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REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM
WEDNESDAY, MARCH 10, 1999
U.S. House of Representatives,
Subcommittee on Risk Management,
Research, and Specialty Crops,
Committee on Agriculture,
Washington, D.C.
The subcommittee met, pursuant to notice, at 11:05 a.m., in room 1300, Longworth House Office Building, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
Present: Representatives Barrett, Smith, Everett, Chambliss, Moran, Thune, Jenkins, Gutknecht, Ose, Hayes, Fletcher, Condit, Dooley, Pomeroy, McIntyre, Stabenow, Etheridge, Boswell, Lucas, Thompson, and Stenholm (ex officio).
Also present: Representatives Goodlatte, Peterson, Gilman, and Kingston.
Staff present: Stacy Carey, staff director, Subcommittee on Risk Management, Research, and Specialty Crops; Ryan Weston, Alan Mackey, Jeff Harrison, Callista Bisek, Wanda Worsham, clerk; and John Riley.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. The meeting of the Subcommittee on Risk Management, Research, and Specialty Crops to review the Federal Crop Insurance Program will come to order.
I appreciate all of you being here today. This is a very important subject and I am sorry for the delay, and so we will try and move our hearing along in an expedited manner as well as we can.
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We are here this morning to discuss the Federal Crop Insurance Program. More than any other program, crop insurance has become a vital link to the soundness and prosperity of the American agricultural producer. It is a safety net that assists the producer in managing risks on the farm. It allows the producer, not the Government, to decide how to manage this risk, be it financial, market, or legal risk.
By no means is the program perfect. While it is unrealistic to expect the same program to work well in every part of the country, it does work well in many regions, but in other areas it has its problems. In the specialty crop states such as California and Maine, the program is not working as well as it should.
The subcommittee recently visited with producers in Georgia and North Carolina. I want again to thank Ken Ackerman for traveling with us to those forums last month. We received valuable producer insight and advice.
Some producers advocate complete elimination of the program. Some advocate elimination of the actuarial soundness standard. Many support retaining the program, but believe improvements should include increasing premium subsidies, modifying rating practices, dropping disaster years when determining the APH was another very popular recommendation and many producers were interested in the development of a cost of production crop insurance policy.
The committee is on a two-track approach towards the Crop Insurance Program. The first track will be to make short-term improvements to the program for the next crop year. Issues under consideration include an increase in the farmer premium subsidy, adjustment of rating policy, incentives to encourage private development of risk management projects, allocating the premium discount to producers who demonstrate a history of participation without incurring losses.
I am particularly pleased the administration is here with us today to discuss the program. It is no surprise that I along with many of my colleagues were concerned about the lack of funding in the President's budget for the Crop Insurance Program, particularly after the President expressed commitment to reform in the State of the Union address.
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Funding issues and offsets are not easy issues to deal with. However, this effort truly needs to be a partnership with Congress and the administration.
To that end, I am pleased that USDA is here with us today to begin this partnership. We look forward to your testimony and to working with you to strengthen this important safety net.
The committee's second track, the long-term approach, will include more of a structural review of the program. This effort is likely to include a top to bottom review of the program that may result in a total rewrite of the Crop Insurance Program. Many of these ideas and concepts will be discussed later this session.
The Crop Insurance Program is an evolving effort and requires constant review. I am the first to admit that we do not always get it right, but we are here to hear from you and to try and get it right.
I would like to thank today's witnesses in advance for their time and effort, and we look forward to your testimony.
If there are any Members who have statements for the record, they may be accepted at this point in the record.
[The prepared statements of Members follow:]
PREPARED STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. Chairman, thank you, for holding this very important hearing on a subject that is so important to each sector of agriculture. I would also like to thank our witness panels for their participation in this hearing. I commend the vision that the chairman of the Agriculture Committee, Larry Combest, has taken on the crop insurance issue.
In a full committee hearing in Grand Island, NE, last month, there was excellent testimony on the state of the agricultural economy. Many of the witnesses testified to the importance of a strengthened Crop Insurance Program. For example, one witness said, and I quote, ''the Crop Insurance Program as presently constructed has so grievously failed our farmers that the State government was forced to pick up the slack by funding a Federal crop insurance premium reimbursement program. States cannot afford to pick up the slack forever. By providing farmers with better risk management tools, Congress can do its part to break the vicious cycle of boom-bust-bailout.''
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Mr. Chairman, with comments like the above, we need to act—and act quickly—to improve one of the most important risk management tools that farmers use as they prepare for each growing season. There is no question that each member on this subcommittee has producers who are involved in the Crop Insurance Program through their respective commodities. But it seems like we just cannot ''get it right.'' The Federal Crop Insurance Program was instituted in the 1930's with major reforms in 1980 and in 1994. This risk management tool was established to protect farmers against unavoidable risks such as natural disasters, insect infestation, and disease.
However, it is clear that the current Federal Crop Insurance Program does not provide a large enough umbrella in times of natural disaster, and it certainly doesn't do enough to protect producers from low market prices, such as we experienced last year.
With any kind of meaningful reform, I am well aware of the fact that Congress cannot pass—and USDA implement—a program that will assist producers immediately. However, we must make another attempt at improving this most important program for our producers.
Crop insurance has become increasingly important as our Nation's farmers visit with their lending institutions to establish farm plans. During this agriculture downturn, many farmers are experiencing difficulty with cash flow as they meet with their bankers. I commend the current program for making it possible for many producers to be approved for loans that would otherwise be declined.
But, as Congress develops a crop insurance reform package, we need to make sure that a workable ''assurance program'' is part of the mix. This assurance program should provide income in times of low prices as well as after natural disasters. Given what we have learned about the Freedom to Farm bill after 3 years of experience, a program without a well-reasoned—but fiscally-responsible—assurance element will not be helpful to our Nation's producers.
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In addition, this committee should take steps to help the livestock industry by developing a comprehensive coverage program for livestock. The livestock industry has experienced very low market prices over the past year. If we establish a high-quality program that will serve as a financial tool for the livestock industry, we will again move away from direct cash payments from the Government. During our hearing in Grand Island, our producer panels were enthusiastic about working toward livestock provisions in any insurance reform package.
The Crop Insurance Program has come to be a very costly tool to producers. Many producers in my area of Nebraska have mentioned the fact that they cannot afford the amount of coverage that is required to survive a true disaster. As we continue to review this program, we should consider alternatives that will make the insurance more affordable for farmers.
PREPARED STATEMENT OF HON. TERRY EVERETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. Chairman, I want to first start out by thanking you for your leadership in improving crop insurance. This subcommittee has the task of reforming the most important risk management tool we can offer our producers across this country, the Federal Crop Insurance Program. While the program does work at times, it must be improved to be an effective risk management tool. I, and many others on this committee, signed off on a letter last week reiterating to the Budget Committee how important providing money for this reform movement is. We must change this program to make it more affordable to a broader range of producers and provide more coverage to make this program a viable risk management tool.
In my State of Alabama we have a crop insurance participation rate of 67.2 percent.
While that might sound pretty reasonable, a substantial percentage of those producers only have insurance to cover catastrophic disasters and nothing else. CAT coverage is not the answer to our farmer's problems, but the Government subsidizes this at virtually a 100 percent level. As producers purchase ''buy up insurance'' for typical hazard protection, the subsidy levels drop dramatically. For example, when a producer purchases 65 percent coverage the Federal subsidy drops to 42 percent. If a producer was to purchase 75 percent coverage his share of the premium doubles from the 65 percent coverage. There is little wonder why we see so low participation rates outside of CAT Coverage; the Government provides a disincentive to purchase higher coverage.
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We must seize the opportunity to help producers effectively manage risk. We need to look at ideas such as:
changes in the crop insurance rating system
improving CAT coverage a insurance premium discounts for producers with low claim history
coverage for multi-year disasters to name just a few.
We started out on the right foot by encouraging farmers to buy higher coverage of insurance or to buy it for the first time by including a 30 percent discount on insurance premiums. That was just the beginning. This committee also has a responsibility to educate our farmers of their options. A lot of the time producers only learn of crop insurance until after they have a loss. Another area of concern of mine is that Actual Production History (APH) for farmers becomes skewed when they have a number of disaster years in a row as many have seen in the last five years. We need to look at a way to make APH's more accurately reflect a farmer's production history.
With low commodity prices predicted for this crop year, simply having a good yield does not insure a profitable harvest for our farmers. We need to look at ways for successful farmers to be assured that they won't lose money by taking a successful crop to completion. One area where I see promise is coverage that not only insure yield, but also insures crop price. These revenue policies such as crop revenue coverage and revenue assurance policies are something this subcommittee needs to explore and I look forward to hearing from our panelists today concerning all these ideas. Thank you Mr. Chairman.
PREPARED STATEMENT OF HON. GARY A. CONDIT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Chairman, thank you for holding this important hearing to review the Federal Crop Insurance Program. There are many topics in this area that are of great interest to all involved in the food and fiber production industry in this nation and I commend you for providing this opportunity to establish a record for the subcommittee's use.
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Agricultural producers face a severe threat to their continued economic viability. Conditions are severe enough to trigger a chain reaction that could have a dramatic and detrimental impact on the rural and national economy. The administration and the Congress are rightly responding to these conditions in a number of ways that could help alleviate the crisis and contribute to the restoration of economic health in rural America.
The future of the Federal Crop Insurance Program is a keystone to any plan aimed at stabilizing America's farm economy. Members of the Agriculture Committee are committed to comprehensively review the insurance program in the 106th Congress. It is now crucial we look ahead to that process.
Historically, the Federal Government has used two approaches to assist farmers in the event of a natural disaster—ad hoc disaster assistance and crop insurance. Although both intended to help farmers in the event of a natural disaster, there are significant differences.
With ad hoc disaster programs, Congress votes after occurrence of a disaster to provide aid at no cost to farmers. Crop insurance is a permanent program made available to farmers at subsidized premiums contracted before occurrence of a disaster.
The heavy budgetary burden of the two programs over previous decades prompted the passage of the 1994 Crop Insurance Reform Act. That act put ad hoc disaster assistance ''on line'' in the budget, requiring an offset in other Federal programs for disaster assistance and expanded the existing Crop Insurance Program. The main purpose of this change was to reduce reliance on future ad hoc disaster aid legislation.
