 67 28 8- 48

Page 35 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Appendix III Regional Coordinators for Risk Management Education
Appendi x I I I

Source: USDA.

Region/ institution Cognizant RMA

regional service office( s) States covered

Northeast/ University of Delaware Raleigh, North Carolina Maine,
New Hampshire, Vermont, Massachusetts, Connecticut,

Rhode Island, New York, New Jersey, Pennsylvania, Delaware,
Maryland, Virginia, West Virginia, North Carolina Southeast/
Auburn University Valdosta, Georgia Alabama, Georgia, South
Carolina,

Florida, Puerto Rico Midsouth/ Texas A& M University Jackson,
Mississippi, and

Oklahoma City, Oklahoma

Kentucky, Tennessee, Arkansas, Mississippi, Louisiana, Oklahoma,
Texas, New Mexico

Midwest/ University of Nebraska Springfield, Illinois, St. Paul,
Minnesota, and

Topeka, Kansas Minnesota, Wisconsin, Iowa,

Michigan, Illinois, Indiana, Ohio, Nebraska, Kansas, Missouri,
Colorado

West/ Washington State University

Billings, Montana, Spokane, Washington, and Sacramento, California

Alaska, Hawaii, Washington, Idaho, Oregon, California, Nevada,
Utah, Arizona, Montana, Wyoming, North Dakota, South Dakota

Page 36 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Appendix IV Project Descriptions of the Risk Management Education
Grants Appendi x I V

Integrated Risk Management Education ($ 248,461) Grantee: South
Central Technical College (North Mankato, Minnesota)

The objective of this project is to develop an integrated risk
management education curriculum and deliver it via educational
programs for farmers in Minnesota, North Dakota, and South Dakota.
The project will develop local educational teams of agricultural
professionals. Understanding Farmer Risk Management Decision
Making and Educational Needs ($ 243,388)

Grantee: Mississippi State University The objective of this
project is to develop the knowledge base to guide the design and
implementation of effective risk management programs for
agricultural producers. The project will identify the risk
management objectives of diverse agricultural producers,
investigate perceptions and understanding of risk management tools
and strategies, examine the factors influencing choices of risk
management strategy, and study how information and analysis
influence producers' perceptions and risk management choices.

Risk Management Education With Focus on Producers and Lender
Stakeholders ($ 250,000) Grantee: Pennsylvania State University
The objective of this project is to help farmers and lenders
manage risks and expand the understanding of risk management with
a focus on farmer liquidity constraints. The project will develop
and distribute a risk management curriculum to farmers, provide
training and workshops,

improve risk management financial expertise with workshop
applications tailored to lenders, and use computers and
telecommunications in risk management education.

Managing Risks and Profits for the National Grain Industry: A
Whole- Farm Approach ($ 72,180) Grantee: Ohio State University
Extension Service The objective of this project is to create and
deliver information and analytical tools to help grain farmers and
agribusinesses manage their risks and profits for entire farms.
The project will create and revise risk management programs for
whole- farm assessment, analyze profit levels and cash- flow
risks, create a risk management center at Iowa State

Appendix IV Project Descriptions of the Risk Management Education
Grants

Page 37 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

University, measure the risk tolerance of farm operators, and
analyze the effectiveness of innovative information delivery
systems. National Program for Integrated Dairy Risk Management
Education and Research ($ 129,600)

Grantee: Ohio State University The objective of this project is to
focus public and private expertise on generating understandable,
useful, and results- oriented knowledge and tools for the dairy
industry. The project will develop a risk management educational
curriculum for dairy producers, conduct symposia and regional
training workshops, develop relevant computer software, and
distribute information electronically.

Optimal Grain Marketing: Integrated Approach to Balance Risks and
Revenues ($ 232,800) Grantee: National Grain and Feed Foundation
The objective of this project is to develop information on
commonly available risk management tools coupled with an
assessment of how such tools can be expected to perform. The
project will reach 500 elevator operators and 20, 000 farmer
customers with a standardized methodology

for evaluating new products, with an emphasis on the use of cash
contracts.

Agricultural Risk Management Education for Small and Socially
Disadvantaged Farmers ($ 229,808) Grantee: Virginia State
University Cooperative Extension Service The objective of this
project is to create risk management educational materials and
help socially disadvantaged and limited- resource farmers in
Virginia, Maryland, Delaware, and North Carolina understand how to
manage risk. This project will nurture a partnership between the
private

crop insurance industry and certain land- grant colleges in the
four states, providing a model for similar efforts elsewhere. The
project will also integrate risk management education into
outreach, training, and technical assistance programs for small-
scale farmers.

