SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC 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,
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.
Page 2 PREV PAGE TOP OF DOC 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.
Page 3 PREV PAGE TOP OF DOC 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.''
Page 4 PREV PAGE TOP OF DOC Mr. Chairman, with comments like the above, we need to actand act quicklyto 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 passand USDA implementa 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-reasonedbut fiscally-responsibleassurance element will not be helpful to our Nation's producers.
Page 5 PREV PAGE TOP OF DOC 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.
Page 6 PREV PAGE TOP OF DOC 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.
Page 7 PREV PAGE TOP OF DOC 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 disasterad 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 insuranceif availablefor the following 2 years.
Page 8 PREV PAGE TOP OF DOC There isagainevident 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.
Page 9 PREV PAGE TOP OF DOC Then came the 1996 farm bill, and with all of the changes it made in basic farm programs we knew that risk managementwith all the meanings of that termwould 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 realizedto the tune of $6 billionthat 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?
Page 10 PREV PAGE TOP OF DOC 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.
Page 11 PREV PAGE TOP OF DOC In North Dakota, producers have economically suffered from both bad weather and low prices. North Dakota has experienced multiple years of wet weatherwith the flood of 1997as 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.
Page 12 PREV PAGE TOP OF DOC 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.
Page 13 PREV PAGE TOP OF DOC 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?
Page 14 PREV PAGE TOP OF DOC 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.
Page 15 PREV PAGE TOP OF DOC 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?
Page 16 PREV PAGE TOP OF DOC (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
(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.
Page 17 PREV PAGE TOP OF DOC 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.
Page 18 PREV PAGE TOP OF DOC 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.
Page 19 PREV PAGE TOP OF DOC 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.
Page 20 PREV PAGE TOP OF DOC 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 changeI 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.
Page 21 PREV PAGE TOP OF DOC 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.
Page 22 PREV PAGE TOP OF DOCSTATEMENT 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.
Page 23 PREV PAGE TOP OF DOC 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.
Page 24 PREV PAGE TOP OF DOC 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.
Page 25 PREV PAGE TOP OF DOC Mr. EWING. And you mentioned that 32 percent of the crop insurance policiesor it was in your testimonyare 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?
Page 26 PREV PAGE TOP OF DOC 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 itwell, 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.
Page 27 PREV PAGE TOP OF DOC Mr. ACKERMAN. Yes.
Mr. EWING. What would happen if the CAT program were completely eliminated?
Mr. ACKERMAN. Our fearand we discussed this when we were looking at different options to proposeour 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. 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.
Page 28 PREV PAGE TOP OF DOC 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 experienceagain, it takes a very long time to analyze itwe will be able to expand it.
Page 29 PREV PAGE TOP OF DOC 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 notas 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.
Page 30 PREV PAGE TOP OF DOC 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.
Page 31 PREV PAGE TOP OF DOC 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. 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.
Page 32 PREV PAGE TOP OF DOC 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.
Page 33 PREV PAGE TOP OF DOC 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 increasedor 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.
Page 34 PREV PAGE TOP OF DOC 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.
Page 35 PREV PAGE TOP OF DOC 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.
Page 36 PREV PAGE TOP OF DOC 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.
Page 37 PREV PAGE TOP OF DOC 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.
Page 38 PREV PAGE TOP OF DOC 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 concernI 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. 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.
Page 39 PREV PAGE TOP OF DOC 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.
Page 40 PREV PAGE TOP OF DOC 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.
Page 41 PREV PAGE TOP OF DOC 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.
Page 42 PREV PAGE TOP OF DOC 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.
Page 43 PREV PAGE TOP OF DOC 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.
Page 44 PREV PAGE TOP OF DOC 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?
Page 45 PREV PAGE TOP OF DOC 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?
Page 46 PREV PAGE TOP OF DOC 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.
Page 47 PREV PAGE TOP OF DOC 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.
Page 48 PREV PAGE TOP OF DOC 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 ruleprimarily 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 ofbecause 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.
Page 49 PREV PAGE TOP OF DOC 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 provideyou 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.
Page 50 PREV PAGE TOP OF DOC 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.
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.
Page 51 PREV PAGE TOP OF DOC 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.
Page 52 PREV PAGE TOP OF DOC 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?
Page 53 PREV PAGE TOP OF DOC 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.
[The prepared statement of Mr. McClure appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. McClure.
Page 54 PREV PAGE TOP OF DOC 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 simplegrowers 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.
Page 55 PREV PAGE TOP OF DOC 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.
Page 56 PREV PAGE TOP OF DOC 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.
Additionally, we believe the product approval process and the general culture of RMA must be changed if the program is to ever work effectively. Individual companies should have more flexibility to design products that enjoy a relative share of the premium subsidy and reinsurance, assuming these policies meet basic guidelines for coverage.
Today, private companies find it nearly impossible to develop private policies for cotton that could meet regional needs. Even if they are submitted to RMA, the process is stymied by naysaying attorneys and by a lack of qualified actuarial professionals to review submissions and approve them in a timely manner.
Mr. Chairman, there appears to be significant support in the ag community for increased subsidy to make 75 percent coverage more affordable. We agree the entire mechanism and level of premium subsidy does need to be reconsidered. Current premium subsidies are in effect bottom-loaded and thus higher, more effective levels of coverage are unattainable. However, just increasing the subsidy does not address the fundamental rating problems that plague cotton crop insurance.
If we can fix our rating problem first and provide equitable coverage to cotton, then we could support funds for increasing subsidies. Further, we do not believe that CAT coverage provides any effective means of protection and would be willing to discuss how to better apply the subsidy associated with it to higher levels of coverage. With today's thin to negative margins, no farmer can afford a 35 percent loss before insurance benefits kick in.
Page 57 PREV PAGE TOP OF DOC We also believe for there to be any meaningful insurance reform, something must be done to address fraud and better compliance with policy provisions. This appears to be an area where neither the companies nor the agency can provide constructive answers but to hold companies, agents, and loss adjusters at least partially accountable could be a good start.
In closing, Mr. Chairman, I would echo the concerns you have heard from farmers around the country about the serious profitability crisis in American agriculture. Crop insurance reform is important, but in itself cannot restore farm profitability.
The National Cotton Council and all its industry segments and regional organizations have voiced strong support to restore funding for cotton's Step II competitiveness provisions, and have voiced support for additional AMTA payments or disaster funds in the absence of a dramatic turnaround in the farm economy.
Thank you again for allowing me to present this testimony today.
[The prepared statement of Mr. Jones appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Jones.
I want to turn to my colleague from Georgia, Mr. Kingston.
Mr. KINGSTON. Thank you, Mr. Chairman.
I wanted to just take this time to welcome a couple of constituents and friends to this committee who will be testifying and by way of introduction say Mr. Joe Boddiford is here with the National Peanut Growers group and he will be testifying. Joe is from Screven County, GA. He has about 2,000 acres, not just in peanuts, but cotton, corn and wheat as well. He has been farming for 25 years and is a third generation farmer and is always looking out for the small mom and pop farmers and not a stranger to Washington by any means, but I think it is the first time he has testified at least this year.
And then next to him with a different group which is a group of loose knit farmers from Bulloch County, GA is Lee Cromley and Lee has about 2,000 acres, mostly in cotton and peanuts. He has been farming for 10 years, his family for 55 years. And, actually, I guess, his father for 55 years, his family for about 100 years. His cousin, Christie Cromley, has the unenviable job of trying to run Saxby Chambliss' ag department and is doing a great job with it.
Page 58 PREV PAGE TOP OF DOC So I just want to welcome them. They have some other folks here from Bulloch County, Wes and Chuck back there. I do not know if anybody else came up from the First District, but Mr. Chairman, this is such an important issue that our farmers have taken the time away from their farm and duties and gotten in the classrooms back home and they have been doing their homework and I think, you know, a lot of times you hear the talk but you do not hear the work behind the talk and they have taken the time to come up with proposals and innovations.
So I wanted to welcome them and also introduce them to your committee.
Mr. EWING. Thank you, Mr. Kingston, and we are glad to have them. I think you ought to let your people know back home, though, that it is illegal to grow corn in Georgia. [Laughter.]
STATEMENT OF JOE BODDIFORD, CHAIRMAN, NATIONAL PEANUT GROWERS GROUP, SCREVEN COUNTY, GA
Mr. BODDIFORD. Thank you, Mr. Chairman, for this opportunity to be here and, Jack, thank you for those kind words.
I believe if you can help get us more markets for peanuts, we will be glad to quit growing corn in Georgia. We have just about exported the livestock industry up in your direction and towards North Carolina, and it is getting to be a tough time there.
Mr. Chairman, members of the committee, I am Joe Boddiford, a farmer from Screven County, GA, and the chairman of the National Peanut Growers Group's subcommittee on crop insurance reform. I am accompanied by several members of our group today.
The current crop insurance system does not adequately provide a financial safety net for farmers. Real and substantial reform is needed to ensure farmers have adequate risk management tools for years when a disaster does occur.
Farmers need higher levels of coverage at affordable prices to provide the incentive for producer participation to increase. This, in turn, spreads risk over a greater number of policies and reduces cost.
Page 59 PREV PAGE TOP OF DOC The goal of a viable Crop Insurance Program should be to eliminate the reliance on future ad hoc disaster assistance. Purchase of crop insurance should not be required for participation in other Government farm programs and crop insurance benefits should not be subject to a gross income test or other form of payment limitation.
We believe reform can be accomplished through adoption of the following measures and concepts:
Ratings should be changed to promote broader participation levels, especially among lower risk producers.
Base the minimum crop insurance coverage on the cost of production using some realistic factor such as Cooperative Extension Service budgets.
Established growers should be able to use personal yields which would follow the producer from farm to farm. Allow these growers to purchase higher coverage based on these personal yields. New growers could purchase coverage based on county averages.
Do not penalize producers for disasters. When calculating APH, drop the disaster years and replace with the 10-year average.
Establish a unit coverage designation of less than the whole farm. Because disasters sometimes strike a specific area, farmers should not be penalized by having low yields spread over an entire farm. Producers need to have the flexibility to divide their farms into units. Irrigated acreage should be differentiated from non-irrigated. Also, growers should be allowed to divide their operation by FSA tract number if they so choose.
Producers should be allowed to purchase crop insurance regardless of planting practices. Many production practices exist and though they may differ from farm to farm they work for the producers that use them.
Because the rate of Government support for crop insurance is greatest for CAT and falls dramatically for higher levels of coverage, we suggest using the resources invested in the program to supplement producer costs for buy-up coverage. CAT coverage is not an adequate safety net.
Page 60 PREV PAGE TOP OF DOC Reward producers for good experience via premium discounts. We recommend offering premium discounts to producers who demonstrate a history of participation without incurring insurable losses. These incentives should be graduated so that the more years a producer has without a claim, the greater his premium discount would be.
Crop insurance premiums should be waived or rebated if Congress passes an ad hoc disaster bill.
Change the Federal Crop Insurance reporting deadline to 15 days after the Farm Service Agency certification deadline. With current technology, electronic transfer of data, this would be your acreage certification, yield data, any other necessary information, is the most time and cost effective method available.
When yields become low enough that harvest costs are not covered, the yield should be adjusted to zero and the producer not be required to harvest the crop.
County FSA offices should allowed to be agents for FCIC. This would allow the greatest effectiveness of the operation of the program. It would also provide greater ease of reporting for the producer.
Encourage increased producer education regarding available risk management tools.
Farmers must have an adequate risk management safety net in order to have incentives to participate in any Federal Crop Insurance Program. Any risk management program must also include crop insurance which covers the cost of production and this must be done at a reasonable cost.
Ladies and gentlemen, 1998 demonstrates that changes must be made to the Federal Crop Insurance Program. I thank you for your time and I would be glad to answer any questions.
Thank you, Mr. Chairman.
Page 61 PREV PAGE TOP OF DOC [The prepared statement of Mr. Boddiford appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Boddiford.
STATEMENT OF LEE CROMLEY, FARMER, BROOKLET, GA
Mr. CROMLEY. Before I start, I would like to say something to Congressman Kingston. He has taught me a lesson. We called a couple of weeks ago to complain about the crop insurance situation and he sort of called our bluff a little bit. He threw this back on us and that is what has got me in this mess here today. So, Jack, I will not complain quite so often any more.
I greatly appreciate the opportunity to speak with you today on behalf of a group of farmers from Bulloch County, neighbors and friends who face the same challenges that we face.
We have been meeting over the past several weeks discussing what we see to be the failings of the Crop Insurance Program and improvements that we feel could be made to it. I would like to focus on two main points today, first of all, why our current system does not meet my needs as a producer and then, second, what we believe could be done to improve the system.
Let me begin by saying that I am not a crop insurance expert by any means. In the 19 years that I have been farming, I have never bought anything but CAT insurance. The only reason I did that was the requirement to do it and it has never beenevery year I look at the numbers and every year it is just not a sound business decision to purchase this insurance. And again this year, even with a 30 percent reduction, I could not make it work on my farm.
Why does the current program not work for me? The best way to explain it is to use the actual figures from our operation. In our written material, you will find documentation that if I were to experience the same yield in 1999 that I did in 1998 I would suffer a total loss of $206,000 on my cotton operation. Crop insurance at the 75 percent indemnity level would pay me a net indemnity of $32,600. 15.9 percent of my actual losses, real numbers, actual losses, 15.9 percent. To me, that is the most important thing I could say here today. Even with 75 percent coverage, with the discrepancies in the yields and various problems, 15 percent is that would cover me. I cannot justify spending $40,000 for such poor insurance.
Page 62 PREV PAGE TOP OF DOC If I could stop right there a second, I would like to respectfully take exception to a comment made earlier this morning about farmers being poor risk managers. For me to take this insurance would increase my risk. I would be a poor risk manager if I took this because of the added cost it puts on my operation and the low return I would get from it. It is just not feasible.
Another part of the Crop Insurance Program that is totally ineffective is CAT insurance. According to the annual report of FCIC, in 1998 which was a disaster year by all accounts, the loss ratio was 0.28. That was a $358 million subsidy, with only a 28 percent payout. We believe that money could be redirected toward coverage that is more practical and more useful.
But the real question before us is how can we change the current Crop Insurance Program so that it becomes an effective part of the safety net for farmers during adverse times. You will find in our written statement a list of reforms that we believe will help make crop insurance more attractive to a larger number of producers, on page 6, I believe.
The centerpiece of our proposal is to move to a dollar-based program that offers protection from substantial losses by weather problems, the marketplace, or quality discounts. A program that insures a producer at some level of his cost of production would eliminate the problems that we have heard today about yield-based programs. It would eliminate those programs and it would be used by a greater number of producers. And this to me is an important point to make. As you work to make the program more effective, you will draw in higher producing, lower risk growers who will make the program more sound.
In summary, we believe the changes that you make to the current Crop Insurance Program need to have these characteristics for us to purchase it: offer coverage that reflects some percentage of our cost of production; cover losses from weather disaster, market disaster and quality problems beyond the producers' control; and, third, it needs to be a premium level that is in line with the tight margins that we operate under.
Page 63 PREV PAGE TOP OF DOC In closing, I would like to say that as important as crop insurance reform is to farmers, it is only one piece of the puzzle. I believe that you have an opportunity in the next few years to redefine and influence farm policy for generations to come. How will we compete in the international marketplace? Will we continue to fund research to help reduce our costs and add value to our products? What position will our Government take on international trade policies? All of these issues and many more affect not only dollar-based crop insurance, but it affects the whole ag economy.
A friend of mine recently said that we do not depend on China or Mexico for our national defense, do we really want to depend on them for a safe, abundant, cheap food supply?
As a matter of national policy, I believe that this is a question that as a nation we must debate and that you and your colleagues must decide. With $4.50 soybeans, $2 corn, 55 cent cotton and 20 cent hogs, these issues must be addressed soon or many producers just simply will not survive.
Thank you for your time.
[The prepared statement of Mr. Cromley appears at the conclusion of the hearing.]
Mr. EWING. Thank you, sir.
STATEMENT OF DAVID A. BOSSMAN, PRESIDENT, AMERICAN FEED INDUSTRY ASSOCIATION
Mr. BOSSMAN. Mr. Chairman and members of the subcommittee, my name is David Bossman and I am president of the American Feed Industry Association here in Arlington, VA.
I want to thank you for the opportunity to participate in this important examination of the how insurance products and futures markets can help the American farmers and ranchers manage the risks inherent to livestock and crop production. In addition to being AFIA's chief executive, I am also president of the American Feed Industry Insurance Company, the risk retention group in Des Moines Iowa and its subsidiary, American Agri-Business Insurance Company, which will write some multi-peril crop this year.
Page 64 PREV PAGE TOP OF DOC I would like to lay out for the committee a new, and we think creative, approach to livestock production management.
AFIA proposes that Congress authorize the U.S. Department of Agriculture to work with industry to create a new livestock income risk management tool, Livestock Revenue Protection is what we are calling it or LRP.
AFIA's proposed LRP program centers on a unique insurance product designed to allow farmers and ranchers relatively simple, understandable, self-directed protection from downside market moves, while leaving upside price potential unimpeded.
You only need to review the disaster in the hog industry over the last 12 months to understand why such an important contemporary risk management tool is needed.
During the last 30 days, American Agri-Business Insurance conducted farmer/rancher focus groups in Missouri, Indiana, Minnesota, and last week, in Nebraska. Consistently, the producer message is the same: Yes, we want an affordable, producer-directed price risk management tool that does not influence the markets; and yes, we are familiar and comfortable with simple insurance policy terms and format.
Whether you call it income protection or price protection is really irrelevant. For the livestock producer, price ultimately equals income. What any livestock production risk management tool, private or Government, must recognize is that in today's market, cattle or hog risk is not just a local risk, but it is a systemic risk.
If hog prices drop in Indiana, they drop just as much in Georgia, Kentucky, Nebraska or anywhere. If the market across the Pacific disappears, every U.S. hog or cattle producer feels the financial pain.
At the same time, livestock and poultry producers do not enjoy the luxury, if you will, of holding production pending price increases. You do not warehouse or inventory cattle or hogs. Once they reach market weight, they are going to go and you have to take the price that you get.
Page 65 PREV PAGE TOP OF DOC These are some of the reasons why insurance and financial industries up to now have not developed price guarantee contracts. All of the policies based on livestock prices will be called to pay all the owners all at the same time, creating astronomical reserve requirements to satisfy the incredible loss potential. This translates to premium prices higher than the average producer can afford or is really willing to pay.
At the same time, livestock producers do not routinely use futures or futures options tools to manage the risk. Producers generally reject options or hedging as too risky or too arcane, too complex and way too time consuming. Compounding this is their basic distrust of the institutional players in those markets.
In the simplest form, LRP lets the rancher buy an insurance policy to protect against market price declines, while not interfering with price increases. Scenarios covering hogs, cow/calf and cattle finishing operations are included in our formal testimony and they have been submitted for the record.
The producer provides proof of ownership and possession and chooses for his or her herd for the defined period of ownership whether it is 120 days or up to 360 days beginning when they first take possession. The producer insures at the price up to the futures price for that type of livestock involved at the day the insurance is written. The payout of the policy is abased on the average price of that livestock for the last 5 days of the month of the insured period as reported by USDA's Agricultural Marketing Service's Market News.
The producer would have to own livestock when the policy is first purchased, but could sell the livestock at the optimum market time. It is not driven by the time of the policy, so that the price that the producer can receive is the best price available, therefore, the high quality producers would get a higher price and the lower quality producers would receive the lower price.
LRP recognizes that in today's market there is a need to revise and update premiums at least daily. The proposal would make the policies available at the prices on the Internet. We think because it would be sold electronically agent fees and commissions would be quite low, particularly compared to other agriculture insurance products.
Page 66 PREV PAGE TOP OF DOC Participation by USDA's RMA and the Federal Crop Insurance Corporation is critical to the success. FCIC is the preferred reinsurer for LRP because of its expertise in dealing with the risk and because State insurance offices recognize and accept FCIC risks.
AFI proposes that the Federal Crop Insurance Program participate in a premium co-payment or buy-down similar to the crop insurance. Our formal testimony includes tables showing the cost of LRP based on zero, 30 or 50 percent Government participation.
The role of the Federal Government is critical to provide the reinsurance because of the systemic nature of the livestock price risk. All policies pay at the same time. Traditional reinsurance does not always work with a program like LRP. Futures and futures options markets provide sufficient management for this systemic risk. However, State insurance commissioners do not allow those as admitted assets, so we are faced with two possibilities: go offshore for reinsurance, which we really do not wish to do, or obtain reinsurance from the FCIC.
In conclusion, I would like you to consider that if LRP had been available to livestock producers in 1998, the producer policy payout would have totaled more than $1.3 billion based on participation by 50 percent of the eligible hog producers. The cost to the U.S. Treasury would have been about $100 million, assuming a 30 percent premium cost share.
We are a strong supporter of 1995 Freedom to Farm. We believe that the addition of LRP to USDA's array of risk management programs would be very beneficial to make that safety net much stronger. It is time for a simple producer-directed, market neutral insurance policy for the livestock producer and LRP would do that.
Thank you very much.
[The prepared statement of Mr. Bossman appears at the conclusion of the hearing.]
Mr. BARRETT [presiding]. Thank you, Mr. Bossman. I am interested in your developing a livestock policy. That has been discussed in the recent past many times, but there has not been a product laid on the table. I find it interesting that on the Senate side reformation of crop insurance has been introduced which will eliminate the exclusion for livestock.
Page 67 PREV PAGE TOP OF DOC Now, are you proposing that livestock be included in the package of revenue insurance or are you suggesting perhaps a separate policy to reform what is out there on the market now, which admittedly is not the greatest?
Mr. BOSSMAN. Well, the differences between the crop program that is existing and what we actually need for the livestock is so large that we feel that we would need a new reinsurance agreement, if you will. We would need a new structure. I do not think there is enough similarities between the two to try to smash them together to make it work.
Mr. BARRETT. You are suggesting, then, without question a separate policy.
Mr. BOSSMAN. Yes.
Mr. BARRETT. Divorced from
Mr. BOSSMAN. Absolutely.
Mr. BARRETT. OK. Thank you. What are the largest hurdles that you have faced so far in the work that you have done in trying to develop a livestock policy?
Mr. BOSSMAN. Establishing the proper premium is one. Developing the reinsurance mechanism that the insurance industry would use going on the Chicago Merc, for instance, and that would be critical to this as well. Taking away the exemption is statutorily necessary, of course, and allowing for that to be an acceptable reinsurance mechanism is another key one. And straightening out any regulatory jurisdictional problems that may arise.
Mr. BARRETT. Would this be a comprehensive policy, all inclusive as far as coverages are concerned or would there be some limitations?
Mr. BOSSMAN. Essentially, it would be a price decline only. The current industry can handle any mortality considerations.
Mr. BARRETT. Would you anticipate that Government subsidies would be necessary?
Page 68 PREV PAGE TOP OF DOC Mr. BOSSMAN. I would think they would need to be either as a premium co-pay or some sort of delivery mechanism that would be necessary. I am talking agent commissions, that sort of thing. The amounts of that we have not
Mr. BARRETT. Do you have an estimated cost of this program at this point or is it too early?
Mr. BOSSMAN. I guess it is too early. Mr. Ackerman suggested that they start with $50 million. I do not know what the right number is yet. We are getting closer to that. Our focus groups are helping us with that and we will let you know.
Mr. BARRETT. I am sure you will. Thank you. Keep in touch. I know that you have already made some contacts on the Hill.
Mr. BOSSMAN. Yes.
Mr. BARRETT. This sounds very interesting.
Mr. BOSSMAN. Thank you.
Mr. BARRETT. Mr. McClure, inasmuch as only about 16 percent of our corn and soybean farmers are purchasing higher levels or buy-ups, why are they not taking revenue coverage? Is it cost?
Mr. MCCLURE. Part of it is at the end of the day they do not feel that they are rewarded. You know, the 65 percent, if I lose 35 percent of my income on my farm, I have had a disaster. I have had a disaster before the crop insurance even kicks in. We just need to ratchet that rate up.
And I guess I am a believer, Mr. Barrett, that if we create a good crop insurance product, we farmers are pretty good at ferreting out a good deal. I have heard it talked this morning about we need education and maybe need to put money towards education.