In recent years, Congress has followed this general policy that crop insurance is meant to be the main Government response to natural disasters in agriculture. This approach provides the dual benefit of making revenues more predictable for producers while providing taxpayers with protections that go along with insurance-based delivery involving premiums and deductibles. However. because of significant and enduring shortcomings in the current Crop Insurance Program. exceptions were made in 1998 and disaster relief was provided even to those who had foregone the opportunity to purchase Federal crop insurance. To minimize the detrimental impact this occurrence will afflict on producer participation in the Crop Insurance Program. The emergency plan included a requirement that any producer receiving disaster assistance purchase crop insurance—if available—for the following 2 years.
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There is—again—evident need for significant overhaul of the Federal Crop Insurance Program. As we address this issue, it is vital we provide coverage for crops and regions not adequately protected under current law. These regions and the crops grown in these regions have experienced significant losses in recent years due to drought, severe rains and flooding. and freezes. As such, any crop insurance proposal should focus on several areas including, (1) expanding the program to include more crops that currently do not have products available for use, (2) crop insurance programs must recognize the different types of risk involved with different commodities and allow for flexibility in implementation of the programs, (3) increase participation in the Federal Crop Insurance Program, (4) create a fast-track approval process for new and improved products by the Federal Government, and (5) crop insurance must recognize grower diversification.
I plan to work with you, Mr. Chairman, and other Members of this committee to establish a plan that will provide an adequate safety net for the agriculture community now and into the next century. Thank you again for this hearing and I look forward to hearing from our witnesses today.
PREPARED STATEMENT HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, thank you for holding this hearing. I appreciate your commitment to the Crop Insurance Program and to making it better for the producer and more efficient for the taxpayer. This subcommittee is the right one to take on the task of improving our system. I know that Mr. Condit, the subcommittee ranking member, and I are looking forward to rolling up our sleeves, gathering the views of interested parties, prioritizing problems that have given rise to the need for improvements, and sitting down together with you, the full committee chairman, and all the members of the subcommittee to make this program better.
Mr. Chairman, we worked together very hard in 1994 to make significant changes in the Federal Crop Insurance Program. Driving that legislation was a strong desire to develop a system that eliminated the need for ad hoc crop disaster assistance. In fact, the changes we did make were sufficient to allow an increase in the crop insurance budget baseline to correspond with expected declines in ad hoc disaster legislation. In theory, it was a good deal for producers who were to get a better deal on insurance and a more reliable Government response to weather related disaster. It was a good deal for he taxpayer because the Government could know up front what its liability is and what the rules are for responding to disaster.
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Then came the 1996 farm bill, and with all of the changes it made in basic farm programs we knew that risk management—with all the meanings of that term—would be a crucial challenge to be met by producers.
Mr. Chairman, last year's experience tells me that we have not met our commitment to helping the producer manage risks. In a year when a combination of market price declines, weather disasters, and compounded disaster from prior years devastated farm income, we realized—to the tune of $6 billion—that the combination of programs that make up our farm policy is not doing the job.
Mr. Chairman, I believe the Agriculture Committee has two jobs to do in this Congress. First, we must take a hard look at crop insurance. To be blunt, this program is not working. Dissatisfaction is high and widespread. We may need money to really fix it but, even if we don't have more funding, there have to be some ways to make improvements. Our other job is to design a backup income assistance program that helps to safeguard investments in agriculture that have made our food and fiber production the great system that it is. Perhaps crop insurance is not the program for performing that role, but I think we would be wise to consider the two jobs in tandem as we proceed forward on either one.
Today, Mr. Chairman, I am pleased that we have an excellent group of witnesses the administration, the farm and ranch sector, and insurance communities to help us start this ambitious committee project. As interested experts, their commentary in general will be of great value to the committee. I hope that, specifically, they will address the following questions:
What should our most basic policy be for a farmer trying to manage risk? Should it have a price fluctuation component as well as yield?
Why are so many producers dissatisfied with the program? Is it too complicated? Are the products they want unavailable? Is it too expensive?
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What kind of return is the Government getting for the funds it provides to crop insurance companies to deliver this program? How can we change the nature of this partnership in order to enhance the efficiency of the program's delivery?
Are there structural problems in the USDA risk management administrative structure that inhibit innovation in products or in accurate pricing, or in education and outreach?
Was it wise for Congress to eliminate linkage in 1996? If government is going to share in the risks of farming, is it not reasonable to require that a producer get crop insurance as a condition of earning the capital the Government provides?
We still frequently hear stories about ''farming the program.'' What progress is being made to combat fraud? How can we redesign the program so that it is less vulnerable to abuse? What additional steps should be taken to improve program integrity? How can we make the appraisal system more fair and accurate?
Mr. Chairman, again I want to thank you for convening this hearing. I am very interested in the testimony to be given, and I pledge to you and to all interested parties that I am prepared to work with you hand in hand to make this program work.
PREPARED STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Thank you, Mr. Chairman for holding this important hearing on the Federal Crop Insurance Program. I am very pleased with the committee's willingness this year to tackle some of the most pressing issues currently facing American agriculture: concentration in agriculture, low livestock prices, timely deliveries of farm programs, the financial credit crunch, and the Federal Crop Insurance Program.
As we all know, America's farmers and ranchers are facing near record low commodity prices. Unfortunately, many leading economists predict no real immediate end in sight with prices continuing at low levels for the next 2 to 3 years. With that disturbing news and if we are forced to work within the parameters of the current farm bill, Congress and the administration must work extremely hard and collaboratively in developing a crop insurance program that protects producers from disastrous weather conditions and provides many options for price protection.
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In North Dakota, producers have economically suffered from both bad weather and low prices. North Dakota has experienced multiple years of wet weather—with the flood of 1997—as one of the worst in modern history. Due to the multiple years of wet weather, a severe wheat disease, known as scab or head blight fusarium, has forced many wheat and barley producers off the land because of its devastating impacts to yields and quality. With the combination of weather-related diseases and continual low commodity prices, many of North Dakota's producers are leaving agriculture for other opportunities.
Last fall, President Clinton signed into law the fiscal year 1999 Omnibus Appropriations bill that included nearly $6 billion in emergency disaster assistance for producers who suffered both financial and weather-related disasters. The passage of the emergency relief package was desperately needed for American agriculture, but without real reform in the Federal Crop Insurance Program, we, as Federal lawmakers, will be faced with the same dilemma each and every year that commodity prices are low and bad weather impacts producers.
Because of our experiences last fall, many have coined 1999 as the ''year of the safety net.'' Secretary Glickman has made crop insurance reform his number one priority for 1999, and Chairman Combest has demonstrated the willingness to work in a bipartisan fashion to make substantive changes to the Federal Crop Insurance Program.
Representing nearly 30,000 farmers, I believe that Congress and the administration must work together, putting aside philosophical differences, to develop a crop insurance program that meets the diverse needs of American agriculture.
Crop insurance reform is my main priority for the 106th Congress. I have held meetings with leading producer organizations, commodity groups, crop insurance agents, and bankers in both North Dakota and Washington, DC to gather information on what needs to done to correct the Federal Crop Insurance Program.
From these meetings and from what I have observed in North Dakota the past several years, the Federal Crop Insurance Program must include multiple-disaster year provisions, increased subsidy levels, and measures to meet the rising costs of productions. Also, as a result of those meetings and constituent input, I intend to introduce a comprehensive crop insurance proposal that will focus on those three priorities.
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In North Dakota, due to harsh weather-related conditions many producers have received lowered coverage levels under the current Crop Insurance Program. Because of the multiple years of wet weather and disease conditions, average yields for hard red spring wheat and barley have fallen to lower levels. With the falling yield levels, producers' actual production history (APH) levels fall; under the current crop insurance system, the falling APH levels result in lower in crop insurance coverage.
I am pleased that the administration's proposals and other proposals are focusing on the multiple year disaster component as crucial to crop insurance reform. I look forward to working with my colleagues on developing a fair and equitable way to determine APH levels impacted by multiple year disasters.
My second priority for crop insurance reform is increasing the current subsidy levels. Currently, the Federal Government subsidizes crop insurance policies at the following levels: 65 percent coverage/100 percent price election is 41.7 percent subsidy and 75 percent coverage/100 price election is 23 percent subsidy. Due to the lower costs of the 65 percent coverage level, many producers because of rising costs of production, are forced to take the 65 percent policy. Unfortunately, in many cases, the difference between a 35 percent loss (the 65 percent policy) and a 25 percent loss (the 75 percent policy)is whether or not producers are able to cashflow.
I believe that Federal Government's role in crop insurance must be greater. Instead, of passing massive ad hoc disaster bills, Congress and the administration would be spending money much wiser by addressing the current subsidy levels to protect producers' income from disaster conditions and low prices.
My third priority for crop insurance reform is to develop a program that is aimed at meeting producers' growing costs of production. With increased technologies and the ever present need for producers to get larger, costs of production have risen sharply in the last decade. I believe any comprehensive crop insurance reform proposal must provide policies that factor the rising costs of production. I realize that costs of production differ throughout United States, therefore, I believe Congress should authorize a pilot cost of production program.
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Again, Mr. Chairman, thank you for holding this important hearing. The 106th Congress is the time to reform the current Federal crop insurance system. What we do this session will set the future parameters of American agriculture. I look forward to working with you and my colleagues on the committee in developing comprehensive crop insurance reforms.
PREPARED STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
I would like to thank the chairman and the ranking member for holding this important hearing this morning. Reforming crop insurance for farmers will, in my opinion, be the most important work that the Agriculture Committee will undertake in the 106th Congress. While there continues to be considerable debate over what an appropriate safety net for American farm families should be, there is little doubt that what we have in place today is wholly inadequate. There is also little debate over the fact that a reformed and adequately funded Federal Crop Insurance Program must play a significant role in providing producers the safety net they need and deserve. While many Americans are monitoring the skyrocketing mutual funds and pondering whether or not to roll over their IRA's, farmers are going through some of the toughest times they have experienced in decades. I am committed to working with my colleagues on this committee and in Congress to develop an adequate crop insurance program for American farm families. Mr. Chairman, at this time I have a few questions for Administrator Ackerman. Mr. Ackerman:
Can you explain why the administration has said that crop insurance for farmers is a top priority but did not include any money for it in its fiscal year 2000 budget proposal?
