SPEAKERS CONTENTS INSERTS
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IMPLEMENTATION OF THE AGRICULTURAL RISK PROTECTION ACT
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FEBRUARY 13, 2002
Serial No. 10715
Page 2 PREV PAGE TOP OF DOCPrinted for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
Page 3 PREV PAGE TOP OF DOCCHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
TOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
Page 4 PREV PAGE TOP OF DOCKEN LUCAS, KENTUCKY
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on General Farm Commodities and Risk Management
SAXBY CHAMBLISS, Georgia Chairman
JOHN A. BOEHNER, Ohio,
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
Page 5 PREV PAGE TOP OF DOCWILLIAM L. JENKINS, Tennessee
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
DOUG OSE, California
ROBIN HAYES, North Carolina
CHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
MARK R. KENNEDY, Minnesota
CALVIN M. DOOLEY, California
Ranking Minority Member
BENNIE G. THOMPSON, Mississippi
SANFORD D. BISHOP, Jr., Georgia
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Indiana
KEN LUCAS, Kentucky
BARON P. HILL, Indiana
JOE BACA, California
MIKE ROSS, Arkansas
RICK LARSEN, Washington
Page 6 PREV PAGE TOP OF DOCRON KIND, Wisconsin
RONNIE SHOWS, Mississippi
COLLIN C. PETERSON, Minnesota
BOB ETHERIDGE, North Carolina
CHRISTY SEYFERT, Subcommittee Staff Director
C O N T E N T S
Chambliss, Hon. Saxby, a Representative in Congress from the State of Georgia, opening statement
Smith, Hon. Nick, a Representative in Congress from the State of Michigan, opening statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Honor, Phyllis, Acting Administrator, Risk Management Agency, U.S. Department of Agriculture
Pomeroy, Hon. Earl, a Representative in Congress from the State of North Dakota
Answers to submitted questions
American Association of Crop Insurers, submitted statement
Montana Grain Growers Association, submitted statement
Page 7 PREV PAGE TOP OF DOCNational Association of FSA County Office Employees1\
National Cotton Council of America, submitted statement
National Grain Sorghum Producers, submitted statement
Rural Coalition and Missouri Action Research Connection, submitted statement
Swenson, Daniel, producer, Woonsocket, SD1\
1\ On file with the committee.
IMPLEMENTATION OF THE AGRICULTURAL RISK PROTECTION ACT
WEDNESDAY, FEBRUARY 13, 2002
House of Representatives,
Subcommittee on General Farm Commodities
and Risk Management,
Committee on Agriculture,
The subcommittee met, pursuant to call, at 10:43 a.m., in room 1300 of the Longworth House Office Building, Hon. Saxby Chambliss (chairman of the subcommittee) presiding.
Present: Representative Smith, Moran, Thune, Jenkins, Gutknecht, Johnson, Rehberg, Graves, Kennedy, Putnam, Dooley, Berry, Boswell, Phelps, Lucas of Kentucky, Ross, Peterson, Etheridge, and Stenholm [ex officio].
Staff present: Christy Seyfert, subcommittee staff director; David Ebersole, senior professional staff; Callista Gingrich, chief clerk; Kellie Rogers, John Riley, and Russell Middleton.
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OPENING STATEMENT OF HON. SAXBY CHAMBLISS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
Mr. CHAMBLISS. The Subcommittee on General Farm Commodities and Risk Management to review the implementation of title I of the Agricultural Risk Protection Act shall come to order.
Thank you all for your patience in waiting on us. And we are now prepared to get started.
As chairman of the Subcommittee on General Farm Commodities and Risk Management, I welcome Members, staff, and our witnesses and other interested folks to the subcommittee's first hearing in Washington. The subcommittee held several field hearings across the country in 2001 to discuss farm policy, but this is our first hearing in Washington.
We are here to discuss a very important topic, the Implementation of title I of the Agricultural Risk Protection Act of 2000.
In the development of ARPA, farmers asked for a number of key provisions: Better coverage at a more affordable price, better access to revenue coverage, protection against the effect of multiple year disasters on actual production history, more coverage options and a reduction in fraud, waste and abuse of the program which in turn has increased producers out-of-pocket costs.
In my part of the country, south Georgia producers asked for cost of production coverage which was authorized in the bill and is currently under development.
In June 2000, the reforms that Congress made to the Federal Crop Insurance Program to address these needs were enacted. Since then a lot of time, money and work have been invested by the Risk Management Agency, the Farm Service Agency, and industry into the ongoing implementation of this law. It has been a year-and-a-half since ARPA was signed into law. And from a political transition to a farm bill to a war, a great deal has happened.
Page 9 PREV PAGE TOP OF DOC In addition to authorization reforms, Congress met its commitment to an improved crop insurance program with substantial investment of funds. Approximately $8.2 billion has helped increase Government assistance in the purchasing of policies and higher levels of coverage. This funding has also allowed the shifting of research and development into the private sector and provided for reimbursements and contracts. In terms of funding, I should point out that the Senate's farm bill eliminates the continuous coverage provision of ARPA and shifts $2 billion from the Federal Crop Insurance Program and uses it to pay for their farm bill. I believe it is dangerous territory on which to tread when advocates of agriculture start cutting a successful, popular program to pay for the farm bill that has already been allocated generous funds. When I served as vice chairman of the Budget Committee I secured over $6 billion in the budget resolution for improved risk management through comprehensive crop insurance reform. I did not secure these funds to serve as a farm bill reserve.
The subcommittee will hear from two witnesses today. First Congressman Earl Pomeroy, a former member of the House Agriculture Committee who has a keen interest in the Crop Insurance Program and will give us his views on the program and its implementation. Our second panel, Ms. Phyllis Honor, Acting Administrator of RMA, will present the Agency's views on a number of issues. We will hear a report of the agency's actions and achievements, and we will also delve into issues of program compliance, research and development, program operations, price elections for the 2002 crop year as well as other smaller but important issues of interest to our districts and regions.
I would like to thank Ms. Honor for serving as a witness today. Especially, in light of the fact that a permanent administrator has recently been appointed and will take over in about a week.
Thank you for being here today. And I appreciate your participation in this important topic.
Page 10 PREV PAGE TOP OF DOC At this time, I would like to recognize my ranking member, Cal Dooley from California, for any comments you might have.
Mr. DOOLEY. Thank you, Mr. Chairman. And I just thank you for organizing this hearing. And in light of our delay, I'll defer any opening comment.
Mr. CHAMBLISS. All right. We are very pleased to have our committee ranking member, my friend, Charlie Stenholm, here with us. Charlie, I recognize you for any comments you might have.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman, and thank you for holding the hearing. And I too appreciate the acting administrator being here this morning. Mr. Chairman, ARPA has been the law of the land for nearly 2 years. It was signed into law on June 20, 2000. Two administrations have now had reasonable opportunities to charge ahead and implement the changes that we worked on here for nearly 2 years ourselves. I will admit that we made many changes and that the full implementation task was not a small one.
Nonetheless, Mr. Chairman, the pace of implementation has been much too slow and the time has come for an accounting. Mr. Chairman, there have been some successes resulting from ARPA. Acreage insured has increased, the amount of insurance that is in force has increased, and the evidence we have suggests that producers are choosing higher coverage levels.
However, we continue to hear many of the same complaints which drove the development of ARPA. The program is ripe with fraud and abuse, that producers of specialty crops do not have the tools they need, that policies ensuring the cost of production are still not available for pilot testing. More generally, that RMA is an agency that is difficult to deal with, at least some people within RMA. And that FSA and RMA continue to have difficulty building the kind of cooperation that would so obviously lead to improvement in the programs that each administers, which the law very clearly stated should happen.
Page 11 PREV PAGE TOP OF DOC Mr. Chairman, I am grateful that you have given the subcommittee the opportunity to examine RMA's progress in implementing ARPA. I am sure that we will hear important information today. And I know that the chairman of the full committee will provide additional opportunities as necessary for the subcommittee to focus more closely on areas that need its continued attention. I thank the chair.
Mr. CHAMBLISS. Thank you. Mr. Smith.
OPENING STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Mr. SMITH. Mr. Chairman, thank you. And thank you for holding this hearing. I was very involved in helping with the 1994 legislation and again in 2000. And risk management, I think, is very key to what farmers survive and succeed. And it is reasonable for USDA to be involved.
The Risk Management Agency needs to consider, I think, a broader range of tools that could be made more available to farmers to minimize risk.
We should remind ourselves that in order to minimize risk and maximize profits, we need to do three things. One, purchase inputs at the lowest possible cost. Two, minimize the field operation costs. And three, sell at the highest possible price. Some input products can already be forward contracted or hedged on the commodity exchanges. I would think more options for farmers to lock in the price of their inputs, from fertilizer to seed to the other chemicals, and even to fuel that runs their machinery.
If RMA is going to maximize their efforts to minimize risk, they should look into ways to give farmers the best possible information of supply and demand on those input products, and develop better means for farmers to lock in the price that farmers will pay for inputs.
Page 12 PREV PAGE TOP OF DOC In terms of minimizing the risk of weather and commodity prices, our insurance programs, I think, have done an excellent job but need to be seriously reviewed to maximize fairness to all farmers. However, again, we need improved information from farmers on anticipated world supply and demand for particular products.
For example, our photoradar interpreters now have the technological ability to forecast most crop production, acres and yields, 60 days after planting with an accuracy of 12 percent. So we can go to the southern hemisphere and we can predict accurately between 30 and 60 days after planting by keeping track of the weather conditions what that yield and production is going to be within a deviation of plus or minus 12. That kind of advance supply information to farmers, especially in northern United States, could be very beneficial in deciding how much of a certain crop to plant.
In that regard, USDA could be much more helpful, it seems to me, to small- and medium- sized farmers in providing information that is more easily understood and timely, i.e., 6 months advance estimates, for both input supply and demand, and commodity price and demand. We have FSA offices in every State and most counties and parishes.
Also a concern for small farmers is that traditional hedging on the Chicago Board of Trade often does not allow small farmers to produce a lesser quantity than the minimum required for a buy-sell contract to participate effectively.
In conclusion, I would like to also comment on Federal Crop Insurance Program. By enacting the 2000 Agricultural Risk Protection Act, Congress chose to invest $8.2 billion over 5 years to expand and improve Federal Crop Insurance Program. We are now almost 2 years into the implementation process. And I think the question that we have got to ask is, are we getting our money's worth? Is FCIC effectively encouraging the development of new insurance policies, approaches and products? So far it seems only a handful of new products has actually been approved.
Page 13 PREV PAGE TOP OF DOC Has the program reached new farmers? Have existing farmer customers raised their level of coverage? The data seems to be mixed. Have we improved compliance with program rules and upgraded integrity. And I think these are all questions.
And finally, it is now time to renegotiate the standard reinsurance agreement with participating companies to assure that their underwriting gains are proper and defensible.
And, Mr. Chairman, thank you.
Mr. CHAMBLISS. Thank you, Mr. Smith. Anybody else have any opening comments they want to make? Everybody's welcome to insert anything into the record. Due to time constraints, we will operate under the 5-minute rule.
I saw Mr. Pomeroy downstairs, but I guess he is still in the Ways and Means hearing. So we are going to go ahead and move to the second panel and put them as the first panel. So we welcome Ms. Phyllis Honor, Acting Administrator of Risk Management Agency USDA. She is accompanied by Mr. Michael Hand, the Acting Deputy Administrator of RMA USDA. Mr. Garland Westmoreland, the Deputy Administrator of Risk Compliance, Risk Management Agency. And Mr. Tim Witt, Deputy Administrator Research and Development, Risk Management Agency.
We will ask witnesses, because of our time constraints, to keep their oral testimony to approximately 10 minutes.
Ms. Honor, we are glad you are here and we will turn the floor over to you. We look forward to hearing from you.
STATEMENT OF PHYLLIS HONOR, ACTING ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Ms. HONOR. Mr. Chairman and members of the subcommittee, thank you for this opportunity to appear before you today to discuss the implementation of the Agricultural Risk Protection Act of 2000.
Page 14 PREV PAGE TOP OF DOC If I may, I would like to summarize the testimony and submit it for the record so that I can respond to any questions that you may have.
Mr. Chairman, the last 386 days, 2 hours and 47 minutes that I have served as the Acting Administrator has been both challenging and rewarding. I have likened my experience to a battlefield commission. In the true American Spirit we have been victorious. And today I am pleased to report on our results.
USDA strongly supports the Federal Crop Insurance Program because it reflects the principals contained in the Food and Agricultural Policy Report. The program helps producers when they need it most. It provides a safety net that is compatible with international trade commitments. It creates products and services that are market driven. And it harnesses the strength of both the public and private sectors and reflects the diversity of the farm sector in its outreach activities and programs.
The Agricultural Risk Protection Act of 2000, a bipartisan act, that represents dramatic forward-looking public policy that has significantly increased the ability of producers to manage their agricultural risk and made major changes in the way RMA conducts business.
With the new compliance tools provided under the 2000 Act, our oversight system will be tightened and expanded even further. Mr. Chairman, through this legislation you have given us a mandate to address this issue squarely. It is a mandate that we accept and we welcome.
The act also provided incentives to encourage private sector research and development of new innovative products. The act recognized the need to expand risk management education and participation for specialty crops and for producers, crops and in States that have been designated as underserved. It encouraged the expansion of the Dairy Options Pilot Program and mandated that we conduct pilot programs into new areas, such as livestock and wild salmon.
Page 15 PREV PAGE TOP OF DOC Additionally, it changed the authority of the Board of Directors and the time frame for the approval of private sector developed products. And least I forget, we now include coverage of organic farming practices through written agreements.
Mr. Chairman, I am pleased to report that RMA has launched all initiatives required in the act, while administering a program that has tripled in size over the last decade. We managed this challenge despite the fact that some changes, such as, giving more authority to the Board of Directors, the termination of RMA's research and development in favor of private sector initiatives, and the formal inclusion of another Government agency in providing program oversight have dramatically altered program expectations, the skills that are needed by our employees, and our familiar patterns of conducting business.