We farmers have been pretty wellwe have done a pretty good job of educating ourselves over the years and if there is a good product laid out here on the table, we will find it.
Page 69 PREV PAGE TOP OF DOC Mr. BARRETT. I would not argue with that. Is therewe have skirted around it, some suggestions have been made, that farmers will never buy crop insurance because the Government is always going to step in with a disaster payment. Is that a fair statement today?
Mr. MCCLURE. I think you are right. I think we need not only as farmers, the Government, even farm organizations, we need to say that the disaster program will not be there. But before we say that, we have to make sure that the insurance program is adequate for all farmers.
We cannot take away thatyou know, we have talkedhow many times today have I heard where are we going to find the funding for this. I think we can make the argument that we are already spending the money when we have these disaster programs. We just spent $6 billion here a few months ago. If we would have had a proper crop insurance in place, we would not have needed that money.
Mr. BARRETT. Absolutely.
Mr. POMEROY. Thank you, Mr. Chairman.
I have been very interested to listen to this panel. If nothing else, it has taught me that Jack Kingston is not the only one that sounds like he sounds. The next time we have a group from that part of Georgia, I want a little interpreter right here with kind of a Norwegian lilt so they can talk slow so I can understand exactly what is being said.
To the extent I could make it out, we are exactly on the same wave length, even though we are a continent apart or a country apart and grow entirely different crops. [Laughter.]
The suggestions that you advanced, both Mr. Boddiford and Mr. Cromley, I thought were very, very constructive.
Page 70 PREV PAGE TOP OF DOC I would like to ask a question to start right across the panel, recognizing the different parts of the country and different focus of the commodities or livestock.
Is it your opinion without additional support from the Federal Government that family farming agriculture, at least from your perspective, is in significant trouble?
I will start with you, Mr. McClure.
Mr. MCCLURE. Yes, I just think maybe we need to refocus the money that is coming in. I think I just mentioned the disaster money. If we look back over the years, we have spent a tremendous amount of money in disaster money. Sometimes it hits the target, sometimes it completely misses the people that we are trying to help.
Yes, I do think if we spend the proper subsidies and subsidize crop insurance the right way and reform it for all people that we can help the farm. Yes, we will lose farms unless we make some changes.
Now, we can make the argument that we have been losing farms for years, but we are getting down to a small enough number that I do not know how many more years we can continue to do that. At some point, we are going to have to slow down the loss of those farmers.
Mr. POMEROY. Mr. Jones.
Mr. JONES. In my area, we are facing the same thing, but I think a good, fiscally-sound Crop Insurance Program would be a big help and make a big impact. However, it is not profitable to farm with just looking forward to crop insurance, we have to have the markets in order to be able to survive and I think if we had a good underlying Crop Insurance Program, if we would spend some money trying to open these markets and have it where we could get our products into the trade channels, I think that would be very beneficial to the family farmer.
Mr. POMEROY. Thank you.
Mr. BODDIFORD. Mr. Pomeroy, I think agriculture is facing some very challenging times in the immediate future that is coming before us and certainly the level of inputs we are putting into our crops and the returns we are getting out of them are getting to where there is just not enough profit margin to sustain some of the risk we face on a daily basis, annual basis, however you want to look at it.
Page 71 PREV PAGE TOP OF DOC And I think in our part of the country, if you had a good Crop Insurance Program it would help, but as one gentleman already said, if you have a 35 percent loss, I have already had a disaster and even if I would go prove all the yields I have and do some of the best, you know, there are going to be some of those bad years thrown in there, so I am not going to have, you know, a proven yield that is actually what I am capable of by any means and then you take another 35 percent loss on that, it just gets totally out of the realm of where there is any chance of it paying off. You know, when I have a 1 in 40-year chance of collecting, I do not play those odds.
But I do think one thing and I have talked to Jack about this and I think it is one thing that Congress is going to have to debate is what is the national security interest in having a viable, sustainable agriculture in the future. You know, we have world trade, we are moving more in that direction and you see some commodities doing quite well, some groups doing quite well, but then you see some shake-ups in it.
You know, the Asian crisis has certainly slowed down the exports of grain, slowed down the export of cotton, peanut market is kind of flooded right now. It is all a bad situation. But I think we need to decide how important agriculture is because with technology where it is, we can export that technology and with the regulations we have in these United States, many of our companies can introduce products in foreign countries many years earlier, many years cheaper. How can we compete on that type of basis? I mean, I understand it
Mr. POMEROY. I hear what you are saying, I hear Mr. Jones' comment on we are not in some markets across the world. I hear your comments about over-regulated even now. I think both are valid points, but we basically last addressed crop insurance, then we changed the farm bill very dramatically, the farm program very dramatically.
It is just kind of like we got the risk management tool in place before we established what the farmer's risk is and now we need to come back and fill in because I believe the farmers are carrying all together too much risk today.
Page 72 PREV PAGE TOP OF DOC I am going to run out of time here, so I just want to get to a specific technical question. Sounds like there is concurrence in this panel that as we try to figure out how we get the financing behind this subsidized buy-up, the greater subsidy in the buy-up to work, you would be willing to give up some of that complete subsidy for the CAT level in exchange for a bigger subsidy at the buy-up level. I guess yeses or noes right down the panel.
Mr. MCCLURE. Farm Bureau policy says we would like toif we do not do a better job at it, we would like to eliminate it, one of the two. But I see it of no use on my farm. A 50 percent loss, that is a disaster.
Mr. BODDIFORD. Yes, we would like to use the CAT premiumto use it for buy-up.
Mr. BODDIFORD. Yes, sir. And that was in our statement.
Mr. CROMLEY. Yes, sir. Definitely.
Mr. POMEROY. You are kind of
Mr. BOSSMAN. Yes. I would like to go back to your other question, if I could.
Mr. POMEROY. Fair enough. And then my time is expired. You have been an excellent panel.
Thank you, Mr. Chairman.
Mr. BOSSMAN. We have not had a livestock program in the past, so while we have talked huge amounts about putting money into agriculture, the livestock sector really is a bigger cash contributor to the agriculture than the crop side is and we have ignored that whole side of that.
So I think if we develop this risk management tool for livestock, it probably would go a long way to assisting the crop folks. Seventy percent of the corn, and I know that you do not raise any corn in Georgia, or you are not supposed to any more, 70 percent of the corn goes into livestock feed; 90 percent of the soybean meal goes into livestock feed. So we have a linkage there that we have to acknowledge and the U.S. Government has not done that.
Page 73 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you very much.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
Mr. Pomeroy, I would just tell you, it is not the way Jack talks that bothers us, it is what he says that bothers us. [Laughter.]
I want to address a question to Mr. Cromley and Mr. Boddiford. You all obviously come from my part of the world down there and I know a little bit about what you do, not nearly as much as you all do. In our hearings in Georgia over the last month and, again, earlier today, we talked about the most viable option for farmers to purchase crop insurance would be along the lines of cost of production.
Now, you guys are at the level where you know what the cost of production is on your farm. Now, do you think it is realistic that we can come up with an average, say, for the State of Georgia, for the Southeast or whatever region we look at as to what the cost of production is for an acre of peanuts, an acre of cotton or an acre of tobacco or whatever it may be? Is that realistic, to think about coming up with a number that is a good hard number that we can use for insurance purposes?
Mr. CROMLEY. I believe it is. It varies. I think the key to it is what you referred to as regional because the cost of production in Georgia varies from the cost of production in Mississippi or California or Texas.
So I believe a regional approach to it may be an answer to it, but we have discussed that very same thing in our little meetings and each State's extension comes out with cost of production estimates.
Mr. CHAMBLISS. Are those realistic? Do you think what the extension service comes up with, say, in Georgia, are they realistic numbers?
Mr. CROMLEY. If you includeif you take a realistic view of your operation and break it down from an economic standpoint, I come within a few dollars every year. It varies up and down a little bit every year. When I first started framing, I thought it was way too high, but the costs are there. They are as accurate as any that I can come up with.
Page 74 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Mr. Jones, how about in your part of the world? Is that a fair way of approaching the cost of production?
Mr. JONES. Well, in our part of the world, of course, Texas is so large out there that I think you would probably have to do it on a regional standpoint, high plains versus gulf coast and the valley and those sorts of things, but I think it would beif you break it down like that, I think it would work.
Mr. CHAMBLISS. Joe, I did not mean to interrupt you.
Mr. BODDIFORD. Well, I just wanted to comment a minute on that, on these extension budgets, at least the ones that I see in the State of Georgia. When you go down through it and follow it, I think that they are probably within 5, less than 10 percent of most operations.
Now, you have some farmers thatyou know, they give it the Cadillac treatment and so that may not be quite as much as they do and then some are going to cut back a little bit. But I run across peanut farmers that say, oh, I can grow peanuts for $300 an acre. Well, I can tell you, they cannot do it. They might think they can do it. If they are doing it for that, then all they are charging is the diesel fuel they burn on that day and if they happen to need a set of points on a bottom plow that day. There is no equipment cost, no pick-up truck cost, no insurance costs.
You know what I mean? They are not figuring their costs in there becauseI know one time years ago I was like Lee, I kind of questioned some of the numbers and then I went down through it and looked at what myI looked at their budget, this is when I had mainly corn and soybeans, I looked at the budget for corn and the budget for soybeans and I multiplied it by the acres I had and I went and looked at my expenses for the year and lo and behold, where do you think I came out? Real close. So I think it is certainly a good starting point. It might need a small adjustment or whatever, but I think it would work quite well for us.
Page 75 PREV PAGE TOP OF DOC Mr. CHAMBLISS. How about the fraud and abuse in the insurance program? Mr. Jenkins and I were talking about this a minute ago, that that is one of the biggest problems, I know, that we have had. I know in southwest Georgia, we have had that problem and I know you all have over in east Georgia, too, and I think the same thing occurs all over the country.
Is there a way from the producer standpoint that you all think we can do a better job of controlling the fraud and abuse in the insurance program?
Mr. CROMLEY. If I could comment on that?
Mr. CHAMBLISS. Sure.
Mr. CROMLEY. That is probably the most talked abouthere again, I will go back to our little group meetings, but that is probably the most talked about topic that we have had because of the concern that if you make the program attractive enough for top quality producers to enter the program, then you are going to increase the likelihood of fraud and we have had more discussion on that probably than any other topic.
And we have talked about several different things, one being that each participant in the program has to take some responsibility for it, form local committees. Farmers know more than anybody else what is going on on their neighbors' farms.
Any insurance adjuster that comes out there one time might not make a true judgment on that, but farmers in the area know what is going on. And if we want a viable program, we have to participate in it. We have to make it strong.
Another thing we talked around is that if you movea lot of the fraud comes from the different farm numbers. In other words, when you have losses on one farm number and not another. A lot of the fraud, I think, comes from that.
If you were to go to cost of production and include just the big unit, all under the one operator, that would eliminate a lot of fraud. That was one thing we tossed around, was that instead of going by farm numbers, make it one complete unit.
Page 76 PREV PAGE TOP OF DOC Mr. CHAMBLISS. OK. Lastly, if you had the option of doing so, would you rather insure your whole farm if you have irrigated and non-irrigated, or would you rather insure irrigated under one policy and non-irrigated under another policy?
Mr. BODDIFORD. I will respond to that because I have a right good bit of irrigation, but I think you have absolutely got to separate those policies out. I mean, the ladies at the local FSA office say, Joe, when are you going to come in and sign up for disaster? Of course, I have CAT coverage, it is all blended in. There is no point in meyou know, to write one dry land farm, total dry land farm.
Some irrigated farms have some dry land on them, but that one total dry land farm is not going to bring that irrigated production down enough to even remotely qualify. You have got to have it separated out. And our recommendation about that differentiation applied to that, but also some of these growers are working over a 30- or 40-mile spread and so sometimes you need to have it separated out by smaller chunks.
You know, sometimes the weather pattern is just a little different there 30 miles away than it is right at your home headquarters or vice versa. So I think that if the grower wanted to break it down into a unit that he could justify as a differently insurable unit, you know, then he ought to be able to do it. You know, in your auto policies, you get to do that with your children sometimes.
Mr. CHAMBLISS. Thank you.
Mr. CROMLEY. Could I just make one more point referring to that? Joe and I seem to be disagreeing a little bit. If we would move to a cost of production type system, that would eliminate the problem, because you would have cost of production built into the irrigated and the dry land and then you could move to a whole unit, if it goes to a cost of production. If it is like it is now, if you remain on a yield base, you have to separate them. It is just not fair to the irrigated producer.
Page 77 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Thank you.
Mr. BARRETT. Mr. Condit.
Mr. CONDIT. Yes. Mr. Boddiford, if I may, I would like to follow up on the comment you made for Mr. Pomeroy and it has to do with your view of us viewing agriculture as a national security question.
Could you clarify kind of where you were headed with that? You did not have enough time with Mr. Pomeroy, but I am going to give you a couple of minutes to make that clearer.
Mr. BODDIFORD. Thank you, Mr. Condit.
You know, and it probably is not really under this committee
Mr. CONDIT. I understand that, but I thought it was interesting.
Mr. BODDIFORD [continuing.] But I think this committee is interested in agriculture, I have heard that from the questions I have heard asked this morning and I sense that there is a very deep commitment to agriculture from this panel and I just think it is something that is going to have to be addressed in the next few years.
I have had one chemical supplier say that you can buy Roundup in South America for $10 a gallon. We are still paying over $30 a gallon for it. And Photocure has been available in Argentina for 3 or 4 years prior to its availability in the United States and its price is cheaper. We can export these new technologies, these new big tractors, equipment to these other countries and certainly the American manufacturers are doing it and making money and then when they have zero regulations or very limited regulations and a dollar an hour labor or less or whatever running this equipment.
All of a sudden what you have is transportation cost to get it to the United States border and many times that will not make up the difference in the competitive advantage that we have.
Page 78 PREV PAGE TOP OF DOC And I think we need to decide, do we want to ultimately purchase all food from the least cost supplier or do we want to be sure that we have an adequate food supply and that means the industry that produces it available, ready in an emergency to turn out what we need to be sure that we have adequate food supplies?
In dealing with the European countries, I think you will find out that they have some structure in place and I think a lot of that is because there are enough people that remember World War II when there was food rationing and some problems that they had that they want to be sure as much as humanly possible that they can produce at least an adequate food supply in a bad time for their citizens of their country. And in many ways, the United States is headed towards the least cost supplier.
And I wonder if we need to address that problem before it becomes a serious problem and all of a sudden we go to the grocery store and there is not the product in the store that the American housewife is looking for.
Mr. CONDIT. Well, the reason I ask that question and solicited that answer from you is basically I think that the point that you bring up is we can have a crop insurance hearing and we can talk about farm policy and the farm bill and so on and so forth; until we deal with the underlying question that you bring up and that point, we are going to be just kind of chasing our tail on this deal and so that is the reason I wanted you to make that comment.
I think what you pointed out is something that we sort of have hesitated to deal with. We kind of nibble around the edges, but I think from my point of view, what you say is very important and we are not going to be able to ignore that. At some point, we are going to get down to dealing with that issue.
And I have some time and you got a free shot there, if you have anything to add to that, you are welcome to do it.
Page 79 PREV PAGE TOP OF DOC Mr. BODDIFORD. I just very much appreciate the opportunity to present that before this committee.
Mr. CONDIT. Thank you, sir.
Mr. BARRETT. Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman.
Well, I certainly can understand these gentlemen from Georgia, but so that Mr. Pomeroy can take part in this part of the hearing, would you call out the east Tennessee interpreter? [Laughter.]
But let me pick up on something that Mr. Chambliss started. He mentioned the subject of abuse and certainly I think we all need to be concerned that there is not abuse at the present time or there could not be abuse in the future that would jeopardize this insurance concept and this program and jeopardize help coming to the farm community.
But as I understand it, and maybe Mr. Cromley or any member of the panel could speak to this,but as I understand this system, the Government pays part of the premium, the lion's share, the farmer pays part of the premium and an insurance policy is purchased.
And then if there is a reported loss, the insurance company involved comes back and does the adjusting, but their liability and involvement ends there and payment for that adjustment is made from this pool of money provided by the United States Government.
Now, is that a good system, Mr. Cromley? Or does that in and of itself, is there the prospect and we have some insurance witnesses here and they can speak to this, but does this in and of itself give us the opportunity for there to be a Santa Claus at work out there in the community and perhaps jeopardize this whole concept?
Mr. CROMLEY. I think that is a real possibility and a real problem. There is always a few people that try to abuse the system. And it is a problem now.
Mr. JENKINS. And those abuses can be very subtle and, as you point out, only those farmers in the community that are growing similar crops, have the same weather conditions, use basically the same amount of fertilizer and know what is going on from planting until harvest, they are the only people in the world really who can understand those abuses.
Page 80 PREV PAGE TOP OF DOC Mr. CROMLEY. I believe that is true. We are up here asking for help, but I think it is a two-way street, that we have to work with the system, too, by forming a committee or doing something to police ourselves.
Mr. JENKINS. Well, are you hearing incidents of abuse in your part of the country? Now, I am not asking you to rat on anybody, but have you heardexclude your part of the country, but have you heard of incidents where abuse is suspected of the entire concept?
Mr. CROMLEY. I personally do not know of abuses in the past few years. You hear things. I feel sure there are probably abuses going on. Subtle abuses and maybe not big dollar abuses. I am not talking about some of the problems that have been in the past.
We have had some pretty severe abuses that have been in the press in the past, years ago, and it is not that type of abuse, but I think that subtle little things sometimes probably are going on right now.
And I would say that from that standpoint, I do not think we should let the possibility of abuse stop us from trying to improve the system because abuse, there are those people that are going to abuse any system and if we police it ourselves, if we try to work within the systemI would hate for that to be a deterrent to moving forward and improving it.
Mr. JENKINS. Can anybody else on the panel comment on that?
Mr. BODDIFORD. I will make a response on that. To my knowledge, in our county at the current time, there is nobody that is farming for insurance. Now, during the late 1970's and early 1980's, I could have probably named you for or five, but they are all gone. And I can pretty well assure you that if you plant for disaster, you will get one. And that has been one of the problems in the past.
But a thought crossed my mind and I do not know how it would work out, but it is a possibility that if the Crop Insurance Program came up with a pilot program or something and put a deal out there that the farmers basically would flock to in just say one county or a number of counties to try it in, but in setting that up you put four or five growers that had that insurance on a committee and they had to approve the payout, you understand? Then I think that you would have much better control over that. You know, there is politics right on down to the local level right here in our country.
Page 81 PREV PAGE TOP OF DOC Mr. JENKINS. That was going to be my next question.
Mr. BODDIFORD. But if I had invested in that and I had a vested interest in preserving that low insurance premium for the next year and the next year and the next year, I do not think I would overlook Lee Cromley's disaster farming. Not to say that Lee is one of theI am not in his county, but you understand what I am saying?
It would be a little harder if I say, OK, we will just pay this one and pay this one and pay this one. Recognizing the fact that they had not used good workmanship and it was going to cause my premium to go up in the next year, I think I would have a vested interest in trying to keep that number down.
Mr. JENKINS. Would FSA be a good place to lodge that responsibility, Farm Services Agency?
Mr. BODDIFORD. It is a possibility. There is politics on those committees, too. It takes a strong committee to deal with those things, but what I was suggesting is if you had a financial interest in it. You know, if you were one of the premium purchasers. I mean, if we are going to self-insure ourselves right here, right? And we have a good rate, I do not think that the majority of this group is going to allow one of us to abuse that and cause all of our premiums to go up year after year after year. We are going to say wait just a minute, you did not do that in an acceptable manner to this group of your peers. That is tough to do. It is tough.
Mr. JENKINS. Thank you, sir.
Thank you, Mr. Chairman.
Mr. EWING. Mr. Kingston.
Mr. KINGSTON. Thank you, Mr. Chairman. I appreciate the opportunity to sit in on your committee today. You all are doing good work over here. It is interesting that we have Mr. Ackerman at our committee right now that I am going to go to. And I am going to try to go real slowly for Mr. Pomeroy. I do not know if it is the size of the words or the way we pronounce them that is the problem. [Laughter.]
Page 82 PREV PAGE TOP OF DOC And I also want to say for the record, the first soybean in North America was grown at Skitaway Island, GA, so just keep that in mind next time you want to win a bet in a bar or something like that. [Laughter.]
Mr. KINGSTON. Mr. Cromley, you had said that if you bought the 75 percent coverage, the most you could get was 15.9 percent. What does that translate into dollar-wise? Have you ever looked at how much you would pay in premiums and how much you would recover?
Mr. CROMLEY. With the example that I used with my 1999if I had the same yield in 1999 that I did in 1998, it would have beenI would have shown a total loss of, like I say, $206,000. And the insurance at the 75 percent level would have paidthe net indemnity would have been $32,000. I think in this case my premium would have beeneven with the 30 percent reduction this year, my premium would have been $40,000 and my indemnity would have been 75, somethingthe numbers are a little rough. I am doing that in my head, but
Mr. KINGSTON. Now, you also talked about loss ratio. Over a 10-year period of time, did you give us a figure on what you would have paid approximately and what your losses would have been recovered?
Mr. CROMLEY. That was something that I just stuck in there as a reflection of over a period of timein 19 years that I have been farming, this 1998 was the first year that I would have had any collection on any insurance. We have been fortunate and we have triedwe have been fortunate.
Mr. KINGSTON. So you would have paid in 19 years and only collected one and not gotten any credit for a good loss ratio.
Mr. CROMLEY. I would have collected in 1998 for the first time.
Mr. KINGSTON. Mr. Boddiford, a question for you. You and I have talked about the farm bill a lot and Freedom to Farm and so forth. If you had your druthers, which would you rather have, a new farm bill or a new Crop Insurance Program?
Page 83 PREV PAGE TOP OF DOC Mr. BODDIFORD. I think that crop insurance is a piece of the pie, so, I mean, obviously, if you are going to give me a chance to have the whole pie, I want to have the whole pie. I am kind of greedy.
Mr. KINGSTON. OK. And then also, Mr. Bossman, I wanted to mention to you, I do not know if you have looked at the Federal windstorm pool but on coastal property, the way the reinsurance works is that the Federal Government actually underwrites a certain amount of losses over a certain limit and you might want to look at that as model. There are also other programs for inner city crime and for workers compensation pools and things like that that could be a model for you.
And then, Mr. Chairman, I will yield back the balance of my time. I also wanted to recognize Wade McElveen who has come up here with the group. He was Farmer of the Yearwas it 1995? And I did not see him until a few minutes ago.
Thanks for letting me sit in with you all.
Mr. EWING. Thank you. We are going to recess the hearing for 15 minutes. I am going to take Mr. Kingston and go to a speed talking school and then we will be back in 15 minutes for our final panel.
Thank you, gentlemen, very much for your participation.
Mr. EWING. Gentlemen, thank you. Now you know why the days are so long around here, because that was 15 minutes.
Our third panel today starts with Mr. Ron Brichler, senior vice-president, Great American Insurance Company, from Kansas, Mr. Michael Miller, president of Blakely Crop Hail, Inc. also in Kansas; Mr. Richard Bill, actuary, Country Mutual Insurance Company, Bloomington, IL, in my district; Mr. Dennis Everson, senior vice-president, First Dakota National Bank; Mr. James Caspary, president & CEO, First National Bank of Clifton, also in the 15th District of Illinois, welcome; and Mr. William Wise, Jr., executive vice-president and chief operating officer of Pee Dee Farm Credit, in Florence, SC.
Page 84 PREV PAGE TOP OF DOC We will start with you, Mr. Brichler.
STATEMENT OF RONALD L. BRICHLER, SENIOR VICE-PRESIDENT, GREAT AMERICAN INSURANCE COMPANY, OVERLAND PARK, KS, AND CHAIRMAN OF THE BOARD OF DIRECTORS, NATIONAL CROP INSURANCE SERVICES
Mr. BRICHLER. Thank you, Mr. Chairman. As you said, my name is Ron Brichler. I serve as the chairman of the Board of Directors of National Crop Insurance Services, on whose behalf my testimony is presented today. We appreciate the opportunity to present this testimony before the Subcommittee on Risk Management and Specialty Crops.