As you know, pork producers have been experiencing the lowest prices for live hogs in decades. What is the Department's position relative to providing crop insurance for livestock producers?
Will tobacco farmers be treated equitably in any risk management proposal USDA supports?
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As you may know, many farmers complain that some producers are abusing the crop insurance system. Why is this going on, how widespread do you see the problem, and how does USDA propose to correct this problem in a reformed Crop Insurance Program?
Does the Department agree that a Federal Crop Insurance Program must take in more crops and that it should be designed to respond to multiyear economic and weather related disasters?
PREPARED STATEMENT OF HON. CHRISTOPHER JOHN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA
Mr. Chairman, I appreciate this opportunity to submit this statement and questions for the record on the occasion of the appearance of Mr. Kenneth Ackerman, Administrator of the Risk Management Agency of the U.S. Department of Agriculture before the Subcommittee on Risk Management, Research, and Specialty Crops. I would be grateful if this statement could be printed as part of the official committee transcript of this hearing and if the Administrator could respond to my questions at the earliest possible opportunity.
Let me begin by simply saying that I support an improved Federal Crop Insurance Program. The recent ad hoc disaster payments for agriculture, though necessary, point to the Crop Insurance Program's inadequacy of addressing the dramatic losses that the farm economy suffered. The principles that must guide this subcommittee, and ultimately this Congress, in strengthening the Crop Insurance Program are several. First and foremost, I believe that we must make the program more attractive so that maximum participation in the program is insured. It must be flexible enough to meet the demands of the rice farmer from south Louisiana, the wheat farmer from North Dakota and the specialty crop farmer from California. Finally, we must be committed to providing better information and risk management education to farmers so that they can take advantage of and best utilize any new developments in the program. With the above in mind, I look forward to the testimony today reviewing the Federal Crop Insurance Program.
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As you know, a recent development concerning a private crop insurance policy provided primarily for rice has called into question the integrity of the Federal Crop Insurance Program. Specifically, CRCPlus is a supplemental insurance product available only from American Agrisurance. It is my understanding that the policy allowed producers to increase their Crop Revenue Coverage (CRC) revenue guarantee to provide a higher level of protection against major crop loss or a decline in market price. After the sales closing date for Federal crop insurance policies had passed, I understand that American Agrisurance changed the terms of the CRCPlus plan for producers that had applied for the supplemental coverage. In response to this situation, RMA announced on Friday, March 5, 1999, that producers who signed applications for CRCPlus would have until March 15, 1999, to cancel the underlying CRC policy.
On behalf of the rice producers in the Seventh Congressional District of Louisiana and other rice producers in the affected southern States, let me first extend my deep appreciation to Administrator Ackerman and his agency for their expeditious response in dealing with this issue. From the producers back home and their industry representatives to our staff in Washington, Administrator Ackerman and his staff kept us informed throughout the process and made know their willingness to assist these producers. Despite the acceptable resolution to this situation, however, producers in my district at the very least believe that American Agrisurance misrepresented themselves in the sale of their CRCPlus policy. In the extreme, producers called for taking remedial action against the company based upon their behavior.
I would like for the Administrator to respond to the following questions about this issue:
(1) Given your recent announcement regarding producers who want to cancel their CRCPlus and the underlying CRC policy, would you clarify the Agency's policy regarding producers' ability to obtain CAT coverage?
(2) Given the fact that CRCPlus is a private crop insurance policy, would you please elaborate on your authority, if any, to regulate private insurance policies?
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(3) Can you describe any remedial actions that the agency has at its disposal against companies who offer private crop insurance policies like CRCPlus?
(4) Had the mutual consent agreement not been reached between American Agrisurance and the RMA, would you have had any other option to remedy this situation for rice farmers throughout the South? If not, do you think
you should?
(5) As Congress addresses strengthening the Federal Crop Insurance Program, would you recommend changes that would afford RMA more flexibility in dealing with problems like we experienced with American Agrisurance?
Thank you, Mr. Chairman and Mr. Condit, for allowing me to submit this testimony and these questions for the record, and I want to thank Administrator Ackerman for appearing before the subcommittee and for answering my questions.
Mr. EWING. Our first panel today is a one-person panel, Mr. Ken Ackerman, Administrator of the Risk Management Agency, U.S. Department of Agriculture.
Ken, it is probably appropriate, you probably feel like you are out there alone a lot of times. Well, you are today, but we will be very kind to you and we are glad to have you here.
Thank you very much.
STATEMENT OF KENNETH ACKERMAN, ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. ACKERMAN. Thank you, Mr. Chairman. I appreciate those kind remarks and I want to thank you for the opportunity to have me here to present the administration's views on your hearing to review the Crop Insurance Program.
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I also want to thank you for giving me a chance to participate in the farm forums that the committee has conducted so far in the State of Georgia and for RMA to participate in your other forum in the State of North Carolina. That was a very valuable experience for us.
This is obviously not the first time that we have been here to discuss reforming the Federal Crop Insurance Program. We have been around the block several times on this issue.
Over that time, we have achieved a number of changes, many of which have been favorable for the American farmer, but obviously the fact that we are still here again means that the job is not done and that we still have work to do.
Mr. Chairman, to speed up the process this morning, I would like to submit my testimony for the record and for my oral remarks to simply walk through a brief handout of slides that has been provided to the committee.
For those in the room following, it is the one with the full slides on each piece of paper.
Mr. EWING. Fine. That will be very good.
Mr. ACKERMAN. I also thank the committee staff this morning for helping us getting copies made and getting them circulated very quickly.
If you start with the second page, the reason that we are here this morning reviewing the farm safety net was that it was put to a very serious test last year and the problem was not only the magnitude of the damage to American agriculture, but also the nature of the crisis.
Last year, we saw a very unusual coincidence of three different types of loss occurring at the same time. We saw low prices coming the same year as bad crop yields in many regions. Usually these two phenomenon happen in opposite years. Normally, when prices are high, yields are low. When yields are low, prices are high. Last year, both happened at the same time. And, as a third element, we saw the coming home to roost of multiple years of loss in many parts of the country.
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These multiple years of loss created problems for farmers going much deeper than simply crop insurance. It resulted in farms having to eat into their savings, into equity, and being put in very serious financial straits.
If you go to the next page, you can see that the problems last year were exacerbated because they come at the end of 10 years of risk history which has been very unusual historically.
In the last 10 years, we have seen a drought of the century in 1988; another drought of the century in 1989; a hurricane of the century, Hurricane Andrew, in 1992; a flood of the half millennium, the Midwest flood in 1993, coming the same year as a major drought in the Southeast.
In 1995, we had historically high losses of cotton due to insects, serious floods in California and a serious flooding period in the spring in the Dakotas, in the Northern Plains.
In 1996 we saw several major hurricanes in North Carolina; a record winter in the Northern Plains. In 1997, more floods. Last year, El Nino, La Nina, a drought in the South and the Southeast. And this is only a very partial list.
The ultimate response of Government to this parade of problems and the problem we had last year was a $5.9 billion emergency aid package for agriculture. This, to us, was a very serious danger sign, really a wake-up call, that our safety net system across the board was not doing the job, it was not enough, that we needed something more there.
And the problem was really across the board. When you look at the nature of the disaster bill that was passed, while $2.4 billion covered various forms of crop loss, another $3 billion of that package was needed for income loss, market loss assistance. Another $200 million was needed for the dairy industry. We on top of that had to create an additional emergency program for the hog sector because of price drops there. Clearly, the problem with the safety net was shown to be across the board.
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When we look at crop insurance, it is important to remember that we are not reforming it for the first time. In the 5 or 6 years since I have been involved in this program, we have now had five major rewrites, five major revisions, of Federal crop insurance: the 1993 Budget Reconciliation Act putting actuarial soundness into the law; the 1994 Reform Act; the 1996 farm bill, which changed the context in which crop insurance works compared to other programs; the introduction of revenue insurance; and the 1998 Research Act creating permanent funding.
Now, during this time, there were many positive impacts, but there were also a number of danger signs that come across when you look at the record of the last few years.
You will note I have included a chart here showing the participation record going back to 1993 in Federal crop insurance. And while there was a sharp spike in 1995, we have seen participation go down every year since then. We have gone from 220 down to 180 million acres insured and a large part of that insurance is at the catastrophic coverage level.
Our experience last year around the country was that farmers who relied on catastrophic coverage were extremely disappointed when they faced real losses, real emergencies. The 30 cents on the dollar did not cut it, it was not sufficient.
Also, we saw that our buy-up coverage, because of the cost and because of what farmers were getting for their money, was not a sufficient draw for enough farmers to use it.
Another change in the program was the type of insurance we sell. In 1993, we had one product, multi-peril crop insurance. Today, we have many: CAT coverage, buy-up, limited buy-up coverage, revenue insurance in half a dozen varieties, the group risk plan, and so on. And while these have provided farmers more choices, they have also created a great deal more complexity in the program, a great deal more difficulty in the choices farmers have to make.
And, finally, the other danger sign was the changing expectations, the unclear expectations, not only for farmers, but also for Government officials and for people in the agri business community on how the programs work, what the programs were supposed to do, what the role of crop insurance is, was crop insurance or revenue insurance supposed to be a replacement for the old deficiency payments.
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Clearly it is not structured that way, it is not designed to do that, but the expectations were unclear. People expected crop insurance to deliver things that it was not designed to deliver.
All of this is not to say there were not positive developments, I have given you a slide that lists a number of them during this period, but when you look at the insurance program itself and how we tried to respond to an emergency, there were many inherent limitations in its structure.
Actuarial soundness means that whenever we make a change to benefit producers, that has an impact on rates. That balance is always present in every decision we make. Often, our responses were inflexible because crop insurance is based on contracts which cannot be changed without serious legal liability implications.
Our policies are based on regulations in the Code of Federal Regulations that cannot be changed without notice and comment rulemaking, which often causes serious delays and slow reactions.
There are problems if participation is low, if crops are uninsured, if there are multiple years of loss, if there are flaws with particular policies, as we saw, for instance, with onions in the State of New York.
Our proposals for change—I will not walk through them now in detail, they are spelled out in the testimony. We feel that they reflect a balanced and meaningful approach to addressing the problems that we have seen.