Days after the act was signed into law, RMA made the necessary changes to the Standard Reinsurance Agreement and implemented a package of administrative and regulatory actions that lowered farmer premiums, increased coverage, and reduced the administrative expenses. These initial changes made 90 percent of the new benefits available to producers. As RMA publicly stated in June 2000, some of the other changes required by the act would take months to implement while others would take years.
I would like to briefly summarize some of the initial results produced by the act in 2001 and touch upon some key implementation plans for 2002.
Program participation has increased with new and improved products and tools. In part, due to increased premium subsidies provided by the act, reinsured companies provided producers more than $36.7 billion in protection on over 211 million acres through nearly 1.3 million policies. The act increased the premium subsidies at higher levels of coverage resulting in both greater participation and a shift by producers from the lower levels of coverage to the higher levels of coverage. As a result, while the overall insured acres and protection increased by less than 7 percent, they increased by at least one-third at the 70 percent or higher coverage levels.
Page 16 PREV PAGE TOP OF DOC These increases at the higher levels of coverage due to increased premium subsidies are reflected in the bar charts that you see before you. Many of you have already commented on the fact that the participation at the higher levels has increased. The first charts before you show what the subsidy levels were prior to ARPA and shows what they were after the passage of the act. As you can see on the other chart, our coverage has increased at the 70, 75 and at greater than 75 percent level. And this is an indication that the producers asked for higher levels of coverage, we gave it to them, and they bought it.
Further, the act provided $20 million in fiscal years 2001 and 2002 to increase program participation by refining existing products and managing the development of new risk management tools. In 2001 RMA awarded 27 contracts worth over $18 million for research and/or development of new risk management programs on subjects such as, pasture, rangeland, Hawaiian tropical fruit and trees, and other commodities; risk associated with quality loss adjustments. The impact of boll weevil damage on insurance yields, and plans of insurance based on cost of production.
In 2001 the Federal Crop Insurance Corporation Board of Directors met a record 14 times. We considered 15 private products submissions and authorized three innovative, new risk management products. We approved two livestock products and the Nutrient Best Management Practices Pilot Program.
We also approved changes to three of our current products: The Crop Revenue Coverage, the Revenue Assurance, and the Hybrid Seed Price Endorsement.
We are building a network of partnerships to reach underserved producers. The act provided additional funding for RMA's effort to reach producers crops and States that have been designated as underserved. For example, the act provided $5 million in annual funding to reach States designated as underserved.
About $2 million annually is earmarked to provide risk management educational opportunities to specialty crop producers using many of the same avenues used in addressing underserved States. As a result, in 2001 more than 130 partnerships were formed to reach specialty crop producers. An additional $5 million was provided to the Cooperative State Research Education and Extension Service for a competitive grants program to provide risk management educational opportunities.
Page 17 PREV PAGE TOP OF DOC Finally, the Dairy Options Pilot Program was expanded to included 300 counties. DOPP in an innovative cost-share program for dairy producers that helps dairy farmers put a floor under the price they receive for milk using the Futures and Options Market. In the very recent round of training that we just completed, Round III, producers purchased a total of 2,788 put options. This contrasts to a total of 1,847 put options that were purchased collectively in Round I and Round II in 1999 and in 2000. We also have an Interactive Distance Learning Program for DOPP that is available for eligible producers over the Internet.
We have instituted a new alliance to enhance program integrity and compliance.
I know members of the subcommittee have a particular interest in the compliance provision of the act and I am pleased to report some promising initial results. The act provided $23 million over 5 years to enhance program integrity and compliance. This goal is being accomplished through a formal new alliance among the Risk Management Agency, the Farm Service Agency, and the Reinsured Companies. Achieving this goal is a multi-year process that began with the initial training of FSA county office personnel on crop insurance policies and procedures. In 2001 RMA spent approximately $2.25 million providing 2,500 Farm Service Agency county office personnel, 28 hours of classroom training. This basic training enabled local FSA personnel to assist RMA in obtaining evidence of program fraud and abuse.
By working proactively with insurance providers and the Farm Service Agency, the alliance prevented more than $15 million in improper claims payments in 2001; more than double RMA's average annual recovery. RMA, through criminal, civil and administrative actions also recovered about $29 million.
At the same time, the training initiative was launched. RMA initiated a project to apply research and technology to crop insurance data, commonly known as data mining to identify and target reviews. A combination of the initial data mining efforts and the alliance has enabled RMA to increase the average number of cases reviewed annually from 200 to 700. And the average number of policies reviewed from 2,000 to 10,000. This effort also included the identification of reviews of agents and loss adjusters with loss ratios that exceeded 150 percent of the mean in an area.
Page 18 PREV PAGE TOP OF DOC In 2002, RMA will provide 500 FSA employees an additional 32 hours of loss adjustment and anti-fraud training. The 60 hours of training that employees will receive is the same amount of training required of reinsured company loss adjusters. The additional training they will receive will help them provide more accurate referrals to RMA and, subsequently, to insurance companies for further investigation.
Although RMA and FSA have been reconciling indemnified policy data for 2 years, the act required that RMA and FSA reconcile data for all program crop policies. Currently, entity, acreage, share, and production are being compared. This requirement has resulted in identifying over 450,000 data discrepancies. This is up from the 1,900 that we had the previous year that exceeded a 5 percent tolerance. This large number of discrepancies requires the development of additional criteria to differentiate between those that are mistakes or misrepresentations or that vary from the expected program differences.
Consulting with the State FSA offices enables the FSA to make timely recommendations to RMA on policies and plans of insurance and other important program issues. These recommendations will help RMA identify program discrepancies and vulnerabilities.
This initiative has gained momentum as FSA State committees have been organized and initial meetings have taken place in several States. Initial meetings focus on briefings about the crop insurance cycle, filing process and schedule, and how to access the actuarial data and other program information from the RMA web site. This will allow the State committees to understand how to find program information and make recommendations in time for them to be incorporated into the policy decisions and changes, if appropriate.
The roles and responsibilities of the Farm Service Agency and the Risk Management Agency have been developed by a joint consultation team from RMA and FSA and were published in an agency handbook. Additional consultation guidelines are being developed in the RMA regional offices to assure consistent practice across the country as these meetings take place.
Page 19 PREV PAGE TOP OF DOC In 2002, RMA will continue the implementation of the act. RMA will use a combination of research, feasibility studies and surveys to determine the unique production and marketing systems of specialty crop growers; the insurability of biomass crops, tree vine and bush replacements; additional livestock programs; and vegetable, flower and lawn seed. There will be a dramatic increase in risk management training opportunities in 2002 because agreements initiated in 2001 are just becoming operational.
RMA will again award partnership agreements to reach specialty crop producers and continue the AGR cost share and the DOPP training programs. RMA will continue training Farm Service Agency personnel, and further refine data reconciliation efforts. The data mining initiative will continue to disclose new information that will help strengthen program compliance.
In conclusion, Mr. Chairman, the act has helped make RMA an innovator in the Government of the new millennium. We deliver products via the private sector, we stimulate market driven research and development through incentives and share overall program costs among producers, reinsured companies and the Federal Government.
Producers now can plan, grow and market their crops with confidence because they are backed by affordable, tailored policies that provide substantial risk protection. RMA, reinsured companies and the Farm Service Agency have worked hard under rapidly changing conditions to implement all aspects of the act in a farmer-friendly fashion.
To help smooth the way for sustainable long-term implementation of the act, RMA is actively addressing employee's needs, for new skills and program support systems. We are actively acquiring contract oversight skills and developing the tracking systems necessary to monitor contracts, funds, pilot programs, product reviews, and the other initiatives required by the act.
Mr. Chairman, I hope that this provides the information that you and the committee members need to know that we are on the move in the implementation of this act.
Page 20 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Thank you very much, Ms. Honor. And certainly, you have played a very integral part in the implementation of this act. And we look forward to your taking questions. I also note that former RMA administrator, Ken Ackerman, is with us today. Ken was very much involved, obviously, in the development of the reform of the Crop Insurance Program. And, Ken, we are glad to see you here today.
I think before we go to questions, I see Congressman Pomeroy is here. I think without our panel moving, Earl, if you want to just pull your chair up we will be glad to take your testimony right now. Mr. POMEROY. Thank you, Mr. Chairman.
Mr. CHAMBLISS. ANd then we will proceed with questions for Ms. Honor.
STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Mr. POMEROY. I apologize that a Ways and Means conflict kept me from being here at the top of the hearing. It is great to be back in the Agriculture Committee and to be talking about crop insurance.
Mr. CHAMBLISS. Are you serious about that, Earl? We got a spot over here. We can take you off Ways and Means and bring you back here.
Mr. POMEROY. If I could do
Mr. CHAMBLISS. Charlie will be glad to work that out for you.
Mr. POMEROY. I would like to do them both, Mr. Chairman. But in any event, it kind of makes me feel like wrestling, just being back in the room again. I am happy to be here. The committee's done some pretty good work since I was gone. I commend you for your work on the farm bill. There's no question we wouldn't be on the brink of going to conference committee on a farm bill but for you getting this bill out of the committee in the timely and bipartisan fashion that you did. I commend you for it. I think that is almost a follow-along to the wonderful bipartisan effort that really was reflected in the Agricultural Risk Protection Act. That effort began, Mr. Chairman, with your own heroic efforts to get the Budget Committee to give us the resources to build a Crop Insurance Program.
Page 21 PREV PAGE TOP OF DOC When you look at the $8.2 billion commitment over 5 years, the budget commitment that provided the funding for the enhancements we made to the Crop Insurance Program through ARPA, you can really get a feel for what a significant enhancement this was. It was easier getting this done in the age of surplus than the age of deficits. That would extrapolate the $16.2 billion over 10 years. Compare that to the $73 billion cost of the whole farm bill under consideration now over 10. And you can really get a perspective in terms of just how significant your work in the Budget Committee was on behalf of being able to enhance the program.
I am prepared to work with you, Mr. Chairman, if anyone wants to make a run at those resources already committed to crop insurance. We need them just where they were.
Mr. CHAMBLISS. I mentioned to you coming over and mentioned in my opening comments about the Senate taking $2 billion out of this to fund their farm bill. So it is going to be a fight and we appreciate your help.
Mr. POMEROY. I think that is a bad, bad idea.
I think this hearing has already accomplished something pretty good. We finally have a new administrator appointed. And really, I commend Ms. Honor and everyone else who has tried to run RMA without a head. But to go a year without leadership in the program is tough, and I think that this hearing just may have spurred some decision-making and I am very pleased to have learned of the appointment of Mr. Davidson. USAA, his insurance company, is a very fine insurance company. They do not write a bushel of crop insurance, so I trust this committee to play a role. I expect to play a role, too. We will be involved in bringing Mr. Davidson up to speed in terms of the farmer dynamic so critically important to the sound administration of the Crop Insurance Program.
I wish Chairman Combest was here because I have never been a part of such an inclusive, bipartisan process-producing piece of legislation as ARPA. The chairman simply could not have been more fair. I continue to look on that as one of the real high point experiences I have had as a Member of Congress.
Page 22 PREV PAGE TOP OF DOC We tried to get these resources committed where they need to go, and 80 percent of those additional resources were committed to basically enhancing the value of the Crop Insurance Premium. More subsidy in the premium allowed the farmer to better insure the financial risk exposure.
Two principal things in ARPA give the farmer a better deal. First of all, the coverage he is going to buy is going to be more reflective of the actual productive capacity of the land. We did that by correcting the yield history problem that had emerged under the old program. Second, the buy up has been talked to, undoubtedly in your opening statements and by Ms. Honor as well. So I won't say a lot about that other than that coverage was made more affordable at levels that a farmer needs to cover their investment. We have seen the market move. We have seen CAT coverage decrease. We have seen buy up levels increase. It is working just like we thought it would.
There are, however, some areas that need further attention, as there is always going to be with crop insurance. You have a dynamic agricultural sector, and that is going to mean you have got to continue to tinker with the risk protection to make sure that you are getting the job done. I would cite two problems. One administrative and one requiring some legislative attention.
The first is administrative. I am very concerned heading into this spring that farmers at this point in time are really hampered in knowing what price selection to lock in on their coverage because we have not had marketing loan rates announced by the U.S. Department of Agriculture. For each of the last 5 years, that is for each year under the Freedom to Farm Program, the U.S. Department of Agriculture has locked in market loan rates at the highest statutory level allowed. That announcement would then allow farmers to know what levels to lock in their price selection under the Crop Insurance Program. It would let them know what to plant, let lenders know what to lend. We don't have an announcement yet on marketing loan rates, and I think that has left everyone very much in the dark. They will be allowed to lock in a price selection. In the event the resulting loan rate is different, they will have 5 days to alter that. That may sound fine here sitting in Washington. But, boy, springtime is a very busy time for our farmers, as we know. And I just worry that some people are going to be caught betwixt and between and not, within that very narrow window, able to get their coverage levels adjusted in time.
Page 23 PREV PAGE TOP OF DOC What does it mean? Well, for example, you take the soybean rate. The price selection presently offers $4.92 a bushel. It was $5.26 last year. The difference is that $4.92 is the lowest marketing loan rate allowed under the statute. $5.26 is where it has been in each of the last 5 years. If you lock in $4.92, we may get a later USDA announcement, or the legislation in the farm bill may drive that market loan to where it has been. They are going to have 5 days to get their coverage up. And that is a significant 30-cent difference. I just think it is unfortunate that we have put farmers in this position. It could be remedied tomorrow if the U.S. Department of Agriculture would establish those marketing loan rates. I think it is, that would be the right thing for them to do. And I would encourage them to do that, not just establishing the loan rates, but establishing them at the rate they had been at each of the last 5 years.
What would be the basis for changing the loan rate? As we know, the support levels under this, the final year of the farm bill, are at the lowest levels under Freedom to Farm. We know that market prices stink. So, to allow the loan rate to come down from where it has been over the last 5 years just makes no sense at all. I would hope that the Secretary would make that announcement and make it soon.