NCIS is a nonprofit trade association whose member companies include every crop insurance company that actively participates in the Federal Crop Insurance Program. NCIS member companies write more than $1.8 billion in MPCI and related revenue products premium with liability totaling nearly $28 billion.
These companies service some 1.2 million policies, covering all farmers participating in the Federal program, including limited resource and economically disadvantaged farmers. In partnership with the Government, these private companies are the safety net that equitably provide risk management to the American farmer.
In addition to the Federal program, NCIS member companies write approximately $575 million in private hail and named peril programs.
On behalf of the crop insurance industry, NCIS would like to take this opportunity to express its appreciation to the administration and the Congress for its commitment to strengthening the safety net for the American farmer.
Within the past few years, vital legislative action has taken place providing stability and support for crop insurance. First, actions taken in the recent Agricultural Research bill moved program support from discretionary to mandatory funding was a major step and signaled a very positive direction.
Page 85 PREV PAGE TOP OF DOC Second, the newly legislated Emergency Funding Assistance Program provides an effective incentive structure to encourage farmers to participate in the Crop Insurance Program. The EFA Program also includes funding for pervasive multiyear disasters, along with special incentives for wheat farmers hit by losses due to scab.
All these measures represent a commitment by the administration and the Congress to provide a strong safety net for the American farmer.
Since the Crop Insurance Reform Act of 1994, the program has greatly expanded. It has exhibited an acceptable level of stable participation and it is beginning to achieve its long-term actuarial targets. The Crop Insurance Program is working and has worked as a risk management tool to indemnify an individual farmer when that farmer suffers a loss under the policy.
However, we realize the current Crop Insurance Program has limited ability to provide economic and direct price supports for sectors of the farm economy facing depressed export markets. Crop insurance is not a supply control instrument and was simply not designed to handle the current problems of a dramatic decline in commodity markets due to downturns in the international economy.
Stopgap measures can and have been taken. However, additional resources will have to be allocated in the direction of production agriculture to solve the problems currently confronting the sector.
We cannot overemphasize the importance of strengthening the current Crop Insurance Program for the future of production agriculture. A strong Crop Insurance Program provides the agricultural banking community the foundation required in order to invest with the farmer in the future of American agriculture. In addition, the existence of a strong Crop Insurance Program enables farmers to better market their crops.
We feel that it is imperative that the program be strengthened in several key areas:
Page 86 PREV PAGE TOP OF DOC First, we must provide adequate incentives for farmers to obtain buy-up protection across a wide range of coverage levels.
Second, we need to monitor and evaluate the catastrophic coverage component in order to meet the basic risk management needs of the farmer in all regions of the country.
By meeting the first objective, farmers will be able to select among a wide range of risk management alternatives. By meeting the second objective, the administration will ensure that the webbing of the safety net is tightly meshed and secure. That is, no one slips through the cracks.
NCIS staff and members would like Congress to know that stability and adequate support to the program is essential for its continued success. The producer must know that the program is there when needed and agents must know how the program works so that they can properly discuss with the farmer every detail. Continuing change raises doubt and confusion as to how the program works or how to measure the true success.
We know that what we are doing with multi-peril and revenue coverage is receiving widespread attention. The association has hosted some 8 different foreign countries at our headquarters in Kansas City to explain how the public and private partnership is working.
We have also been the guests in Europe and in South America to explain in detail how the U.S. Government and the insurance industry are working together.
Yes, we are on the right track and the rest of the world would like to know how they can model themselves after us.
Mr. Chairman, I thank you again for this opportunity to present our testimony to the committee.
[The prepared statement of Mr. Brichler appears at the conclusion of the hearing.]
Page 87 PREV PAGE TOP OF DOC Mr. EWING. Thank you very much.
STATEMENT OF MICHAEL A. MILLER, PRESIDENT, BLAKELY CROP HAIL, INC., TOPEKA, KS, ON BEHALF OF THE AMERICAN ASSOCIATION OF CROP INSURERS
Mr. MILLER. Thank you, Mr. Chairman. It is my pleasure to appear before you today to talk about the Federal Crop Insurance Program. I am Mike Miller, president of Blakely Crop Hail, Inc. and chairman of the American Association of Crop Insurers, or AACI. AACI represents insurance companies and agents that write nearly 80 percent of the multi-peril crop insurance premium throughout the United States.
I want to thank you, Mr. Chairman, for holding this hearing and giving us the opportunity to testify. As you know, risk management and crop insurance have been the focus of much discussion this year. We welcome the discussion and, quite frankly, view this as a very positive opportunity for American farmers and the Crop Insurance Program.
Mr. Chairman, the Crop Insurance Program is working today just as it was designed to work. The program has improved significantly since 1994. Today, over 180 million acres are insured. This is nearly a 100 percent increase over the past 4 years. Coupled with this, farmers have more choices today than ever before. Three years ago, there were no federally subsidized revenue insurance products on the market. In 1999, there are five such products, three of which were developed by the private sector.
Those farmers who buy insurance know that they will be protected from financial disasters and lenders also now more than ever are relying on crop insurance as collateral for loans.
We are concerned about our customers. The agricultural economy is in a tailspin. We have heard that comment run throughout the day today. Within the past year, we have seen commodity prices plummet, export markets collapse, and the Department of Agriculture's outlook for 1999 and beyond does not provide much hope for improvement.
Page 88 PREV PAGE TOP OF DOC What we are hearing is that crop insurance should do more and be more responsive to the current agriculture economic situation. Can the crop insurance cure all the current ailments faced by agriculture? We do not think this is realistic, certainly not in the short term.
Improvements in the Crop Insurance Program can provide some relief, but let us be realistic. Insurance is based on market conditions. If the outlook for market conditions is dismal, insurance will not improve these conditions.
Where should we look for improvements in the program? As has been mentioned today, two of the most common complaints about crop insurance are that it costs too much and does not provide enough protection. This goes to the heart of the current premium subsidy formula. Premium subsidies are currently capped. As farmers purchase higher coverages, the cost to them rises disproportionately.
For example, the current premium subsidy for 65 percent coverage is roughly 42 percent of the total cost. If the farmer purchases 75 percent coverage, the total premium roughly doubles and the subsidy falls to roughly 23 percent and the out-of-pocket cost to the farmer more than doubles. As a result, over 90 percent of all acres covered under the program are insured with a 35 percent greater deductible.
Is the 35 percent deductible adequate for farmers to manage production and risk revenue, especially in light of low economy prices? I do not think they are. That was mentioned earlier today by several of the producers.
Virtually all of the perceived and real problems with crop insurance would be greatly minimized if growers had higher coverage levels and more affordable rates.
To the administration's credit, they have taken a first step in 1999 toward making crop insurance more affordable. By setting aside $400 million of the ad hoc disaster payments provided last year, the administration has made crop insurance more affordable, but this is limited to one year. So far, we have not seen what the next step will be from the administration.
Page 89 PREV PAGE TOP OF DOC We expect many farmers to utilize the $400 million to purchase higher insurance coverage. However, many farmers are also taking the 30 percent discount and keeping coverage at the same level as last year. In part, this is due to the tardiness of administrative decisions regarding the availability of the $400 million and the tremendous amount of misinformation in the county field offices regarding this program and the availability of ad hoc disaster payments. In addition, farmers are also looking to cut input costs this year because of low commodity prices.
We are delighted that Chairman Combest is making improvements to the Crop Insurance Program a top priority for the committee. We commend his efforts along with Representative Chambliss in seeking additional funding for the program.
We would note that we believe that many of the chairman's concerns regarding perceived fraud within the program can be addressed by changing several key policy provisions of the underlying crop insurance policy.
We would also ask that as changes in the subsidy formula are considered, impacts on the Standard Reinsurance Agreement be considered also. Reinsurance and program participation are tightly interwoven and one cannot be changed without the other.
Finally, Mr. Chairman, we believe the role of the private sector should be strengthened in this program. Farmers face a host of risks today and insurance companies and agents work with their customers almost daily. We are best positioned to note what their needs are, to advise them on how best to insure for these needs and develop new and innovative products to meet the needs that the current program does not address.
We must have regulatory oversight of this program to protect the taxpayer and the farmers but the current system stifles innovation. We need a regulatory structure that rewards innovation rather than one that thwarts it.
Mr. Chairman, thank you again for holding this hearing and we look forward to working with you in the future.
Page 90 PREV PAGE TOP OF DOC [The prepared statement of Mr. Miller appears at the conclusion of the hearing.]
Mr. EWING. Thank you.
STATEMENT OF RICHARD BILL, ACTUARY, COUNTRY MUTUAL INSURANCE COMPANY, BLOOMINGTON, IL, ON BEHALF OF THE CROP INSURANCE RESEARCH BUREAU
Mr. BILL. My name is Richard Bill and I am actuary for Country Mutual Insurance Company located in Bloomington, IL. I have the privilege of speaking on behalf of the membership of the Crop Insurance Research Bureau, a not-for-profit industry trade association, whose mission is to promote and work for the improvement of crop insurance in the United States.
I will summarize our comments and the full text is in our written testimony.
CIRB has consistently stood for the following principles: encouragement of initiatives which foster strong program participation, attainment of affordable actuarially-sound rates, choice in coverage levels, simplification of the program to make it more user friendly and program integrity.
We agree with Secretary Glickman, who stated during the USDA's Working Group on Improving the Farm Safety Net meeting, that ''Crop insurance should provide the foundation for risk management, and the program should operate more like traditional insurance products.''
At this time, I would like to share with you some of CIRB's thoughts on improving this vital element of the safety net. Suffice it say that a high degree of participation in the program and in the buy-up program is essential. Although not where we would like it to be, participation has remained high over the past several years even in years when crop insurance was not mandatory.
Page 91 PREV PAGE TOP OF DOC There are places in the country where program participation is strong; however, there are still places where participation remains a challenge. It should be noted that participation may never reach the high levels in some places or on some crops not because of a lack of a good program, but because other methods of risk management are being utilized. For example, many California producers use geographic and/or crop diversification as their foremost risk management tool. Yield variations may be minimal in some areas and for some commodities price is generally stable.
Actuarial soundness. To the greatest extent possible, the goal of actuarial soundness should be maintained. Certainly, we have achieved a degree of actuarial soundness over the past few years, in part due to better rating methods, but also because of a string of unusually good weather and market conditions. There are real challenges ahead on the price side if that component is to be brought into the mix.
A Crop Insurance Program as strong and as vital as we would like is difficult to realize in an environment where large-scale disaster assistance is a possibility. We understand the pressures that came to bear on you in 1998 because of plunging prices; however, it was unrealistic to expect the current Crop Insurance Program to react to such a situation. Therefore, the constant criticism of the program for not being able to predict or react to what happened in 1998 is not useful.
For the most part, the program is doing what it has been designed to do thus far. Should it incorporate more price protection? Yes, but it should be done carefully with thorough study and examination.
We also appreciate Congress' support for the Crop Insurance Program in the past. However; Congress deviated from its previous commitment to not make disaster payments. To producers who took proactive measures to protect themselves with crop insurance because they believed that disaster assistance would no longer be forthcoming, a credibility gap has been created because of 1998.
Page 92 PREV PAGE TOP OF DOC What you do in 1999 must close that gap. Disaster assistance and a viable Crop Insurance Program do not coexist comfortably. In fact, many would say they cannot coexist at all.
The CAT program has come under considerable criticism especially from the southern parts of the country where the perception is that the coverage is so low as to not even be worth the small administrative fee charged. This perception, accurate or not has obviously damaged the credibility of the program there and in some other areas of the country.
Most producers understand that CAT was designed to be just what it is, the most basic of all coverages, a substitute for disaster payments.
The question is should CAT be made more attractive? By increasing what CAT covers, we could run the risk of creating a disincentive for producers to buy-up. It is our opinion that some upside adjustment in CAT may be in order, but what is the best way to do that?
You may want to consider changing CAT to a basic 50/60 revenue product. We believe that such a product would be simpler and address producers' primary concern. As a yield product, it simply will not react appropriately when we experience a 1998 scenario.
CIRB recommends that consideration be given to equalizing the subsidy for buy-up coverage to 50 percent for all levels. This would certainly serve as a real incentive for producers to get the kind of coverage that will provide real risk management and make the products more affordable. Affordability translates into flexibility for farmers. CIRB is concerned about the potential downside of inverting the present premium subsidy structure.
CIRB supports the ongoing initiative of the industry and RMA in providing real program simplification. Simplification has been given a great deal of lip service over the years, but the fact is the program has become more complex.
A classic example of the program becoming more complex is CAT. For an agent and a farmer, CAT is no simpler than buy-up.
Page 93 PREV PAGE TOP OF DOC Multiyear disasters. The unfortunate experience, best represented by the Dakotas, of multiyear disasters has certainly brought this problem to a sharp focus. While the problem is clearly evident, the solution or solutions are not.
The very definition of Actual Production History would indicate that all yield data must be factored in or else the APH is not really an APH at all and the resultant rates based upon the APH cannot be actuarially sound.
We encourage Congress, RMA and the Industry to thoroughly study the impact of increasing the APH or artificially reducing rates.
Livestock coverage. There is considerable interest both in Congress and from the administration in revising the Crop Insurance Program so that RMA can extend coverage to livestock. It should be noted that private sector farm owner policies provide coverage for livestock for wind, fire and other perils.
CIRB feels strongly that the Federal Government should not compete with the private sector or expand into areas where the private sector already serves the market.
There is an old saying, where there is a will, there is a way. It is obvious that Congress, private sector insurance providers, RMA, producers' groups, lenders, et cetera have the will. Will we find a way in 1999? Probably not.
However, we are confident that working together we can put the Crop Insurance Program well on its way.
[The prepared statement of Mr. Bill appears at the conclusion of the hearing.]
Mr. EWING. Thank you.
STATEMENT OF DENNIS EVERSON, SENIOR VICE-PRESIDENT, FIRST DAKOTA NATIONAL BANK, YANKTON, SD, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Page 94 PREV PAGE TOP OF DOC
Mr. EVERSON. Mr. Chairman, I am pleased to be here on behalf of the American Bankers Association to participate in this important hearing to discuss the Federal Crop Insurance Program. I am Dennis Everson, senior vice-president, First Dakota National Bank in Yankton, SD. In addition, I am currently chairman of the ABA's Agricultural and Rural Bankers Committee and Chairman of ABA's Task Force on 21st Century Agricultural Banking.
First Dakota National Bank is the oldest bank in what was once known as the Dakota Territory and today our bank has more than $300 million in assets. We presently have $100 million loaned out to farmers and ranchers in our service area.
Nationwide, more farmers and ranchers borrow more money from banks than from any other source. At the end of 1998, banks had over $72 billion outstanding to farmers and ranchers. More than 41 cents out of every dollar of credit to every farmer and rancher in America comes from banks.
We have a growing concern about the health of our agricultural economy. Since bankers have so much at stake in the health of agriculture, the ABA formed a special task force on 21st century agricultural banking this spring. At our first meeting, crop insurance was on the top of many task force members' lists.
Crop insurance has worked for farmers that buy it, but more needs to be done to make sure this program is more effective for all America's farmers and ranchers.
Our task force on 21st Century Agriculture spent a great deal of time discussing the current program and discussed ways the program could be made stronger for the future.
We found we had more questions than answers. I have great faith in the innovation and creativity of our industry that by working together we will be able to design an insurance program that meets the needs of our farm and ranch customers. But we need time and our customers may not have the time we need to solve these problems. As an intermediate step, we have some recommendations that should be implemented immediately.
Page 95 PREV PAGE TOP OF DOC Recommendation 1. Extend the spring 1999 sign-up date by 30 days. To make sure that the widest range of producers take advantage of the 30 percent premium reduction being offered this year, extend the sign-up for spring planted crops by another 30 days. Many producers are under financial pressure this year and they may not have had the opportunity to carefully evaluate and leverage the benefit of the additional premium discount.
Recommendation 2. Make adjustments for multiyear disasters. We must address the problems faced by farmers that have suffered multiyear disasters. We must develop a way to adjust a farmer's APH for multiple year disasters or many farmers that farm in affected areas will not insure their crops this year. If we do not take immediate steps to deal with this, many farmers will abandon the program and expose themselves, their lenders and others to severe risks.
Recommendation 3. Redirect the Federal subsidy. The cost of crop insurance to the producer is subsidized, but the subsidy is misdirected. The highest subsidy should be on the highest level of coverage. The current subsidy formula is designed to provided the highest level of subsidy to the lowest level of coverage. Leverage the subsidy to encourage producers to buy up.
Recommendation 4. Provide adequate coverage for forages. Introduce a policy that sufficiently covers pasture and range land so livestock producers at least have certainty about being able to feed their animals.
Recommendation 5. Allow price elections to move with the markets. The current system of locking in a price selection 6 to 8 months before any sales occur actively discourages participation.
By acting on these recommendations, you would give producers additional risk management opportunities right now and you would allow all stakeholders additional time to carefully and deliberately design a program that meets the needs of the producers in the 21st century.
Page 96 PREV PAGE TOP OF DOC The American Bankers Association looks forward to working with you as you address the challenges facing today's agriculture.
I will be happy to answer any questions at a later time.
[The prepared statement of Mr. Everson appears at the conclusion of the hearing.]
Mr. EWING. Thank you.
STATEMENT OF JAMES CASPARY, PRESIDENT AND CEO, FIRST NATIONAL BANK OF CLIFTON, CLIFTON, IL, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF AMERICA
Mr. CASPARY. Thank you, Mr. Chairman. It is a pleasure to be here today to discuss crop insurance.
I am the president and CEO of the First National Bank of Clifton and chairman of the IBAA's Ag-Rural America Committee.
Mr. Chairman, the issue of improving and expanding crop insurance is one of central importance given the current debate over developing risk management tools and ways to strengthen the farm safety net.
My bank's experience with the Crop Insurance Program has been favorable and we think that the program is essential for many of our farm customers because it helps them protect their investments in the crop. Crop insurance strengthens the farmer's repayment ability in the event of weather disasters and helps them to project a positive cash flow position. Whether the loans can show a positive cash flow is a question on the minds of many farmers and lenders in these days, given the severely depressed farm prices
Page 97 PREV PAGE TOP OF DOC It appears that two of three factors, declining exports and low prices, will be with us again this year and perhaps for the foreseeable future. Hopefully, we will not have a widespread weather problem this year, but some areas are already experiencing dry weather.
Mr. Chairman, we appreciate your leadership on the export front, as that is essential to improving the farm income picture on a long-term basis. We must do away with embargoes, sanctions, trade distorting mechanisms and we must have authority to negotiate trade agreement. Otherwise, Alan Greenspan's remarks of a couple of weeks ago could be an omen when he said ''Short of a significant building back of export demand, it is going to be difficult to work our way through this particular low price problem.''
An aggressive trade policy, which the IBAA has called for in our farm safety net proposal made in January, is essential to ensuring the health and viability of agriculture as we move into the 21st century.
Clearly, we must also ensure that farmers have adequate risk management tools.
Mr. Chairman, for the sake of time, I would like to offer the following recommendations:
A strengthened farm safety net should incorporate components that allow producers to protect themselves against both yield and income losses if we are to avoid future ad hoc farm aid packages.
Crop insurance needs to be improved by increasing the coverage amounts and making it more affordable. Producers need more coverage at lower cost. Inverting the crop insurance subsidies so that more subsidy is paid at higher buy-up coverage levels as contained in the Roberts-Kerrey bill is important.
Address lower yield coverages resulting from multiple-year disasters. Again, the Roberts-Kerrey legislation seeks to address this problem with a multiyear APH adjustment. This issue should be a high priority since farmers are finding multiple-year losses reduce their yields too much.
Page 98 PREV PAGE TOP OF DOC Equalize the subsidy between multi-peril crop coverage and revenue assurance program so that products like CRC are more affordable and available for more crops.
Simplify the revenue coverage programs by allowing producers to purchase a dollar amount of insurance. Also consider options that allow producers to ensure for a certain amount of their cost of production.
We believe that Congress should also amend current laws to guarantee that program participants will receive more benefits than those who do not buy insurance in any year that Congress passes ad hoc disaster legislation.
Mr. Chairman, Congress should consider a product or mechanism that provides farmers with price protections when prices are low and even when the yields are good. This would be important if producers are expected to take advantage of any future policy mechanisms that allow producers to accumulate income in the good years so they are less dependent upon the Government's assistance in the bad years.
Good yields can offset low prices, but they do not allow the producers to accumulate income as a buffer against low prices and low yields in subsequent year or years. Insurance should cushion against the dramatic price swings that we have seen in recent years.
Mr. Chairman, given the severely depressed prices, Congress may need to once again pass additional farm income assistance to help the producers survive. In fact, last week, the IBAA joined with 25 major farm groups in a letter to Congress urging that significant additional funds be incorporated into the fiscal year 2000 budget to address deteriorating conditions in the farm economy.
In conclusion, Mr. Chairman, producers need help now. Farmers are trying to get loans at their local lending institutions, but most do not cash flow. Congress is pursuing strengthening the farm safety net by using crop insurance. While there is no money specified in the President's budget request, clearly everyone understands that more money will be needed.
Page 99 PREV PAGE TOP OF DOC Addressing those problems sooner rather than later will prevent costly ad hoc farm aid and disaster packages in the future, but only if we have confidence in a farm safety net that is truly adequate.
To the extent that long-term solutions cannot be immediately addressed, we encourage Congress to provide additional up front financial assistance for the current crop year to address existing distress in the farm sector for the low 1999 prices.
Doing so will send an important signal to farmers and their lenders at this important time when they are now reviewing loan applications and credit decisions.
[The prepared statement of Mr. Caspary appears at the conclusion of the hearing.]
Mr. EWING. Thank you.
STATEMENT OF WILLIAM H. WISE, JR., EXECUTIVE VICE-PRESIDENT AND CHIEF OPERATING OFFICER, PEE DEE FARM CREDIT, ACA, FLORENCE, SC, ON BEHALF OF THE FARM CREDIT COUNCIL
Mr. WISE. Mr. Chairman, my name is Bill Wise and I am the executive vice-president and chief operating officer of Pee Dee Farm Credit. We are based in Florence, SC.
Pee Dee Farm Credit is an Agricultural Credit Association and an institution of the Farm Credit System. Pee Dee provides some $170 million in loans to South Carolina agricultural producers and rural homeowners. In addition, we provide a variety of financially related services to our member borrowers, including crop insurance.
I am here today representing the Farm Credit System to provide our views on reforming the Federal Crop Insurance Program.
Page 100 PREV PAGE TOP OF DOC Farm Credit has a unique perspective on crop insurance. As lenders, we depend on crop insurance to be a backstop for our borrowers. In many cases, we could not lend to farmers without adequate crop insurance protection.
As agents that sell crop insurance products, we depend on the availability of quality crop insurance products developed by private industry and the Federal Government to offer our customers. As a farmer-owned cooperative, we are vitally interested in ensuring that farmers and other producers have the tools they need to manage the risks inherent in agricultural production.
We are very appreciative of the subcommittee's effort to thoroughly review the existing Crop Insurance Program. We believe that the current program has many benefits for producers in many areas. We also believe that the current program needs to be substantially improved and hope your efforts lead to extensive reform in the program to address those areas that need improvement.
Recently, the Farm Credit System agreed on a set of principles for any reform effort.
Participation by the private sector remains critical. Both from a delivery standpoint as well as a product development standpoint, private industry involvement is necessary to a successful crop insurance/risk management program.
Federal subsidies should be targeted to higher level coverages. Mr. Chairman, our recent experience with this year's 30 percent discount on buy-up coverage indicates that more producers will purchase higher levels of coverage if the price is more reasonable.
Producers need coverage for a wider range of commodities, including livestock. Currently, coverage options for commodities vary from area to area throughout the country. What is eligible for coverage in one county may be ineligible in another. Many commodities, particularly specialty crops, have virtually no coverage.
Page 101 PREV PAGE TOP OF DOC Let us bring back good experience discounts. In many areas, producers with little or no loss experience do not participate. These above average managers need an additional incentive to participate. Rewarding them for proven ability to avoid loss is necessary.