They center around improving the basic safety net, making crop insurance more affordable, more worth buying, covering multiyear losses, covering livestock on an initial basis, speeding new tools to market, improving the NAP program and providing better service to customers.
I would not be complete without saying a word about the budget implications of these proposals. We estimate that the cost of our package all together, based on the detail that we have spelled out today, will cost between $2 and $2.5 billion per year. That is our estimate.
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I will tell you that we have provided our detail to the committee staff and also to the Congressional Budget Office so that they, too, can do a score, a formal score, of our proposal on the budget side.
The administration is ready to work with the committee and work with Congress to finalize these proposals and to identify sources and amounts of needed funds.
This is a very serious commitment on our side of the table. The President has expressed it in the State of the Union address. Secretary Glickman has repeated it. I am repeating it again this morning and my testimony has the clearance of the Office of Management and Budget. So clearly we are committed to go forward.
The first step we have taken is a premium price discount to get us through the 1990 crop year, knowing we have problems in the near term that needed to be addressed, but we feel looking forward this bundle of proposals, this package of proposals, gives us a strong basis to work with.
We know that we are not the only ones with ideas. Many Members of Congress have brought ideas to the table, as you have, Mr. Chairman, as have others in the other body, and as have many members in the agriculture community.
We look forward to working with all of you in the next several months, and I thank you very much.
[The prepared statement of Mr. Ackerman appears at the conclusion of the hearing.]
Mr. EWING. Thank you very much, Mr. Ackerman.
I am going to, with leave of the committee, go out of order for just a moment and call on Mr. Gilman, who is chairman of the International Relations Committee. He has a lot of things on his plate today, but asked to appear here today and I wanted to extend that courtesy to him.
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STATEMENT OF HON. BENJAMIN A. GILMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Mr. GILMAN. Thank you, Mr. Chairman, and I apologize to my colleagues. We are in the process of marking up an important measure and I have to return, but I did want to appear on this very important hearing that affects so many farmers throughout the Nation and particularly in my own district. Most folks do not realize that New York State is still the third-largest agriculture producer in the Nation and we do have some very serious concerns, as I do in my area.
In recent years, a number of our producers have suffered substantial crop losses and have found themselves frustrated by a crop insurance that has not provided them with any adequate assistance. It has become increasingly clear that the current Crop Insurance Program is not working.
There are numerous vegetable growers in my congressional district in the lower part of New York State facing bankruptcy due to a series of disastrous weather conditions during both the 1996 and 1996 growing seasons. And it is obvious that the current program needs some serious changes.
There are a number of small family farms in New York State, some of which reside in my district. The farms in this area that have suffered greatly at the hands of this failed program also provide for us the best example of the inadequacies of the Crop Insurance Program.
For example, Gratz & Utter, which is one of the oldest onion farms in New York State, and Pawelski Farms, both of which are located in Orange County, NY, have serious problems as a result of this program. Gratz & Utter have been in operation for 4 generations and is close to bankruptcy as a result of severe storms that destroyed their onion crops in 1996 and 1998 and at the same time having a crop insurance policy that did not provide them with any substantial relief.
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Gratz & Utter have been barred from participation in the agriculture program since 1990 when Mr. Utter raised contention with the Agriculture Department with regard to the low market price for onions at the time. The years have since proven his contentions were accurate, but he has yet to have his crop insurance eligibility reinstated.
It is my hope that this long-standing family farm will once again be able to prosper and sustain itself for years to come, unhampered by any unsubstantial Crop Insurance Program.
Pawelski Farms, another example, have been in operation in Orange County, New York for almost 100 years. Chris Pawelski has farmed there all his life and took over the full operation of the farm as the farm was passed down to him from his parents. Like other farmers in New York State, he has worked tirelessly with USDA and Risk Management officials in attempts to assuage the despair that they have faced since the 1996 storms which ravaged their crops in this area.
In my conversations with him, he has described the details of the troubles that he and other farmers have faced in their dealings with USDA and with RMA, as well as the fact that they will be running out of funds and facing the closing of their farms if immediate and direct assistance is not provided and changes in the crop insurance policy are not implemented.
I welcome Chairman Combest's comments in his February press conference which I attended in which he stated that crop insurance revision is going to be this committee's number one priority and I have continued to work with him to that end and I want to commend you, Mr. Chairman, again for bringing this to our attention by holding this hearing.
Also, on February 1, Secretary Glickman instituted a sign-up period for the disaster assistance appropriated in the Omnibus Disaster bill back in October of last year.
That sign-up period was to begin on March 12 and I just learned the other day that the Secretary has now further extended that sign-up period to April 9, thereby further delaying the allocation of any emergency assistance so sorely needed by our farmers and which they may not receive any of those funds until June of this year, at a time when they are already involved in the planting season.
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I have also been informed by the local Risk Management Agency that most producers will not receive any assistance available to them until this lengthy sign-up period is over. I have made my opposition to the sign-up program very clear in my conversations with Secretary Glickman. This type of program merely delays the disbursement of the emergency funds that this committee sponsored and was trying to get to the farmers at an early date, funds that are so desperately needed by our farmers.
Accordingly, I call upon the Secretary to provide immediate and direct aid to those producers who are struggling to prepare for next season's crops. And, more important, those who without such aid will recall last year's last growing season. I have attached testimony from Mr. Pawelski that details the problems that they and other farmers have been facing to be entered in the record with your permission, Mr. Chairman.
And, again, I urge your committee to try to expeditiously help our farmers by revising this Crop Insurance Program and I ask the representative of the Department of Agriculture, let us try to get those emergency funds out before the farmers go under. October we passed a $5.9 billion fund for emergency assistance, and they have yet to receive any of those funds.
Thank you, Mr. Chairman.
Mr. EWING. Thank you, Chairman Gilman, for your input on this matter.
Returning now to our witness, Mr. Ackerman, the administration has proposed a number of improvements to the program. One is increasing the CAT coverage from its current 50 percent of yield and 55 percent of price to 60 percent of yield and 70 percent of price. What would this provision cost?
Mr. ACKERMAN. Mr. Chairman, this provision standing alone would cost about $200 million.
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Mr. EWING. And you mentioned that 32 percent of the crop insurance policies—or it was in your testimony—are at the CAT level. At this increased coverage, what would you anticipate the number of policies to go to for catastrophic coverage?
Mr. ACKERMAN. If this were adopted as part of the larger package, we would expect to see probably that number go down.
Our expectation is that the larger part of the money, about $1 billion, would go for incentives at the buy-up level and our expectation is that many farmers at the CAT level would buy up.
If this piece were adopted in isolation from the rest of the package, yes, you are right, it would result in more people at the CAT level, but if it is part of the package, we expect that more people will buy up to higher levels of coverage.
Mr. EWING. When you say buy up at the higher level, are you talking about the increased levels for CAT would be a buy-up, then?
Mr. ACKERMAN. No, CAT would remain CAT. The buy-up levels would essentially——
Mr. EWING. What would the levels be for CAT, though?
Mr. ACKERMAN. Sixty/seventy. Sixty percent of yield at 70 percent of price.
Mr. EWING. And that would be for the same price as your estimate in your figures? Is that for the same $50 or $60 a crop?
Mr. ACKERMAN. That is correct.
Mr. EWING. So that would not be considered a buy-up.
Mr. ACKERMAN. That is correct.
Mr. EWING. Why do you believe that if we change the catastrophic yield and the amount of price that we would have more people buying up?
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Mr. ACKERMAN. Again, we view it as part of a package, that the bigger part of the financial investment that we make to improve crop insurance needs to be made at the buy-up level.
Financially, of the $2 to $2.5 billion, we expect about a billion of that would be for the buy-up coverage, but we felt that we could not simply leave CAT out of the picture.
You are always going to have some number farmers who will want to get the lowest level floor coverage. What we found this past year is that many farmers who have CAT coverage found that the coverage almost provided more a false sense of security than a real form of protection.
The 30 cents on the dollar or 27 cents on the dollar at CAT levels for a farmer who has a serious loss, a serious financial impact from a disaster, just was insufficient. If we are going to keep the CAT program in place, which we feel we needed to do, to keep it and not raise the floor would do almost more harm than good.
Mr. EWING. I guess I cannot quite figure out, though, how you would anticipate that you would have fewer people taking CAT. If you are going to offer better CAT coverage for the same amount of money, why would we not anticipate that would increase? The number of participants would increase.
Mr. ACKERMAN. Mr. Chairman, the reason is we feel the incentives that we are providing, the enhanced incentives at the buy-up level, would offset the incentive at the CAT level.
Mr. EWING. All right. So you are saying that you are going to make it—well, I guess a sweeter deal to buy up than we currently have.
Mr. ACKERMAN. Yes, that is the goal.
Mr. EWING. And that would be something that would attract more people instead of less people, even with the floor being raised.
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Mr. ACKERMAN. Yes.
Mr. EWING. What would happen if the CAT program were completely eliminated?
Mr. ACKERMAN. Our fear—and we discussed this when we were looking at different options to propose—our fear was that if the CAT level were simply eliminated that you would have a significant minority of farmers who would simply not be insured at all. You would have a larger number of people simply falling through the cracks and in the event of a serious disaster, you would have a large number of people with no protection at all.
Mr. EWING. Is it not true that the buy-up subsidy goes down as you go up higher, for the higher coverage levels?
Mr. ACKERMAN. Yes, that is the way it is currently structured. The highest, most lucrative subsidy is at the 65/100 level today.
Mr. EWING. In your proposal, would that stay the same or would there be more incentive for people to buy up to the 75 level?
Mr. ACKERMAN. Under our proposal, it would move upward. The best deal financially under our proposal would move from 65/100 to 70/100 and then there would be increases in the subsidy level above that.
Mr. EWING. Seventy/one hundred, that is is 70 percent coverage——
Mr. ACKERMAN. Excuse me for my shorthand. That means 70 percent of your yield at 100 percent of the price.
Mr. EWING. Fine. Thank you.
Mr. Condit.
Mr. CONDIT. Thank you, Mr. Chairman.
Mr. Ackerman, one of the administration's goals is to speed up new and better tools to the market. It is my understanding that the average product can take as long as 5 years to development and implement.