The second issue that I want to talk about is probably one going to be more involved with the committee action: quality loss. Crop insurance ought to cover a farmer's risk exposure in growing a crop. It is an economic investment. But basically that economic investment and the exposure to the farmer doesn't end when they dump the grain into the grain truck at the end of the field. It is what they get paid for their crop. What we have seen, given the wet cycle in our neck of the woods and problems in other areas of the country as well, are tremendous discounts being taken at the elevator itself. So, at the point of sale they are losing the economic value of the product. They are getting the bushels, but they are not getting the check because of the quality loss discounts.
It is estimated that in North Dakota alone in each of the last two summers farmers have lost $200 million due to the application of discounts. The farm bill last night on the Senate side added $2.1 billion to cover 2001 quality loss issues. Whether that will be kept in conference committee, I don't know. I think we can all appreciate being able to address this issue through the emergency bill, but that day is about done. We have the coverage in the Crop Insurance Program.
Page 24 PREV PAGE TOP OF DOC For that reason, we directed RMA to study this issue and to bring forward some changes in ARPA. The contractor assigned on this study has yet to report to RMA. They will be doing it soon. And I think there is just an awful lot at stake in our area, just for an example. You have a crop. Again, you have got the bushels. But by the time you are at the elevator doing the testing, you receive discounts for SCAB, you receive discounts for VOMATOX. If you are marketing sunflowers you have got fusarium headblight. We have seen more damnable discounts in the last few years than we have ever seen before, and I believe that these are directly linked to the farmers' economic stake in their crop. Therefore, they need risk protection attached to this peril of losing the economic value. And the RMA cannot move fast enough, in my opinion, to address this question.
That concludes my testimony. I would be happy to take any questions from my colleagues if they have any. I appreciate your work on this.
Mr. CHAMBLISS. Anyone have any questions for Mr. Pomeroy?
Mr. POMEROY. I have got a statement for the record, Mr. Chairman.
Mr. CHAMBLISS. OK.
Mr. POMEROY. Thank you.
Mr. CHAMBLISS. Well, thank you very much for your insight. I will tell you that we miss you here on the committee. And on a personal note, I particularly miss you even though we come from different parts of the country and we grow different crops, and we have always said that you wouldn't grow peanuts, cotton and tobacco if we didn't grow wheat and sunflowers. And we are still living up to that. But we do miss you. And we thank you for coming and bringing your always good insight into this critical issue.
Mr. POMEROY. Thank you, Mr. Chairman. Thank you very much.
Mr. CHAMBLISS. Now we will return back to Ms. Honor for the questioning side of her testimony.
Page 25 PREV PAGE TOP OF DOC Let me start off, Ms. Honor. On page three of your written testimony you state that the Board will evaluate a number of existing pilot programs for conversion to permanent programs.
In Georgia, blueberries are gaining quite a big of acreage and I am glad to see that that crop is on your list. However, there is one crop that we have a significant interest in that is left off, and that is pecans. The Pecan Pilot Program has been in effect for several years and it has been very successful.
What is the status of expanding pilot programs, and has there been a moratorium placed on pilot programs? If so, what is the status of that moratorium.
Ms. HONOR. The passage of the new legislation changed our authority to operate in traditional ways. The act was interpreted by our attorneys so that in cases where that we had to make changes into actuarial documents, then those things had to go before our board and be subjected to independent review.
Due tothe new legislative changes and not having procedures in place, a moratorium was placed on program expansion. Once the Board began to act, we developed a set of internal procedures, and provided them to the Board. This took several months because we were developinga working relationship with the Board. And the act, the legislation, was new. We had to take a look at all of the things that we normally do. Because the way the legislation is written, anytime we make any changes to an actuarial document, the interpretation that we have is that we have to go and take it to the Board, or the Board has to give us authority to act on it. So we looked at those things that we routinely maintain and those things that we do expansion or changes on it.
In December 2001, the Board passed internal procedures that now allow us to make changes and to expand on programs that have been codified in the Federal Register. And so the first act that occurred was that I approved the expansion of the Group Risk Protection Plan in the Texas area. And that was done, I believe in December I signed the expansion of that. So you can expect that we will be moving on improved, approving and expanding on the pilot programs.
Page 26 PREV PAGE TOP OF DOC Now the specific one that you are asking on pecans, I have to refer to Tim and find out exactly where we are on pecans.
Mr. CHAMBLISS. OK.
Mr. WITT. Mr. Chairman, for this fiscal year, we are planning to conduct an evaluation on pecans. And we will probably either do that through a partnership arrangement or contract. But we do have pecans on schedule to be evaluated. And then depending on that evaluation, we would move towards the Board of Director consideration for making that program permanent down the road.
Mr. CHAMBLISS. So do you think that will be completed this year in time for the next season, 2003 season?
Mr. WITT. I don't believe it is going to be completed in time for the 2003. But the contract will be between now and this fall. It will probably take the contractor roughly, my best estimate, would be 120 days. And then if we do move forward on that program, we would move through the Federal regulatory process with a proposed and final ruling-making process.
Mr. CHAMBLISS. Miss, Honor, in the nationwide update of the T-yields for cotton this year, how weree these T-yields calculated, and was it on a rolling average? And what other T-yields were updated?
Ms. HONOR. We updated T-yields this year because they were not updated in previous years when they should have been. As a result of that, we had to update a number of them that should have been done before.
We used data provided by NAS to update our T-yields this year. I am just trying to remember exactly how many we did.
Last year we did all of the spring crops. They were the ones that we updated. And because we had not done them for, we were behind one year, the change was very significant. And we got some comments on as a result of that. They should have been done the year before. But now we are on schedule and we will updating another set this year.
Page 27 PREV PAGE TOP OF DOC Mr. CHAMBLISS. All right. And what is going to be updated this year?
Ms. HONOR. I'll defer to Tim on this.
Mr. WITT. Mr. Chairman, we updated T-yields using 1991 through 2000 crop year data. We have internally a 3-year time span between when we update those yields. And we did all the spring crops effective for the 2002 crop year. For the 2003 crop year we are updating all of the fall crops, which primarily would be the winter wheat crops. And from this point on, we will be on average of every 3 years we will update with the most recent 10 years of NAS data.
We have been questioned whether that is the most accurate process or if there is a different means of doing that. And we do intend to have a contractor do an evaluation to see if there are other alternatives or viable means to do that. But right now that is our tentative plan.
Mr. CHAMBLISS. OK. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman. And representing California and the Central Valley, California, we haven't been necessarily involved in many aspect of crop insurance as other regions of the country for a lot of different reasons.
But one approach that we are interested in as it would pertain to some of our commodities is the cost of production approach. And, obviously, we are interested in a pilot program being moved forward with that. And I was wondering if you could give me an estimate in terms of when you think we might see a cost of production program that would be available for our cotton growers in California?
Ms. HONOR. We awarded a contract to a contractor in July to develop 12 crops under the cost of production model. It has taken some period of time for us to get through the contracting process, because this was a new process for us. And this is on the system that we are using where we are contracting out the development that we would have been doing before.
Page 28 PREV PAGE TOP OF DOC So right now we are planning to, the contractor is to develop the 12 crops. After looking at the number of crops and the length of time, and also the process needed to get something online, we have attempted to, we are looking at the possibility that perhaps we can select maybe two crops. We are looking at the possibility of two crops, cotton being one of those, to see if we can take them through the full process to see how quickly we could get them online.
Now what this means is that we have to develop all the supporting data for the crops. It has to go to our Board of Directors for them to look to review. That goes out for the expert review process, which is required by the act. The reviewers will look at the product and evaluate it and give a recommendation to the Board of Directors as to whether or not they should go forward with approval of the product.
I don't think it is reasonable that we will have a product available for 2002. And it may be pushing to say that 2003 is a possibility given what we have to do to go through the process of getting the product online. We would try for 2003, but I think that 2004 is more of a reality.
Mr. DOOLEY. I would just be kind of interested, as I understand it, when we put together the pilot programs on the adjusted gross revenues that the timing that it took to put those in place was shorter, I mean, than some reports I have got it only took around 13 months from when we tried to put those pilot programs together.
I would assume that you would have had to gather the same type of information and data there. Why is it taking so much longer on a cost of production?
Ms. HONOR. Well, the process by which we approve the product has changed. We now have to take them to the Board and then they have to be reviewed. So we have sorted of added something in the process that was not there before. The reviewers, it has to go out for expert review. And then it has to come back in and the Board has to act on it. And that has added something to the process. Now what we are trying to do, because this is new and we just implemented it, is to look at what we can do to reduce the amount of time in that process. But you are right. In the past, we were able to develop and bring on the 18 t 24 months. And we are attempting to look at the possibility of trying to shorten the amount of time.
Page 29 PREV PAGE TOP OF DOC But this is 12 crops coming on board is a lot of crops. And if we can just get a couple through the process so we can determine how it is going to go and how we can save time, then I believe that we can shorten the process. But this is entirely new for us. Now this is an area that Tim and I have had some talks about. And also we have talked with the contractor several times about that, only just yesterday. It is just a different process now. I will ask Tim if he wants to add some details to sort of further clarify in terms of the timing.
Mr. WITT. Cost to production contract was let in June or July of this past year. So it really has not even been one full year in development. We have had a number of discussions with the contractor. We have had some preliminary draft, deliverables made to the Agency. I believe that we will have a final product delivered sometime late spring, early summer. Depending on the quality of the product from the contractor, depending on the Agency's comments and those of the expert reviewers it is not unlikely that there is a possibility for some crops for 2003.
But there is a significant process we do go through now via requirements made in ARPA that we did not have to go through with AGR. But the actual COP contract was let last summer. So I think the contractors made significant efforts. And the Agency, we have recently tried to add more resources in the review of those deliverables.
Mr. CHAMBLISS. Mr. Rehberg.
Mr. REHBERG. Thank you, Mr. Chairman. I feel like I am in a different time zone than you down here. I represent the State of Montana. And as you may know, we are entering into our fourth drought year. And in fact, in my own home county this will be the sixth drought year. So I want to ask you a specific question on behalf of the beer drinkers in the room.
Currently, the Agency does not provide equivalent levels of coverage for both irrigated and dry land producers. Producers can only get full coverage if there is a reasonable probability of having adequate water to carry out an irrigated practice. In a drought year the producer's only option is to claim a prevented planting that only carries 60 percent of the producer's guarantee.
Page 30 PREV PAGE TOP OF DOC Malt barley producers in my State have an interesting situation. Because malt barley provisions do not allow for prevented planting. So in order to be covered they must carry a small grains policy. This covers producers at a level of 50 to 60 percent of the malt barley price. This means that malt barley producers in my State get about 23 percent coverage when the math is done. What suggestions do you have for this subcommittee, or is there authority within your Agency to work on making some changes to make equivalent coverages for irrigated and dry land growers?
Mr. WITT. Congressman, I am aware of your issue. There is authority within the Agency to modify the policies and the amounts on prevented planting. That is something that we could look at. We likely would need to contract out for someone to evaluate it and make some proposals to the Agency for consideration.
Mr. REHBERG. Have you looked at the issue yet, and if you haven't, how long would it take you to implement that? And I don't mean to underplay the level of anxiety among my constituency as you have these multiple years. And I have other questions I may want to ask if time permits about multiple year droughts. Because we don't know when the cycle is going to break. And to have so little support or help on a continuing basis, it would seem like one of the complaints I have with the Department of Agriculture is a sense of urgency. I saw it on hay grazing of CRP land where I don't think the Department got it that every day that goes by that we don't have the opportunity to cut hay on CRP or open it up for our spring grazing costs one more farmer or rancher perhaps their year or even multiple years of income.
And so I guess I want some assurance from you and that you recognize the severity of the compoundedness of the problem. And we don't have a lot of time left for some of these producers.
Mr. WITT. I understand your concern as far as promising land. I have to admit, I was unaware that this was an issue. But it certainly is something we are willing to take a look at and try to move up with the other priorities within the Agency. That is the best I can tell you right at this moment.
Page 31 PREV PAGE TOP OF DOC Mr. REHBERG. Thank you, Mr. Chairman. I would like to follow up then with the committee itself and see if we could apply some pressure to have you expedite this issue. Thank you.
Mr. CHAMBLISS. Well, the person to apply the pressure to will be on board about March 1. So we will look forward to because that is a critical issue. All of us have that issue of particularly dry land versus irrigated land that needs to be addressed. Mr. Kennedy.
Mr. KENNEDY. I thank you. And thank you, Ms. Honor, for your great service to us and your good responsiveness as we have talked about crop insurance many times.
As you know, in our region of the country in southwest Minnesota we have people really questioning their faith in crop insurance, which I don't think is a good thing. I think they ought to have faith in crop insurance and I think it is a great program. But we have particularly with our sugar beet situation where the prices in determined, like a lot of other crops, for an individual at the time of harvest, but on a cooperative-wide basis after processing. And in that causes some degree of difficulty. What ideas do we have, is there ways of modifying this contract or otherwise to make it more reflective of the sugar beet type situation in the future so that we don't have these types of issues? And is that a new type of contract that we can move forward on?
Ms. HONOR. Congressman Kennedy, we have met on this issue and we have talked about it. And I certainly understand your concerns and I understand what has happened to the people that you represent with regard to this issue.
We have certainly been thinking about what we can do in this area. However, as you are aware, there are currently lawsuits in play. The producers have one and a lawsuit has been filed against our agency. On the advice of counsel we have limited our public discussions on what we are doing in this area. Because we would not want to move forward with any plans to make changes to our policy and then find out through litigation and legal action that perhaps we didn't have the authority or should not have done that.
Page 32 PREV PAGE TOP OF DOC What we are attempting to do is to wait for the outcome of those lawsuits so that we will know exactly the direction that we should be going in to make the changes to the program.
Mr. KENNEDY. So your suggestion is that we want to defer looking at whether we revise the contract not for the past but for the future until once we have completed and commenced thecompleted the lawsuit that is currently in place?
Ms. HONOR. Yes.
Mr. KENNEDY. And is there any advice in terms of that may take several years as we look at future crop years, 2002, 2003, that one would carry back to the beet cooperatives as to how to manage their harvesting under these contracts that are currently in place prior to the completion of that litigation?
Ms. HONOR. Well, I think one of the things that we certainly learned is to pay attention to the weather in that area. I go to the Under Secretary's staff meeting on Tuesdays and we get a weather report. I always pay attention to the period of time if there is a freeze or even a hint or potential of freeze in your area.