Producers who experience multiyear losses due to continuing weather conditions need to be protected. In several areas of the country, producers have been hit with three or more consecutive years of disastrous weather conditions. Through no fault of their own, these producers are now unable to buy adequate coverage. The program needs to be modified to take into consideration multiyear disasters.
The program must be sufficiently attractive to build participation and offset the need for ad hoc disaster programs. As long as inadequacies remain in the program, producers will have no alternative but to see ad hoc assistance when faced with disasters. Congress must devote an adequate level of Federal resources to the program to attract high levels of participation in order to avoid future instances of massive Federal disaster payments.
Participation in crop insurance and risk management programs must be voluntary. Efforts to require participation in crop insurance are counterproductive. Unless the program is improved, efforts to make it mandatory simply require farmers to purchase products that do not adequately protect them.
And, finally, Mr. Chairman, we believe the most important step in reforming crop insurance is devoting more Federal dollars to the program. Over the years, agriculture has more than done its part for deficit reduction. No other function of Government has been cut more than agriculture. At the same time, our competitors continue to dramatically out-spend the United States in agricultural support.
Congress is now considering how best to use Federal budget surpluses. We urge Congress to devote some of the surplus to ensuring that American producers have the tools necessary to manage risk and compete in the global marketplace.
Page 102 PREV PAGE TOP OF DOC We appreciate the attention being given to this important issue and look forward to working with the subcommittee as it moves forward.
Thank you for allowing me to come before you today.
[The prepared statement of Mr. Wise appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Wise.
And I think you all heard the bells go off. I think that is a series of votes, so we will try, since I am the only questioner here, to get the questions done and adjourn before I go and vote because I know it has been a long day for this panel particularly and I appreciate your patience and your being here.
To the representatives of the insurance industry here, what is your thought on some kind of payment if your firm or your company initiates or comes up with a really super idea in crop insurance?
Mr. MILLER. Part of developing a product is designed to give a company a niche in the marketplace, part of the reward would be in the development of that product and I think that goes along with basically your cost of doing business.
Mr. EWING. So you are saying you would go aheadyour company would go ahead and try and come up with innovative new products just because that is good business practice.
Mr. MILLER. I think that is good business practice if you are concerned with trying to get a product out there that will benefit the producer. Part of the difficulty that we experience as companies today is the approval process that it takes to go through with, quite honestly, FCIC.
Mr. EWING. Mr. Brichler.
Mr. BRICHLER. Yes, Mr. Chairman. I would like to also offer something else. We have tried over the last few years to have RMA rely more on the industry to help them develop products and we have consistently run into a brick wall with that organization about them being able to pay private sector to do research.
Page 103 PREV PAGE TOP OF DOC They are paying the public sector through universities an that type of thing in order to develop products and we have seen that, I think, the industry can develop products that are more widely accepted.
If you look at the CRC sales compared to IP and other products that have been developed by RMA, I think we have a little bit better feel for what the individual producer out there wants to buy. And we would hope that RMA would use our efforts a little bit more pervasively than they have at this point.
Mr. EWING. There are suggestions that companies should be rewarded for coming up with a newmonetarily rewarded for coming up with a new policy idea.
It would appear to me if that is the case and if, say, CRC was a new idea and you had to pay more for it or if you got from the crop insurance agency payment for coming up with that, some of that is going to be passed on. Would you agree? I mean, it has got to becosts of business have to be passed on.
Mr. BRICHLER. I will take a shot at that first. I think that that is always the case, that any particular business that is in business for a profit has to control its costs and obviously develop some type of a profit margin, otherwise we would not be able to support an organization like the one sitting right here.
But I think there can be the ability to charge some type of a fee, whether it is to other companies or as they do with developing genetically engineered materials such as some type of a technology fee. I think there are a number of ways that that can be approached.
And I do believe as Mr. Miller has already said if companies feel they will develop a marketing niche or advantage over their competitors, that they will develop products that are innovative and that producers want on their own accord.
Mr. EWING. Mr. Bill, did you have a comment on either of those?
Mr. BILL. I think I pretty much agree with Ron.
Page 104 PREV PAGE TOP OF DOC Mr. EWING. To our friends in the banking industry, am I getting the right impression that generally crop insurance is a big help to you in making loans to your farm customers? It could always be better, but that you depend on it in many cases?
Mr. CASPARY. Yes.
Mr. EVERSON. It is an excellent risk management tool and it can only get better by improving it, some of the improvements we have talked about today.
Mr. EWING. Can any of you give me an example, no names, of course, but of a client who maybe was saved from financial ruin or from going out of farming because he had crop insurance? Do they get that type of a collection in your areas?
Mr. WISE. Mr. Chairman, I have never had anyone that has been able to get enough to save them at the current levels at which they are able to get insured at. It is just like if I were to insureI would not want to insure my house at 75 percent of value. If they can only insure their crop at 75 percent of value, then that means they are going to take a 25 percent hit and they cannot stand that now.
Mr. EWING. Jim?
Mr. CASPARY. I would say between the loan deficiency payments and the crop insurance that it made the difference between profit and losing money, those two items probably helped us more in this last year than anything else.
Mr. EWING. Mr. Everson?
Mr. EVERSON. I cannot cite specifically that a customer has been saved by it, but can tell you that over time, the majority, if not all, of my customers who are involved in crop insurance have used it as part of their marketing plan and it gives them some assurance that they can go out and market that much of their crop. If it is a 65 percent level, that would be 65; if it is 75, it is 75. And so it has been an integral part of that marketing plan. But, again, coverages are not sufficient right now to save them from disaster.
Page 105 PREV PAGE TOP OF DOC Mr. EWING. Jim, you made the point there that the loan deficiency payment entered into that. Which would you say is more important?
Mr. CASPARY. The loan deficiency payment brought in more money to them. However, had the farmers used the crop insurance and pre-sold their grain at an appropriate time last year, they would have made far more money, even though not directly from the insurance but being able to get a certain amount of crop sold and knowing that you had that. Had they used that, I think it would have been far more beneficial with the crop insurance.
Mr. EWING. Do any of you in the banking business use guaranteed loans, federally guaranteed loans? Is that a major part of your financial structure with your farm customers?
Mr. CASPARY. We do not.
Mr. EVERSON. It represents 10 percent of our portfolio which is $100 million, so we have approximately $10 million in guaranteed loans today.
Mr. EWING. Jim, you say you do not at all?
Mr. CASPARY. No.
Mr. WISE. Mr. Chairman, we have about $10 million in guaranteed loans.
Mr. EWING. To the entire panel, was that a bad message that we sent to producers as far as the safety net and the need to buy crop insurance with the disaster bill?
Mr. MILLER. Considering the times that they were faced with, I do not think that was a bad move, but I wish it would have come a little quicker so they could have done a little better job of planning and looking at their own financial situation to see how they would best utilize the money. Then I guess the next part to your question is how quickly will the payments, loss payments, be received, which seems to be slowing down the process.
Page 106 PREV PAGE TOP OF DOC Mr. BILL. Of course the problem is the credibility gap that we created now. It is going to hurt participation when farmers think that they can get a disaster payment whenever the weather is bad. It is kind of rewarding people that do not make maybe the right decisions. So what do you do about that?
I do not know if we have any solutions to help with that, but it is certainly a big problem.
Mr. BRICHLER. I also think that we sent mixed signals. At one point, we brought the CAT program into being, it was a mandatory linkage requirement for other Federal programs and we have since done away with that and we have seen some participation fall off of that, but I think we still have done a good job of trying to get those people that are in the CAT program to buy up to greater levels of coverage.
The mixed signal, as Mr. Bill has said, we have a program out there and we heard people talk today about the cost of farming and their cost of production. Is it smart for one farmer to buy a CAT policy and build that into his cost of production and another buy CRC which is costing him a lot more?
It is a risk management tool that he will be to future market his crop or do whatever he wants to from an aggressive marketing standpoint. By having the disaster payments, we have pretty much equalized those two individuals from the standpoint they are both going to get paid, even though one has increased his cost of production and the other has not.
Mr. EWING. Do you believe that theand this is for the bankers maybe more than the insurance peoplethat the most well established producers out there, are they buying the crop insurance?
Mr. Caspary. Yes. We have hadI think we are down to maybe only one or two of the holdouts of the Government programs and I think one of them went this year and they are applying for the farm package and also is buying up on it, too.
Page 107 PREV PAGE TOP OF DOC Mr. EWING. Even those that maybe could afford to self-insure themselves?
Mr. CASPARY. Pretty well, yes.
Mr. WISE. We have seen more buy-up this year with the 30 percent assistance than ever before, particularly the larger producers.
Mr. EWING. So I assume everyone would wholeheartedly support the continuation of an added buy-up subsidy as one good way to get many more of our producers into the system and keep them there.
Mr. BRICHLER. Mr. Chairman, there is one other area I think that the program is still not really penetrating as much as we would like and that would be those people in districts such as yours where the frequency of loss is very small and some of the major farmers have decided that it is not in their best interests to buy insurance at the current levels, current cost levels.
We have heard people address that today in some of the testimony, that there has to be a new product or a new vehicle to pull some of these farmers that are good farmers that just do not perceive the risk as being as heavy as some other folks around the United States and we need to find a way to pull them into the program.
Mr. EWING. Gentlemen, I am down to I think no minutes and so I am going to adjourn this meeting and the record will remain open for 10 days to accept statements of any additional information. I do appreciate your being here and your patience and thank you very much for your input.
The subcommittee is adjourned.
[Whereupon, at 3:16 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Page 108 PREV PAGE TOP OF DOC Statement of Kenneth Ackerman
Mr. Chairman and members of the subcommittee, thank you for this opportunity to discuss our proposal to strengthen the Federal farm safety net and the Crop Insurance Program. I commend you for starting this critical discussion early in the legislative year.
Last year, a combination of falling crop prices, regional weather disasters, and the impact of multiple-year losses stretched our Federal support programs to the limit. Families who have been in farming for generations found themselves with deeper financial challenges effecting their ability to stay on the farm.
As a result, Congress and the administration agreed on the need for Government to intervene and provide help through a $6 billion emergency farm aid package. At the same time, President Clinton and Secretary Glickman began a process of examining options for more permanent improvements to our Government programs aimed at helping farmers cope with volatile conditions.
The current Crop Insurance Program was designed to work in conjunction with agricultural programs that no longer exist. Once those programs were eliminated, it was apparent that the current Crop Insurance Program was inadequate to fill the void on its own.
Reform is needed if farmers are to have the tools they need to successfully manage their agricultural risks. In his State of the Union message, President Clinton pledged to work with Members of Congress of both parties to create a farm safety net that includes an improved Federal Crop Insurance Program.
Earlier this month, USDA presented specific ideas for strengthening the farm safety net with the announcement of the fiscal year 2000 budget. Since then, we have further refined our ideas and want to work with Congress to invest additional funds to enhance the Crop Insurance Program for farmers. Before outlining our specific plans to improve the program, I would like to review some of the factors that have brought us to this critical juncture in agricultural policy.
Page 109 PREV PAGE TOP OF DOCBACKGROUND
Prior to 1994, crop insurance ran side-by-side with ad hoc disaster assistance. Under ad hoc disaster programs, farmers were in a constant state of uncertainty over whether, how much, and when disaster assistance might be provided. Further, disaster programs were prone to abuse, and created an unmanageable drain on tax dollars. The availability of free disaster assistance also undercut participation in the Crop Insurance Program and as a result, the Crop Insurance Program never achieved sufficient participation to become the primary source of Federal assistance for farmers suffering a crop loss.
In 1994, the administration proposed legislative reforms to replace ad hoc disaster assistance in favor of an enhanced Crop Insurance Program. Under that plan, farmers could obtain catastrophic risk protection (CAT) level of insurance for a nominal administrative fee. In addition, premium subsidies were increased for producers choosing to obtain higher levels of coverage. The legislation also created a non-insured crop disaster assistance program (NAP) for crops that are not currently insurable.
In its proposals to Congress for the 1996 farm bill, the administration recommended and Congress approved enhancing crop insurance by authorizing USDA to offer revenue insurance. Congress also directed USDA to help farmers become better risk managers, eliminated both the requirement that producers obtain crop insurance to participate in most USDA farm programs and began the phase-out of direct-subsidy programs which had been the heart of traditional farm policy. The result of these changes is that farmers have been placed on a steep learning curve to learn new ways of doing business at a time they also face unprecedented challenges in the form of low prices.
In 1998, commodity prices plummeted while many farmers struggled to cope with the effects of natural disasters, sometimes spanning several years. In short, the concerns raised by passage of the 1996 farm bill became reality. Neither crop insurance nor the other 1996 farm bill programs were able to provide the amount of assistance requiredresulting in a $6 billion emergency relief package.
Page 110 PREV PAGE TOP OF DOC Although the current Crop Insurance Program must be enhanced to respond adequately to current conditions, it has made significant progress. For example, in 1993, the program provided $11.3 billion in protection through 70,000 policies on 83.7 million acres of crops. In 1998, crop insurance provided $27.9 billion in protection through 1.2 million policies on 181.6 million acres.
This increase in participation was partly due to the significant increase in the number and types of insurance plans available. For example, prior to 1996, no federally backed revenue insurance products were available to producers. Today, there are five different types of revenue insurance available: Income Protection (IP), Revenue Assurance (RA), Crop Revenue Coverage (CRC), Gross Revenue Income Protection (GRIP), and Adjusted Gross Revenue (AGR). Revenue insurance protects farmers against price declines, not just production losses from natural disasters.
Because crop insurance helps producers manage their risk and diversify their operations, there has been an aggressive effort to create new programs and expand the availability of existing ones. In 1998 alone, pilot programs were developed for avocados, sweet cherries, rangeland, winter squash, mustard, cranberries, cabbage, watermelon, and wild rice.
Consistent with its commitment to building a stronger Crop Insurance Program, USDA supported a provision included in the fiscal year 1999 Omnibus Reconciliation Bill, requiring uninsured recipients of the emergency assistance to obtain insurance over the next 2 years. More significantly, to encourage greater participation in crop insurance and as a down payment on crop insurance reform, USDA earmarked $400 million from the emergency aid program to provide most farmers a one-time, 30-percent reduction of their crop insurance premiums.
Concerns. In 1998, emergency aid was provided and a financial crisis of enormous proportions was deferred. However, in future years, the new system needs to work without ad hoc infusions of tax dollars.
Page 111 PREV PAGE TOP OF DOC To preclude a repeat of 1998, the following weaknesses must be addressed this year:
Basic CAT coverage in most cases has not been sufficient to provide farmers an adequate safety net in times of severe stress, and not enough farmers buy higher levels of coverageonly two-thirds of the farmers who have crop insurance purchase buy-up coverage.
Farmers generally obtain insurance based on expected market prices established at the start of the year, which may vary significantly from actual prices at the time of harvest. Also, current insurance products do not protect them against low prices that carry over annually.
Farmers who experience several years of adverse weather may be unable to obtain enough insurance to cover their costs of production because the amount of coverage they can buy is linked to, and limited by, their actual production history. In many cases, farmers find their insurable yields declining as their premium rates increasea problem especially acute in the Great Plains.
While growing, participation in revenue insurance, which protects against falling prices, remains relatively limited. Only about 16 percent of the corn and soybean farmers who purchase higher levels of coverage take revenue insurance.
Measured in value of sales, the livestock industry represents the biggest segment of American agriculture; however, the current law does not permit USDA to extend coverage for livestock losses. The private sector only insures against livestock mortality, and this coverage is only used sparingly.
Crop insurance programs have not yet been developed for many important and economically significant crops. Thus, these producers are protected only through the limited coverage offered by NAP.
Crop insurance is governed by contractual and regulatory restrictions that often make it unable to respond quickly and flexibly to changing needs of the farmer, unanticipated events, or unforeseen program flaws. The program is least effective in those areas of the country where participation is low, certain crops are uninsurable, or where multiple years of disaster have occurred.
Page 112 PREV PAGE TOP OF DOC Guidelines for Reform. USDA believes that any legislation to strengthen the farm safety net should address the following principles:
Maximize participation. Farm programs as well as crop insurance should assist as many farmers and ranchers as possible by making the (insurance) program more affordable. Re-establishing linkage with other USDA programs should be considered.
Provide comprehensive coverage. Insurance coverage should be as comprehensive as possible, covering as many commodities (including livestock) and risks as possible.
Use market mechanisms. Both farm programs and crop insurance should fully use market mechanisms.
Increase flexibility. The Crop Insurance Program should be flexible enough to meet the diverse demands posed by the varied risks farmers and ranchers face.
Provide programs at the lowest cost to taxpayers. These programs should be delivered at the lowest possible cost to both taxpayers and farmers and ranchers.
Proposals for Change. As indicated earlier in my testimony, USDA has been refining the initial proposal to strengthen the Crop Insurance Program:
Raise the coverage floor. In 1998, nearly 32 percent of crop insurance policies were at the CAT level of coverage. Since CAT and NAP levels of coverage protect less than a third of the crop value, crop insurance reform legislation should increase the coverage available under these programs. Specifically, we propose to raise the coverage to 60 percent of approved yield indemnified at 70 percent of the expected market price, a 50 percent increase. Caution is needed to avoid raising buy-up insurance too high thereby shifting production and potentially depressing prices further. Caution is also needed to avoid raising CAT coverage too high due to the potential buy-down affect on current buy-up policy holders.
Make higher-level coverage more affordable. Crop insurance reform should increase incentives for farmers to buy more comprehensive insurance at higher buy-up levels. Specifically, we propose to (a) increase the premium subsidy so that coverage at 70 percent of the approved yield indemnified at 100 percent of the expected market price level (or 70/100) will cost the producer the same as 65/100 coverage does today; (b) provide an additional premium subsidy for coverage above the 70/100 level of 50 percent of the additional premium; and make all insurance plans, including revenue, equal in terms of assistance for premiums; review of company expense reimbursements may be warranted in recognition of the higher premium. The subsidy rate at these higher coverage levels would be 55 percent.
Page 113 PREV PAGE TOP OF DOC Cover multiyear disasters. To address the special concerns raised by multiyear crop losses and losses not severe enough to trigger current loss requirements, crop insurance reform should authorize USDA to offer a new multiyear insurance product. Specifically, we propose to develop a new multiyear insurance ''umbrella'' to complement single-year policies. Further, crop insurance price elections and company expense payments would be based on multiyear price averages, avoiding sharp inter-year swings. In this context, RMA would also examine alternatives to the current method of determining the yields used as the basis for coverage.
Speed flexible, new risk management tools to market. To meet the changing needs of farmers and ranchers, crop insurance reform should provide farmers more flexible products to cover their diverse needs, including more types of revenue-based insurance products. Crop insurance reform should permit USDA to work more creatively with private insurance companies and others to develop and bring to market new risk management tools and give USDA more flexibility to use and expand pilot projects. Specifically, we propose to stimulate the flow of new risk management tools to farmers by: (a) authorizing the Risk Management Agency to reimburse companies for costs of successful new products that they develop; (b) expanding contracting with the private sector to develop products for smaller crops; (c) reducing the regulatory procedures required to develop and update policies; and (d) giving RMA greater flexibility to use pilot projects, including pilot programs on a nationwide scale.
Cover livestock. Because the current Crop Insurance Program does not cover livestock producers, who make up the largest single sector of American agriculture in terms of value of production, crop insurance reform should include provisions to enable USDA to cover livestock. Specifically, USDA proposes authorizing RMA to pilot revenue-based livestock insurance products proposed by the private sector. On an initial basis, we propose providing up to $50 million per year from the FCIC fund for these products.
Improve the NAP program. Many farmers rely on the NAP program as their primary protection from natural disaster losses. Coverage should be increased to 60 percent of yield and 70 percent of price, commensurate with the CAT increase. In addition, the cost-effectiveness of the current area trigger versus a Secretarial disaster designation should be reviewed.
Page 114 PREV PAGE TOP OF DOC Provide better information and service to farmers. As we make these changes to strengthen the Crop Insurance Program as part of the farm safety net, it will also be important that we increase farmer awareness so that producers can more quickly access a wide range of both new and existing risk management tools. Crop insurance reform should include a public awareness outreach effort to enable producers to assume more responsibility for greater understanding, and to better manage their risk management planning portfolios, backed by an annual financial commitment of up to $50 million.
Taken together, these proposals would constitute a major financial investment by the Federal Government that would total between $2 and $2.5 billion per year. The administration is ready to work with you to refine these proposals so we can agree on a mutually acceptable reform package and to identify the amount and sources of funds these changes will require.
While the Crop Insurance Program is the anchor of the farm safety net, USDA also wants to work with Congress to examine other programs to assist farmers and ranchers.
The Next Step Recently, Secretary Glickman wrote: ''Farmers deserve better than to be a political football for Democrats and Republicans to toss around. So, whatever approach we adopt, we have to do it in a bipartisan fashion. It just makes sense that the more people you have contributing to the process, the better the ideas that emerge.''
In that spirit, USDA began to formulate the basics of a workable plan last August when the Secretary convened a group of farmers and other experts from all sectors of the agricultural community. The results of that effort were refined and have become the basis of our proposal. To help new ideas surface and build consensus on these elements of reform, Secretary Glickman, Deputy Secretary Rominger, and Under Secretary Schumacher plan to host a series of forums over the next several months to hear from everyone who has a stake in building or benefitting from a strong and enduring farm safety net.
Page 115 PREV PAGE TOP OF DOC Mr. Chairman, there is no question that many decisions must be made to provide producers the safety net they deserve. I am confident that the good will and common sense needed to make this vision a reality will prevail. Thank you for this opportunity to participate in this hearing.
Offset folios 113 Insert Here
Statement of Terry McClure
Mr. Chairman, we appreciate your efforts to consider this important issue. Reform and expansion of the current crop and revenue insurance programs is one of Farm Bureau's highest priorities for 1999. Long before last year's crop disasters, congressional leaders had begun questioning the Federal Crop Insurance Program to determine why the level of farmer participation in the program was not higher.
''The level of participation is simply not adequate enough to address the financial consequences of a disaster like we experienced this year. Nor is producer participation in the program sufficient to forestall the political pressures that always come to bear when natural disasters strike a wide path , especially in an election year.'' Mr. Chairman, that statement was probably made several times during last year's discussion of the $6 billion assistance package. However, the actual quote must be attributed to Representative Ed Jones, former chairman of this subcommittee. More importantly, the statement was made 11 years ago. It appears that while we have ''tinkered'' with this program numerous times, the outcome has changed little in the past 11 years.
That is one of Farm Bureau's greatest concernsthe pressure will be so great to do something in the next year that we will continue our pattern of ''tinkering'' with the program rather than truly reforming it to work for all commodities in all regions of the country.
While we have been unable to eliminate ad hoc disaster assistance, it is important to note that participation has increased tremendously. Sixty-eight percent of eligible acres were covered by the Crop Insurance Program in 1998almost double the percentage of participation only four years ago. We cannot, however, expect that participation level to be maintained unless we:
Page 116 PREV PAGE TOP OF DOC Improve the program to make it a viable risk management tool, thereby increasing participation and reducing the need for ad hoc disaster assistance. The $6 billion in assistance last fall sent farmers a clear message that purchasing crop insurance in 1999 was unnecessary because Congress would step in with ad hoc disaster assistance;
Provide farmers the ability to affordably purchase coverage levels providing a smaller deductible for the 100 percent coverage level. When a producer can lose up to 35 percent or more of his crop and still not be eligible for assistance, the program is not a viable safety net; and
Continue to move toward additional revenue insurance policies for all commodities, rather than relying on production risk management alone.
Major reforms of the crop and revenue insurance programs are imperative. The following points highlight our major concerns.
Crop and revenue insurance products must be made available for all commodities including livestock. While the current program provides a risk management tool for most of the production of the major commodities, there are an additional 1,500 crops which are not covered by the program. Coverage for livestock (with the exception of the Dairy Options Pilot Program) is unavailable. The Risk Management Agency (RMA) does not have the staff or resources to accomplish such a feat. The private sector has demonstrated its ability to be creative and responsive to growers' needs for new crop insurance products. However, there is a disincentive for new product development. Under current law and regulations, once a company has the Agriculture Department's approval for marketing a new product, any competing crop insurance company can market it.