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To the growers in California where there are approximately 300 crops grown commercially and less than 30 of them are currently insured, this timeframe is unacceptable.
Does the USDA plan to reduce this 5-year timeframe in any way and what is the department currently looking at in terms of speeding up the product development?
Mr. ACKERMAN. Thank you for the question because this is a very important point and it is also one of our great frustrations also.
We have tried to expand crop insurance into new crops, particularly many of the fruits and vegetables that are not covered right now, but it does take too long to do. Not only does it take often a number of years to put together the actuarial data, the production data, but also we are required by law to start with a limited pilot program in a handful of counties and then expand it over a period of years.
Often, we have the data, we have the backing to start a pilot program nationwide at the beginning, rather than in a selected set of counties, but because of the law, we simply cannot do that. We are asking specifically that we be allowed to start many pilot programs on new crops nationwide.
We have also been looking as an administrative matter at a whole farm policy where a farmer particularly who grows uninsured crops can get a single policy covering all of their crops together.
We are experimenting with that this year in three small areas in north Florida, Michigan, and New England. If that works out well, we think many of your areas in California would be very suitable for it.
Mr. CONDIT. When is that report or finding, when do you finish those programs you get an analysis whether it works or not?
Mr. ACKERMAN. This year is the first year that we are trying it out. Sales are going on right now through March 15, so once we get through the sales period and have a year or two of experience—again, it takes a very long time to analyze it—we will be able to expand it.
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In the meantime, I would say that the main limiting factor for farmers to get into the pilot program at the pilot stage has been getting the information. The whole farm pilot program creates an insurance guarantee based on a farmer's gross revenue as reported on their tax return and to the extent we could get that data from farmers even now, we can expand the program.
Mr. CONDIT. Let me move along. Another concern in the program is flexibility and the ability of the department to extend the sales closing dates.
Mr. ACKERMAN. Yes.
Mr. CONDIT. For example, because of El Nino weather there were massive planting delays throughout California. During this time, both California raisins and the processing tomato industry came to the department and asked for an extension, but the extension was not—as a matter of fact, I think we had to do some legislation so they could have an extension.
What is the USDA doing to allow more flexibility in the current programs? Can you explain to me this idea about RMA reimbursing companies for the cost of successful new products as well?
Mr. ACKERMAN. As far as the dates go, the sales closing dates for crops in the spring are in statute. The March 15 date and the February 28 date are in statute. They were inserted in the 1994 act. And that makes it very difficult for us to adjust them, to respond to them.
Also, many of the other program dates are in the Code of Federal Regulations, so to change them requires going through a rulemaking process. That is one of the issues that we would like to address through legislation, if there are ways to deal with the regulatory process.
You mentioned needing legislation last year. I believe it was as part of the emergency bill we were able to get some of those crops covered under the NAP program because the planting during that period was considered an appropriate farming practice.
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As far as our proposal to reimburse companies who develop new products, we felt that this was a fair idea, a good way to bring the private sector more into the fold, to bring us new products to back for farmers.
When a private company today develops a new product, whether it is for an individual crop or a new concept, when they put the money and the expense and the research development into it, the minute we approve it, it has to be shared with every other company. They get no copyright, no royalty, no exclusive marketing. They also have to bear the expense of maintaining it.
We feel in those cases we, RMA, should have some authority based on a formula, based on cost, to reimburse them for those expenses.
Mr. CONDIT. Can you tell me quickly, and if you said this, just be specific, what is the Department doing to increase participation and can you tell me, are you working with grower groups to achieve the goal to increase participation rate by farmers? I mean, are you working with farmers throughout the country to do that?
Mr. ACKERMAN. Yes, we are working very extensively with groups throughout the country and specifically this year we instituted the 30 percent price discount as part of the emergency package to increase participation.
Mr. CONDIT. Can you give me some practical suggestion on how you are doing that? How do you reach out to those people?
Mr. ACKERMAN. We have a number of contacts with grower organizations. We have been holding a number of grower meetings around the country. We have been doing a fair amount of advertising, of working with grower groups to get out newsletters, working with agents around the country, holding risk management education seminars and many similar initiatives.
Mr. CONDIT. Well, I will get back to you on that.
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And, if I may, Mr. Chairman, I would like to ask permission to place in the record Mr. Chris John's opening statement, and the series of questions that he has for the panel. He cannot be here, but I would like to submit that for the record at his request.
Mr. EWING. Certainly. Without objection, it will be inserted in the record.
Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman.
Nice to see you again.
Mr. ACKERMAN. Nice to see you, too.
Mr. BARRETT. Nice to have you here to share your expertise.
A lot of farmers out in my area are telling me that the coverage on the yield guarantee does not really reflect the advanced technology that is available today to our producers, does not reflect the yields that have increased dramatically over the last several years and this is caused perhaps when a farmer has one low number in his average production history. Is that true?
Mr. ACKERMAN. Often, that is the case. Yes.
Mr. BARRETT. How can that be corrected? Or can it be corrected? What are you doing in that regard?
Mr. ACKERMAN. The issue you are stepping up to is one of the most difficult in this entire discussion and that is the actual production history system, APH.
We base our insurance for any given farmer on their actual production history and their personal records rather than any county average or so on. We have so-called plug yields, T-yields, when their records are incomplete, but generally it is on the person's yield.
When it works, it is a very popular program and these farmers with good records and good management and good histories can take advantage of it. When it does not, when a farmer has had a bad year and particularly when a farmer has had 2 or 3 bad years in a short period, their APH can get beaten down. It can get eroded over time. And in some areas where there have been repeated wet years or repeated dry years, repeated bad yields, it causes a very serious problem.
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We have tried to address it within the four corners of the current program by putting in so-called cups and caps, that an APH yield cannot fall more than 10 percent in a year, but still in many cases it does mean that yields lag behind changes in technology. It does mean that farmers who are going through a bad weather cycle, as has been the case in the northern plains as well as in the southern plains, their yields can fall quite low.
We are looking at legislative fix through a multiyear insurance policy that would give you a kicker if you have more than one bad year in a short period of time. It was also something we tried to deal with in the emergency program through the multiyear payments for farmers with losses in 3 out of 5 years.
Mr. BARRETT. So this current year, then, this cannot be corrected? But you are working on it. Is that what you are saying?
Mr. ACKERMAN. Yes. We are working on it both administratively and legislatively. What we tried to do this year as a short-term fix was to put more purchasing power in farmers' pockets through the 30 percent price discount so a farmer whose APH yield is not as high as they think it should be or need to get good protection will have a little bit more purchasing power to get, say, 70 percent coverage instead of 60 or stretch their dollars a little bit.
Mr. BARRETT. Thank you.
Mr. ACKERMAN. But this is a very difficult problem that is at the root of a lot of our discussions.
Mr. BARRETT. Yes. I understand. That is why I asked the question.
Of the five revenue assurance policies that are available right now, which is the most popular?
Mr. ACKERMAN. Crop revenue coverage, CRC, is probably the most popular right now.
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Mr. BARRETT. And why?
Mr. ACKERMAN. It offers both an upside and a downside protection. Prices go up and then it gives farmers a payment at the higher of the planting time yield or the harvest time yield. If prices go down, it gives them a revenue floor. It has also been marketed in very large parts of the country for 2 or 3 years now, so it has had a chance to develop a following.
Mr. BARRETT. But premium-wise, it is not as competitive as the others?
Mr. ACKERMAN. Yes. Premium-wise, it is more expensive and here, too, it is more expensive both because of the added price risk, but also because of the subsidy system. Currently, we do not subsidize the added price element of the cost, of the farmer cost. This is something we have addressed in our legislative proposal, but it has made it a very pricey item.
Mr. BARRETT. As I recall, we were talking about the farm bill in 1996, the administration and also the Congress certainly increased—or encouraged, I should say, our producers to become better risk managers. And in my area, and I am sure others, a lot of our lenders and others as well have indicated that there is some still question in their mind about our producers not being good risk managers.
Would you care to speak to that? Would you agree with that and what, if anything, could you do or could your agency do?
Mr. ACKERMAN. This, too, is a very important point. Risk management today for farmers is a lot more difficult than it was 5 years ago because of the fact that you do not have automatic deficiency payments, ad hoc disaster rate, even given last year's emergency bill, it is really not playing the same role it used to play.
For farmers today, they have to stay current of the many different kinds of crop insurance, the many different types of forward contracting, the changing financial markets. It is a much more difficult load today for a farmer than it was 5 years go.
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We have tried to address it through a risk management education program growing out of the 1996 farm bill, but so far it has been very small. We have only been budgeted about, I believe, $3 million last year for a small number of pilot programs.
In our legislative package, we felt that this point was important enough that we included a very large funding item for it. We are proposing to go as high as $50 million to finance a very major expansion of hands-on risk management training for farmers.
Our experience last year was that many farmers' decisions or their inability to deal with the market environment and the tools that existed and the exposure that they had in many cases increased the problems that they were facing to start with.
Mr. BARRETT. Thank you very much. That is most encouraging. Thank you.
Thank you, Mr. Chairman.
Mr. EWING. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman.
First of all, I have a statement I would like to introduce for the record, an opening statement. And I would like to tell my colleagues on the committee that the next couple of weeks I will be dropping in a bill on comprehensive crop insurance reform. It tracks for the most part the proposals the administration has highlighted.
I think the fundamental issue is that coverage levels are not adequate to cover the financial exposure of the farmer. The beginning and the end of the problem is the coverage does not protect the risk.
I would address that by providing a higher subsidy level for the buy-up coverage so that at the 75 percent level of the coverage, the subsidy component would be the same as presently provided at the 65 percent level, that being a 41 percent subsidy of the premium. You have to have that kind of subsidy in order to have that coverage level affordable.
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Second, I intend to address head-on this issue of actual production history deteriorating ability to put in place adequate coverage especially in multiyear loss circumstances. If a county is a disaster, you would not have your individual losses taken off of your production history at that point in time.
APH is to measure farming practices and ability to produce and if you have a disaster in the county, you really obviate both of those. You wipe out both of those criteria. And so that is why I have the APH provision in there.
I would make it easier for a farmer to bring proven yield history onto newly acquired acres. With the transitions we are seeing in agriculture, certainly in the northern plains but I know all across the country, you have people farming newly acquired land.