I think that we in the Agency and the locations in the field where we have sugar beets are very sensitized to the impact that freezes can have on the production. And we have worked this last fall, there was a possibility of that same situation in your area. And we took early action to make sure that our folks in the field and our regional offices worked with the farmers in the area to give them whatever guidance was necessary so that they were not in the same situation that they were in last year. And so what we have done internally is to be more aware of what is going and to have some early intervention in that.
Now Michael Hand is with me and he is our claims guy. And so if he may want to give you a little more information on that. But that is where we stand now. And as I said, because of the lawsuits we are withholding any directions that at to move forward in changes now. We have some ideas but we are waiting the outcome of that.
Page 33 PREV PAGE TOP OF DOC Mr. HAND. Congressman, I would just say that Ms. Honor has accurately stated what we did this year. We did take extra precautions this year to make sure that producers knew that they should file a notice of loss when they suspected that there may have been damage from a similar freeze like she mentioned. And we did spend a lot of extra resources going out and monitoring the situation just so that we would be on top of it if it did occur. And fortunately, thankfully, we didn't have the same thing.
But until and if we change the contract, I think that is the best we can do right now.
Mr. KENNEDY. Well, we appreciate that response and your attention. And we will look forward to working with you each and every fall until we get this modified to keep a close eye on it. And look forward to hopefully working with you once we get litigation resolved in order to recraft the Crop Insurance Program so that we can restore that trust in my part of the State and have a better crop policy for the future. So thank you for your testimony here today and you good work.
Mr. CHAMBLISS. Ms. Honor, I know that a lot of us had a keen interest in a cost of production policy. And that is provided for under our Reform Act. And could you tell us what the status of any work that is being done or development that is being done on a cost of production policy, if it is headed toward the pilot program, what our time table might be.
Ms. HONOR. OK. RMA received letters from growers indicating that they had an expectation that a cost of production program for crops would be available early in crop year 2000. The schedule of deliverables for the cost of production task order and the length of time required for RMA's internal reviews, the expert reviews, and the Board actions, precludes us having a product available for 2002.
The deliverables are necessary that we are currently looking at 12 crops. And we are working with the contractor to see if we can expedite the development and the completion of those so that we can bring them online. We are appreciative of the fact that there is a great amount of interest in this new product. And it is one that has a lot of interest throughout the farm industry and also with producers. And our Board is also interested in exactly how we would go about developing and implementing a cost of production program.
Page 34 PREV PAGE TOP OF DOC So we are moving as quickly as possible on this. I am hoping that we will have at least one crop that we can pilot test at least, hopefully, in 2003. But at this point in time, given the amount of time, the changes that are necessary to get the product before the Board and get it approved, I do not want to make a commitment. But it is something that is in the process.
Mr. CHAMBLISS. Well, I understand that it is a complicated process to try to figure out cost of production coverage. Particularly when you compare the difference in the cost of production and growing an acre of cotton in Texas with what it is in Georgia. But it is something that is critically important to all our farmers. I am glad to hear you moving in the right direction.
Ms. HONOR. We also are fortunate to have two economists on our board. And that adds some very interesting insight into all of our products. We have the Chief Economist, Keith Collins, he is serving as our acting chairman. And Under Secretary Penn. And they both are economists. And so they ask some very probing questions on all of our products. They bring a new insight. And this one that they have expressed interest in, taking a look at exactly how we go about implementing it.
Mr. CHAMBLISS. Good. Compliance is always a key question that we get when we are back on talking with farmers, as well as, with agents. What is the RMA focus on compliance at this point in time?
Ms. HONOR. OK. Well, the act certainly increased the focus and interest on our compliance effort. We have funding that was provided, significant amount of funding. It also took the opportunity to leverage the resources devoted to it by including activities, the assistance of the Farm Service Agency.
In January we completed the development of an implementation plan that was signed by the Secretary of Agriculture, that identified the manner in which we would implement our new compliance activities. That involved the training of the Farm Service Agency, employees that I have talked about, which is one of the elements. It also addressed the reconciliation of the records that we have currently underway. It also addressed the consultation process where FSA State committees will work with the Risk Management Agency to identify local conditions for reporting so that we can have a proactive early warning system. And this is currently in process.
Page 35 PREV PAGE TOP OF DOC So we have a number of things that are underway in our compliance activity to implement the act. And of course, we have the new technology that we are using, which is data mining. It was a very interesting article in Washington Post a couple of weeks ago that the Transportation Department is also using this technology to identify individuals on airplanes now. And it was very similar to the one that we are currently using. So we are moving along and we are making some progress. It may not be that it is fully known at this time and some of the results are still coming in. I do have with me Garland Westmoreland, who is in charge of the compliance area. And he has been very, very involved in implementing it. So I'll ask him to just speak briefly about some of the things that we are doing so that we can move on. Garland.
Mr. WESTMORELAND. Mr. Chairman, our focus in compliance over this past year, particularly, implementing ARPA, has been from an after-the-fact review of policies that had been done for years into a proactive preventive posture. Using the technology provided by data mining and then the in-field fact-finding by thousands of FSA county office personnel, we were able to determine what is happening in real time in each location around the country. Provide this information to the company that wrote, that is insuring that policy holder, and then make sure something is effectively done.
By taking these steps we have largely changed the equation of how we pursue compliance in crop insurance program. And our early results so far are extremely encouraging. We are stopping more money from going out, again by working with the companies and FSA, than in previous years we had ever been to catch afterwards.
Mr. CHAMBLISS. Mr. Stenholm.
Mr. STENHOLM. I want to briefly follow-up on what the last question, Mr. Chairman, you were asking. I know and I understand Mr. Dooley also got into the cost of production insurance question.
And, Ms. Honor, when did the contractor deliver to you the proposal? And I believe you said possibly maybe next year cotton could be with a pilot project. When did the contractor deliver a proposal to you regarding cost of production on cotton or any other commodity?
Page 36 PREV PAGE TOP OF DOC Ms. HONOR. I have to defer to Tim because you are asking a question about a date or a time that he has delivered. And I have to defer to Tim on that.
Mr. WITT. Congressman, to the best of my memory, the deliverables come in several different pieces. And some of the first deliverables have been drafts of underwriting laws, loss adjustment handbooks, and policies. And those have started, I believe, November, December. That will continue on through final stages. And then we will get the final rating and pricing information on the product, I believe, sometime this spring.
Mr. STENHOLM. Has not a proposal been delivered to you, has not discussions with you been held regarding a cost of production proposal?
Mr. WITT. Well, when you say a cost of production proposal, we have let the contract. And under the terms of the contract, the contractor has brought back these deliverables under the time frame specified. And we have had informal discussions, yes, back and forth.
Mr. STENHOLM. What has been your initial reaction?
Mr. WITT. Our initial reaction, so far the preliminary information looks like they have done a fairly good job. We haven't gone through an in-depth analysis completely yet. That is actually going on as we speak. But the preliminary indications are the product looks like they have done a pretty good job to date.
Mr. STENHOLM. If that is your initial reaction, then I would hope, just speaking for myself and members of this Committee, that we would be a little more expeditious in the development of this product than what has occurred over the last year or so. And so I think that is encouraging. And maybe some of the roadblocks that have been thrown up might be going away.
Let me shift from that to both the National Cotton Council and the American Association of Crop Insurance and their testimonies submitted in writing today, mentioned a problem that I am very interested in. And that is the fact that we still do not have the cooperation between FSA and RMA that was specified very clearly in the law. Now, Ms. Honor, have you seen the Tarlton/Bradley Project?
Page 37 PREV PAGE TOP OF DOC Ms. HONOR. Yes.
Mr. STENHOLM. You have looked at it?
Ms. HONOR. The contractor provided a brief, yes.
Mr. STENHOLM. I realize this project is in its early stages. But what are some of the problems? Why, apparently and in your own testimony I think you refer to this, certainly, Mr. Westmoreland was talking in regard to the compliance a moment ago, that we have seen some pretty outstanding results this year on compliance that have occurred now as evidenced by the Bradley/Tarlton Project and some of the things that have been pulled together. But we, for example, the frustration of the crop insurers now is that RMA and FSA use different definitions of shares that can result in data differences. And we keep getting reports that we still are not able within USDA agencies to agree on what are units, what are fields. Why?
Ms. HONOR. Well, our programs are different is perhaps the simple answer. But we are running an insurance program. And the data that is needed for an insurance program is different from the data that is needed for a farm program. The manner in which the insurance is determined and the basis for those require different information from the information that is provided for the farm program.
And over the past years as we have taken the data during we have had some reconciliation of data between the two agencies, we have identified those common elements that we have. And we have done through a number of efforts have been able to do some matching of the data. But the data is basically, we have just different information that we collect. We are moving towards trying to address those differences and make appropriate changes.
But I really think that we will always have some data differences because our programs are different.
Mr. STENHOLM. Mr. Chairman, I was involved about 12 years ago in the USDA Reorganization Act of which we passed some pretty good law instructing USDA to do certain things, like work together. Now I my statement now is not criticism of RMA. This is designed to get back to your FSA brothers that I am very disappointed in the manner in which FSA has worked on the data mining project with you. You have done a pretty darn good job based on what I have seen in RMA in working with the companies and others on compliance. But we have got the missing link in this, it is FSA. And I am so disappointed in the attitude that has come from them thus far regarding working together in order that we might simplify the amount of bookwork that is going on. We now have reconciliation going, and according to this testimony and I have heard from States, reconciliation in FSA State offices that could have been done in minutes instead of days and had they chosen to participate in the Bradley/Tarlton Project with you regarding insurance.
Page 38 PREV PAGE TOP OF DOC Some of you, and you know who you are, are dragging your feet within RMA. But overall, you are doing a pretty good job. We have got to get FSA in. And, Mr. Chairman, I hope that in some very early moment that you will find that this subcommittee will bring FSA in and ask them the questions of why they have chosen not to be as cooperative regarding crop insurance as they should have been.
Ms. HONOR. Mr. Stenholm, if I might comment a little longer. Jim Little, who is the administrator of the Farm Service Agency, and I are very good friends. We have a good working relationship. We work together and I think he is a reasonable man. And he intends to do a very good job. He is a Virginian, like myself. He is an accountant, like myself. And he has been a chief financial officer. He has just taken over that job and we will have a new administrator in RMA very soon.
Mr. STENHOLM. I am not pointing fingers at anybody, anyone except those who are now working and have the responsibility today. My frustration goes back 12 years. And if you want to defend every single one of the USDA fine personnel that have not gotten the job done in the last 12 years, be my guest. But I think the chairman will bring this to a halt before you do so.
That is not what I am talking about. I am talking about, and let me just
Ms. HONOR. I think that the issue concerns you and bothers you that we are looking towards a ways of adjusting that. The act and the agreement that we currently have with Tarlton is for RMA's data and it is RMA's funds. And that
Mr. STENHOLM. I understand and I understand the wonderful lawyers that are involved in all of this. And not being one, I do not understand all of the intricacies. But I do understand what we put into the law and I can read. I can read. And what we said in this Committee that Mr. Pomeroy bragged on us for doing and the chairman's work. And if the chairman were here I think he would be underlying this with me also. That is a problem. When we pass a law and it doesn't get administered I get frustrated. And we will carry on that another time.
Page 39 PREV PAGE TOP OF DOC But let me, Mr. Chairman, let me point out one thing to you and to Mr. Dooley of again a part of the frustration and what we are about to get into budget-wise. Because in the budget for fiscal year 2003, the administration proposes that underwriting gains paid to a crop insurance company be limited to no more than 12 1/2 percent of that company's remaining premium. Now that shows $115 million savings for USDA. The only problem with that is on December 20, 2000 the Risk Management Agency issued a bulletin to crop Insurance companies which said FCIC is not canceling the 1998 standard reinsurance agreement effective for the 2003 reinsured year. Therefore, it will remain in effect for the 2003 reinsurance year.
Now if we go in and change that by law in the budget, every crop insurer will sue the U.S. Government for breach of contract and they will be right. So we have got $115 million savings in the budget that are a sham. That we are going to have to find somewhere else in order to meet the budget requirements that have been given to this Committee on agriculture. And these are the kind of games that get played when you don't get folks, and I am glad to see Mr. Hand coming on board now. Ms. Honor, you have done a wonderful job in this. But these are the kind of games, and we will have some others to point out by this in the budget of which there is no relationship between the real world and what we have got to operate under, and what the budget that is before us is going to do. And it ties together with all of this.
And the Tarlton/Bradley Project based on, and I believe you have confirmed it, OMB has seen it, it is having the desired effect even though we haven't fully implemented it with FSA's participation. If we can just bring ourselves to do that, to have the kind of cooperation between FSA and RMA that many within FSA will say, we can do it. To which my response is, you have had 12 years to do it. You haven't done it.
We have now got a project that is doing it. RMA is a part of it and doing a pretty darn good job. We have just got to get FSA in and then both of you do an excellent job. And, Mr. Chairman, the compliance that you and I both are concerned about will get better in a hurry.
Page 40 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Thank you, Mr. Stenholm. And we obviously share the same concerns. Agriculture seems to always take a large hit when games are played with the budget. So, hopefully, we will be able to get that resolved here.
Mr. STENHOLM. Are you still on the Budget Committee, Mr. Chairman?
Mr. CHAMBLISS. No, sir.
Mr. STENHOLM. Maybe if you know somebody on the Budget Committee.
Mr. CHAMBLISS. I know somebody over there.
Mr. STENHOLM. Me, too.
Mr. CHAMBLISS. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I just got a couple of questions that have been brought to my attention from some producers in South Dakota. And if it is covering ground you have already covered, I apologize for that. But I would like to just get your response to a couple of concerns that have been raised about the program.