An exclusive marketing rights agreement or a cost-reimbursement proposal would help solve this problem and make product development more attractive for insurance companies. A company that stands to gain a market advantage over its competitors can more easily justify the research and development costs for new products. We are concerned, however, that ''fixing'' this problem does not cause approval of multiple products with minor differences from products that are already available. Farmers are confused enough about the duplicity of options available; we need to work toward simplification of the programs rather than adding to their confusion.
Page 117 PREV PAGE TOP OF DOC While we want to do everything possible to encourage private sector development, we are not convinced the private sector will address the needs of all crops. We believe RMA should continue to develop new products, but should focus on those types of products and on those commodities in which the private sector is not likely to focus.
Farmer premium subsidies should be increased to 50 percent for all levels of coverage. As farmers purchase higher levels of coverage, premium subsidy levels decrease, and the cost rises disproportionately, providing a disincentive to purchase coverage above 65/100. At the 65/100 level, the Government pays 42 percent of the premium while the producer pays 58 percent. However, at the 85/100 level, the Government pays only 13 percent while the producer must pay 87 percent. This means the out-of-pocket cost to the producer nearly triples. As a result, virtually all buy-up coverage is at the 65/100 coverage level.
An example may be helpful. A cotton farmer in Florida producing 650 pounds of cotton at a 70 cent price election can guarantee $296 per acre liability coverage at the 65/100 level. If he selects the 75/100 coverage, he can guarantee himself $341 per acre, or $45 more. However, the 65/100 premium costs $33.45 per acre while the 75/100 costs $78.32 per acre. The bottom line is that it costs that cotton farmer $44.87 more per acre for the premium in order to increase his liability coverage per acre by $45. Obviously, that would not be a prudent business decision.
No single issue is more important to producers than their belief that they are going to be offered adequate insurance coverage on their commodities.
Crop insurance rating practices should be modified to encourage broader participation particularly among lower risk producers. Crop insurance rating practices rely on a 20-year historical, actuarial database to determine the risk or probability of loss and establish premium levels for particular areas and crops. Prior to the 1994 Crop Insurance Reform Act, the actuarial database for many commodities reflected low participation rates and significant adverse selection. Although Crop Insurance Program participation has increased, the historical data continues to reflect the now unrepresentative data accumulated in prior years. The resulting premiums do not correspond to the current actual risk and over-represent the impact of a single adverse event. This has discouraged producers from program participation or purchasing adequate coverage.
Page 118 PREV PAGE TOP OF DOC An example may be useful. Following is the insurance history for rice in Louisiana.
Year / Percent Insured / Policies Insured / Loss Ratio
1980 4 percent 1,329 .01
1981 6 percent 2,142 .46
1982 11 percent 3,553 .54
1983 11 percent 3,244 .68
1984 5 percent 1,591 .51
1985 5 percent 1,485 .47
1986 11 percent 2,834 .72
1987 18 percent 5,055 .76
1988 26 percent 6,884 .34
1989 26 percent 7,206 .19
1990 31 percent 9,213 .71
1991 29 percent 8,0110 .91
1992 31 percent 8,472 .43
1993 28 percent 7,492 .50
1994 29 percent 743 .76
1995 99 percent 7,537 .52
1996 70 percent 3,339 .17
1997 63 percent 2,197 .61
1998 60 percent 1,806 .48
Page 119 PREV PAGE TOP OF DOC This chart shows that a year like 1980 when only 132 policies were insured is given the same significance for rating purposes as a year like 1995 when the number of policies exceeded 7,500. The probability of adverse selection against the program is very high when you have low participation, but far less when you insure most of the acreage.
New rating methodologies and/or blending of National Agricultural Statistics Service (NASS) data with Actual Production History (APH) should be considered as a way to more accurately determine premium rates. Another possibility is to use the income protection rating method on a pilot program basis.
Alterations must be made so the program is able to respond to multiyear disasters. Current crop insurance policies have been ineffective in providing adequate coverage levels for producers who experience multiyear crop losses due to factors beyond their control. This failure is at least partly responsible for the $6 billion disaster payment made last fall. The problems of multiyear disasters should be partially addressed by allowing producers to drop one year of production records for the purpose of APH calculations.
Producers who participate in the Crop Insurance Program should be eligible to receive ''good experience'' premium discounts based on their indemnified loss history. Prior to the implementation of the APH program, an experience rating system was in place that adjusted premiums on the basis of a producer's loss experience. The system provided discounts for good experience (i.e., no losses) and surcharges for bad experience (i.e., multiple losses). In 1985, when the APH program was implemented, it appeared the experience rating system would no longer be necessary since averaging 10 years of actual yield data would accomplish the same goal. Consequently, beginning in 1985, the premium adjustments for experience were no longer applicable, and the premium reductions were phased out.
The experience rating system should be reinstated. Producers are familiar with the concept and believe the system is equitable. The system will also encourage participation precisely because it rewards producers with low losses by reducing the premium rate. Keeping producers with low risks in the program can, in turn, improve the program's overall soundness. Those with infrequent marginal losses will have an incentive to absorb those losses in order to keep or improve their discounts. Those experiencing consistent losses will face increasing surcharges until the insurance is priced more consistently with the risk associated with their proven losses. It is likely that you would want to cap the surcharges and discounts if such a program was again implemented.
Page 120 PREV PAGE TOP OF DOC The catastrophic (CAT) program should be eliminated or significantly enhanced. The intent of the 1994 Crop Insurance Reform Act was to eliminate ad hoc disaster payments and to provide farmers with a good risk management tool. While this has been achieved for some commodities and in some regions of the country, it is far from true in other areas. The premise behind the creation of CAT coverage in 1994 was to increase participation levels enough to significantly reduce or eliminate congressional pressure for future ad hoc assistance. The flaw in this premise appears to be that while high participation rates may be the key, the coverage provided by a CAT policy is so abysmal that it alone cannot eliminate the pressure. Instead, a high percentage of participation in the buy-up program is required if we are to reduce future plans for ad hoc assistance. If 60 to 70 percent of all producers don't participate in an insurance system, producers who need aid will not be included. If less than 60 to 70 percent of the farmers are protected, there is likely to be significant pressure for further ad hoc assistance. While Farm Bureau has not yet reconciled its final position on the CAT program, we believe that elimination of the CAT program and using the money saved to further subsidize farmer-paid premiums for buy-up coverage might be the best use of our resources.
The program should allow for competition between companies. In late 1997, Farm Bureau and several commodity organizations suggested we restructure insurance premium quotes to producers to include two parts. The first would be the actuarial portion that is used to define loss ratios. The second part would reflect delivery costs, including grower and agency education, sales commission, loss adjustment activity, and other administrative and operating costs. The portion of the premium would be competitively determined by market forces. Companies and agents would be allowed to compete in the marketplace on the delivery expense portion of the total premium within an established maximum percentage.
The use of T-yields for beginning farmers and for those producers who plant a new crop for the first time must be altered. Currently, a farmer who does not have at least four years of certifiable yields must use a transitional yield (T-yield) to complete the four year series. T-yields are based on NASS county averages. This is a major deterrent to new producers or those producing a commodity for the first time as yields developed using a T-yield are generally believed to be too low by most of the better farmers.
Page 121 PREV PAGE TOP OF DOC In addition to the above priorities, we also support:
improving the public-private partnership;
equalizing the administrative and operating percentage subsidies for all crop insurance products;
providing policy coverage options, including prevented planting, quality adjustment provisions and replanting coverage that is comparable across commodities when adequate rating data is available; and
significantly improving the Noninsured Assistance Program (NAP) until all commodities are covered by a crop or revenue insurance program.
We appreciate the opportunity to present our views regarding reform of the Crop Insurance Program. As risk management becomes increasingly more important to our nation's agricultural producers, we must work together to ensure the continued strength of the program. Reform must assure broad-based availability and affordable crop insurance products.
Testimony of Richard Bill
Good morning, my name is Richard Bill and I am actuary for Country Mutual Insurance Company located in Bloomington, IL. I have the privilege of speaking on behalf of the membership of the Crop Insurance Research Bureau (CIRB), a not-for-profit industry trade association, whose mission it is to promote and work for the improvement of crop insurance in the United States. CIRB was established in 1964 and its members include some of the giants in the insurance industry as well as a host of smaller regional and single state insurance organizations engaged in the writing of private crop-hail insurance and/or multiple peril crop insurance.
First of all CIRB wishes to express its thanks to Representative Ewing for the opportunity to testify on this most important of agricultural issues. We know that you and other members of both the House and Senate will be looking for ways in which the Crop Insurance Program can better meet the needs of more agricultural producers. We also know that significant changes to improve the program and to strengthen the safety net cannot happen without an infusion of more monetary resources. Private crop insurers share your concerns for program improvement and pledge to work with you in positive ways to make this happen.
Page 122 PREV PAGE TOP OF DOC CIRB has consistently stood for the following principles: encouragement of initiatives which foster strong program participation, attainment of affordable actuarially-sound rates, choice in coverage levels, simplification of the program to make it more user friendly and program integrity. We agree with Secretary Glickman who stated, during the USDA's Working Group on Improving the Farm Safety Net meeting, that ''crop insurance should provide the foundation for risk management, and the program should operate more like traditional insurance products.'' The program CAN work more like traditional insurance, but we understand that some concessions to that principle must be made in order to make the program universally available and affordable.
The challenges that face crop insurance are well documented - the solutions are yet to be realized. However, if one looks back and traces the evolution of the program from the inception of the public-private partnership in 1981, the changes that have occurred to strengthen the program have been great. We have, in 1999, a solid core of insurance organizations delivering the program. These are organizations are obviously ''in it for the long haul'' as is evidenced by their considerable commitment to infrastructure, technology, human resources and program integrity.
FOR YOUR CONSIDERATION
At this time, I would like to share with you some of CIRB's thoughts on improving this vital element of the Safety Net.
Program Participation. Suffice it say that a high degree of participation in the program and in the buy-up program is essential. This has been and continues to be a vital tenant of a successful program. Although, not where we'd like it to be, participation has remained high over the past several years even in years when crop insurance was not mandatory. There are places in the country where program participation is strong; however, there are still places where participation remains a challenge. We need to thoroughly analyze why and take whatever steps might be necessary to remedy low participation.
Page 123 PREV PAGE TOP OF DOC However, it should be note that participation may never reach the high levels in some places or on some crops not because of a lack of a good program but because other methods of risk management are being utilized. For example, many California producers use geographic and/or crop diversification as their foremost risk management too. Yield variations may be minimal in some areas and for some commodities price is generally stable.
Actuarial Soundness. To the greatest extent possible, the goal of actuarial soundness should be maintained. Certainly we have achieved a degree of actuarial soundness over the past few years in part due to better rating methods, but also because of a string of unusually good weather and market conditions. There are real challenges ahead on the price side if that component is to be brought into the mix.
Crop Insurance & Disaster Assistance. A crop insurance program as strong and as vital as we'd like is difficult to realize in an environment where large-scale disaster assistance is a possibility. We understand the pressures that came to bear on you in 1998 because plunging prices; however, it was unrealistic to expect the current Crop Insurance Program to react to such a situation. Therefore the constant criticism of the program for not being able to predict or react to what happened in 1998, is not useful. For the most part, the program is doing what it has been designed to do thus far. Should it incorporate more price protection? Yes, but it should be done carefully with thorough study and examination.
The private sector crop insurance industry appreciates the opportunity to participate in the dialogue that will shape an improved Crop Insurance Program. We also appreciate the support for the Crop Insurance Program in the past. However; Congress deviated from its previous commitment to not make disaster payments. To producers who took proactive measures to protect themselves with crop insurance because they believed that disaster assistance would no longer be forthcoming, a credibility gap has been created because of 1998. What you do in 1999 must close that gap. Disaster assistance and a viable crop insurance program do not coexist comfortably. In fact many would say they cannot coexist at all.
Page 124 PREV PAGE TOP OF DOC Catastrophic Coverage. The CAT program has come under considerable criticism especially from the southern parts of the country where the perception is that the coverage is so low as to not even be worth the small administrative fee charged. To these same producers the buy-up coverage is simply too expensive in their mind. This perception, accurate or not has obviously damaged the credibility of the program there and in some other areas of the country. Most producers understand that CAT was designed to be just what it is, the most basic of all coverages - a substitute for disaster payments. Certainly it is not the wisest coverage for those who are required to secure operating loans with crop insurance.
The question is should CAT be made more attractive? By increasing what CAT covers, we could run the risk of creating a disincentive for producers to buy-up? It is our opinion that some upside adjustment in CAT may be in order. But what is the best way to do that. You may want to consider changing CAT to a basic 50/60 revenue product . We believe that such a product would be simpler and address producer's primary concern. As a yield product, it simply will not react appropriately when we experience a 1998 scenario. We do believe that such a basic revenue product could coexist well with primary additional insurance coverages available such as MPCI, CRC, RA and the like.
Buy-Up. CIRB recommends that consideration be given to equalizing the subsidy for buy-up coverage to 50 percent for all levels. This recommendation was made by several in November's field hearings, sponsored by this committee, in Sioux Falls, SD. This would certainly serve as a real incentive for producers to get into a kind of coverage that will provide real risk management and make these products more affordable. Affordability translates into flexibility for farmers. CIRB is concerned about the potential downside of inverting the present premium subsidy structure.
Program Simplification. CIRB supports the ongoing initiative of the industry and RMA in providing real program simplification. Simplification has been given a great deal of lip service over the years, but the fact is the program has become more complex. A classic example of the program becoming more complex is CAT. For an agent and a farmer, CAT is no simpler than buy-up. All that is required to obtain a CAT policy is required of buy-up. Companies, their agents and insureds still must work their way through a minefield of rules regulations and requirements.
Page 125 PREV PAGE TOP OF DOC Delivery Mechanism. CIRB strongly supports the private sector deliver of all crop insurance products. CIRB knows that there are still those who believe that the Government should either deliver the program in its entirety or have a shared role in delivery as was the case in the past. We do not believe that this approach is called for. The history of exclusive private sector delivery would not indicate that the private sector cannot or does not deliver the program in the most efficient and timely manner.
New Product Development. The notion that private sector insurance companies are somehow insensitive to the needs of farmers is not born out in fact. In fact the private sector through the development of products such as Crop Revenue Coverage and Revenue Assurance has demonstrated that it is accomplished at meeting farmer needs. Both programs resulted from an extensive amount of farmer input and we believe that given more incentive to develop these types of innovative products, the private industry will respond.
At this time, there remain some significant impediments to product development in the private sector. One of those is coming up with a fair and equitable way of compensating a company for development costs. Another impediment has been the rather lengthy and ill defined process imposed on the developing company by RMA regulations. Although RMA is making strides at addressing these issues, much is left to be done.
Multiyear Disasters. The unfortunate experience, best represented by the Dakotas, of multiple disasters has certainly brought this problem to a sharp focus. While the problem is clearly evident, the solution or solutions are not. The very definition of Actual Production History would indicate that ALL yield data must be factored in or else the APH isn't really an APH at all and the resultant rates based upon the APH cannot be actuarially sound.
We encourage Congress, RMA and the Industry to thoroughly study the impact of increasing the APH or artificially reducing rates.
We are not suggesting that some type of creative approach to the problem may not be warranted, but the approach should be well thought out and considered with an eye toward maintaining, to the greatest extent possible, a level of actuarial soundness. One idea, which might be considered, would be to continue to utilize the current method of calculating APHs but provide enhanced coverage in areas with multiyear disasters through increased subsidy levels.
Page 126 PREV PAGE TOP OF DOC Livestock Coverage. There is considerable interest both in Congress and from the administration in revising the Crop Insurance Program so that RMA can extend coverage to livestock. USDA has indicated that private sector programs routinely insure only for livestock mortality. It should be noted that private sector farmowner policies provide coverage for livestock for wind, fire and other perils. CIRB feels strongly that the Federal Government should not compete with the private sector or expand into areas where the private sector already serves the market. If authorization is given to USDA to offer livestock coverage, care must be taken that it does not in any way duplicate the efforts of the private sector.
There's an old saying, ''Where there's a will there's a way.'' It is obvious that Congress, private sector insurance providers, RMA, producer groups, lenders, etc. have ''the will''. Will we find the way in 1999? Probably not. However, we are confident that working together we will put the Crop Insurance Program well on its way.
When we look back over the nearly two decades of the current Crop Insurance Program, the progress that has been made is immense. Hundreds of thousands of farmers are still in business today, because this program has given them a meaningful way to manage much of their own risk. We know what this program has cost over this length of time, but what would have been the outlay without it?
Thank you for allowing me to speak to you this morning. I will be happy to entertain any questions you may have.
CIRB Member & Associate Member Organizations 1998
AgForce Insurance Services, Fargo, ND,
American Agricultural Insurance Company, Park Ridge, IL American Farm Bureau Insurance Services, Park Ridge, IL
Page 127 PREV PAGE TOP OF DOC Carthage Mutual Insurance Company, Carthage, IL
Country Mutual Insurance Company, Bloomington, IL
Farm Bureau Mutual Insurance Company, West Des Moines, IA
Farmers Mutual Hail Insurance Company, Des Moines, IA
Grinnell Mutual Reinsurance Company, Grinnell, IA
Kansas Farm Bureau Mutual Insurance Company, Manhattan, KS
Nodak Mutual Insurance Company, Fargo, ND
North Carolina Farm Bureau Insurance Company, Raleigh, NC
Oklahoma Farm Bureau Insurance Company, Oklahoma City, OK
Rural Mutual Insurance Insurance Company, Madison, WI
Square Deal Insurance Division of Allied Mutual, Des Moines, IA
State Farm Fire & Casualty Insurance Company, Bloomington, IL,
United Farm Family Insurance Company, Indianapolis, IN
Virginia Farm Bureau Mutual Insurance Company, Richmond, VA
Associate Member Companies
Agricultural Conservation Innovation Center
American Reinsurance Company
Agricultural Risk Management North America
Baldwin Mutual Insurance Company
Benfield, Greig, Ellinger Inc.
CIGNA Insurance Company
John B. Collins & Associates, Inc.
Guy Carpenter & Company, Inc.
Insurance Fund for Natural Risks in Agriculture (ISRAEL)
Liberty Mutual Insurance Company (UK) LTD
Page 128 PREV PAGE TOP OF DOC National Association of Mutual Insurance Companies
National Crop Insurance Services, Inc.
Pioneer Hi-Bred International Insurance Services, Inc.
Partner Insurance Corporation of the U.S.
Totsch Enterprises, Inc.
Tyser & Company (ENGLAND)
Statement of Ron Brichler
Mr. Chairman, my name is Ron Brichler. I serve as chairman of the Board of Directors of National Crop Insurance Services (NCIS), on whose behalf my testimony is presented today. We appreciate the opportunity to present this testimony before the Subcommittee on Risk Management and Specialty Crops.
NATIONAL CROP INSURANCE SERVICES
NCIS is a nonprofit trade association whose member companies include every crop insurance company that actively participates in the Federal Crop Insurance Program. NCIS member companies write more than $1.8 billion in MPCI and related revenue products premium with liability totaling nearly $28 billion. These companies service some 1.2 million policies, encompassing all farmers participating in the Federal program, including limited resource and economically disadvantaged farmers. In partnership with the Government, these private companies are the safety net that equitably provides risk management to the American farmer.
In addition to the Federal program, NCIS member companies write approximately $575 million in private hail and named perils programs.
NCIS brings significant resources to address the requirements of the agricultural risk management process. NCIS has historically researched and provided to Government and industry highly technical crop risk information in order to:
Page 129 PREV PAGE TOP OF DOC develop fair underwriting guidelines so that crop risks may be adequately evaluated and rated prior to executing an insurance contract;
develop and test accurate loss adjustment procedures to appraise crop damage at any stage of plant growth;
develop appropriate and adequate premium rates and insurance policy terms and conditions specific to each crop and location;
develop professional training and educational programs for agents, adjusters, farmers and the agricultural community; and
develop research programs and innovative procedures that look beyond the traditional agricultural programs to provide risk management solutions to meet the future agricultural environment.
Industry has directly supported some form of NCIS since the early 1900's. As an insurance advisory organization, NCIS is licensed and approved to operate by the individual insurance departments in all fifty states. Internally, NCIS has a diverse, well-trained professional and technical staff, many holding graduate and undergraduate degrees in Agricultural Economics, Statistics, Soil Chemistry, Botany, Plant Science, Biological Sciences, Economics, Computer Science, Computer Engineering, Education and Mathematics. NCIS organizational structure of member-companies taps a reservoir of talent and experience within the crop insurance industry through a series of technical standing committees and regional/state committees which deal with a diverse set of subject matter including loss adjustment procedures, statistical data gathering, industry public relations and industry legal issues.
On behalf of the crop-insurance industry, NCIS would like to take this opportunity to express its appreciation to the administration and the Congress for its commitment to strengthen the safety net for the American farmer. Within the past few years, vital legislative action has taken place. First, the actions taken in the recent Agricultural Research Bill (S.1150), which moved program support from discretionary to mandatory funding was a major step and signaled a very positive direction. This action provided both the farmer and the public/private delivery system the stability to effectively plan and manage for the future. Second, the newly legislated Emergency Funding Assistance Program (EFA) provides an effective incentive structure to encourage farmers to participate in the crop-insurance program. The EFA Program also includes funding for pervasive multiyear disasters along with special incentives for wheat farmers hit by losses due to scab. All these measures represent a commitment by the administration and the Congress to provide a strong safety net for the American farmer.
Page 130 PREV PAGE TOP OF DOC Since the Crop Insurance Reform Act of 1994, the program has greatly expanded. This expansion can be measured in terms of acres insured or increases in program premium and liability. Even with the elimination of a formal linkage requirement, the program has exhibited an acceptable level of stable participation. Moreover, the program is just now beginning to achieve its long-term actuarial targets. For the reasons just mentioned, one can say that the Crop Insurance Program is working and has worked as a risk management tool to indemnify an individual farmer when that farmer suffers a loss under the policy.
As a risk management tool designed for viable farm businesses, the current Crop Insurance Program has limited ability to provide economic and direct price support for sectors of the farm economy facing depressed export markets. Crop insurance is not a supply control instrument and was simply not designed to handle the current problems of a dramatic decline in commodity markets due to downturns in the international economy. Stopgap measures can and have been taken. However, additional resources will have to be allocated in the direction of production agriculture to solve the problems currently confronting the sector.
As a risk management tool designed for viable farm businesses, the current Crop Insurance Program has limited ability to deal with the tremendous socio-economic issues confronting USDA. Expanding crop insurance participation of limited resource and socially disadvantaged farmers cannot in and of itself solve the serious problems confronting USDA. Crop insurance can be a major part of the solution, but to rectify certain aspects of the socio-economic problems in U.S. agriculture will require additional effort and commitment from all parties.
We cannot over-emphasize the importance of strengthening the current Crop Insurance Program for the future of production agriculture. Without an adequate safety net in place, the farmer cannot plan for the future or secure the necessary financing to maintain or grow the farm business. The presence of a strong Crop Insurance Program provides the agricultural banking community the foundation required in order to invest with the farmer in the future of American agriculture. In addition, the existence of a strong Crop Insurance Program enables farmers to better market their crops.
Page 131 PREV PAGE TOP OF DOC Given the recent direction of the administration to improve the Crop Insurance Program, as mentioned in the President's State of the Union Address, we feel that it is imperative that the program be strengthened in several key areas. RMA along with its private sector delivery partners should work together jointly to develop an equitable distribution of program coverages and incentives which would enable the farmer to better tailor new and currently available risk management tools to meet the needs of his/her individual operation.
To achieve this goal, two fundamental tasks must be accomplished: (1) provide adequate incentives for farmers to obtain buy-up protection across a wide range of coverage levels, (2) evaluate and monitor the catastrophic coverage component in order to meet the basic risk management needs of the farmer in all regions of the country. By meeting this first objective, farmers will be able to select among a wide range of risk management alternatives. In this manner, program incentives will be smooth and continuous across a wide array of risk management instruments, and the benefits of coverage will not be skewed toward either high levels of buy-up coverage or lower levels of catastrophic protection. By meeting the second objective, the administration will ensure that the ''webbing'' of the safety net is tightly meshed and secure. That is, no one slips through the cracks.