I believe that if the land is reasonably proximate to what they have been farming, they ought to be able to take their yield history onto that land and not have to go through the proving up process. Again, it gets to the issue of giving them adequate coverage levels.
Finally, I have heard from a variety of perspectives in agriculture that what they really are looking for is cost of production coverage, a simpler, cleaner way of locking in place coverage for their cost of production and we would require a pilot project, a pilot demonstration to test out whether or not this would be a viable way to restructure the program.
I would invite any of you to tear this legislation apart, take a look at it. We would love to have you on it if you would like to be on it and we will work with you on that over the next couple of weeks.
The bottom line, however, is it all costs money. The administration recommends or estimates $2 to $2.5 billion dollars. And we are getting to the point where we are going to have to get some serious discussions going on how we pay for it.
I was delighted to see the President talk about crop insurance in the State of the Union. As far as I know, no president has ever elevated crop insurance to that level before. I was disappointed there was not a new dime in the budget to back up his stated interest in improving crop insurance.
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Similarly, we are reading about the majority's budget plan and they make no provision for increasing the funding for crop insurance. And to let you know the sums we are talking about, $2.5 billion a year over 5 years is $12.5 billion. I mean, that is a significant commitment. And if we are going to really be able to get this done, we are going to have to have those budget discussions joined soon or this is just so much talk in the wind. It is not going to go anywhere.
A couple of questions before my time runs out.
On the issue of product innovation, you talked about reimbursement for development costs, has RMA carefully evaluated whether or not the exposure of the companies is at an appropriate level?
Does the Federal Government potentially take away too much exposure from the private sector? And I am thinking if they had a broader realm of exposure that they themselves were taking or laying off on reinsurers as opposed to the Federal Government's role, they would have a realm in which to compete beyond what they now have.
As companies have expressed to me their frustration about developing the innovations and then not being able to exclusively use them, I tell them you want to innovate and accept risk on the Federal dollar. It is not your money you are putting at stake.
And if we maybe evaluate where their exposure attaches, we can get it to the point where they do have a private stake and therefore could have exclusive access to that component in the market.
Mr. ACKERMAN. I will say this, we did a very extensive review of the companies' exposure, the risk sharing and gain sharing arrangement we have when we renegotiated the standard reinsurance agreement, I believe 2 years ago, there was quite a debate at that time about what the right level should be.
We put a proposal on the table, there was quite a lot of back and forth. And we ended up with an agreement that we think at this point under which the companies increase the level of exposure, increase the level of risk that they carry.
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Also, when crop revenue coverage was introduced, I believe 2 years ago also, in early 1997, on a broad scale, one of the major debates was how much risk should the private sector carry for those policies, should the private sector carry increased risk for the added price risk of a CRC policy. The outcome of that was that in fact a separate reinsurance term was created for CRC under which added risk was in fact borne by the private sector for those new policies.
The idea of when a company brings in a new policy that adds new risk that part of that added risk should be borne by the private sector is a sensible one. It is something that we have looked at more on a case-by-case basis.
As far as how that would affect innovation, the proposal we put on the table is to try to get at a very narrow problem and that is that innovation is not free, it costs money. When a company develops a new product, they have to make an investment, they have to hire an economist, they have to collect data, they have to rent computer time, they have to do analysis, all of that costs money.
And when a company makes that investment and brings it to RMA and we go through the full process with them, the first thing they have to do once we approve it is to share it with everyone else. And even at that point, the company still maintains ultimate ownership of it.
They have to continue to maintain the product, maintain the rates year by year, maintain the handbooks, maintain the pricing, and that continues to cost money. And that continues to be shared.
Our proposal was that there is some justice in providing some reimbursement to companies who do that and there is some logic to the argument that the reason we have not been seeing more products come to the table is because of that financial investment.
Mr. POMEROY. My time is up. If we go around again, I would like another crack.
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Mr. EWING. Thank you.
I think it is proper to maybe point out to Mr. Pomeroy that there are no details in the budget. It is up to us to work out how we come up with that money and allocate the money and set our priorities for crop insurance and I think we will find there is a lot of agreement around here on that as a priority.
Mr. POMEROY. Will the chairman yield?
Mr. EWING. I will yield.
Mr. POMEROY. My concern—I believe that there is not enough money left any more in the function of agriculture to fund $12.5 billion additional support for crop insurance and so we are going to have to engage in discussions with the budget committee to find money in other functions of Government and it is going to be a tall order, I believe.
Mr. EWING. It is a tall order. I think the $12.5 billion is not the figure for crop insurance. That is a lot more than we spend in crop insurance today, but I just think the point ought to be made that the fact that it is not in the budget resolution does not keep us from achieving the reform that we all want.
Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman.
Ken, anyway, good work so far. It is a tough row to hoe.
Would you say looking at at least what is available now as far as forward contracting or hedging with the futures that the insurance program is a way of minimizing loss? Rather than making a profit?
As you evaluate and analyze what the December futures are, for example, on feed grains. It does not, in my estimation, cover production costs. It seems to me the advantage in this kind of an environment is to minimize loss, rather than to maximize profits.
Mr. ACKERMAN. I think that is exactly right. What crop insurance or revenue insurance or any combination of them with risk management tools, what they do is to give you a way to manage your risk exposure. That means to minimize loss.
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Now, with the security you get from that, with the confidence, the protection you get from that, that can give you the basis to then go and forward contract and to be more aggressive in marketing to try to maximize gain.
Mr. SMITH. That is what I meant. To me and maybe I need an expanded understanding, but to me the CRC program gives a producer the opportunity to forward contract, to sell some of that product with the assurance that if the weather does not give him at least that much of production that the insurance program will, so it gives him additional protection and assurance that he can forward contract.
But even the forward contracting right now at existing prices, for example, on feed grains is at the February estimate of the December futures, that what you are going to contract for now is not going to pay the cost of production. And so I guess in our area, maybe my bottom line question is more flexibility.
Have you considered greater flexibility in terms of some insurance program, whether it is for livestock or whether it is for grains, that would concentrate more on price protection rather than weather protection?
Mr. ACKERMAN. This question, too, raises a very large issue in this debate and that goes to the expectation of what crop insurance or risk management products can do.
If the price of corn, for instance, is $2 at the beginning of the year and $2 at the end of the year, then no combination of crop insurance, revenue insurance, futures, options or forward marketing is going to make it $2.50.
And if a farmer is expecting or needing to get $2.50 in order to cover cost of production, then there is a gap and that gap is often filled by other programs, loan deficiency payments, what have you, but that difference, the problem that is created by the combination of low prices as well as production exposure is what has made the crisis we are in this year and last year so difficult.
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Crop insurance and revenue insurance can cover cost of production so long as that cost of production is backed by the expected value of the crop. If a combination of lower prices takes it out of that realm, then that creates a larger economic problem.
Mr. SMITH. Let me ask you about the CAT. Is there a buy-up availability for the CAT program?
Mr. ACKERMAN. For the catastrophic?
Mr. SMITH. Yes.
Mr. ACKERMAN. No.
Mr. SMITH. You are just speculating on the possibility of increasing the 50 percent up and the yield protection up? Is that just an idea but that is not in place this year and you cannot buy up on yield?
Mr. ACKERMAN. You can buy up, but if you buy up it is no longer a catastrophic policy. Catastrophic is simply the lowest level coverage that gives you 50 percent of your yield at 55 percent of the price.
Mr. SMITH. OK. I thought you were talking about increasing the 50 percent to 55 percent and increasing the yield from 60 to 70?
Mr. ACKERMAN. Yes. We want to raise that floor coverage so that instead of giving you 50 percent of yield at 55 percent of price, it would give you 60 percent of yield at 70 percent of price.
Mr. SMITH. But you are not considering doing that this year?
Mr. ACKERMAN. No, that would require legislation. That would be part of the legislative package that we are proposing.
Mr. SMITH. Have you costed this out?
Mr. ACKERMAN. Yes. And that piece of the package would cost about $200 million, but it would require legislation. We could not do it without action by Congress.
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Mr. SMITH. What are the other areas, Ken, you are looking at? Do we have the kind of experience with the insurance agents, do you know whether the insurers made money and how much money they made last year?
And have you completed your negotiations for how you are going to bargain with those insurance agents in terms of making sure that they do not make too much money?
Mr. ACKERMAN. As far as the insurance companies and the gains and losses of insurance companies, the insurance agents simply get a commission based on how many policies they sell and the size of premiums that they bring in. But as far as our gain/loss with the insurance companies, the numbers are not final yet, but we think the gains will be sizeable this year because of the fact that you did have very strong crop production in many of the core midwest States. The corn crop was a very good crop nationwide, the soybean crop was a very good crop nationwide.
A lot of the actual crop losses this year were regional and, as a result, many of the companies with nationwide books of business did well this year, even though they absorbed a number of losses.
I would say also that the reinsurance terms have now been locked into statute also by the research bill that was passed last year so that if we wanted to change the reinsurance terms, the financial terms of the reinsurance agreement, we could not do that without action by Congress as well.
Mr. POMEROY. Thank you, Mr. Chairman.
Mr. EWING. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman, and I commend you and Ranking Member Condit for holding this hearing today and beginning the process of reexamination of crop insurance and seeing what might be able to be done in this very important area. This is the beginning place.
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I would just choose to make one comment, though, regarding the budget issue, perhaps another opinion, but I keep reading now that all sides are saying that we are going to protect Social Security, and we are going to do that, but it is important that we start focusing on the real numbers now and watch this, because it is particularly significant to this committee.
If we are going to set aside all Social Security monies 2000, we have a $5 billion deficit that we have got to come up with first, and that means it has to come out of discretionary spending and that means agriculture is vulnerable.
If we are going to freeze spending for the year 2000, and it used be that was what a lot of us tried to get done, is just freeze this year's level at last year's level, we have to come up with $13 billion and get 218 votes to do it.
And I get a little nervous now when I keep seeing that we are still going to be enthusiastically supporting a tax cut at the same time we are going to deal realistically with Social Security.
And I just urge a little caution for all of us on this committee on both sides, to take a look at the real numbers and to watch your rhetoric on this because we can do irreparable harm to agriculture and to any chances that we have of dealing realistically with this if we do not get realistically involved with the actual numbers.