In central South Dakota the cost of producing soybeans equates to about $200 an acre. Cost of corn production is about $216 per acre. And using examples that have been brought to my attention by some producers in South Dakota who are using the Crop Insurance Program, and it is the most risk management tool that is available to them, they are four brothers who are trying to grow their operation. A farmer would have a safety net of a negative $87 per acre on soybeans, and a safety net of a negative $9 per acre on corn based on that cost of production at $200 per acre for soybeans and $216 per acre for corn. The question I would have for you is, what they are saying essentially is we have always planted 60 percent corn, 40 percent beans, and now we are going to plant 90 percent corn because of the way the Crop Insurance Program is operating. And so it is distorting planting decisions. And instead of responding to market signals they are making planting decisions based upon the program.
Page 41 PREV PAGE TOP OF DOC Is it possible, or do you think that the soybeans maybe need a CRC policy that overrides prices when they fall below the cost of production? You got soybean price at $4.30 a bushel. And if you can't use the future's market and prices have been low for some time in conjunction with crop insurance, you kind of manage your risk. I guess essentially what I am saying is, there are planting decisions that are being made based upon crop insurance that are not consistent with previous production history or what the farmer would probably normally want to plant.
Ms. HONOR. I will defer to Tim. Because we have been doing some research on this particular question. And he is really current on.
Mr. WITT. Congressman, if I understand your question, I think your growers must be referencing the plan of insurance crop revenue coverage.
Mr. THUNE. Correct.
Mr. WITT. Which is price discovery on that it is market driven in your area, I am not sure, but of the Chicago Board of Trade
Mr. THUNE. Correct.
Mr. WITT. That product, while it is a private sector developed product brought in under the section 508(h) of the statute, is a product that if market starts out low and stays low, that is probably one of the limitations in the product. And there is not much that they or us are in a position to do about it. Although we would be happy to share that concern with them to look to see if there are any alternatives that are viable.
The other thing that has been done in the last couple years is for the Soybean Program, the soybean price selection was set at the loan rate, which had been $5.26. Granted, that doesn't provide market movement between spring and fall. But it was a price that was higher based on the loan rate.
But the crop revenue coverage is not one the corporation developed. We do reinsure it and we fully support it. But we would be happy to share that concern with the developer and look at, if there are other alternatives, they are willing to pursue. Part of that is not, it is not totally in our control on that one.
Page 42 PREV PAGE TOP OF DOC Mr. THUNE. Right. And I would appreciate that if you would share that. Because I think that it is designed as a risk management tool. But it is impacting. And even if you went to the soybean loan rate at $5.26, you are negative on that relative to you are negative on corn. I mean, when I say negative, less cost production. Is still significant enough that it is going to move a lot of production into corn that might otherwise be in soybeans.
I suppose you could argue in some ways that maybe that is a function of prices on the futures market and so maybe their planting decisions are reacting to market signals. But their contention is that they are reacting to the way the program is designed and structured in making those planting decisions based upon that.
Mr. WITT. I understand the issue and the concern, I guess. My response is they are probably reacting to both. I mean, the program is not in a position to offer prices that get so high that it creates an adverse selection against it. And because the margins right now due to the way the market stand are so slim, it creates that dilemma. And I have empathy for them on that.
Mr. THUNE. One other question that kind of comes back to what Mr. Stenholm was addressing. And that there were also concerns raised, not only by producers but also people who are on the insurance side of it, about the auditing process and FSA's role and the request evidently to go back 10 years. And to provide historical data going back that far. And then also some frustration being expressed about FSA allegedly falsely accusing fraud in some circumstances.
And it seems to me that what Mr. Stenholm was referring to in terms of some of these issues and problems with respect to FSA's role and RMA's role here could be resolved. It would not take a piece of legislation to do that. There ought to be a way to fix this. I am just curious if you know of other problems in this regard and do you have some plans to address them or take of them?
Ms. HONOR. Well, I think that we are working with the Farm Service Agency to train them on our program. And that was part of the reason that we invested last year $2.25 million in training so that they would understand how our program works. And we intend to continue to do that this coming year. We intend to continue. The act provides that they now assist us in carrying out our compliance function. And in order to do that they need to understand how the program is operating. And we are working in that to accomplish that.
Page 43 PREV PAGE TOP OF DOC We will continue the training this year. And we will also be adding other ways of working with them so that they will understand how our program is. I am hopeful that we will see some better relations and some better results. And I think that over time as they understand our program that these will change also.
And, Garland, you may have some comments, some feelings on that as well.
Mr. WESTMORELAND. Thank you. Congressman, the first year out of the chute, if you will, for implementation of ARPA we, of course, had some problems. I would have to say by and large it has been typified of an extremely good working relationship between RMA, FSA and the companies.
As Ms. Honor pointed out we have trained 2,500 FSA people around the company in the policy and procedures of crop insurance so they would understand what they are doing. And we have a team composed of FSA people, RMA people, and company people to review what we are doing when we refer issues from FSA to ourselves to the companies and how they should be responded to. Most of those have been very, very effective producing results five and six times higher than we get from any other source.
But still there are, they can be improved. And our team is even now working together to see what things work particularly well and what things can be improved on.
Mr. THUNE. How about the question of a 10-year crop history?
Mr. WITT. Congressman, this stemmed from an office on Inspector General Audit of our yield history in the program. And the yield history drives eventually the insurance guarantee. The Inspector General's Office asked us to strengthen the controls we have on the yields that we allow to be certified, one by the grower, and two, by the auditors from the companies that are submitted to the Agency. In some cases they found yields that had come through and been certified that were very excessive, sometimes in excess of four times the county average.
Well, when that yield sits in a 10-year history in order to get those corrected, we need to have the companies go back and deal with that year or that specific yield that was causing in essence an excess insurance guarantee which caused excess losses to the program.
Page 44 PREV PAGE TOP OF DOC We went through and we made a run this past summer. We gave the companies a list of those policies that fell out of those tolerances. And we asked them to correct those yields to get the producer's history more in line with what it should be. The companies have worked very diligently on that. It is unfortunate we had to go back and do that, but it has cleaned up the data and the insurance guarantees.
And to the best of my memory, that was not a significant number. It may have seemed like it but in terms of pure size of the program it was a very small percentage of the growers in the program.
Mr. THUNE. Companies have expressed concerns about the data collection and everything else that is associated with this. And the producers bringing in their data and then having it questioned because of a distinction about planted acres versus prevent plant. And so there are accusations flying back and forth, I think, about whether or not these are, they are being accurate and forthcoming.
And I just know there is a lot of frustration on the part of the producers themselves and the companies with FSA and the way they are going about collecting this data. And so I hope there is something that as you continue to work the kinks out of this that will, this is a designed program. It is designed obviously to benefit the producers. And there is a tremendous amount of frustration among the producers at least with this sort of, what I would call, a paperwork kind of bureaucratic side of the program.
Thank you, Mr. Chairman.
Mr. CHAMBLISS. Thank you. Mr. Dooley.
Mr. DOOLEY. Thank you. I represent the Central Valley of California, which is noted for its production of a lot of specialty crops, tree fruits and vegetables. In my conversations with a lot of those producers, as well as, some of the organizations that represent them, there is real concern, if not outright opposition, to adjusted revenue, adjusted gross revenue product. And the reason for that is that there is concerns that you will create distortions in the market place that Mr. Thune talked about, is because risk isn't all bad. Risk a lot of times allows us to realize the relative advantage that we have, and because of geography or climate or other conditions.
Page 45 PREV PAGE TOP OF DOC And my question is, as we are seeing these pilot programs out there that are going into the specialty crops on adjusted gross revenue, how are we defining success?
I mean, a lot of the information you are providing to us is how many people are participating in it. But are we also getting provided the information on the loss ratios that we are seeing there?
The information in terms of the amount of subsidy that is embodied in the premium in a per acre basis, are we getting the information to in terms of the levels of indemnification on a per acre basis to those specialty crops, and are we also doing an analysis in terms of the actual production history.
Are we seeing an increase in production in some of these commodities because of this new product we are offering there? And are we correlating that with what we are seeing in terms of the actual prices for those commodities so that we can make a determination whether we are seeing in fact a distortion in terms of what should be an appropriate market response by producers?
Ms. HONOR. The question that you are asking is with regard to how we evaluate our pilot programs before we go forward?
Mr. DOOLEY. Yes.
Ms. HONOR. OK. All right. This has somewhat changed, and I will ask Tim to help out in a minute. We have a process that where we operate our pilot programs for 4 years. And then we do an evaluation of the program to see how it is operating. And that is a process that we have had in place.
Now since the enactment of the legislation that has changed. And what we will do now is at the point that we are considering going forward with that, the program will be reviewed by the reviewers. And then we will be making a decision through the Board of Directors. So the process has changed and we will be looking at more information.
Page 46 PREV PAGE TOP OF DOC Tim, do you want to comment any further?
Mr. WITT. Congressman, I hope all my program analysts look at each one of our programs along the line of questions that you just presented because all of those are very important points.
We have a mixed bag. But in the evaluation process, in general, all of those issues that you raised are looked at to determine whether the program is viable to continue into the future. We look at the loss history, we look at the participation; are we getting adequate participation at by up levels. Are we impacting the marketplace. When they do the evaluations they try to go back and do producer interest groups.
We have had both good and bad experiences where we have created a program that maybe has impacted the marketplace. We have withdrawn from that and we have added other programs that have been very successful.
But in general, the answer to the number of the questions that you raised is, yes. All of those are factors that are considered either by the Agency. When we contract for an evaluation of a program that goes into the contract. Or if we are bringing a new program to the Board of Directors the expert reviewers will look at these kinds of issues.
Mr. DOOLEY. So then I could access information from you that would be able to quantify the cost per acre of both the premium as well as the indemnification that we have seen for these various commodities? Obviously, the information I am interested in is how much is this costing the tax payers to provide this product out there on a per acre basis, and then doing the correlation to what that is doing in terms of production.
Mr. WITT. Congressman, you can go to the RMA web site and it has a summary of businesses that will break it down by crop, by State, by area, even down to county level. And it will tell you the indemnities paid, the premiums paid, the amount of subsidy. And so you can get all those numbers. And if you or your staff need, we would be happy to work with you on that.
Page 47 PREV PAGE TOP OF DOC Mr. DOOLEY. OK. Thank you very much.
Mr. CHAMBLISS. Mr. Putnam.
Mr. PUTNAM. Thank you, Mr. Chairman. And thank you for allowing me to join you here for this hearing even though I am not on this particular subcommittee.
I apologize if I am going to wheat plow some ground that Mr. Dooley made have already gone over as a fellow specialty crop producer. My predecessor, along with a number in the California delegation, worked very hard to add the $25 billion for specialty crops for the development of a crop insurance policy.
And in the 2 years that have passed since that bill took effect, Florida has not been eligible as a second largest specialty State in the Nation, has not been eligible for any new policy under that particular provision. I am curious why that may be.
Ms. HONOR. That Florida has not been?
Mr. PUTNAM. That is correct. Under the specialty crops underserved $5 million per year, $25 million pot.
Ms. HONOR. Well, specialty, we have a specialty crop partnership and education cooperative agreement that includes Florida. So we do have some work that is going on in the Florida area.
Mr. PUTNAM. It has not come out of that specialty crop provision though, has it?
Ms. HONOR. This has come out of our partnership. This has come out of our education, our risk management education partnerships where we havewe have agreements with the State for risk management education under our Risk Management Education Partnership Agreements, where we are working with the education, with the States to
Mr. PUTNAM. This is policy development, not education.
Ms. HONOR. OK.
Page 48 PREV PAGE TOP OF DOC Mr. PUTNAM. They have made one request which was not granted. And this was a specific set aside for specialty crop States.
Ms. HONOR. Right.
Mr. PUTNAM. Which Florida ought to be in on. And I am curious as to what circumstances may have led to that
Ms. HONOR. I vaguely recall the issue that you are talking about. But I cannot remember exactly the details. Can I confer with the staff here for a minute?
Mr. PUTNAM. Certainly.
Ms. HONOR. But I think I do.
Mr. WITT. Congressman, if you are referencing the research and development, we have not made, at least from the R&D standpoint, we have not made a distinction on underserved per say. We have a number of contracts that, and the list is available on our web site, that are currently in progress for different commodities that will impact Florida.
In addition, we have a specialty crop survey going on trying to target growers so that we can identify specifically the needs of those growers and what we need to do to change programs that may exist now or to increase them. And that specialty crop survey, I think actually will begin to take place within the next two or three weeks in Florida.
But that from the R&D standpoint we have included Florida in specialty crops. Although, I don't believe we have made a formal designation like the risk management education has for the 15 underserved States. I believe that the previous Secretary made that decision on. But Florida is certainly very much front and foremost in our efforts.
Mr. PUTNAM. Well, that is an important part of it because unlike a lot of the other States, States like Florida and California, the traditional, the specialty crop States do not avail themselves or cannot avail themselves of other management tools that the Government offers. And crop insurance is really the one thing that is out there that some of these producers can take advantage of.
Page 49 PREV PAGE TOP OF DOC And it is vitally important for these specialty crops you give some attention. And the law is fairly clear in directing some special consideration for specialty crops, and set aside the money for it so that they have some form of safety net. Because that crop insurance is the only thing out there for them. And so I would hope that you would give some additional thought to ways to assist our specialty crop producers around the nation.
Mr. WITT. Congressman, I understand that and we place a great deal of emphasis. I should mention the University of Florida is involved in conducting that specialty crop survey. And citrus is one of the crops of the 12 that we have talked about earlier under the cost of production plan, as well as, we have other things going on for different vegetables.
Mr. PUTNAM. My understanding is is that was rejected.
Mr. WITT. Thatwhat is that?
Mr. PUTNAM. Cost to production plan.
Mr. WITT. The cost of production is not, is a contract that is not yet completed. The final deliverables on that will be due in late this spring. And then we will begin the process of evaluating that and taking it to the FCIC Board of Directors. What year that will be effective, it is possible there may be one, two or three crops effective for 2003. And then the rest of them, we would hope, might have a better chance for 2004.
Mr. PUTNAM. Thank you. Thank you, Mr. Chairman very much for your indulgence.
Mr. CHAMBLISS. Certainly. Ms. Honor, you talked a little bit earlier about the improving relationship between RMA and FSA. I want to ask you about the training. Is RMA training company representatives in addition to FSA representatives, and how are you communicating with them?