In addition to increasing the strength of the safety net, Industry believes that further work still must be done in the area of risk management education and training for all sectors of production agriculture in the United States. In this regard, National Crop Insurance Services has taken a leadership role on several fronts. In the area of insurance training and education, NCIS has partnered with several 1890 institutions to develop a program that provides education on current crop insurance and risk management tools to socially disadvantaged and limited-resource farmers.
NCIS has also taken a leadership role with respect to pioneering efforts in traditional land grant university extension and outreach. Last year at the Annual meeting of the American Association of Agricultural Economics held in Salt Lake City, Utah, NCIS staff organized and moderated an Organized Symposium entitled ''Outreach Challenge: Effectively Reaching Limited Resource Farmers.'' The panel consisted of staff from USDA (including the Economic Research Service and RMA); Ralph Paige of the Federation of Southern Cooperatives; Desmond Jolly, Director of the Small Farms Center at the University of California-Davis; and Albert Essel, Director of the 2501C Program at Virginia State University (as you are no doubt aware, the 2501C Program is a federally funded program of the 1890 institutions designed to reach limited resource farmers.) This symposium was well received and a follow-up symposium for the 1999 Annual Agricultural Meetings has been put forth. The title of the program for the 1999 meeting is ''Strategies for Reaching Hard to Contact Limited-Resource Farmers.'' Lastly, through the NCIS magazine, the Industry has published several articles on issues facing limited-resource and socially disadvantaged farmers (Civil Rights and Program Delivery and ''Working Effectively with Limited-Resource Farmers'' Crop Insurance Today Vol. 30, No. 4).
Page 132 PREV PAGE TOP OF DOC As an industry and as taxpayers, we feel it is important to roll up our sleeves and work on the serious problems facing production agriculture. Within the confines of the current legislation, crop insurance was not designed to be all things to all people. If the scope of the current program is expanded through new legislation as suggested by many, crop insurance can take on a broader role. The increased level of support envisioned here will require a renewed commitment on the part of the administration and the Congress. We feel we can work with the administration through RMA, along with the relevant stakeholders to move the process forward.
NCIS staff and members would like Congress to know that stability and adequate support to the program is essential for success. The producer must know that the program is there when needed. The agent must know how the program works so that he can properly discuss with the farmer every detail. With continuing change, it becomes very difficult for this to happen, thereby raising doubt and confusion as to how the program works or how to measure the true success. While we know that we are living in an ever-changing world that requires continual adjustments, we must give this program the true test of time.
We know that what we are doing with multi-peril and revenue coverage is receiving widespread attention. This association has hosted some eight different foreign countries at our headquarters in Kansas City to explain how the public and private partnership is working. We have also been the guests in Europe and South America to explain in detail how the U.S. Government and the insurance industry are working together.
Yes, we are on the right track, and the rest of the world would like to know how they can model themselves after us.
Mr. Chairman, I thank you again for this opportunity to present our testimony to the committee.
Page 133 PREV PAGE TOP OF DOCStatement of James Caspary
Chairman Ewing, it is a pleasure to be here today to present testimony to you and other members of the House Agriculture Committee's Subcommittee on Risk Management, Research, and Specialty Crops regarding our views on crop insurance. This issue has become an issue of central importance as we focus on ways to strengthen agriculture's safety net.
Mr. Chairman, I am the president and CEO of the First National Bank of Clifton in Clifton, IL. I'm also the Chairman of the Agriculture-Rural America Committee of the Independent Bankers Association of America (IBAA).
IBAA is the primary voice for the Nation's community banks, representing 5,500 institutions at nearly 16,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. IBAA's members hold nearly $445 billion in insured deposits, $524 billion in assets and more than $314 billion in loans for consumers, small businesses and farms in the communities they serve. For more information, visit www.ibaa.org.
The First National Bank of Clifton is a small midwestern agricultural bank with $24 million in assets that has been serving our community since 1902. It is located in the north central part of Illinois which is corn and soybean country. The bank owns an insurance agency which sells crop insurance and is one of the largest providers of crop insurance in the state of Illinois.
CROP INSURANCEA LENDER'S PERSPECTIVE
Mr. Chairman our experience with the Crop Insurance Program has been favorable and we think the program is essential for many of our farm customers. From a banker's perspective, the program helps ensure the farmer is covering a major portion of his production risk and therefore will not be financially ruined if a major weather disaster occurs. As a lender, we know our farm customers will be better positioned to repay their operating loans if they have crop insurance.
Page 134 PREV PAGE TOP OF DOC Crop insurance can help the farmer in several ways. Since it protects a certain amount of the producer's yield, it is possible to project a certain amount of income based on his yield and the likely price he will receive from the crop. This can help the producer establish a positive cash flow if the prices he receives will be high enough. The issue of whether a borrower can cash flow has been increasingly on the minds of lenders in recent months due to the severely depressed farm prices we are currently experiencing, which are a result of rising crop carryover levels and weak foreign demand.
STRENGTHENING THE FARM SAFETY NET
The deteriorating state of the farm economy has challenged us all to consider whether we can improve crop insurance and risk management tools to provide an adequate farm safety net. The $6 billion farm aid package that Congress passed last year helped farmers cope with the triple whammy of low prices, declining export markets and widespread weather related crop losses. It appears that two of the three factors that hurt the cash flow positions of farmers last year will be with us again this year and perhaps for the foreseeable future. Hopefully we won't have widespread bad weather this year but some areas of the country are already experiencing dry weather and there have been some suggestions that La Nina could cause a dry summer in the Midwest.
We appreciate your leadership Mr. Chairman and that of other members of the Agriculture Committees to pass anti-embargo and anti-sanctions legislation and the continued efforts to pursue policies which will improve trade and foster agricultural export growth. However, USDA currently predicts U.S. farm exports will fall to $49 billion this year from a high of nearly $60 billion just two years ago. And the long term forecasts do not show a significant and quick turnaround in farm exports. Perhaps this will change if we can quickly pass a number of pro-export oriented trade measures.
As Federal Reserve Chairman Alan Greenspan remarked a couple of weeks ago when testifying before the House Banking Committee, ''It is not surprising that agricultural commodity prices have fallen to such low levels given the situation with weakened foreign demand.'' Chairman Greenspan added, ''As for how long it could take for U.S. agriculture to recover from current market price lows, my own judgment is that, short of a significant building back of export demand, it's going to be difficult to work our way through this particular problem.'' An aggressive trade policy, which the IBAA has called for in our Farm Safety net proposal made in January, is essential to ensuring the health and viability of agriculture in the long term.
Page 135 PREV PAGE TOP OF DOC However, in the short term, farmers must have adequate risk management tools that can help producers manage both their production and revenue or price risks. A strengthened farm safety net should incorporate components that allow producers to protect themselves against both yield and income losses if we are to avoid future ad hoc disaster and farm aid packages. However, given the severely depressed prices and the likelihood that a strengthened farm safety net will not be in place for the 1999 crop year, Congress may need to once again pass additional farm income assistance to help producers survive. In fact, last week the IBAA joined with 25 major farm groups in a letter to Congress urging that significant additional funds be incorporated into the fiscal year 2000 budget to address the deteriorating conditions in the farm economy.
Most farmers do not currently cash flow, meaning they will attempt to obtain credit based on their equity. But the expectation of continued low prices for two or three years casts a dim shadow over the future prospects of many farmers unless the farm safety net receives quick and substantive attention.
NEW LEGISLATION NEEDED TO IMPROVE FARM SAFETY NET
We are encouraged to see the legislation introduced last week by Senators Roberts and Kerrey which intends to provide more flexibility and affordability to the Crop Insurance Program. It is clear that crop insurance needs to be improved by increasing the coverage amounts and making it more affordable. Producers need more coverage at lower costs. The subsidies clearly need to be increased on the higher buy-up levels.
The Roberts/Kerrey legislation will help address some of the current discrepancies in the Crop Insurance Program by inverting the crop insurance subsidies so that more subsidy is paid at higher buy up coverage levels. This will encourage producers to take out greater protection rather than settling for CAT coverage or the 65 percent level. Many producers as well as lenders complain that the CAT coverage is almost worthless because the farmer doesn't receive anything unless he has a total crop failure.
Page 136 PREV PAGE TOP OF DOC The bill also helps address the multiyear crop loss problems that were a focus of the recent disaster payment legislation due to several states having experienced severe crop losses for successive years. The bill establishes a multi-ear disaster actual production history (APH) adjustment. Under the current rules farmers are finding the program reduces their yields too much when they experience multiple year disasters, making insurance coverage inadequate. Fixing this problem should be a high priority.
Mr. Chairman, we also believe it will be important to equalize the subsidy between multi-peril (MCPI) coverage and revenue assurance programs so that products like CRC are affordable to producers. Several suggestions have also been made in the area of simplifying the program of revenue coverage and allowing producers to purchase a dollar amount of insurance and also allowing producers to insure for a certain amount of their cost of production. In addition, livestock producers currently do not have ample insurance options. These categories of products should receive further attention.
It is imperative that producers who buy crop insurance receive more benefits than those who do not buy the insurance in any future ad hoc disaster legislation. And this added benefit should be written into basic statute so that Congress will have to consider these benefits in future ad hoc disaster bills, should Congress decide they are necessary. Otherwise, some producers may question the need to buy crop insurance if they are not convinced that Congress truly intends to make the revised crop insurance programs a key safety net component. Non-participating farmers may believe they can rely on Congress for help if a disaster occurs, which makes it harder to encourage participation. Encouraging producer participation in the program will help strengthen actuarial soundness of the program. High producer participation in the program is essential.
Ad hoc disaster programs can be extremely costly as we have seen. But unless adequate changes are made in the current program, Congress and producers themselves, will lack the confidence that we have sufficient protection in place against wide-spread weather disasters.
Page 137 PREV PAGE TOP OF DOC Mr. Chairman, IBAA joined a number of farm and lending groups in a December 15 letter to Congress in which we laid out eight concepts for improving the Crop Insurance Program and these eight general concepts are at the end of this statement just prior to the conclusion.
A SAFETY NET THAT PROTECTS AGAINST A VARIETY OF DISASTERS
It may indeed be possible to expand crop insurance to cover a variety of disasters that producers face and to keep producers creditworthy. But to accomplish this there will need to be a variety of coverage options that are affordable across the spectrum of products available. There are currently a number of problem areas, as your committee is aware, which make truly fixing the Crop Insurance Program a very complicated and expensive short term task.
However, if Congress truly wants to use crop insurance as the main pillar of a strengthened farm safety net then we will need to ensure that farmers are protected against both crop and income losses and that the available risk management tools will assist and enhance their marketing efforts.
Currently, the MPCI coverage provides yield and quality protection while CRC provides a combination of yield and price coverage. However, some producers would like a product that provides protection when prices are low and yields are good. This would also be important if producers are expected to take advantage of any future policy mechanisms that allow producers to accumulate income in good years so they are less dependent on Government assistance in bad years. Good yields can offset low prices but they do not allow the producers to accumulate income as a buffer against low prices and low yields in the subsequent year or years. This minimizes marketing opportunities.
One option would be a price protection product that triggers when prices are low. It could be as simple as comparing the harvest price CBOT contract for the current year to the average price of the previous three or five years and indemnifying growers for a price shortfall on their guaranteed bushels.
Page 138 PREV PAGE TOP OF DOCEIGHT CONCEPTS PRESENTED IN DECEMBER 15 LETTER TO CONGRESS
1. Increase the farmer premium subsidies to make the program more affordable.
2. Crop insurance rating practices should be modified to encourage broader participation levels, particularly among lower risk producers.
3. Regulatory incentives and monetary reimbursements for approved insurance products should be provided to encourage the private development of risk management products and insurance program expansion to additional commodities.
4. Alterations must be made so the program is able to respond to multiyear disasters.
5. Improve the public/private partnership.
6. Equalize the Administrative and Operating (A&O) percentage subsidies for all crop insurance products.
7. Crop insurance policy coverage options, including prevented planting, quality adjustment provisions, and replanting coverage should be comparable across commodities when adequate rating data is available.
8. Producers who participate in the Crop Insurance Program should be eligible to receive ''good experience'' premium discounts based on their indemnified loss history.
Mr. Chairman, producers need help now. Farmers are trying to get loans at their local lending institutions, but most don't cash flow. Congress is pursuing strengthening the farm safety net by using crop insurance as the key program. While there is no money specified in the President's budget request to accomplish these ends, clearly everyone understands more money will be needed. Addressing these problems as soon as possible will prevent costly ad hoc farm aid and disaster packages in the future, but only if we all have confidence the farm safety net is truly adequate. The IBAA and our agricultural lenders will be pleased to work with you in developing the necessary solutions. A copy of our safety net proposal is attached. To the extent that long term solutions cannot be immediately addressed, we encourage Congress to provide additional up-front financial assistance for the current crop year to cover short-term distress in the farm sector.
Page 139 PREV PAGE TOP OF DOCSTRENGTHENING THE FARM SAFETY NET
Increased Budget Allocation to American Agriculture. The recent Farm Aid package of market loss payments and disaster payments reveal that the current mix of farm programs are inadequate to sufficiently protect farm income during periods of severely depressed prices; declining exports and widespread crop losses. Congress would alleviate uncertainty for farmers and their lenders by committing several billion dollars in new funds to increase the budget baseline and which could be applied to eventual farm safety net solutions.
Expand Risk Management Tools. Especially by reviewing ways to improve crop insurance to protect farm income and yields. Efforts to lower the premium costs of the Federal Crop Insurance Program to make it more accessible and affordable for all producers in all regions and efforts to cover multiple-year disasters and provide revenue protection should be considered. Improved risk management tools could eventually be more cost efficient than ad hoc disaster programs and should provide options to adequately insure both crop and income protection.
Provide Additional Market Loss Payments. Until farm prices improve significantly or export markets rebound it may be necessary to continue market loss payments to support farm income. With over thirty percent of U.S. ag commodities tied to export markets, reductions in these markets can have serious, devastating affects on American farmers.
Pursue An Aggressive U.S. Trade Policy. It is imperative that U.S. agricultural trade rebound if family farmers are to receive a profit from the market and be viable in the long term. Congress should pursue several initiatives including exempting agriculture from unilateral economic trade sanctions; requiring USTR to consult with House and Senate Agriculture Committees prior to signing any trade agreement comprising agriculture-related provisions; pursue elimination of State Trading Enterprises and an audit of the Canadian Wheat Board, and pass Pass Fast Track trade negotiating authority.
Increase Funding & Options For FSA Guaranteed Loan Programs. With recent program changes including increased size caps; devastation in the hog market; weather related losses in 1998 and continued low prices, the demand for more guaranteed loans is likely to increase.
Page 140 PREV PAGE TOP OF DOC Alternative Funding Sources for Community Banks. As deposits leave rural areas, allowing community banks access to the capital markets to fund loans and keep these loans in their portfolios will become increasingly important. Utilizing Government sponsored enterprises (GSEs) for this purpose would have no budgetary costs.
Increase Food Aid Donations. Food aid commitments to needy foreign nations should be increased and these programs should be reviewed to assess ways to improve cost efficiencies.
Limited, Short Term Use of the CRP. Authority to use the CRP on a limited, short term basis to reduce overproduction on marginal acres, target disease stricken acres, and prevent land from being dumped on the market could be useful.
Tax, Regulatory and Other Farm Safety Net Initiatives. Support tax reduction initiatives including: eliminating estate taxes; expand Subchapter S tax relief eligibility; lower taxes for qualified community lenders; and pursue initiatives that encourage savings in federally insured depository institutions. Also support efforts to allow flexibility by bank examiners to allow banks to work prudently with their farm borrowers. Implement a moratorium on burdensome new regulations affecting rural citizens; oppose the mixing of banking and commerce and review the direction and plans of the Farm Credit System. Also appoint an expert agricultural economist to the Federal Reserve Board of Governors.
Statement of Lee Cromley
The 1998 crop year was a disaster year for many parts of the country. Weather, price and quality discounts all worked together to produce this disaster. Georgia was a hard hit state and in particular, southeast Georgia. It was the worst year since 1980 for many of our farmers and for some it was the worst year they have ever experienced. It has caused many of us to begin to question whether it is worth it or not to continue to risk everything we have every year to produce crops that have so little promise of a respectable return. While it could be said that farming has never been a reasonable thing to do, it seems we have entered an era in which the risks associated with farming are now totally unreasonable and unacceptable.
Page 141 PREV PAGE TOP OF DOC For about 2 months now, a group of farmers from Bulloch County, GA have been meeting to discuss (and sometimes cuss) crop insurance. We have sought to analyze the current coverage available while seeking for some consensus on how a program could be devised that would be effective in insuring us against the risks we take as farmers. We began by recognizing the fact that many of us, after having studied the coverage available, choose not to spend money to buy this insurance. In seeking to identify why that is the situation, we identified a number of problems with the current available coverage.
THE INDEMNITY TO LOSS RATIO PROBLEM
We analyzed the 1998 crop year on some of our farms, most of which did not carry cotton insurance. On two farms in particular, Boggy Branch Farms and Cromley Farms, substantial losses were incurred due to severe drought. The owners of both of those farms thought during harvest that they should have taken crop insurance on their cotton. However, when they analyzed what they would have collected in indemnity payment, they were surprised to see that crop insurance, even the highest levels of coverage, would not have been a wise investment. Summaries of their analyses are included. In short, they found that if they had carried the highest available multi-peril coverage (75 percent), when compared to the cost of producing their cotton, they would have collected only about 15 percent or less of their total loss after paying the premium.
An analogy would be thus: if a man tried to sell a $30,000 tractor that would not work for the operation, it would do him no good to lower the price 30 percent. It still would not work for the operation. Such is the case with multi-peril coverage. The drop in premium of 30 percent still leaves you with insurance that at best only recoups a small percentage of your loss. This is why many farmers who have taken the time to analyze the coverage choose not to buy this insurance.
The premiums on the highest levels of coverage (even after the 30 percent premium reduction) represent a sizable investment, sometimes adding up to 10 percent to our out-of-pocket costs. Reform in crop insurance must produce a situation where it is poor management not to buy crop insurance. The math says that that is not the case now.
Page 142 PREV PAGE TOP OF DOCTHE SUBSIDY INVERSION PROBLEM
In analyzing the present coverage and the levels at which the coverage are subsidized by the Federal Government, we were surprised to discover that the following axiom held true for all coverage: the more worthless the coverage, the higher the subsidy. The more valuable the coverage, the less the Government subsidized the coverage. The prime example is the coverage euphemistically called catastrophic coverage. The coverage is, to be blunt, worthless. It is $358 million given to companies and re-insurers with virtually no chance that the growers will ever realize any significant loss recovery from it. In a terrible year like 1998, the loss ratio was only 0.28. (Taken from Federal Crop Insurance Corp. summary of business report 02/22/99). The higher subsidies on the lower coverage would be better spent if redirected toward more effectual coverage providing the grower with a realistic chance of recovering enough of his or her loss to insure their future survival.
THE DISASTER YEAR EFFECT UPON FUTURE INSURABILITY
Lee Cromley analyzed the effect 1998 would have upon his 1999 yield history. The present system is determined by yield history. Disaster years affect yield history in such a way that a producer such as Cromley Farms with a yield history of 825 lbs. of cotton per acre would now have their insurable yield level reduced 10 percent. Their 1999 insurable yield will be 742 lbs. simply because of a certified disaster year such at 1998. We believe this works to further decrease participation in crop insurance. Cromley Farms is just as capable of producing 825 lbs. of cotton per acre as ever but in 1999, insurance will be a worse deal for them than in 1998.
WHO DOES THE GOVERNMENT SUBSIDIES BENEFIT?
Our analysis of the current program leads us to believe that the current subsidy system is more a subsidy for the insurance companies than for the farmers who need the insurance:
Page 143 PREV PAGE TOP OF DOC It was not the insurance companies who began calling for reform. The system operates effectively for them and not the farmers.
While millions of dollars is spent on subsidizing the coverage, many farmers still do not take the insurance. This is not because we don't realize the risks we take in farming nor is it because we cannot add or multiply. It is because when we do add or multiply the figures, we find coverage ineffectual and costly.
We believe the public monies given to the private companies to administer crop insurance may be better directed by keeping crop insurance in-house so to speak. FSA already does much of the work in collecting and recording data necessary for crop insurance. We simply ask the question: can the present monies spent on subsidizing crop insurance be better spent by having the taxpayer underwrite crop insurance rather than private companies?
There are other problems beside these associated with crop insurance-problems that lead to abuse of the system both by farmers and by insurance agents. The present insurance penalizes you for having a yield that is so low you cannot afford to harvest it, yet the amount is deducted from your indemnity.
Reform or complete renovation is needed. Our concern is that this reform should be driven by those who use it and need it, and not be driven by those who profit from the sale of crop insurance. Again the axiom that must hold true is; any reform of crop insurance must economically indicate a wise management decision to buy the coverage. Again, we reiterate that, from the farmer's perspective, this is not the case now.
RECOMMENDATIONS FOR REFORMS
1. Eliminate Catastrophic Coverage.As already noted, the subsidies on this coverage would be better spent being redirected toward providing better coverage at a more affordable premium.
2. Replace multi-peril with a dollar-based coverage that covers a high percentage of input costs associated with growing particular crops. The yields, quality adjustments and markets all contribute toward the risks associated with trying to make a profit. Multi-peril insurance in most cases only covers yield. Crop Revenue Coverage (CRC) is expensive and the price it is based upon is tied to the market. In a poor price year like this year, the coverage base price will be too low to provide adequate coverage for the price.
Page 144 PREV PAGE TOP OF DOC Though many details would have to be considered, from the farmer's perspective (and we think from a lender's perspective), a coverage that insures a certain level of input costs would be useful if it is affordable. The costs could be calculated regionally using Extension Service figures.
3. Farm Service Agency Administered. Instead of periodically spending $6 billion, we suggest that serious consideration be given to making this coverage an FSA administered program. We are concerned that the monies that could be used to make crop insurance effective and affordable will never be available at the farm level because it gets siphoned off in administration costs and commissions.
We advocate farmer involvement in the compliance issues and developing coverage on regional and local levels. Farmer driven programs are always the most successful and accountable. Local county boards selected from a producer pool would be invaluable in maintaining the integrity of the program.
USDA in its 1997 Census, reports that there are only 310,000 farms left in the United States that have gross sales of $100,000 or greater. A farmer would need to gross over $250,000 to make a living off the profit of those sales. The number of full-time professional farmers in that category is only 143,000. The contribution of part-time farmers to the well being of the Nation is significant. But we do question whether we as a nation can have a secure supply of food and fiber if we do not maintain a corps of professional farmers who are fully engaged in crop and livestock production. While the National Guard and the different reserve arms of the military play a valuable role, we still insist that a professional full-time military is vital for our national defense. If we can commit resources of 1.5 million professionals under arms at a cost of $325 million to defend our national interests, why can we not commit a fraction of that effort to the most critical function of this country; food and fiber production.
Unless true and effective reforms or renovations of crop insurance take place in the immediate future, you will see a further decline in the number of professional farms in this country. We are already at an unacceptable level. We must have a risk-management tool that is both effective and affordable. The lack of this will add disaster upon disaster.
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Statement of Dennis Everson
Mr. Chairman and members of the subcommittee, I am pleased to be here on behalf of the American Bankers Association (ABA) to participate in this important hearing to discuss risk management in general, and to discuss the Federal Crop Insurance Programs in particular. I am Dennis Everson, senior vice-president of First Dakota National Bank in Yankton, SD. In addition, I am currently chairman of the ABA's Agricultural and Rural Bankers Committee and Chairman of ABA's Task Force on 21st Century Agricultural Banking. First Dakota National Bank is the oldest bank in what was once the Dakota Territory, and today our bank has more than $300 million in assets. We presently have $100 million loaned out to farmers and ranchers in our service area.
In addition, First Dakota National Bank offers a service called Dakota Mac. Dakota Mac is a Farmer Mac seller organization that works with 42 other banks in a 15 state region to process and service Farmer Mac I and II loans. Bankers that participate in the Farmer Mac programs are able to offer their customers long term fixed rate mortgages. Giving producers the opportunity to take advantage of a long term, fixed rate mortgage is an effective way that they can manage interest rate risk. We started Dakota Mac in 1993 and since that time we have successfully sold $65 million in loans through the Farmer Mac program. We expect our Farmer Mac service to grow considerably this year. Last year we did a total of $14.5 million in loans sold to Farmer Mac. In the first 30 days of this year we have received applications for almost $14 million.