And I just add that because I keep hearing this and it is passed off like it does not mean anything, but having spent a good part of time looking at this over the last 3 years now and the Social Security question in particular, it is relevant.
So I would much rather, as we say, to me, starting today with crop insurance, I am looking at a blank sheet of paper. I could be very critical of a lot of what has happened in the past and have been and have worked on this. We can come up with other solutions, but we have to do this in a bipartisan way and we have to do it in a realistic way.
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You know, the best thing that I think we can do for our farmers in the tax cut area is reduce the deficit and keep interest rates down and then let us look realistically at what the needs of agriculture are going to be and have a good solid debate, get a unanimous agreement out of this committee bipartisanly to take to the floor on what we are going to do. But we are not going to get there when we read headlines day after day after day of what we ware going to be talking in the budget next week.
Anybody that believes that we can do that and still do what we are talking about needing to do here for agriculture, you can convince me in private that I am wrong.
Mr. CHAMBLISS [presiding]. Thank you, Mr. Stenholm, and we welcome you back to the Budget Committee to help us solve this dilemma because, as you well know, it is though and we are in a real dilemma. You and Earl are both right, we have——
Mr. STENHOLM. I have great confidence, Mr. Chairman, in you and Mr. Pomeroy, that you are going to come up with the answer.
Mr. CHAMBLISS. Thanks for that confidence.
Mr. Ackerman, I want to start off by thanking you and I was going to thank Chairman Ewing who had to leave, both of you for coming down to my district and doing the hearings on crop insurance.
You are to particularly be commended because you took the brunt of all the questions and got beat up on pretty good for a whole day and into the night, but I want you to know that you handled yourself very professionally and very well. We knew to start with, all of us, that we did not have the answers, but you were willing to discuss them with farmers in my area and I appreciate that very much. And my farmers have again expressed appreciation to me for you coming down and being willing to talk to them about crop insurance reform.
There are a couple of things that I want to sort of home in on that came out of those hearings that you discussed while we were down there.
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First of all, with respect to the rating issue, Mr. Pomeroy has already addressed the fact that there are problems with the APH and that some changes need to be made there. Is it your opinion that changes in the current program could be done administrative or is that going to take a legislative fix to fix the current APH problems?
Mr. ACKERMAN. We have stretched our minds to the limit, frankly, on trying to come up with ways within the four corners of the current program to fix the APH system.
So long as we are required to be within an actuarial soundness rule and you have situations of farmers suffering multiple years of loss, it seems that some add-on is needed. The way we have proposed to do it in our legislation is to create a multiyear crop insurance policy, a policy that if you have losses in 2 out of 3 years, then you would qualify for a bump in your payment, essentially a 90 percent coverage rather than 75 or 65.
We have been a little bit nervous about proposals to go and change the database to actually drop years out or add year in or use Olympic scoring simply because of the administrative impact that that has on the underwriting of the program, but obviously on this we are open to ideas because I can tell you in your meetings in Georgia and other meetings around the country, the concerns about APH, the concerns about these eroding yields for farmers who have suffered years of loss is one of the most consistent themes that I have heard. And if our multiyear policy is not a good idea, if that does not pass muster, then we definitely have to look at some other alternative.
Mr. CHAMBLISS. Another thing that we heard a lot of and it has already been mentioned a number of times here today is that we need some sort of real cost of production policy that is available to our farmers and while it is easy to say that we need to come up with a cost of production policy and let folks pay for the risks they want to insure, it really is a lot more difficult than that because I look around this room, the cost of production for an acre of cotton in my part of the world is different from what it is in Mr. Stenholm's and is different from what it is California and other parts of the country and how we come up with what the cost of production really is in the Southeast versus the West or the Midwest, I do not know, but do you have a thought as to whether or not we can come up with a good solid crop insurance program that will provide a cost of production policy to our farmers and yet regionalize the numbers with respect to cost of production?
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Mr. ACKERMAN. Mr. Chambliss, I appreciate your raising this question because in our town meetings in Georgia, this issue got thrashed out very well. The issue was raised by many people who have a direct problem on this point.
The two traditional problems we have had trying to institute cost of production coverage are, one, how do you measure it, because every farmer's cost of production is different, every economist has a different formula as to whether you include fixed costs, variable costs, which of those costs you include. They differ county by county. A lot of the averages that universities keep in their databases, some are more credible than others. So just measuring cost of production is very difficult.
And then, second, to maintain actuarial soundness and to balance the books, generally, crop insurance can only cover a cost of production if that cost of production is supported by the expected value of the crop. And what we are seeing right now is a lot of situations where because of falling prices and falling yields, expected yields, that the two do not match up and that has been the problem.
The technical issue you can deal with through revenue insurance. Let the farmer develop their own cost of production and we could give them a policy that would cover that dollar level however you get to it.
The economic problem, what do you do if the two do not match up, is more difficult. And to address that, that is what is requiring these large sums of investment that you are hearing both from our proposal, the $2 to $2.5 billion, and from other proposals that have been batted around in different quarters.
To do that, you need to make crop insurance at the highest levels more affordable and that is where the cost comes in.
Mr. CHAMBLISS. But are you researching and working towards some sort of regional cost of production program that might be available?
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Mr. ACKERMAN. I think technically we can do it within those parameters. If you set it up so that a farmer can pick their coverage, a farmer can calculate their cost of production, come up with a dollar value and we will reinsure that dollar value, again within that economic limit, I think we can do that. That is the goal of making this added investment to crop insurance, recognizing, though, the bigger economic context we are in.
If prices continue to be low so that the value of a crop does not cover the cost of production, then we are going to continue to have that disconnect.
Mr. CHAMBLISS. Mr. Condit.
Mr. CONDIT. Mr. Ackerman, I have a couple of quick questions.
Given your recent announcement regarding producers who want to cancel their CRC plus and the underlying CRC policy, would you please clarify the agency's policy regarding a producer's ability to obtain CAT coverage?
Mr. ACKERMAN. Yes, sir. Thank you for the question because I understand there has been some confusion in the field on this.
Under the announcement that we made in January, which opened various sales periods in response to the emergency bill, farmers can obtain catastrophic coverage only, catastrophic coverage only, up through April 28. The confusion that existed was whether you had to specifically be required to obtain it because of linkage purposes, but that is not a requirement. Any farmer can get catastrophic coverage up through April 28 from any company they choose.
Mr. CONDIT. Thank you very much. And I want to go back to where you and I left off talking about you working with farm groups to help promote participation.
One of the areas that appears promising for promoting increased levels of participation is the use of some of the farm alliances, farm associations to work directly with individuals or their members or what have you so that they can obtain coverage for them.
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There are some restrictions on that. I would like to know what those restrictions are and why they are in place.
Mr. ACKERMAN. The principal restriction, and I will just say generally many of these grower associations and groups have come up with very useful programs, very interesting programs. The one restriction that is in place under the reinsurance agreement and most State laws has to do with rebating.
Rebating of premiums is not allowed under the reinsurance agreement or under State law. If a program can be developed that does not touch on that issue, then we have not stood in the way of them.
I would say also generally this has been a very contentious issue because it does get to the role of the crop insurance agent in the program and how they interact with customers. We are going to be publishing for public comment a regulation covering this issue and a number of related items that should be in the Federal Register for public comment, we are hoping within the next few weeks.
Mr. CONDIT. Is there any expectation of changes that would promote a greater participation without damaging the integrity of the program? I mean, you talked about rebates. Is that a State and Federal regulation.
Mr. ACKERMAN. It is a requirement of the standard reinsurance agreement that we have with our companies and, in addition, it is a restriction in State law in the large majority of the States, not every State, though.
Mr. CONDIT. OK. So is there anything you are going to be doing or suggesting that would allow these associations, alliances or what have you, these groups to be able to proceed and provide insurance for their individual members?
Mr. ACKERMAN. We are going to be putting out a regulation that will spell out the ground rules so that grower associations would know what they can do and what they cannot do and we think that will clarify a lot of the confusion that exists right now.
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A lot of these associations, as I say, have put together some very good programs that have helped increase participation in areas where it is currently low, but because of the integrity issue, the rebate issue, we have a responsibility to put out some rules of the game so people know what is good and what is not.
Mr. CONDIT. What is the goal of the program? The goal of the regulations that you are getting ready to put out?
Mr. ACKERMAN. The goal is to make it clear where these kinds of association marketing and similar plans can go forward because they can fill a very positive role of increasing participation, but letting them know where the problems of program integrity will start, to let them know what they can do and what they cannot do.
Mr. CONDIT. But the goal is not in any way to discourage this effort by the association or the alliances to provide this coverage or to be the clearing house or what have you. The goal is not to dismantle that effort, but to clarify it?
Mr. ACKERMAN. Yes. So long as that effort can exist within the four corners of those rules, the anti-rebating rule—primarily the anti-rebating rule, then we would like to see them go forward, but recognizing the program integrity needs that we have.
Mr. CONDIT. We have 3 minutes before we vote, so I am going to have to stop there and go and vote, but I might want to follow up and I know you have to leave. I may want to follow up at a later time.
Mr. ACKERMAN. OK.
Mr. JENKINS. Thank you, Mr. Condit.
Mr. Ackerman, just a couple of—because I have 3 minutes to vote, too, but a couple of quick questions.
There has been some reference today and I think this is one of the most important things we are going to do in the Agriculture Committee in terms of policy this year and it was mentioned, the President mentioned it in his State of the Union address, but did not budget for it.
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Mr. Stenholm referenced the fact that there has not been this budget process, the budget resolution that we are in the midst of right now, that we make sure that we provide—you have mentioned in your testimony $2 to $2.5 billion is the cost of this program.
I am just wondering if you have any suggestions or the administration about where it is going to come from. I mean, does USDA have some ideas about where to come up with $2 or $2.5 billion? Because you are essentially coming up and suggesting that is what it is going to cost and yet the administration did not provide for it in their budget.
Mr. ACKERMAN. We recognize that there is an issue here. We recognize that we are going to have to work with you to find a way to fund this program.
At this point in time, I can tell you that we are committed to do it, we are committed to working with you. My statement this morning is backed by the Office of Management and Budget and by the administration. We recognize you have a budget resolution process that is about to get underway and we are prepared to work with you on an administration-wide basis to find a way to solve this problem.