Ms. HONOR. No, we are not training company representatives. They are doing their own training.
Page 50 PREV PAGE TOP OF DOC Mr. CHAMBLISS. All right. How are you communicating program changes to the companies?
Ms. HONOR. Well, we on our implementation teams we have company representatives on the team. And they participate in the development of the processes and procedures that we use. And so we do have them on our team.
We have had meetings with company representatives to keep them advised of what is going on. And we had an industry meeting to talk about the overall implementation of what we were doing. So we have had some ongoing discussions with them.
And Garland has had several meetings with company representatives. Do you want to comment on specific meetings and how that is done.
Mr. WESTMORELAND. Congressman, in the implementation of ARPA, at least under section 121, there are very few policy changes requires in that. Most of what we are doing is working within policy. Given that, we are working on five teams implementing the five areas of 121. Each team is composed of on equal parts, FSA, RMA and company folks.
In addition to that, whenever these procedures are developed we distribute them to the companies. We publish them on our web page. And we try to make sure we briefed or discussed this at every company meeting.
If any policy issue does develop then, of course, as any other policy manner we would take that through the Agency and then discuss that with the companies involved.
Mr. CHAMBLISS. OK. How about farmers, is there any direct communication between RMA and the farmers themselves?
Ms. HONOR. In the process of implementing the act?
Mr. CHAMBLISS. Well, in policy changes.
Ms. HONOR. Well, newsletters and opportunities. But I am trying to think of an instance with policy holders. We have a contract with the reinsured companies. And the reinsured companies have the relationship with the policy holders. We have in the past had meetings with various grower groups and with commodity associations to get into determine what farmers are interested in.
Page 51 PREV PAGE TOP OF DOC We certainly do get a lot of communications from them. And during the past year many have come into the office to express their concerns and their interests.
But let me ask specifically, I think you are asking me what kind of communication we have directly with the producers.
Mr. CHAMBLISS. Well, we are trying to make all of our programs, whether it is farm bill, commodity programs, or crop insurance programs more farmer friendly and more farmer oriented.
Ms. HONOR. Right.
Mr. CHAMBLISS. And we took a lot of input from farmers into the process before we developed and passed ARPA. So what I am trying to make sure of is that farmers now know that we didn't just take the information and stick it in a hole somewhere. That their concerns really are being addressed.
And while we are not to the point of offering a cost of production policy, for example, I think farmers need to know that it is in the developmental stage, we are working on that, we are taking your concerns seriously. And if there are other pilot programs out there, Mr. Putnam's concerns I share because I have an awful lot of specialty crops.
I think folks just need to know, the farmers need to know as well as the banking community needs to know what is going on out there and what we are doing with respect to developing these new programs within the crop insurance industry.
Ms. HONOR. OK . I understand your question now. All right. We have 10 regional offices. And they are located throughout the United States. And they are very, very active in working with the farmers and grower groups, and congressional offices and their staffs to let them know exactly what is going on. They attend a number of meetings and they provide training opportunities.
And so that is a vehicle that we have to do exactly what you are asking. That is primarily the function of the regional offices that are located. They bring back to us the desires and the interests of the producers. They participate in the groups in training sessions and all sorts of sessions locally. That is a major part of what they do, attending local producer farm meetings and holding sessions with producers. And so we do have a network to get that information out.
Page 52 PREV PAGE TOP OF DOC We also in this new alliance with the Farm Service Agency, we are using their newsletter also as a vehicle for getting information out to the farmers. So we do indeed have that. I wasn't really clear on the question that you were asking me now.
That is in Michael Hand's area. And he likes to give them a plug whenever we can. So I will ask him to elaborate a little more. He can tell you exactly the kind of meetings that they are holding.
Mr. HAND. Mr. Chairman, and Phyllis mentioned the newsletters. And your question is timely because Phyllis was just stressing the other day how important it was for us to make use of the FSA facility and their newsletters to get some of our program information out.
But through some of the funds that were allocated under the ARPA legislation we have conducted hundreds of meetings out in the field through the regional offices with producer groups, with grower groups, just a multitude of people. In cooperation with the Extension Service as well to try and get all the information that you are talking about out to the producers.
And that is the theme, is that we want to make sure producers understand that things are changing, that is not just the same out there.
I would say at the same time, as well, as far as getting information out, although it is not directly through RMA, but we certainly do expect the companies to provide some information channels out to producers and their policy holders. And I think they do that. Agents hold meetings for producers on a routine basis to bring them up to speed on specific policy changes for the coming year, that sort of thing.
Mr. CHAMBLISS. OK. Any other questions?
Mr. MORAN. Mr. Chairman, I would like to ask questions of the panel but I would like to submit them in writing. They are rather detailed and specific to some Kansas issues related to continuous crop and State license warehouse. And with your permission I would like to submit for answer.
Page 53 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Certainly. Adam.
Mr. PUTNAM. Mr. Chairman, very briefly let me take one more stab at this because I feel like I did a very poor job of indicating my interest to the panel.
Have you or have you not let a contract for 12 commodities for development of a cost of production insurance policy?
Mr. WITT. Congressman, yes, we have. We did that in June, July 2001. And I do need to make a correction. I think somebody handed me a note. I don't believe citrus is on the list of 12 crops.
Mr. PUTNAM. Now we are on the same page.
Mr. WITT. OK. I am getting there. I am trying to
Mr. PUTNAM. First we are on the wrong page, but we are on the same page.
Mr. WITT. OK. Well, I don't have the list of the 12 in front of me. So I misspoke. I apologize.
Mr. PUTNAM. Well, citrus is not on it.
Mr. WITT. No, citrus is not on it, to the best of my memory. And again, I don't have all 12 in front of me.
Mr. PUTNAM. OK. Let me ask you another question. If there is a commodity where less than 10 percent of the acreage chooses to participate in the coverage that you all provide because it is unworkable, it is not well suited to that particular crop or commodity, isdoes that meet some definition of underserved if fewer than 10 percent of the folks are participating?
Mr. WITT. I am not aware of the exact definition that we may be using. I don't know.
Ms. HONOR. We don't have a special definition for underserved.
Page 54 PREV PAGE TOP OF DOC Mr. PUTNAM. Well, the law sets aside a special underserved category.
Ms. HONOR. Yes.
Mr. PUTNAM. It has $5 million in it per year. So how do youbut you don't know the definition of underserved?
Ms. HONOR. Well, the Secretary designated 15 States as being underserved.
Mr. PUTNAM. What is that criteria and who are those 15 States. Or more importantly, is Florida one of them?
Ms. HONOR. Florida is not one of them. They are the northeast States and Utah and I think
Mr. PUTNAM. Well, then I would look forward to submitting some further technical questions to you and continuing to work with you on a situation that is, I believe, a very clear example of an underserved commodity. Thank you.
Ms. HONOR. OK.
Mr. PUTNAM. Thank you, Mr. Chairman.
Ms. HONOR. An underserved commodity we will certainly look at because we can cover that.
Mr. CHAMBLISS. All right. If there are no further questions, again I would like to thank RMA for your time and appearing before our subcommittee. And to Ms. Honor, we thank you for your great service, particularly stepping in over the last year or so here. And doing a really, really good job in a tough situation. We hope you enjoy your retirement. We want you to come back and visit us also.
Ms. HONOR. I am looking forward to it.
Mr. CHAMBLISS. The record will remain open for 10 days to accept statements and any additional information. The subcommittee is adjourned.
Page 55 PREV PAGE TOP OF DOC [Whereupon, at 12:36 p.m., the subcommittee was adjourned, subject to the call of the Chiar.]
[Material submitted for inclusion in the record follows:]
Prepared Statement of Hon. Earl Pomeroy
Mr. Chairman, thank you for allowing me to testify today on the implementation of the crop insurance reform legislation that we passed in 2000, the Agricultural Risk Protection Act. I was proud to be a member of the committee that reported out that legislation, and I am pleased to be here today to participate in this hearing to review its implementation.
The Crop Insurance Program is playing an increasingly important role in helping farmers manage the significant risks they face. For North Dakota, a State that is second only to Iowa in the number of acres enrolled in the Crop Insurance Program, the Crop Insurance Program must continue to deliver credible value.
The goals in writing this legislation were simple: make crop insurance more affordable, increase participation levels at higher levels of coverage, improve the overall integrity of the program, make the program more responsive to actual farming conditions, and make the program more credible in its relationship to actual market conditions.
I. MAKE CROP INSURANCE MORE AFFORDABLE
ARPA increased funding for crop insurance by $8.2 billion over 5 years, with 80 percent of the additional resources ($6.7 billion) allocated for premium assistance to directly reduce farmers' out-of-pocket expenditures. As a result of the legislation, for the 2001 crop year, farmers saw their premiums reduced by 20 percent on 75/100 coverage. ARPA increased the amount of premium assistance offered to farmers at all levels of coverage and increased assistance at an even higher rate for higher levels of coverage. The first year after ARPA was enacted into law, the total amount of premium discount and subsidy for North Dakota farmers rose almost 29 percent overall.
Page 56 PREV PAGE TOP OF DOCII. INCREASE PARTICIPATION LEVELS AT HIGHER LEVELS OF COVERAGE
The objective of the crop insurance bill was not only to increase premium assistance but also to provide incentives for farmers to purchase higher levels of coveragei.e. to insure more of their total risk. In recent years, surveys have shown that nearly two-thirds of eligible acreage was enrolled in the crop insurance but only about 40 percent of eligible acreage was enrolled in buy-up coverage throughout most of the 1990's.
This increased risk sharing by the Federal Government prompted farmers to purchase higher levels of coverage. This increased buy-up coverage has effectively shared the risk of the business among the farmer, the crop insurance company, and the Federal Government. This sharing of risk is the primary impetus behind crop insurance, and ARPA has succeeded in the broader objective of spreading the risk more equitably.
The Crop Insurance Program, although far from perfect, is growing from the multi-peril crop insurance (MPCI) into revenue coverage and farmers are buying up these risk-sharing opportunities. While the vast majority of farmers are still using standard MPCI policies (81 percent of policies in North Dakota last year were standard MPCI), the percentage of North Dakota farmers seeking revenue products is increasing. North Dakota acres in Revenue Assurance products jumped from 4 percent of total insured acreage in 2000 to 15.5 percent in 2001.
III. IMPROVE THE OVERALL INTEGRITY OF THE PROGRAM
One of the most important objectives of ARPA was to improve the overall integrity of the program. Without public confidence in the Crop Insurance Program, the program is seen less as a risk management tool for farmers and more as a handout for farmers. That certainly is not the objective of the Crop Insurance Program and I do not believe farmers want it to be the objective.
The Farm Service Agency and RMA have worked toward consolidating their databases and resolving differences between them with the goal of pursuing those individuals who have attempted to farm the system, rather than fairly farm the land. While the number of farmers who attempt crop insurance fraud is by far in the minority of producers, unfortunately those few individuals can taint the program to the point that public support for the program wanes. Our family farmers cannot afford that, and I encourage USDA to fully complete their effort to consolidate data among their agencies with the intent to prevent fraud. I also encourage USDA to fairly handle discrepancies to achieve the goal of finding those who attempt to defraud the program, while being sure to completely evaluate such cases to avoid unfair accusations.
Page 57 PREV PAGE TOP OF DOCIV. MAKE THE PROGRAM MORE RESPONSIVE TO ACTUAL FARMING CONDITIONS
ARPA contained two provisions that made the crop insurance product more flexible and responsive to actual farming conditions. These provisions became effective this past crop year.
(1) ARPA helped farmers restore production history that has been lost as the result of multi-year disasters. The recent severe wet cycle in North Dakota reduced Actual Production History (APH) levels for some farmers to almost meaningless levels. Just a few years of consecutive losses shrunk farmers' APH to such an extent that they bore no resemblance to the traditional productive value of the land. ARPA set a floor under a farmer's annual yields so that yields in any year cannot fall below 60 percent of the transition yield for that commodity. In other words, even if a producer has a total crop loss in any year, the yield used for that year to calculate the producer's APH will not be lower than 60 percent of the historical average production for the region. Importantly for North Dakota producers, this provision applies retroactively so that in a year in which a producer had a total loss and factored a zero into his APH, he will now be able to substitute 60 percent of the T-yield.
(2) ARPA brought valuable changes to prevented planting guidelines. Specifically, prevented planting changes under ARPA give producers greater flexibility. Under the old rule, if producers collected a payment because they were unable to put in a crop on the final prevented planting date, they were prohibited from subsequently planting a crop on that land. The new regulation will allow farmers to put in a crop after the final date but they will only receive 35 percent of their prevented planting payment. Alternatively, the producer may opt to receive 100 percent of the prevented planting guarantee and not plant a second crop.
V. MAKE THE PROGRAM MORE RESPONSIVE TO ACTUAL MARKET CONDITIONS
While the core goals of improving buy-up coverage and increasing program integrity have been significantly advanced, changes to the Crop Insurance Program's quality loss provisions are lacking. ARPA required that a review of quality loss adjustment procedures be conducted, so that these procedures more adequately reflect local market discounts.
Page 58 PREV PAGE TOP OF DOC I cannot emphasize enough how important a review of these procedures is. Currently, these adjustments do not match the discounts applied to crops at the elevator. In North Dakota, we have seen significant quality losses at times when the quantity of the crop has been only slightly affected. The discounts on these quality losses in the crop insurance tables do not match what our farmers have seen at the elevator. In response, Congress passed provisions to establish a Quality Loss Program for the 2002 crop year to assist in coverage of these losses. However grateful our North Dakota farmers were for this program, these programs should be covered by crop insurance.
When the adjustments do not accurately depict the market situation, the farmer's risk is not being covered by crop insurance to the same coverage level that was purchased. The risk management product is failing at providing a sharing mechanism for the farmer for the risk of quality loss.
Quality loss adjustments were initially more completely considered in crop insurance products. However, I understand these adjustments were removed from the program due to abuse from some bad actors in the grain trade business. These individuals gave insured farmers lower prices based on quality standards with the understanding that the farmer would be able to receive government compensation for the reduced quality. These few bad actors should not prevent the Crop Insurance Program from providing a necessary and useful product for farmers. RMA has done an admirable job of hunting down fraud and establishing rigorous compliance standards, and I believe that historical fraud claims relating to quality adjustments should not prevent the agency from pursuing this initiative.