Delivery of Agricultural Risk Management Education to Extension
Officers and Small- Scale Farmers ($ 150, 000) Grantee: Alcorn
State University

Appendix IV Project Descriptions of the Risk Management Education
Grants

Page 38 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

The objective of this project is to develop and implement risk
management education for students, extension agents, small- scale
farmers, limitedresource cooperatives, industry groups, and
community- based organizations within 28 Mississippi counties. It
will help small- scale farmers limit their exposure to marketing,
financial, and legal risks.

Georgia Agricultural Risk Management Education Program ($ 250,
000) Grantee: Georgia Department of Education

The objective of this project is to train producers and
agribusinesses in risk management. The project will train young
farmers to provide risk management assistance and provide
instructional material and technology to increase managerial
skills in agricultural operations. It will provide risk management
training for minority, limited- resource farmers, and migrant
workers in 134 Georgia counties and establish a certified risk
management program for farm workers. Pacific Northwest Risk
Management Education Project ($ 236,339)

Grantee: Washington State University The objective of this project
is to help Pacific Northwest cereal grain producers improve and
apply risk management skills. The project will develop a research-
based educational curriculum to increase

understanding of risk management tools and integrate areas of risk
management in a decision- making process for small grain
producers. The project will deliver a producer- oriented risk
management program to more than 1,000 grain producers.

Risk Management Research and Education for the Florida Citrus
Industry ($ 19,172) Grantee: University of Florida Cooperative
Extension Service The objective of this project is to develop
appropriate risk management tools and strategies for citrus
growers in 32 southern Florida counties. This project will help
growers to understand their increased exposure to

risk and to use risk management tools and strategies. Risk
Management Education: A Risk- Management Club Approach ($ 150,000)
Grantee: Kansas State University

Appendix IV Project Descriptions of the Risk Management Education
Grants

Page 39 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

The objective of this project is to extend applied risk management
information to agricultural producers and agricultural businesses
in Kansas. The project will establish local risk management clubs
and survey club members to determine risk perceptions, risk
management skill levels, and educational needs. It will plan and
conduct educational meetings, and carry out follow- up evaluations
to measure the effectiveness of the risk management club approach.

Leveraging Risk Management Education Using Crop Insurance Agents
($ 166,500) Grantee: National Crop Insurance Services The
objective of this project is to broaden the understanding of risk
management principles among more than 15,000 crop insurance agents
nationwide. The project will train crop insurance agents in risk
management and foster a partnership involving extension
specialists, crop

insurance agents, and socially disadvantaged and limited- resource
farmers. The project will begin a conference series on risk
management modeled after one in North Dakota. Economic Performance
and Producer Use of Market Advisory Service Products ($ 250,000)

Grantee: University of Illinois Cooperative Extension Service The
objective of this project is to provide producers of corn,
soybeans, and wheat with an objective, comprehensive evaluation of
the economic performance of crop market advisory services. It will
describe subscribers' use of market advisory services, current
risk management practices, and

the educational needs of crop producers. Comprehensive Risk and
Business Planning: A Case Plan Approach ($ 106,841) Grantee:
University of Nebraska The objective of this project is to help
producers and others in risk management consulting and educational
efforts understand comprehensive business planning. Participants
will learn to prepare business plans for each commodity to address
various situations. The project will encourage producer groups to
develop comprehensive risk management and business plans, and will
create and maintain an online forum on risk and financial
management.

Appendix IV Project Descriptions of the Risk Management Education
Grants

Page 40 GAO/RCED-99-90 Farmers' Use of Risk Management Strategies

Develop AgRisk 2000 ($ 206,150) Grantee: University of Illinois
Cooperative Extension Service

The objective of this project is to develop and provide a
comprehensive risk management tool that which can be used by
farmers, lenders, and service providers to evaluate pre- harvest
risk management strategies. The project is targeted at producers
located in the Corn Belt, Wheat Belt, Delta

Region, and Southern States. Risk Management Education for
Limited- Resource Latino Family Farmers in California's Central
Coast ($ 85,000) Grantee: Association for Community Based
Education The objective of this project is to improve the risk
management skills of limited- resource Latino family farmers in
California's central coast. The project will improve the farmers'
capacity to understand the risk associated with their business,
analyze risks and use information in problem- solving and
decision- making, and incorporate risk management education into a
small- farm production and management curriculum.

(150126) Let t er

*** End of document. ***