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 (small- scale farmers). 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. 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. 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. As of December 1998, USDA’s major conferences had reached a relatively  small percentage of the target groups’ members. In June 1998, USDA  awarded 17 risk management education grants, ranging from $19,172 to  $250,000, and averaging about $178,000. 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, 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. 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. 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. 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.
Why GAO Did This Study

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.

What GAO Found

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.