Mr. JENKINS. One other quick question if I might and that is that you have suggested a pilot program RMA has for livestock at a $50 million level and I am just wondering, is that sufficient to get a look at how that might work?
Mr. ACKERMAN. We think that is sufficient to get it started. Whether in the long run, if the program works well and we have a lot of demand for it, whether it will be sufficient to meet that demand, it may not be, but as an initial matter, to get it started, given all of the new factors that are involved in a livestock insurance program, whether it is production insurance or revenue insurance, there are so many new underwriting issues, financial issues, that frankly I would be uncomfortable starting with anything larger, given the risks involved and given the fact that it is so new. But I think once we get it going and once we get a little bit of experience with it and see how it works, then if it works well it is very likely that we will see an interest in growing it.
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Mr. JENKINS. Is that a program that RMA might contract to the private sector?
Mr. ACKERMAN. Yes. This is one where we would very much want to work with the private sector on and I would expect private companies will be coming to us with ideas on how to put it together.
Mr. JENKINS. With that, I want to thank you for your testimony and for the insights that you have provided and at this point recess the subcommittee and when we return we will see the second panel and get to their testimony, so thank you.
Mr. ACKERMAN. Thank you very much.
[Recess.]
Mr. EWING. We will ask people to take their seats and we will ask the witnesses to come forth for the second panel of today's hearing. The first witness, Mr. Terry McClure, Ohio Farm Bureau board member; Mr. Frank B. Jones, Jr., producer, National Cotton Council; Mr. Joe Boddiford, chairman, National Peanut Growers Group; Mr. Lee Cromley, producer, Brooklet, GA; and Mr. David A. Bossman, president, American Feed Industry Association.
We will start with Mr. McClure.
STATEMENT OF TERRY McCLURE, OHIO FARM BUREAU BOARD MEMBER, GROVER HILL, OHIO, ON BEHALF OF AMERICAN FARM BUREAU FEDERATION
Mr. MCCLURE. Good morning, Mr. Chairman.
Mr. EWING. Good morning.
Mr. MCCLURE. We appreciate your efforts to consider this important issue. Reform and expansion of current crop and revenue insurance programs is one of Farm Bureau's highest priorities for 1999.
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My name is Terry McClure. My wife, my father, my mother and my son farm 2,500 acres in northwestern Ohio. We raise corn, soybeans and wheat and we have the crop revenue coverage and the multi-peril crop insurance on our farm.
Mr. Chairman, the American farmer is walking a tightrope. Below him is a safety net that is old, it is worn and has many holes. For some, the net is so near the floor that even if he is caught sometimes the fall could be fatal. For others, the safety net is not there and we hit the ground hard. At that time, the well-intentioned ad hoc disaster program comes about and tries to pick up the pieces.
While we have been unable to eliminate the ad hoc disaster assistance, it is important to note that participation has increased tremendously. Sixty-eight percent of the eligible acres were covered by the Crop Insurance Program in 1998, almost double the percentage of participation only 4 years ago.
We cannot expect that level to be maintained unless we improve the program and make it a viable risk management tool, thereby increasing participation and reducing the need for an ad hoc disaster program.
The $6 billion of assistance last fall sent farmers a clear message that purchasing crop insurance in 1999 was unnecessary because Congress would step in with disaster assistance.
Also, we need to provide farmers with the ability to affordably purchase higher levels of coverage. When a producer can lose up to 35 percent of his crop and still not be eligible for assistance, the program is not a viable safety net.
Also, we need to move towards additional revenue policies for all commodities, rather than relying on programs.
Here are our major concerns.
Number one, crop revenue insurance products must be available for all commodities, including livestock. Current programs provide a risk management tool for most of the major commodities, but there are 1,500 crops not covered by the program and coverage.
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The private sector should be encouraged to create new insurance products to cover their needs, while at the same time being protected from other companies using their new ideas at no cost.
Right now, when an insurance company goes to all the work and does all the actuary work to improve the crop insurance that they sell, then they have to share it with all their competing companies. This needs to be changed.
Farmer premium subsidies should be increased to 50 percent level for all levels of coverage. The 65 percent level in 1998, the Government paid 42 percent, while 58 percent was paid by the producer. However, at the 85 percent level, Government pays only 13 percent while the producer pays 87 percent of the premium.
Crop insurance rating practices should be modified to encourage broadened participation, particularly among the low risk producers. Most insurance that we buy, our personal history affects our rates. Maybe it is time that crop insurance has a safe driver delineation.
Establish an average history program to aid beginning farmers and those who have added land with no production history.
Create a multiyear disaster adjustment for producers who experience consecutive crop year losses to factors beyond their control.
And the CAT program should be eliminated or significantly enhanced.
You know, Mr. Chairman, on my farm this year I will spend $20,000 on crop insurance. I have the CRC on my policies. If I was to have CAT coverage, I would spend $150. Now, I cannot hardly expect that CAT coverage to do the same thing as my CRC. I think the money that is spent to subsidize the CAT program would be much better spent on some of the buy-up protection.
Finally, we feel that the program should allow for competition between companies. The question is do we fix the safety net, mend the holes and raise the level or do we wait until the next ill wind blows and the producer falls and rush in to try and pick up the pieces?
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The time is ripe for change. Is this a magic bullet? No. This is just a tool in our tool box, Mr. Chairman. You know, this is no different than the futures and options that I use, it is no different than the fire insurance that I buy on my barn or on my house.
This is just a tool. But right now, the tool is damaged. It may not work for all of us very well. For some of us, the tool is not even there. It is not available for some of us. We need these tools to go forward.
Senate Bill 529 by Roberts and Kerrey goes a long way towards these goals. With a thin margin and increased risk on the farm, the time is now for change.
You know, I have a 15-year-old son coming up on my farm and right now although he is a freshman in school he thinks the biggest problem in life is getting through school so he can get on the farm with me.
Over the 6 generations of my farm, 5 generations on my father's side and 6 generations on my mother's, there have been a lot of different problems they have had to look at, Mr. Chairman. And right now one of the things is risk management. Maybe for my grandfather it was making sure it was a good well or the land was cleared and drained, but right now one of the things we have to do is manage our own risk.
We are farming more land than we ever have on our own farm and the margins are thinner. And it will be even more so for my son. I think we need to set it in place right now. Some of the things we have heard today are very encouraging and I think we are heading down the right road, but I just want you to know how important it is for our farm that we go forward with this crop insurance protection.
Thank you.
[The prepared statement of Mr. McClure appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. McClure.
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Mr. Jones.
STATEMENT OF FRANK B. JONES, JR., NATIONAL COTTON COUNCIL
Mr. JONES. Thank you, Mr. Chairman and other members of the subcommittee, for taking time to listen to our comments regarding the serious need for reform of crop insurance. My name is Frank Jones. I am from Lubbock TX. I grow cotton, grain, peanuts and I am currently serving as advisor to the board of the National Cotton Council, on whose behalf I present this statement today.
The problem with cotton crop insurance is fairly simple—growers cannot obtain adequate levels of coverage at affordable rates. Therefore, we have low participation, just over 40 percent in the buy-up, and the acreage insured is at inadequate levels to provide effective risk management.
The most significant problem associated with cotton insurance is that premiums are significantly and unjustifiably higher than those for other major commodities. Data obtained from FCIC starkly illustrates the inequity in cotton premiums relative to other major commodities.
The average buy-up cotton premium in 1997 was $30.11 per acre compared with $11.80 for corn, $8.54 for soybeans, $7.73 for wheat and $9 for sorghum. Not surprisingly, this same inequity exists for other southern crops.
A dollar in premium on cotton buy-up policies purchases only $3.60 per acre coverage, on average. For corn, this same dollar buys $14.64 cents in coverage and for soybeans it buys $18.72 cents in coverage. FCIC's own data shows that the average cotton buy-up liability of $211.67 per acre is only $20 higher than the average corn liability.
Incredibly, the increase in cotton's premium relative to corn is almost exactly equal to the increase in cotton's liability. And yet, many Risk Management Agency and FCIC officials still cannot seem to figure out why so many cotton growers are so dissatisfied with the cotton crop insurance.
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Cotton crop insurance premiums, as are other insured commodities, are experienced-based rated relying on a 20-year historical, actuarial database to determine the risk of loss and establish premium levels.
Prior to the 1994 Crop Insurance Reform Act, however, the actuarial database for many commodities, particularly cotton, reflected low participation rates and significant adverse selection, factors which led to unusually poor actuarial performance. I have attached a table for cotton insurance participation rates to my written testimony that illustrates this point.
For example, from 1978 to 1994, only 8 percent of North Carolina's, 23 percent of Georgia's, and 36 percent of Texas' cotton acres on average were covered by crop insurance. Today, cotton crop insurance participation is higher, around 40 percent, but the majority of the insured cotton acreage still carries only CAT coverage.
A recent review further demonstrates discrepancies between average cotton yields relative to cotton crop insurance yields. We have found that cotton APH yields were 25 to 30 percent lower than the corresponding NASS county yields. In other words, cotton crop insurance participants were much lower yielding and significantly higher risk than the typical cotton producer.
Simply put, our low historical participation has led to higher rates, which make the program not cost-effective for average and above average producers.
Further support for a change in rating structure is provided by an ongoing study of cotton crop insurance rates being conducted by Montana State University under contract to FCIC. Preliminary analysis by Montana State economists suggests that cotton crop insurance premiums could be overstated by as much as 40 to 50 percent.
The Montana State effort attempts to obtain a more accurate picture of the risk of loss in a given region for rating purposes by using NASS data for all producers instead of the APH data for the minority who participate in the program. While more work is needed in the Montana State effort, we must note that FCIC officials have not taken issue with the preliminary results.
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Another actuarial related issue is that current crop insurance practices penalize a producer twice in the event of area-wide disasters such as this year's drought. The producer's APH is reduced because of the area-wide disaster and this makes his rate go up.
The immediate result is that the producer must now pay a higher premium for what is effectively a much lower level of coverage. Yet this area-wide loss has already been accounted for by the county's higher risk rating due to the disaster.
Reforms have been made to more accurately reflect actual production history. However, there are still no measures in place to account for area-wide disasters, particularly if they occur back-to-back.
Addi