The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membershipwhich includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banksmakes ABA the largest banking trade association in the country.
Page 146 PREV PAGE TOP OF DOC I would like to say first that I, and the thousands of bankers that I am representing today, are very concerned about our farm and ranch customers. Over the last 18 months we have experienced a roller coaster of price highs and lows, and currently we are experiencing historic price lows. I am sorry to say that there is nothing in my testimony today that will raise the price of corn, wheat, soybeans, hogs or cattle. I am frustrated by the fact that I do not have the answers that my customers want. Our industry provides the vital credit that farmers and ranchers need to be successful. The banking industry has more at stake in the future of agriculture than any other lender.
At the end of 1998, banks had over $72 billion outstanding to farmers and ranchers; more than forty-one cents out of every dollar of credit loaned to every farmer and rancher in America comes from my industry. Last month I had the opportunity to come before the Congress to discuss our recommendations for strengthening the USDA, Farm Service Agency guaranteed loan programs. The guaranteed loan programs allow bankers to work in partnership with USDA to make credit available to a wider range of farmers and ranchers. In my bank, and in thousands of banks across America, bankers are doing everything they can to accommodate the credit needs of their farm and ranch customers.
The erosion in the cash flow of my customers has been, in some cases, severe. My loan officers have completed the majority of their annual reviews with our customers in preparation for the spring lending season. They are reporting to me that even our most productive, best managed and best capitalized customers had a tough time last year and that they are worried about what the next 12 months will bring.
Our concern is great. Agricultural lending is still strongly based on relationships. While I and my fellow bankers employ every conceivable technology available to us to determine if the loan we are about to make will pay as agreed, it still comes down to me looking across the kitchen table at that farm family and judging if what we are about to enter into makes sense for all parties. It has been harder this year for me to do that.
Page 147 PREV PAGE TOP OF DOC With the changes in farm support programs authorized by the 1996 farm bill, farmers are more aware of the need for innovative risk management techniques covering production, marketing and financial risk. Increasingly, our farm customers look to my loan officers for advice and guidance in this new era of freedom to farm.
There is a growing concern about the health of our agricultural economy. Since bankers have so much at stake in the health of agriculture, the ABA formed a special task force on 21st century agricultural banking this spring. The purpose of the task force is to bring bankers from around the country together to discuss ways that we can be more proactive and engaged in the future of this vital national industry. We held our first meeting in January and have begun compiling research and recommendations. We have three main goals for the task force:
First, we hope to provide information to bankers about positive steps that can be taken to respond to the eroding agricultural economy and to encourage bankers to actively participate in forming the banking industry's response to the challenges the agricultural economy presents.
Second, we are developing recommendations to Federal and state policymakers regarding appropriate steps to take in response to the needs of our customers and our communities. The observations and recommendations I will be sharing with you today are the result of our initial discussions about risk management in general and crop insurance in particular.
Third, we want to provide better, more timely information to our customers and communities so that they understand the issues concerning the banking community which is concerned, proactive and engaged.
ABA supports a stable and reliable Federal Crop Insurance Program with private sector delivery. America's bankers and their customers know that dependable crop insurance can, and frequently does, mean that bankers are able to approve operating loans and other types of credit for farmers struggling to stay ahead in high-risk situations, volatile weather and challenging agricultural markets. Crop insurance can also ensure that producers will be able to recover their input costs when damaged by unexpected circumstances, and thus be protected from financial disaster.
Page 148 PREV PAGE TOP OF DOC The decision to purchase crop insurance is entirely up to the producer, and many of our customers are insuring their crops. I expect to see more farmers in our area signing up this spring since USDA announced the 30 percent premium reduction.
Simply put, today's Crop Insurance Program works for the farmers that buy it. In addition to being cost-effective to the taxpayers, crop insurance is an affordable tool for producers, and it has proven to be a significant advantage for careful managers who face devastating weather conditions or other unexpected set-backs.
While crop insurance has worked for farmers that buy it, we believe more needs to be done to make this program more effective for all of America's farmers and ranchers. The ABA Task Force on 21st Century Agriculture spent a great deal of time discussing the current crop insurance programs and discussed ways the program can be made stronger for the future. We made the following observations:
Multiple crop failures over a period of years must be addressed. Insurance coverage is based on an individual farmer's Actual Production History (APH). If a farmer has had a string of bad years, his APH will be reduced, thus reducing the level of insurance coverage that they can buy in the future. Many farmers have had their APH reduced to the point that it is no longer economical for them to buy the insurance. Farmers that have experienced multiple year crop disasters are hit with a double disincentive: lowered yield coverage and higher premium rates.
The concept of actuarial soundness does not work for this program. It does not make sense for the Government to try to indemnify farmers from all crop related problems and, at the same time, adhere to an artificially imposed sense of ''actuarial soundness''. We must maintain affordable and accessible crop insurance protection for farmers that are farming in high risk areas.
The needs of livestock producers must be addressed. The problems livestock producers face are in some ways similar to the problems crop producers face; they need a reliable way to insure their pasture and range land in case there is a severe drought and they need to purchase replacement feed. In other ways, livestock producers face unique challenges. In my part of the country, we have seen hog prices fall to a level that no one ever dreamed could be possible. My customers would be interested in some kind of revenue/price risk insurance.
Page 149 PREV PAGE TOP OF DOC Efforts to link crop insurance protection with price protection have been marginally successful. A stronger, more efficient link between crop protection and price protection could be established. According to USDA, only about 16 percent of corn and soybean producers who have bought up to the higher levels of crop insurance coverage also take revenue insurance. Clearly we need to do more work in this area since revenue coverage holds great promise for many.
Crop price elections need to be more flexible. The current system of buying insurance based on a market price established months before any crops are actually harvested and sold creates a situation that drives farmers away from the program. I have a hard time advising my clients to buy insurance on their corn at $2 per bushel when it costs them more than $2 per bushel to grow it.
Basic coverage and non-insured crop coverage is not adequate. Catastrophic Coverage (CAT) and Non-Insured Assistance Program (NAP) has been universally rejected by farmers. CAT is a floor level of insurance that producers buy and NAP is a program intended to protect producers that grow non insured crops. The FCIC acknowledges that CAT and NAP coverage is not sufficient to provide farmers with adequate coverage, and only two thirds of the farmers that have CAT coverage purchase buy-up coverage.
Producers find crop insurance to be too expensive. Producers are working on razor thin margins. Crop insurance, especially at the higher buy-up levels of coverage, is expensive. We would like to commend USDA for earmarking $400 million this year to provide producers with an additional incentive to buy crop insurance. What happens to producer participation after this one time only incentive is gone?
Clearly, there are more questions than there are answers. I have great faith in the innovation and creativity of our industry, and by working together we will be able to design an insurance program that meets the needs of our farm and ranch customers. But we need time. I am concerned that our customers, and your constituents, may not have the time we need to solve these problems. Due to the urgency of the situation, we have some recommendations that should be implemented immediately.
Page 150 PREV PAGE TOP OF DOC Recommendation No. 1. Extend the Spring, 1999 sign-up date by 30 days. To make sure that the widest range of producers take advantage of the 30 percent premium reduction being offered this year, extend the sign-up for spring planted crops by another 30 days. In my area that would take sign-up to April 15. Many producers are under financial pressure this year and they may not have had the opportunity to carefully evaluate the benefit of the additional premium discount. The sign-up for 1998 fall planted crops was extended, so it makes sense to give the same benefit to spring planted crops.
Recommendation No. 2. Make adjustments for multiple year disasters. We must address the problems faced by farmers that have suffered multiple year disasters. The FCIC must immediately develop a way to adjust a farmer's APH for multiple year disasters or many farmers that farm in these areas will not insure their crops this year. We must take immediate steps to deal with this problem, or farmers will abandon the program and expose themselves, their lenders and others to severe risks.
Recommendation No. 3. Redirect the Federal subsidy. The cost of crop insurance to the producer is subsidized, but the subsidy is misdirected. The highest subsidy should be on the highest level of coverage. The current subsidy formula is designed to provided the highest level of subsidy to the lowest level of coverage. Leverage the subsidy to encourage producers to buy up.
Recommendation No. 4. Provide adequate coverage for forages. Introduce a policy that sufficiently covers pasture and range land so livestock producers at least have certainty about being able to feed their animals.
Recommendation No. 5. Allow price elections to move with the markets. We must address this issue, or more and more producers will leave the program since the current system of locking in a price selection six to eight months before any sales occur actively discourages participation.
Page 151 PREV PAGE TOP OF DOC These recommendations deserve your immediate attention. You would give producers additional risk management opportunities right now, and you would allow all stakeholders additional time to carefully and deliberately design a program that meets the needs of producers in the 21st century.
The American Bankers Association looks forward to working with you as you address the challenges facing agriculture. I will be happy to answer any questions that you may have at this time.
Statement of Mike Miller
Mr. Chairman, it is my pleasure to appear before you to talk about the Federal Crop Insurance Program. I am Mike Miller, president of Blakely Crop Hail, Inc. and chairman of the American Association of Crop Insurers or AACI. AACI represents insurance companies and agents that write nearly 80 percent of the multiple peril crop insurance premium throughout the United States.
I want to thank you, Mr. Chairman, for holding this hearing and giving us the opportunity to testify. As you know, risk management and crop insurance have been the focus of much discussion this year. We welcome the discussion and, quite frankly, view this as a positive opportunity for American farmers and the Crop Insurance Program.
We believe the Crop Insurance Program is working as designed. The program has improved significantly over the last 5 years. Over 180 million acres are now insured. This is nearly a 100 percent increase since 1994. Farmers have more choices now. Five different federally subsidized revenue insurance products are available in 1999 (over $335 million in premium in 1998). Four years ago there were no federally supported revenue insurance products in the market. Three of these new products were developed by the private sector.
The agricultural sector, on the other hand, is in a tailspin. Within the past year, we have seen commodity prices plummet and export markets collapse. The Department of Agriculture's outlook for 1999 and beyond does not provide much hope for improvement. Is crop insurance not working because the farm economy is suffering? We do not think so.
Page 152 PREV PAGE TOP OF DOC Can the insurance program be improved? We think it can be. Can the program cure all of the current ailments faced by agriculture? We do not think this is practicable. We have not heard anyone make the argument that a failure of the Crop Insurance Program is the reason for the current economic downturn in the agricultural economy. What we are hearing is that crop insurance should do more and be more responsive to the current agricultural economic situation.
Can crop insurance be used to cushion the severity of the current economic downturn? Let me turn in a moment to the nearly $6 billion in farm relief provided last year to answer that question. First, let me say, that as an organization, AACI does not support the notion that the current problems in agriculture are the responsibility of the 1996 farm bill. Its market-orientated policy is sound and ought to continue. Having said that, we do support strengthening the tools that are available to farmers to manage risk. We believe the key word is manage risk. A safety net cannot possibly eliminate all risks for all farmers, nor should it distort markets.
Of course, one of the principal farm safety net tools is the Crop Insurance Program. We believe the program can be improved for farmers and we stand ready to work with you to improve the program. We want to deliver the best possible insurance program to the American farmer. Even though congressional action has cut delivery funds by over 21 percent in the past 4 years, we continue to deliver the program on time and without additional supplemental requests for funding. The private sector is getting the job done. It works efficiently and timely.
The $6 billion in emergency aid provided last fall was a tremendous response to devastating decline in farm income. But it was a temporary one-year response. With the outlook for 1999 no better or even worse, farmers will expect a response from the Federal Government this year. Mr. Chairman, I would like to take a moment and review what we consider to be the four major pieces of the 1998 disaster assistance and tie these pieces to the Crop Insurance Program. The four major pieces of the emergency farm package are: (1) supplemental income payments in the form of market loss assistance payments ($3.1 billion), (2) additional funding for livestock feed assistance ($200 million), (3) ad hoc crop disaster assistance payments ($2 billion), and (4) a crop insurance incentive payment designed to increase crop insurance participation ($400 million).
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MARKET LOSS ASSISTANCE PAYMENTS
It is our observation that expectations are changing with regard to the Crop Insurance Program. The Crop Insurance Program, as currently designed, does not provide income or market loss assistance payments. Crop insurance provides protection against a yield loss and, in the case of revenue insurance, protection against a decline in gross revenue based on market prices. If market prices are low and stay low, revenue insurance will guarantee a low price. It is not intended to guarantee revenue in excess of market prices. An insurance program could be designed to do that, if policy makers so choose. We believe that recent experience with insurance products that provide an above market revenue guarantee indicates a significant demand for such a product, but that this type of insurance policy could potentially lead to market distortions. If desired, the insurance program can provide an income transfer payment, but careful consideration needs to be given to this type of policy change.
Livestock is not currently insured under the Federal Crop Insurance Program. Again, the program could certainly be designed to do so. Unlike crop producers, livestock producers generally face small risks associated with loss of production. Price volatility is a much larger concern for them. This argues for a revenue or price insurance policy for livestock producers. While a strictly price-based insurance product can be developed, there may be more efficient and cheaper alternatives for livestock producers to manage price risk. The livestock feed assistance provided in the farm relief package does question the adequacy of the current federally designed forage policy. This policy should be reviewed and, if possible, improved.
CROP DISASTER ASSISTANCE PAYMENTS
The Crop Insurance Program should be strong enough to ward off the demand for ad hoc disaster payments. Here the program could improve. Particular attention should be focused on the existing premium subsidy formula. The Roberts-Kerrey bill, in this regard, is an excellent first step towards improving the affordability of insurance.
Page 154 PREV PAGE TOP OF DOC Premium subsidies are currently capped. As farmers purchase higher coverage, the cost to them rises disproportionately. For example, the current premium subsidy for 65 percent coverage is roughly 42 percent of the total cost. If the farmer purchases 75 percent coverage, the total premium roughly doubles, the subsidy falls to roughly 23 percent and the out-of-pocket cost to the farmer nearly triples. As a result, over 90 percent of all acres covered under the program are insured with a 35 percent deductible or greater. Given the current subsidy formula, this should be no surprise.
INCENTIVES TO INCREASE CROP INSURANCE PARTICIPATION
What are the two most common complaints about crop insurance? The policy costs too much and doesn't provide enough protection. Is a 35 percent deductible adequate for farmers to manage production and revenue risk, especially in light of low commodity prices? Past experience would suggest not. Virtually all of the perceived and real problems with crop insurance would be greatly minimized if growers had higher coverage level at more affordable rates.
To the administration's credit, they have taken a first step in 1999 toward making crop insurance more affordable. By setting aside $400 million of the ad hoc disaster payments provided last year, the administration has made crop insurance more affordable. But this is limited to one year. So far, we have not seen what the next step will be from the administration. We expect many farmers to utilize the $400 million to purchase higher insurance coverage. However, many farmers are also taking the 30 percent discount and keeping coverage at the same level as last year. In part this is due to the tardiness of administrative decisions regarding the availability of the $400 million and the tremendous amount of misinformation in the county field offices regarding this program and the availability of ad hoc disaster payments. In addition, farmers are looking to cut input costs this year because of low commodity prices.
We would like to participate in a policy discussion regarding the existing premium subsidy formula, both for the existing multiple peril insurance policy and revenue insurance. We are delighted that Chairman Combest is making this a top priority for the committee and is seeking additional funding for the program. We applaud his innovative thinking and stand ready to work with you as you deliberate improvements to the Crop Insurance Program. We would note that we believe that many of the Chairman's concerns regarding perceived fraud within the program can be addressed by changing several key policy provisions of the underlying crop insurance policy. We would also ask that as changes in the subsidy formula are considered, impacts on the Standard Reinsurance Agreement must be considered. Reinsurance and program participation are tightly interwoven, one cannot be changed without the other.
Page 155 PREV PAGE TOP OF DOC We recognize that increasing premium subsidies is not without cost. However, if we are to minimize future emergency spending, we must look toward increasing participation in the program and increasing coverage levels and affordability for farmers. In the end, this will prove to be a more prudent investment of taxpayer funds than one-time emergency spending bills.
Mr. Chairman, I would like to thank you for holding this hearing. We look forward to working with you in the future. I would be happy to answer any questions you may have at this time.
Statement Frank B. Jones, Jr.
Thank you, Mr. Chairman and other members of the subcommittee, for taking the time to listen to our comments regarding the serious need for reform of the Crop Insurance Program.
The problem with cotton crop insurance is fairly simplegrowers cannot obtain adequate levels of coverage at affordable rates. Therefore we have low participationjust over 40 percent in buy-upand the acreage insured is at inadequate levels to provide effective risk management. While we submit that our problems are easy to state, finding solutions will be challenging. We are committed to work with Congress and the administration to meet that goal.
One of the most significant problems associated with cotton insurance is that premiums are significantly and unjustifiably higher than those for other major commodities. Data obtained from FCIC's 1997 Summary of Business Reports starkly illustrates the inequity in cotton premiums relative to other major commodities. The average buy-up (BUP) cotton premium in 1997 was $30.11 per acre compared to $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 like peanuts, soybeans, rice, and sugar.
Page 156 PREV PAGE TOP OF DOC Looking at it another way, 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. Furthermore, data from FCIC's 1997 Summary of Business Reports shows that the average cotton buy-up liability of $211.67 per acre is only $20.27 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 Federal Crop Insurance officials still can't seem to figure out why so many cotton growers are so dissatisfied with cotton crop insurance.
Cotton crop insurance premiumsas are other insured commoditiesare experienced-based rated relying on a 20-year historical, actuarial database to determine the risk of loss and establish premium levels for particular areas and crops. Prior to the 1994 Crop Insurance Reform Act, however, the actuarial database for many commodities, particularly cotton, reflected low participation rates and significant adverse selectionfactors 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 conducted by the Farm Service Agency further demonstrates discrepancies between average cotton yields relative to cotton crop insurance yields. The agency found that cotton APH yields were 2530 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. If this cycle is not broken with a change in the rating structure to a more representative cost of insurance, insurance reform will basically be meaningless to cotton producers.
Page 157 PREV PAGE TOP OF DOC Although crop insurance participation has increased because of the 1994 act, the rating structure continues to reflect the unrepresentative data accumulated in prior years. The result is that cotton crop insurance premiums do not correspond to the current, actual risk of this much larger pool of cotton crop insurance participants and significantly overstate the impact of a single adverse event such as a 1 in 100 year- disaster, flood, or drought. This has served to discourage producers from program participation or from purchasing adequate coverage, particularly among moderate to low risk growers.
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 4050 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.
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. This APH reduction could be 2025 percent depending on the how many years of proven yields the producer has available. 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.
Additionally, we believe the product approval process and the general culture of RMA must be changed if the program is to ever work effectively. Individual companies should have more flexibility to design products that enjoy a relative share of the premium subsidy and reinsurance assuming these policies meet basic guidelines for coverage. Particularly in cotton, there are differing insurance needs depending upon what region cotton is produced. Higher risk areas need more basic coverage that allows affordable coverage of production costs. Lower risk areas with higher production costs would like to see more combined revenue and yield loss coverage. Today, private companies find it nearly impossible to develop private policies for cotton that could meet regional needs. Even if they are submitted to RMA, the process is stymied by naysaying attorneys and by a lack of qualified actuarial professionals to review submissions and approve them in a timely manner. We know the private companies will develop products if the process is reformed. In fact, there are about 28 privately developed supplemental policies for corn in the Midwestmany unsubsidizedthat provide additional protection. There is a market for these because it is affordable and there is high participation.
Page 158 PREV PAGE TOP OF DOC Mr. Chairman, there appears to be significant support in the ag community for increased subsidy to make 75 percent coverage more affordable. We agree the entire mechanism and level of premium subsidy does need to be reconsidered. Current premium subsidies are in effect bottom-loaded and thus higher, more effective levels of coverage are unattainable. However, just increasing the subsidy does not address the fundamental rating problems that plague cotton crop insurance. If we can fix our rating problem first and provide equitable coverage across all major commodities, then we could support funds for increasing subsidies. In the short term, we should distribute the available subsidy to favor higher levels of coverage. Further, we do not believe that CAT coverage provides any effective means of protection and would be willing to discuss how to better apply the subsidy associated with it to higher levels of coverage. Insurance reform must result in farmers being able to ensure higher levels of coverage. With today's thin to negative margins, no farmer can afford a 35 percent loss before insurance benefits kick in.
We also believe for there to be any meaningful insurance reform, something must be done to address fraud and better compliance with policy provisions. This appears to be an area where neither the companies nor the agency can provide constructive answers but to hold companies, agents, and loss adjusters at least partially accountable could be a good start.
In closing, Mr. Chairman, I would echo the concerns you have heard from farmers around the country about the serious profitability crisis in American agriculture. Crop Insurance reform is important, but in itself cannot restore farm profitability. The National Cotton Council and all its industry segments and regional organizations have voiced strong to restore funding for cotton's Step II competitiveness provisions, and have voiced support for additional AMTA payments or disaster funds in the absence of a dramatic turnaround in the farm economy.
Thank you again for allowing me to present testimony regarding crop insurance reform.
Page 159 PREV PAGE TOP OF DOC
COTTON CROP INSURANCE PARTICIPATION
Statepercent insured (Insured acres as percent of planted acres, average 19781994)
Testimony of William H. Wise, Jr.
Mr. Chairman and members of the committee, my name is Bill Wise and I am executive vice-president and chief operating officer of Pee Dee Farm Credit, based in Florence, SC. Pee Dee Farm Credit is an Agricultural Credit Association and an institution of the Farm Credit System. Pee Dee provides some $170 million in loans to South Carolina agricultural producers and rural homeowners. In addition, we provide a variety of financially related services to our member/borrowers, including crop insurance.
Page 160 PREV PAGE TOP OF DOC I am here today representing the Farm Credit System to provide our views on reforming the Federal Crop Insurance Program. Nationally, Farm Credit provides approximately 25 percent of the credit extended to farmers and ranchers. As cooperatives, we are the only major agricultural credit providers that are owned and governed by the farmers, ranchers and cooperatives to which we lend.
Farm Credit has a unique perspective on crop insurance. As lenders, we depend on crop insurance to be a backstop for our borrowers. In many cases, we could not lend to farmers without adequate crop insurance protection. In fact, the Farm Service Agency requires crop insurance as a condition of guaranteeing a loan. As agents that sell crop insurance products, we depend on the availability of quality crop insurance products developed by private industry and the Federal Government to offer our customers. As a farmer-owned cooperative, we are vitally interested in ensuring that farmers and other producers have the tools they need to manage the risks inherent in agricultural production.
We are very appreciative of the subcommittee's effort to thoroughly review the existing Crop Insurance Program. We believe that the current program has many benefits for producers in many areas. We also believe that the current program needs to be substantially improved and hope your effort leads to extensive reform in the program to address those areas that need improvement.
Recently, the Farm Credit System established a task force to review the Crop Insurance Program and make recommendations for improvement. After much study, we agreed on a set of principles for any reform effort.
Participation by the private sector remains critical. Both from a delivery standpoint as well as a product development standpoint, private industry involvement is necessary to a successful crop insurance/risk management program. We note, however, that without an adequate incentive, industry is unlikely to spend the money necessary to develop the risk management products that farmers require.
Page 161 PREV PAGE TOP OF DOC Federal subsidies should be targeted to higher level coverages. Under the current program, producers suffer severe ''sticker shock'' when buying-up from lower levels of coverage to higher levels. In many instances, the base level of coverage is simply not adequate to manage risk. At the same time, the price differential between CAT coverage and any level of buy-up discourages participation in the buy-up products. Scarce Federal resources should be devoted to subsidizing adequate levels of coverage. We support a greater percentage of Federal subsidy dollars being devoted to the upper levels of coverage.
Mr. Chairman our recent experience with this year's 30 percent discount on buy-up coverage indicates that more producers will purchase higher levels of coverage if the price is more reasonable.
Producers need coverage for a wider range of commodities, including livestock. Currently, coverage options for commodities vary from area to area throughout the country. What is eligible for coverage in one county may be ineligible in another. Many commodities, particularly specialty crops, have virtually no coverage.