I understand that the contractor looking into the quality loss adjustment issue is expected to report initial findings to RMA by the end of this month. I urge RMA to quickly examine these results and accelerate the process toward eventual progress on adequate coverage of quality losses. I also recommend that RMA pursue these changes vigorously to make crop insurance products more responsive. The Senate version of the farm bill would require implementation of any changes discovered through this study by 2003, and I hope this provision also forces an acceleration of the quality loss adjustments.
Page 59 PREV PAGE TOP OF DOC
VI. OTHER PROVISIONS
In addition to these provisions, I remain concerned about the following aspects of the Crop Insurance Program:
ARPA required that the price election be no less than the expected market price for the crop. I understand that the announced price election for sugarbeets this crop year, however, may be significantly less than what is expected to be the contract price at many of the processing facilities. I would ask that the Administrator look into this price election and insure that sugarbeet producers are able to buy sufficient coverage for this crop year.
The more product choices available to individual producers, the better the crop insurance becomes. ARPA required research and development on a cost of production crop insurance policy. Producers across the Nation are intrigued by this idea, and I urge RMA to work closely with its chosen contractor to advance availability of this product.
The 1-year pilot programs offered for some crops (mustard and crambe) have now expired and are only being offered to producers through written agreements. I encourage you to work to maintain a wide variety of crop insurance products to cover the diversity of our crops and livestock.
VII. RMA'S ROLE
The implementation of ARPA over the past year and a half has been surprisingly smooth and much credit can be given to the Risk Management Agency personnel for working hard to push this program out of the door effectively. I must commend the RMA employees and the Acting Administrator Phyllis Honor for their hard work during this important time of implementation of a new law and transition in Administration. However, the lack of a permanent Administrator over the past year has hampered the Crop Insurance Program at a critical time.
I am very pleased that USDA has named a new Administrator and I look forward to working with Administrator Davidson on crop insurance issues in the future. Congress has established the Crop Insurance Program as a primary tool for the Government to provide assistance to farmers and for farmers to spread their considerable yield, price, and revenue risks, and I welcome Mr. Davidson to his new position.
Page 60 PREV PAGE TOP OF DOC Challenges do remain for the Crop Insurance Program to continue to provide credible benefits for our Nation's agricultural producers. I hope the RMA will continue to work toward this goal and will address the issues brought up during this hearing today.
Statement of Phyllis W. Honor,
Mr. Chairman and members of the subcommittee, thank you for this opportunity to discuss implementation of the Agricultural Risk Protection Act of 2000. USDA strongly supports the Federal Crop Insurance Program because it reflects the principles contained in the Food and Agricultural Policy report. The program:
helps producers when they need it the most;
provides a safety net that is compatible with international trade commitments;
creates products and services that are market driven;
harnesses the strengths of both the public and private sectors; and
reflects the diversity of the farm sector in its outreach activities and programs.
This sweeping, bipartisan act, for which members on this subcommittee labored for nearly 2 years, significantly increased the ability of producers to manage their agricultural risk through crop insurance and other risk reducing strategies and programs. The act also established a new alliance consisting of Risk Management Agency (RMA), the reinsured companies, and the Farm Service Agency (FSA) to provide attention and focus to help ensure program integrity and compliance. In short, it represents dramatic, forward-looking public policy.
Mr. Chairman, I am pleased to report that RMA has launched all initiatives required in the act while administering a program that has tripled in size over the last decade. We managed this challenge despite the fact that some changes such as giving more authority to the Board of Directors, the termination of RMA research and development in favor of private-sector initiatives, and the formal inclusion of another government agency in providing program oversighthave dramatically altered program expectations, the skill set needed to succeed, and familiar patterns of conducting business.
Page 61 PREV PAGE TOP OF DOC Days after the act was signed into law, RMA made necessary changes to the Standard Reinsurance Agreement (SRA) and implemented a package of administrative and regulatory actions that lowered farmer-paid premiums, increased coverage, and reduced administrative expenses. These initial changes made 90 percent of the new benefits available to producers. As RMA publicly stated in June 2000, some of the other changes required by the act would take months to implement, while others would take years.
For the balance of my testimony, I would like to briefly review some of the initial results produced by the act in 2001 and touch upon some key implementation plans for 2002.
INCREASING PARTICIPATION WITH NEW AND IMPROVED PRODUCTS AND TOOLS
2001 Achievements. In part due to increased premium subsidies provided by the act, reinsured crop insurance companies provided producers more than $36.7 billion in protection on over 211 million acres through nearly 1.3 million policies. The act increased premium subsidies at higher levels of coverage, resulting in both greater participation and a shift by producers from the lower levels of coverage to the higher levels. As a result, while the over-all insured acres and protection (liability) increased by less than 7 percent, they increased by at least one-third at the 70 percent or higher coverage levels.
Further, the act provided $20 million in fiscal years (FY) 2001 and 2002 to increase program participation by refining existing products and managing the development of new risk management tools. In 2001, RMA awarded 27 contracts worth over $18 million for the research and/or development of new risk management programs on such subjects as:
launching initiatives to insure pasture, rangeland, Hawaii tropical fruit and trees, and other commodities,
studying the risks associated with quality loss adjustments, initiating a study on the impact of boll weevil damage on insurance yields, and
Page 62 PREV PAGE TOP OF DOC reviewing plans of insurance based on costs of production.
The act also restructured the Board and increased its authority. The new expanded Board now consists of USDA's Chief Economist (Acting Chairman), two USDA Under Secretaries, the FCIC Manager (a non-voting member), four active producers (at least one who produces specialty crops), one person experienced in crop insurance and one person knowledgeable in reinsurance or regulation.
In 2001, the Board met a record 14 times, considered 15 private product submissions, and authorized three innovative new risk management products (two for livestock and the Nutrient Best Management Practices Pilot) as well as improving three current products (Crop Revenue Coverage, Revenue Assurance, and the Hybrid Seed Price Endorsement).
2002 Initiatives. In 2002, RMA will award new contracts and agreements to address the risk management needs of specialty crop producers and producers in underserved areas. RMA will also use a combination of research, feasibility studies, and surveys to determine the unique production and marketing systems of specialty crop producers, the insurability of bio-mass crops, tree vine and bush replacement, additional livestock programs, and fresh vegetables, flowers, and lawn seed. The results of this research may lead to the eventual development of risk management tools and strategies for these commodities.
In addition, the Board will evaluate a number of existing pilot programs like blueberries, avocado, cabbage, cherry, crambe, mustard, rangeland, cultivated wild rice, and winter squash for conversion to permanent programs. Other priorities include finalizing a major regulation that will enact provisions required by the act on double-insurance, prevented planting, and other necessary changes to the basic crop policy.
BUILDING PARTNERSHIPS TO REACH UNDERSERVED PRODUCERS
2001 Achievements. The act provides additional funding for RMA's efforts to reach producers, crops, and States that have been designated as underserved. For example, the act provided $5 million in annual funding to reach States designated as underserved. RMA now has cooperative agreements with 12 State departments of agriculture to provide customized risk management educational opportunities to producers in these States (Pennsylvania, Maryland, Vermont, Rhode Island, New York, Delaware, West Virginia, Maine, New Jersey, Connecticut, New Hampshire, and Utah). RMA supplements these activities with additional risk management training in high schools, community colleges, and other forums.
Page 63 PREV PAGE TOP OF DOC Because many producers in underserved States grow crops or raise commodities that may not currently be insurable, RMA announced a cost-share initiative in many of the designated States to encourage the use of the Adjusted Gross Revenue (AGR) insurance product. AGR is the first whole-farm revenue insurance product and the first federally backed policy that protects a percentage of farm revenue derived from livestock (up to 35 percent). AGR policies provided producers with $189 million of protection in 2001, compared with less than $10 million in 2000.
About $2 million annually is earmarked to provide risk management educational opportunities to specialty crop producers using many of the same avenues used in addressing underserved States. As a result, in 2001, more than 130 partnerships were formed to reach specialty crop producers. An additional $5 million was provided to the Cooperative State Research, Education and Extension Service (CSREES) for a competitive grants program to provide risk management educational opportunities.
Finally, the Dairy Options Pilot Program (DOPP), was expanded to include 300 counties. DOPP is an innovative cost-share program for dairy producers that helps dairy farmers put a ''floor'' under the price they receive for milk using the futures and options markets. Program expansion, higher milk prices, and extensive outreach resulted in a dramatic increase in participation. In Round III (2001), producers purchased a total of 2,788 put options. By comparison, a total of 1,847 put options were purchased collectively in Round I (1999) and Round II (2000). An interactive distance-learning program for DOPP is available for eligible producers over the Internet.
2002 Initiatives. The pace of risk management educational activities will increase in fiscal year 2002, due in part to the fact that many of the cooperative agreements initiated in 2001 have completed the research and development phase and have now started program delivery. Funding for risk management education in underserved States will drop from $5 million in fiscal year 2001 to $2 million in fiscal year 2002, due to budget cuts contained in fiscal year 2002 appropriations. The agency plans on obligating these funds in the underserved States via a competitive cooperative agreement process. The cooperative agreements resulting from this announcement will enable us to maintain most of the existing education programsalbeit at reduced funding levelsand establish programs in the few States we were not able to reach in fiscal year 2001. Two million dollars will also be provided to the Cooperative State Research, Education and Extension Service (CSREES) for a competitive grants program to risk management educational opportunities nationwide. RMA will again award $2 million in partnership agreements to reach specialty crop producers and continue the AGR cost-share and DOPP training programs.
Page 64 PREV PAGE TOP OF DOC It has taken 60 years and many program innovations to make the use of crop insurance a standard business practice for traditional crop producers. The act has recognized the need to reach the remaining producers and markets through policy development incentives and targeted educational outreach.
THE NEW ALLIANCE TO BUILD PROGRAM INTEGRITY AND COMPLIANCE
2001 Achievements. The act provided $23 million over 5 years to enhance program integrity and compliance. This goal is being accomplished through a formal new alliance among RMA, FSA, and the reinsured companies. Achieving this goal is a multi-year process that began with the initial training of FSA county personnel on crop insurance policies and procedures. In 2001, RMA spent approximately $2.25 million providing 2,500 FSA county office personnel 28 hours of classroom training. This basic training enabled local FSA personnel to assist RMA in obtaining evidence of program abuse and fraud.
By working proactively with insurance providers and FSA, the alliance prevented more than $15 million in improper claims payments in 2001more than double RMA's average annual recovery. RMA, through criminal, civil, and administrative actions, also recovered about $29 million.
At the same time the training initiative was launched, RMA initiated a project to apply research and technology to crop insurance data (data mining) to identify and target reviews. A combination of the initial data mining efforts and the new alliance enabled RMA to increase the average number of cases reviewed annually from 200 to 700 and the average number of policies reviewed from 2,000 to 10,000. This effort also included the identification of reviews of agents and loss adjusters with loss ratios that exceeded 150 percent of the mean in an area.
2002 Initiatives. In 2002, RMA will provide 500 FSA employees an additional 32 hours of loss adjustment and anti-fraud training. The 60 hours of training that employees will receive is the same amount of training required of reinsured company loss adjusters. The additional training they will receive will help them provide more accurate referrals to RMA and, subsequently, to insurance companies for investigation.
Page 65 PREV PAGE TOP OF DOC Although RMA and FSA have been reconciling indemnified policy data for 2 years, the act requires that RMA and FSA reconcile data for all program crop policies. Currently, entity, acreage, share, and production are being compared. This requirement has resulted in identifying over 450,000 data discrepanciesup from 1,900 the previous yearthat exceeded a 5 percent tolerance. This large number of discrepancies requires the development of additional criteria to differentiate mistakes or misrepresentation from expected program differences.
Mr. Chairman, the act has helped make RMA an innovator in the government of the new millennium. We deliver products via the private sector, stimulate market-driven research and development through incentives and share overall program costs among producers, reinsured companies, and the Federal Government.
Producers can now plan, grow, and market their crops with confidence because they are backed by affordable, tailored policies that provide substantial risk protection. RMA, reinsured companies, and FSA have worked hard under rapidly changing conditions to implement all aspects of the act in a farmer friendly fashion.
To help smooth the way for sustainable, long-term implementation of the act, RMA is actively addressing employees' needs for new skills and program support systems. We are actively acquiring contract oversight skills and developing the tracking systems necessary to monitor contracts, funds, pilot programs, product reviews, and other initiatives required by the act.
Mr. Chairman, this concludes my statement. I look forward to answering your questions.
QUESTIONS SUBMITTED BY REP. STENHOLM
Page 66 PREV PAGE TOP OF DOCGOVERNMENT CROP INSURANCE COMPANY PARTNERSHIPS
The Agricultural Risk Protection Act of 2000 (ARPA) statute sought to make the entire crop insurance program more effective. Modifications to the structure of the FCIC Board were meant to be a step toward that goal. The statute also directed in a number of areas that RMA work closely with the companies to ensure that the program is operated with efficiency and integrity.
Question: Can you summarize for the subcommittee your view of the state of the relationship between the Government and crop insurance companies?
Answer: Despite occasional lapses in communication, RMA and insurance companies have worked well together on issues where responsibility is shared. For example, reinsured company representatives participate on all ARPA compliance related implementation teams. Further, RMA is currently negotiating an agreement with National Crop Insurance Services (NCIS) to provide FSA loss adjustment training. During the past year, RMA has held no less than 80 meetings with NCIS and crop insurance company representatives at various levels, in the field and at headquarters, regarding ARPA implementation, program updates, loss adjustment issues, and Risk Management Education activities. RMA field and headquarters personnel also attend NCIS loss adjustment training as well as agent training sessions held by crop insurance companies. RMA recently held a teleconference with Industry Senior Management to provide updates on ARPA implementation and other issues.