Bring back ''good experience'' discounts. In many areas, producers with little or no loss experience do not participate. These above average managers need an additional incentive to participate. Rewarding them for proven ability to avoid loss is necessary.
Producers who experience multiyear losses due to continuing weather conditions need to be protected. Weather patterns are unpredictable. In several areas of the country, producers have been hit with three or more consecutive years of disastrous weather conditions. Through no fault of their own, these producers are now unable to buy adequate coverage. The program needs to be modified to take into consideration multiyear disasters.
The different risks from region to region need to be recognized. Some parts of the country are blessed with very low levels of weather-related risks. These producers need only coverage for the most infrequent disasters. Producers in these areas need continued access to very low cost products that cover catastrophic disasters.
Page 162 PREV PAGE TOP OF DOC Penalties for fraud and abuse must be sufficient. Producer confidence in the Crop Insurance Program continues to run low due to perceived fraud and abuse. Stories of ''farming for crop insurance'' persist. While recent experience has improved throughout the country, penalties must be adequate to discourage those who would perpetrate fraud and inspire confidence in the integrity of the program.
The program must be sufficiently attractive to build participation and offset the need for ad hoc disaster programs. As long as inadequacies remain in the program, producers will have no alternative but to seek ad hoc assistance when faced with disasters. Congress must devote an adequate level of Federal resources to the program to attract high levels of participation in order to avoid future instances of massive Federal disaster payments.
In addition, the program can be made more user friendly. Over the past several years, the program has been constantly changing. These constant changes confuse many producers and agents. Also, the program must be adapted to proven farmers who farm new ground to use their own existing yields as a basis for insurance. Farmers with a successful track record should be eligible to take full advantage of the yields that they have produced.
Participation in crop insurance and risk management programs must be voluntary. Efforts to require participation in crop insurance are counterproductive. If the program can be reformed to the point that it is economically attractive to farmers, mandatory participation will be unnecessary. Until the program is improved, efforts to make it mandatory simply require farmers to purchase products that don't adequately protect them.
Mr. Chairman, beyond these principals we would like to emphasize some other ideas in which we find merit. In many areas, there is growing support for insurance based on cost of production. While these types of proposals have some potential difficulties in implementation, we think they may ultimately provide farmers with an attractive tool to manage catastrophic risk. We support efforts to refine this approach.
Page 163 PREV PAGE TOP OF DOC We are also aware that efforts are underway to help farmers and their cooperatives better pool their resources to manage risk. We support a role for cooperatives in providing risk management tools for farmers. Similarly, some groups are interested in exploring self-insurance pools for farmers.
Finally, Mr. Chairman, we believe the most important step in reforming crop insurance is devoting more Federal dollars to the program. Over the years, agriculture has more than done its part for deficit reduction. No other function of Government has been cut more than agriculture. At the same time, our competitors continue to dramatically outspend the United States in agricultural support.
Congress is now considering how best to use the Federal budget surplus. We urge Congress to devote some of the surplus to ensuring that American producers have the tools necessary to manage their risks and compete in the global marketplace.
We appreciate the attention being given to this important issue and look forward to working with the subcommittee as it moves forward. I would be pleased to answer any questions.
Statement of Joe Boddiford
Mr. Chairman, members of the committee, I am Joe Boddiford, a farmer from Screven County, GA and the chairman of the National Peanut Growers Group's subcommittee on crop insurance reform. I am accompanied by several members of our group today.
The current crop insurance system does not adequately provide a financial safety net for farmers. Real and substantial reform is needed to ensure farmers have adequate risk management tools for years when a disaster does occur.
Farmers need higher levels of coverage at affordable prices to provide the incentive for producer participation to increase. This, in turn, spreads risk over a greater number of policies and reduces cost.
Page 164 PREV PAGE TOP OF DOC The goal of a viable crop insurance program should be to eliminate the reliance on future ad hoc disaster assistance. Purchase of crop insurance should not be required for participation in other Government farm programs, and crop insurance benefits should not be subject to a gross income test or other form of payment limitation.
We believe reform can be accomplished through adoption of the following measures and concepts:
Ratings should be changed to promote broader participation levels, especially among lower risk producers.
The current 20-year historical actuarial database being used to determine probability of loss and to establish premium levels does not accurately reflect real risk (particularly in the Southeast). Specifically, this calculation includes data from years when participation levels were low with a disproportionate number of high-risk producers.
Base the minimum crop insurance coverage on the cost of production using some realistic factor such as Cooperative Extension Service budgets.
Encourage the development of new revenue insurance products that will cover production costs, even when prices are low. One possible way to insure the costs of production would be through incremental coverage. The coverage level would increase up to 90 percent at pre-harvest and to 100 percent at harvest. Incremental coverage gives the producer the opportunity to weigh his investment in the crop against the cost required to carry it to harvest and the potential income he would receive.
Established growers should be able to use personal yields which would follow the producer from farm to farm. Allow these growers to purchase higher coverage based on personal yields. New growers
would purchase coverage based on county averages.
The Crop Insurance Reform Act requires the use of 410 consecutive crop year methodology for determining APH yield for growers. Since peanut classifications are calculated using indexed county
Page 165 PREV PAGE TOP OF DOCyields building up to 10 years, it takes longer for growers with consistently low yields to have their classifications affected. Also, it takes much longer for a producer in a new county to get the full benefit of his own experience.
Do not penalize producers for disasters.
When calculating APH, drop disaster years and replace with the 10-year average. This provision should be reviewed periodically or upon the request of the producer.
Establish a unit coverage designation of less than whole farm.
Because disasters sometimes strike a specific area farmers should not be penalized by having low yields spread over an entire farm. Producers need to have the flexibility to divide their farm into units. Irrigated acreage should be differentiated from non-irrigated. Also, a grower should be allowed to divide his operation by FSA tract number.
Producers should be allowed to purchase crop insurance regardless of planting practices. Many production practices exist and though they differ from farm to farm they work for the producers who use them.
Because the rate of government support for crop insurance is greatest for CAT and falls dramatically for higher levels of coverage, we suggest using the resources invested in the program to supplement producer costs for buy-up coverage. CAT coverage is not an adequate safety net, yet it receives the greatest level of Government support. Currently, the Government subsidy for CAT is near 100 percent. At 65 percent coverage the subsidy falls to about 40 percent and at 75 percent to about 20 percent. There are many producers who do not participate at all because CAT offers little protection and buy-up is too expensive. By eliminating CAT and putting the money in a buy-up program, it would encourage increased participation and spread risk over a larger population. Eliminate CAT coverage, if necessary, to provide adequate funding levels for more buy-up or other products.
Reward producers for good experience via premium discounts.
Page 166 PREV PAGE TOP OF DOC In order for crop insurance to be an adequate risk management tool for farmers, participation must be increased. Currently, however, there is no incentive for low-risk producers to participate in the program. We recommend offering premium discounts to producers who demonstrate a history of participation without incurring insurable losses. These incentives would not only encourage participation, but would discourage fraud. Incentives should be graduated so that the more years a producer has without a claim, the greater his premium discount would be.
Crop insurance premiums should be waived or rebated if Congress passes an ad hoc disaster bill.
Change FCIC reporting deadline 15 days after the Farm Service Agency certification deadline.
In the past, producers have reported acres and production to the county FSA office. RMA Regional Service Office (RSO) personnel obtained the yield history from the FSA through electronic transfer of data, evaluated new entities/producers, and established coverage via the current actuarial classification listing system. With current technology, electronic transfer of data (including acreage certification, yield, and other necessary information) is the most time and cost effective method available.
When yields become low enough that harvest costs are not covered the yield should be adjusted to zero and the producer not be required to harvest the crop.
County FSA offices should be allowed to be agents for the FCIC. This would allow the greatest effectiveness of operation of the program. It would also provide greater ease of reporting for the producer. In addition the FSA office already provides assistance in the form of information. The county committee can also help in operation of the program because of their knowledge of the local situation.
Encourage increased producer education regarding available risk management tools.
Page 167 PREV PAGE TOP OF DOC The Government, private companies and farm organizations should work together to ensure farmers understand crop insurance and other risk management tools and are prepared to make informed management decisions.
Farmers must have an adequate risk management safety net in order to have incentives to participate in any Federal crop insurance program. Any risk management program must also include crop insurance which covers the cost of production. And, this must be done at a reasonable cost.
Thank you for your time. I will be glad to answer any questions.
Statement of Robert E. Fulwider
Mr. Chairman, members of the subcommittee. My name is Robert E. Fulwider and I am an independent insurance agent from West Liberty, IA. I come before you today on behalf of the Independent Insurance Agents of America, Inc. (IIAA) in my capacity as chairman of IIAA's Crop Insurance Federal Affairs Task Force. I appreciate this opportunity discuss crop insurance reform as seen through the eyes of crop insurance agents, particularly given the fact that so much talk has been made to overhaul the current agriculture safety net.
Let me first begin by stating that I have provided multiperil crop insurance (MPCI) to Iowa farmers for over 18 years. Like many of you, I know too well the long history of Federal involvement in providing disaster assistance to American farmers. It should come as no surprise to members of this committee that when the Federal Government proposes crop insurance re-tooling, it creates nervousness and suspicion among the agent ranks. I say this because, in the past, reform has often been synonymous with budget cuts, forcing independent agents into unenviable funding fights between crop insurance delivery costs and food stamp and WIC funding. Nonetheless, we were successful in securing at least some level of mandatory funding to sustain program delivery costs. Independent agents also have worked very hard to become the sole delivery vehicle for this public/private program. We remain the most effective sales force in terms of education, service and distribution, and are committed to expanding coverage throughout the United States. Such an effort, however, will take cooperation among the private insurance industry, the Risk Management Agency, and Congress. Having said this, I will now focus on four major areas of concern that independent agents see developing during the course of debate on crop insurance reform.
Page 168 PREV PAGE TOP OF DOC A. Funding Issues. Both in his State of the Union address and budget submitted to Congress, President Clinton has called upon lawmakers and Federal bureaucrats to dramatically expand the current agriculture safety net. Envisioned is a move toward holistic farm value coverage, a sharp departure from the current program that looks to indemnify farm producers in the event of crop-yield losses. While agents welcome the opportunity to provide new risk management tools to working farms, it remains to be seen from where substantial funding for such an expansion will come.
Last year was undoubtedly a difficult year for farmers who felt the impact of low commodity and/or livestock prices. Many have suggested that if it were not for election-year dynamics, supplemental crop insurance benefits would not have been so forthcoming. Given the reality of budget constraints, what has been discussedat least in conceptis a dramatic extension of the program into all areas of farm production with little guidance on how to pay for coverage. Since moving away from traditional ad-hoc disaster payments, there has been a reluctant, but gradual, process of acceptance by farmers to purchase risk management tools. This was to be expected given the history of assistance mechanisms. The fear now is that promises could be made by the Federal Government to guarantee prices for everything from hogs to lagging commodities, but not have a dependable funding source to ensure the stability of the new programs once put in place. The concern from the agents perspective is that Congress and the administration will once again look to fund the expansion of the new agri-business insurance products from funding already committed to other aspects of the Federal Crop Insurance Program (such as expense reimbursements, under which agent delivery costs fall). Simply stated, Federal crop insurance does not sell itself. In fact, it is one of the most labor-intensive lines of insurance to write and service. It generates very low levels of compensation for the effort. It is very important to remember that crop insurance remains a public/private partnership and to effectively distribute nationwide, there must exist appropriate free market incentives. Independent agents will outperform any and all groups within the U.S. if new programs are established, but they cannot be asked to pledge support to reform initiatives that will once again pit them in partisan, social program appropriation battles. We are confident such conflicts can be avoided.
Page 169 PREV PAGE TOP OF DOC B. Maintenance of Agent Delivery. With the continuing evolution of the Crop Insurance Program, independent insurance agents have worked hard to establish themselves as the most effective and efficient distribution channel in the industry. We strongly urge Congress and the administration to utilize this established agent network when moving forward with program expansion initiatives.
As you know, independent insurance agents are well networked within their communities and have built professional and personal relationships with the clients they serve based on their professional reputation, commitment to customer service, and ability to educate. We are often frustrated during the course of our crop insurance business dealings with last-minute changes to the program or late reporting by agencies. Such practices not only jeopardize our credibility with our clients, but increasingly put crop agents at risk for errors and omissions claims. Having said that, it would be our hope that if the current safety net is expanded, it should be done in such a way that agents are kept well abreast of potential changes well in advance as to not disrupt the consistency of service provided to farmers. We must work together in this end, not against one another.
C. Program Simplification. Crop insurance is one of the most labor-intensive lines of coverage in the United States. It is our hope that whatever shape reform takes this year, it compliments the current safety net but does so in a manner which streamlines and simplifies the process. You will recall in previous Congresses the battles fought over private-sector administrative expense reimbursement rates, from which agent delivery costs are derived. As agent delivery costs were decreased, it was done so with an implicit understanding that reduction in compensation would be justified if the program was simplified. To date, agents continue to wait for such streamlining changes. With Congress now exploring the implementation of large-scale price and revenue insurance products for farmers, we must ensure that they not only add value to the purchasing farmer, but that they are based on sound insurance practices and are readily explainable to consumers. Many conversations have taken place concerning the scope of such new programs, but like most legislative concepts, it is difficult to critique any approach until it is drawn up in legislative language. IIAA is encouraged by movement in the Senate among key agriculture leaders and is confident the House will do the same.
Page 170 PREV PAGE TOP OF DOC D. Association Selling. Association selling, or the marketing practice by which membership groups or associations link the sale of crop insurance to potential payment of rebates, is increasingly becoming a concern to IIAA and its crop insurance agents. In the majority of states, the practice of rebating is illegal under state insurance law. The current Standard Reinsurance Agreement, which governs the Crop Insurance Program, also specifically prohibits rebates and rebating of any kind. Yet, in many states we are seeing exactly that: exclusive crop insurance schemes being marketed to captive membership audiences where lower rates and/or money to the association would be promised in return for the exclusivity of selling insurance to its members. We believe such practices are not only anti-competitive, but that they also ''dumb-down'' the education process necessary to ensure that farmer's needs are met.
The Risk Management Agency has, in memorandum form, expressed its concerns over these practices and has indicated that in the near future it will be publishing regulations governing their treatment. IIAA would encourage members of this committee to weigh in with RMA on this matter, particularly given the fact that the licensing, sales, and market conduct practices of insurance are under the dominion of State regulation.
Mr. Chairman, on behalf of IIAA and my fellow crop insurance agents, I commend you for taking the first step in what promises to be a very involved process. To the extent that all parties are active participants in the debate, I believe a positive solution can be achieved. If I sound somewhat skeptical in my testimony toward reform, it is only because the legislative history of the crop program has been difficult treading for crop agents. There are many bright minds in both the private sector and in public service and I see no reason why a holistic farm safety net cannot be instituted if we focus purely on the substance of debate and shield ourselves from divisive politics. IIAA stands ready to assist you and the committee in any way possible as the liaisons between these risk management tools and the American farmer. At this time I would welcome any questions the committee might have. Thank you.
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Statement of the South Carolina Peach Council & Promotion Board
(1) Insure 100 percent of crop potentialnot the average of yearly production.
(2) Insure the revenue potential of the entire farm (all different crops grown). Premiums are adjusted in accordance with the amount of revenue insured e.g. 25 percent, 50 percent, 75 percent, et cetera. Many farms produce different crops, and this would eliminate separate insurance for different crops grown.
CHANGES IN PRESENT CROP INSURANCE PROGRAM
(1) If a basis for production must be established through a yearly average, then take the best 4 out of 6 years.
(2) Remove the $2.5 million cap. We spend $1 to make a dime. Peaches are extremely labor intensive, and are therefore very expensive to produce. Cost of dollars per acre to produce are much more than that of grains.
We realize that these concepts are quite general, and many details need to be addressed. We, as peach growers, feel that these ideas area good place to begin.
Statement of the National Watermelon Association
The economic outlook in U.S. agriculture is dismal. Many watermelon producers can't recall a time when conditions for profitability were worse. They are beset by many forces that make it very difficult to break-even in their production practices, let alone make a return for their sweat and toil. Not only are market conditions depressing, producers have a negative outlook that they soon will be losing strategic means-including agricultural chemicals-that are necessary to compete against pests and disease.
Page 172 PREV PAGE TOP OF DOC Meaningful, low-cost crop insurance assistance as an effective risk management tool is vitally needed for the watermelon producing industry. However, the National Watermelon Association, the principal service association over the past 85 years for the U.S. watermelon industry, sees little if nothing in the current Crop Insurance Program that would benefit our producers. The pilot Crop Insurance Program that the U.S. Department of Agriculture intends to offer in 1999 seems totally inadequate and if implemented would only exacerbate the already depressed market outlook for watermelons. In the opinion of the NWA, the program invites the entry of nontraditional producers who would plant large acreages of watermelon merely to try and capitalize on making money from the Crop Insurance Program and is a situation that eventually will invite fraud.
Additionally, it is our strong fear that producers who utilize the Crop Insurance Program and suffer disparate production results would be penalized in subsequent production years by seeing their coverage lowered while their premiums would be elevated.
The NWA believes that the current Crop Insurance Program being offered by the USDA should be wholly redesigned and restructured to be helpful rather than hurtful to the producer in need of such insurance. For one thing, the program should be careful to appeal itself to only bonafide watermelon producers; to make the premiums affordable to all producers; to not tie the benefits totally to yield but to importantly consider the insurability of the cost of producing a watermelon crop.
Watermelon producers are greatly in need of some type of revenue insurance program that is low cost and is realistically an insurance program against economic loss but not an incentive to overproduce for the sake of attempting to make a profit from a disaster.
Statement of Donald Dressler, CAE, Western Growers Association
Western Growers Association (WGA) appreciates the opportunity to submit a statement for the record regarding the status of the Federal Crop Insurance Program. WGA commends Chairman Ewing and Ranking Minority Member Condit for their leadership on this important issue.
Page 173 PREV PAGE TOP OF DOC WGA represents over 3,300 growers, shippers, and packers of fresh fruit, vegetable and nut products throughout Arizona and California. WGA represents about 90 percent of the fresh vegetables grown in Arizona and California, and about 60 percent of the region's fresh fruits and nuts.
WGA believes there is a great need for reform and expansion of the Federal Crop Insurance Program with respect to high-value minor crops in Arizona and California. Growers of fruit and vegetable crops have experienced significant losses in recent years due to drought, severe rains and flooding, freezes, and other disasters outside the control of agricultural producers. Most recently, citrus growers in California experienced freezing temperatures which inflicted substantial damage. Unfortunately, however, we have seen that the Federal Crop Insurance Program provided little relief for substantial losses suffered by hundreds of citrus growers due to this situation. As such, growers of minor crops would benefit significantly from the availability of better and expanded risk management tools.
It is important to note that there is a very low participation rate in the CAT program among growers of fruit and vegetable crops which are currently eligible for the Federal program. The primary reason for this low participation rate is that, even though CAT insurance is inexpensive, the level of coverage provided is not effective as a risk protection tool. The fact that many citrus growers who participate in the CAT program will not qualify for indemnification for significant losses suffered in the freeze of late 1998 is a good illustration of this situation.
If participation in the Crop Insurance Program is to be increased among minor crop growers, the program must recognize the different types of risk involved in fruit and vegetable production, and be structured in such a way as to accurately reflect these unique risk characteristics. The risks involved in fruit and vegetable production are substantially different than those faced by growers of major crops in many parts of the nation. Fruit and vegetable growers are much less likely to experience catastrophic disasters like those which are visited upon major crops, particularly in the mid-west. However, fruit and vegetable growers do face substantial risks of losses of less than catastrophic magnitude, and yet are still financially significant.
Page 174 PREV PAGE TOP OF DOC Another unique characteristic of the fruit and vegetable industry that must be recognized if insurance coverage is to be effective is that high value crops have different risk protection needs than low value crops. High value crops have a high cost of production per acre, and therefore the risk of loss will be higher per acre. For example, the value of strawberries may be $7,000 per acre, whereas the value of wheat may be $100 per acre. The program must take this difference in the value of a commodity per acre into account in order to serve as effective risk protection.
If the Federal Crop Insurance Program is to become a viable risk protection tool for the fruit and vegetable industry, it also must be expanded to include many of the minor crops which currently are not eligible for coverage. In Arizona and California, the vast majority of growers are highly diversified, growing several different commodities, rather than specializing in only one crop. If only one of the crops in which a grower is involved is covered by the Crop Insurance Program, there is a limit to how the program can offer protection to the grower. However, if multiple crops are covered, the risk protection to
the grower is greatly enhanced, making the program significantly more attractive. In the fruit, vegetable and nut industries, farmers are highly diversified, and therefore need risk protection tools which reflect this high level of diversification.
WGA believes that the most efficient method of expanding crop insurance to greater numbers of minor crops is to simultaneously add a large number of crops over a large geographic area, rather than by only adding one crop at a time in a given county, as is the current practice. The reason for this is that adding a large number of crops simultaneously greatly reduces the risk of financial loss to the program. If only one crop is added in a limited area, the risk that a catastrophic loss will be experienced for that crop is much greater than the likelihood that a large number of crops will experience
catastrophic losses during the same season. By rapidly expanding the program to include greater numbers of speciality crops, the risk of claims relative to the size of the program is greatly reduced.
Page 175 PREV PAGE TOP OF DOC WGA is concerned that traditional methods of educating minor crop growers on the risks and benefits of participation in the Crop Insurance Program have generally been ineffective. WGA encourages USDA to work with trade associations in designing crop insurance programs which meet the needs of minor crop growers. Associations are uniquely structured to add value to the Crop Insurance Program by ensuring that coverage meets the risk protection needs of the industry. WGA believes strongly that associations should be allowed to discount the cost of crop insurance for their members, thus making insurance coverage more affordable and attractive to growers.
Another suggestion that WGA would propose for consideration in order to make the Federal Crop Insurance Program more market-oriented is to establish a program where the Federal Government acts as the reinsurer of new crops, rather than the insurer. This could be done by reinsuring a crop at 110 percent of expected losses. Thus, the private company would accept some of risk, and the taxpayer would not finance the operating expenses of the delivering company, just a portion of the farmer's risk. This would be less costly to the taxpayer and would allow the Government to leverage its resources by providing coverage for more crops at less cost than full insurance.
Again, WGA greatly appreciates the opportunity to present its views in this forum. WGA looks forward to working with members of the subcommittee towards the goal of reforming and expanding the Federal Crop Insurance Program to provide better risk protection coverage for fruit and vegetable growers.
Georgia Peach Council
December 14, 1998
KENNETH D. ACKERMAN
Page 176 PREV PAGE TOP OF DOC USDA-Risk Management Agency
14th &Independence Avenue, SW (3053)
Washington, DC. 200132415
RE: Alternative Peach Crop Insurance Pilot Project
As you are well aware, Southeastern peach producers are in dire need of an alternative and feasible approach to crop insurance for peaches.
Our efforts toward this goal began in April, 1996, following the worst peach crop disaster since 1955. With your assistance, temporary ''fixes'' were implemented for the 1997 crop year. Concurrently, on June 7, 1996, Congress initiated a directive to the Federal Crop Insurance Corporation and USDA to establish a pilot program for alternative peach insurance considering cost of production and expected income.
On Friday, December 4, 1998910 days after the original directiveGeorgia and South Carolina peach producers got the first peek at research results ordered by FCIC. Let me emphasize, we gathered to see research results, not a proposed insurance model. From a producers perspective, the one usable fact that surfaced from the meeting is that efficient peach producers who maintain a ''high'' actual production average, relative to other producers, are over-paying for ''buy-up'' coverage. An element of the research that can hopefully be salvaged for a new program is that long term (i.e. 3040 years) production history is an important consideration for crops like peaches.
We are severely disappointed with the lack of progress made toward implementing a peach pilot project. Our experience reveals that the current process of developing an alternative and viable insurance approach does not work. The process has been fraught with delays, deficient of producer interaction and unconcerned with the immediate need for a feasible safety net.
Page 177 PREV PAGE TOP OF DOC On behalf of the Georgia Peach Council. I request your attention to this matter, as well as your cooperation in using the research to date to aid Congress in implementing a viable crop insurance approach.
"The Official Committee record contains additional material here."