In the past, RMA has worked directly with its insurance providers and their trade groups to resolve issues relevant to the crop insurance program. RMA is interested in offering a more direct and interactive forum to each private crop insurance company to ensure that each individual concern is voiced and addressed by the Agency. Through the regulatory process, RMA will provide notice and a comment period for any new program requirement that is responsive to ARPA. RMA has initiated informal discussions with insurance providers on issues when the regulatory process is not necessary.
Page 67 PREV PAGE TOP OF DOC Administration Budget Proposal on Underwriting Gains: In its budget for fiscal year 2003, the administration proposes that Underwriting gains paid to a crop insurance company be limited to no more than 12.5 percent of that company's retained premium.
On December 20, 2001, the Risk Management Agency issued a bulletin to crop insurance companies which said:
''FCIC is not canceling the 1998 Standard Reinsurance Agreement effective for the 2003 reinsurance year. Therefore, it will remain in effect for the 2003 reinsurance year.''
Question: The RMA bulletin seems to be in conflict with the administration's Budget Proposal. Can you explain to the Subcommittee how RMA would go about administering the President's budget policy in this area?
Answer: In the past, RMA has enacted statutory changes, prior to the July 1 start of the reinsurance year, by amending the Standard Reinsurance Agreement (SRA). For example, in 2000, ARPA required certain statutory changes to the SRA. On June 30, 2000, RMA responded by amending the agreements to increase the administrative fee associated with catastrophic risk protection (CAT); allowing the indirect payment of administrative fees and payments from insurance providers to cooperatives or associations; requiring the reporting of sales data; and reducing loss adjustment expense reimbursements to insurance providers. USDA does not consider legislatively required amendments to the SRA to be a renegotiation of the SRA.
Question: Does RMA believe that the administration's policy can be implemented without violating the companies' legal right to claim the terms of the SRA that was the subject of your Agency's decision on December 20?
Answer: USDA does not intend to violate any of the companies' legal rights. The fact that the decision was made not to negotiate all the terms of the SRA does not mean that individual terms cannot be revised if legislatively mandated.
Page 68 PREV PAGE TOP OF DOC Question: Is it likely that the Government will earn the savings assumed by this provision in the President's Budget?
Answer: The projected savings of $115 million annually is based on actual program experience and numerous assumptions. While it is a realistic estimate for a typical year with normal production conditions, the results are likely to vary from year to year. Further, the amounts of savings in budget outlays that can be achieved in the first year depends upon the assumptions that are made about when the companies actually receive underwriting gains. It is our understanding that the Congressional Budget Office (CBO) has scored the proposal as having essentially no first year outlay savings because it assumes that the outlay savings will be delayed until the following fiscal year. While we acknowledge this difference in scoring, it is our position that the proposal has real potential for long term savings of about $115 million annually.
Question: Can you detail why the administration feels that crop insurance companies are overpaid?
Answer: In 1999 and 2000, USDA used emergency funding to increase the premium subsidy as an incentive for producers to buy higher levels of coverage. ARPA further encouraged the shift to higher levels of coverage by increasing the premium subsidy to about 60 percent of the typical policy premium. This resulted in significant increases in premium dollars that enhanced insurance provider profitability. This profitability is largely due to the significant increase in protection generated by these premium subsidies. Since 1994, companies have received underwriting gains of about $2 billion while the Government has incurred excess losses of about $1 billion.
Crop insurance companies provide many valuable products and services to the American farmer. For that, they deserve fair compensation. Existing law established a limit on the amount they can be reimbursed for delivery expenses. Our proposal provides a similar opportunity to limit underwriting gains at a reasonable level.
Page 69 PREV PAGE TOP OF DOCPROGRAM IMPLEMENTATION
Information Technology: ARPA section 121 requires that RMA information management systems be upgraded; that new systems be compatible with those used by other USDA agencies; and that USDA use data mining and data warehousing and other information technologies to administer the Crop Insurance Act.
Question: Can you tell the Subcommittee what steps have been taken to implement these requirements?
Answer: An agreement was signed on December 14, 2000, between Tarleton State University (Tarleton) and USDA/FCIC in order to fulfill the ARPA requirement. The purpose of the agreement is to create a warehouse of RMA data and mine that data to identify anomalies that may indicate fraud, waste and abuse. The data warehouse was established in March 2001 and by September 2001 over 700 million records had been warehoused. Today, nearly 800 million records are updated monthly with RMA data.
Data mining software and warehouse development are ongoing processes that despite very encouraging early successes, are young, leading edge programs that must be further developed to realize their full potential and return on capital investment.
In addition, plans to acquire commercial off-the-shelf hardware and software to replace the current Compliance Tracking System have been initiated. The new system will allow compliance managers and investigators to track and report on the results of data mining derived leads that resulted in investigations, referrals, sanctions, or other administrative actions.
MINORITY AND LIMITED RESOURCE FARMERS
The subcommittee has received a statement for the record of today's hearing submitted by the Rural Coalition and Missouri Action Research Connection. This statement provides the details from a focus group survey of 130 small, limited resource, and minority farmers representing a diverse array of agricultural producers. Results show that 56 percent were completely unaware of crop insurance and that 80.2 percent do not participate in the crop insurance program.
Page 70 PREV PAGE TOP OF DOC Question: What is RMA currently doing to expand its efforts among minority and limited resource farmers?
Answer: During the last 3 years, RMA has invested over $2 million to help make limited-resource farmers aware of a range of risk management tools and strategies. To effectively reach these underserved populations RMA has entered into partnerships with 1890, 1994 and 1862 land grant colleges and universities, Hispanic Serving Institutions, community-based organizations, and State and Federal agencies.
RMA has recently funded projects to: assess the attitudes of underserved groups in 10 geographic locations toward crop insurance and other risk management tools (Rural Coalition and Missouri Action Research Connection); assist new immigrants, primarily Asian, in growing and marketing specialty crops (Tufts University); created a forum for limited-resource farmers and ranchers to network and discover new risk management tools and strategies (Tennessee State University). RMA is also working with several organizations to train and recruit minority crop insurance agents. Additional outreach and education programs will be offered to reach underserved populations of farmers in 2002.
Question: Does the RMA have any performance indicators for determining progress in this area. If so, what do they show?
Answer: RMA's strategic outreach plan includes goals, objectives, and strategies for ensuring that all farmers can access and participate in all RMA programs and activities. However, measuring performance in this area is difficult because most USDA agencies do not collect demographic data on program participants.
WASTE, FAUD, AND ABUSE
Double Insurance: In ARPA, Congress sought to strike a blow against people who abuse crop insurance for a living. We had heard of instances where producers attempted to collect not just one or two, but even three or four indemnities for losses on the same land in the same year. Included in ARPA section 108 is a provision seeking to limit producers to one claim per year.
Page 71 PREV PAGE TOP OF DOC Question: In the nearly 2 years that have expired since enactment, has RMA implemented that requirement?
Answer: Immediately after passage of ARPA, RMA issued a statement indicating that some of the provisions of the bill would take several years to implement. The ''double insurance'' provision is one that will take several years to implement simply because it must go through the standard rulemaking process, which often takes 1824 months. Further, changes to the policy must be made before the contract change date for the affected crops or additional delays will result.
Question: What steps must you go through to put this restriction into effect and when does the agency plan to take them?
Answer: To implement restrictions on double insurance and prevented planting under ARPA, RMA must comply with the notice and comment provisions of the Administrative Procedures Act to revise the Common Crop Insurance Policy Basic Provisions. The proposed rule to implement the revisions is currently in the review process. Once approved by the Department and OMB, the proposed rule will be published in the Federal Register for pubic comment. Implementation may be possible for 2003 spring planted crops but is more likely for the 2004 crop year.
Disparate Losses: The ARPA statute contained a number of directives designed to improve the integrity of the crop insurance program. One of these was an order that RMA identify agents and loss adjusters who are responsible for loss claims that are larger than their fair share.
Question: Has RMA conducted this review as required by ARPA?
Answer: Yes. A data mining report of agents and loss adjusters that met the ARPA provision of ''150 percent of the mean'' was prepared by Tarleton University.
Question: Were agents and adjusters identified?
Page 72 PREV PAGE TOP OF DOC Answer: Yes. Over 6,000 agents were identified (with a loss ratio greater than or equal to 150 percent of the county average) representing 41 percent of all agents nationally, or 56 percent of all agents who had losses. Of the 3,524 loss adjusters nationally, 2,594 (80 percent) were associated with loss ratios of greater than or equal to 150 percent of the average for the county.
Question: The statute also requires that appropriate remedial action be taken. Has this occurred?
Answer: Due to the large number of people discovered using this criteria, RMA is working with Tarleton to further analyze and refine the list of agents and loss adjusters. Our goal is to only review agents and loss adjusters whose experience indicates that they may be abusing the program. To accomplish this, additional data mining criteria must be developed.
Question: Were insurance companies associated with these claims and adjusters notified?
Answer: No. Once additional criteria are developed, we will work with the insurance providers to review the identified agents and loss adjusters.
Question: If so, were those companies required to take any action to address program abuse? If not, then why?
Answer: Working in conjunction with the policy issuing companies and state insurance commissions, RMA will take the steps necessary to correct or remove the problem. Remedial actions may be additional training, oversight, or disqualification or debarrment. Remedies will be determined on a case-by-case basis.
RMA/FSA Data Reconciliation: ARPA section 121 requires a coordinated plan for your agency and the FSA to reconcile all relevant information that your agencies receive. This is an example where Congress ordered that a process take place which should have been done years ago.
Page 73 PREV PAGE TOP OF DOC Question: Has this reconciliation occurred? If so, can you tell the Subcommittee to what extent discrepancies were found, what the discrepancies were exactly, and what your agency has done to address them?
Answer: The data reconciliation process under ARPA began during the fall of 2001 when RMA and FSA data was compared and matched. Specifically, FSA is matching producer identity, crop share, and acreage.
Approximately 480,000 potential discrepancies have been identified that either exceed allowable tolerances, are within allowable tolerances, or are identified simply because data does not match (e.g. producer identification number). These potential discrepancies have been forwarded to local FSA offices for the initial reconciliation. Currently, these offices are working to identify only those producers who exceed established tolerances.
To assure only legitimate discrepancies are flagged for follow-up action, RMA and FSA are working on a procedural amendment to expand on and clarify allowable program differences. The initial data reconciliation should be completed by FSA in April 2002.
RMA, FSA, and insurance company representatives on the reconciliation team will then review the findings generated by local FSA offices and formulate plans for necessary steps to be taken by RMA and the insurance companies to resolve legitimate discrepancies. The amount of data to be reconciled and available resources may require an increase in the tolerances.
Question: To what extent have the insurance companies been advised of discrepancies and to what extent have they taken measures to address them?
Answer: Company representatives are actively participating on the data reconciliation workgroup. They have been briefed throughout this process and on the early results to date. We will continue our work with company representatives once the results of the initial reconciliation are known. We also plan to solicit their feedback and concurrence on future data reconciliation activities.
Page 74 PREV PAGE TOP OF DOC This year, the working group will identify additional data elements and processes that will be used in subsequent data reconciliation efforts. The working group is also discussing how to compare units and practices. Once developed, these recommendations will be forwarded for discussion by policymakers.
RMA COMPLIANCE ACTIVITY
Question: What progress do you feel that the agency has made in the last two years to improve the integrity of the crop insurance program?
Answer: RMA has improved program integrity by adopting practices used by commercial insurance companies. These include establishing a Special Investigations Branch to target fraud, employing the latest technology to identify and target potential abuse, and using remote sensing technology to establish evidence.
Question: How does your agency measure the performance of its compliance program?
Answer: RMA measures compliance by documenting the number of policies and amount of liability reviewed, the amount improper indemnities recovered, the amount of improper payments avoided, the number and dollar amount of civil and criminal actions successfully resolved, and the crop insurance program vulnerabilities identified.
Question: Are you satisfied that RMA is doing all it can to catch up with and punish those who commit fraud in connection with crop insurance?
Answer: RMA's is committed to reducing program fraud, and we are pleased with the successes realized since the passage of ARPA. These successes have been accomplished through targeted FSA crop monitoring, data mining, and the establishment of a Special Investigations Branch.
Question: Are you satisfied that RMA is doing all it can to control abuse and to identify and correct program vulnerabilities?
Page 75 PREV PAGE TOP OF DOC Answer: RMA is committed to eliminating program vulnerabilities when they are discovered. However, the various processes used to effect program changes (regulatory, judicial, legislative, et cetera.) ensure fairness and deliberation but not speed.
Question: Can you provide the Subcommittee with indicators of RMA's activities in controlling crop insurance waste, fraud and abuse?
Answer: RMA has increased the number of policies identified for review from about 2,000 to over 10,000 during crop year 2001. RMA, FSA, and insurance companies identified and avoided the payment of about $15,000,000 of improper claims and recovered about $29 million for improperly paid losses. In the past, RMA only recovered about $7 million in improperly paid claims each year.
For example, in 2001, a data mining initiative identified about 1,700 insureds with highly unusual loss experience. The insureds were notified that a growing season inspection of their crops would be performed by FSA. As a result, projected losses based on the past history of these producers fell by over $100,000,000. These findings strongly suggest that data mining, producer notification, and FSA growing-season inspections reduced suspected abuse.
FSA Compliance Role: ARPA section 121 requires that RMA make use of FSA's field structure to monitor crop insurance program compliance.
Question: What is the status of the RMA-FSA effort in implementing this section?
Answer: Five implementation teams (training, referrals, claim audits, consultation, and data reconciliation) have developed detailed procedures (4RM- Handbook) that formally involve the FSA field structure in helping to ensure the integrity of the crop insurance program.
Question: To what extent have FSA employees received the necessary training as required by the law?
Page 76 PREV PAGE TOP OF DOC Answer: About 2,500 FSA County employees have received 28 hours of the 60 hours of training required. An additional 32 hours of training will be provided to about 500 FSA County Office employees in spring 2002. The 60 hours of training is the same amount required by RMA of insurance company loss adjusters. Additional training will be provided to other FSA employees as funding permits.
Question: Has this provision led to the identification of losses that have been or might be paid in error?
Answer: Yes. As stated above, initial data mining efforts identified about 1,700 insureds nationwide with very unusual loss experience. The insureds were notified that a growing season inspection by their local FSA office on their crops would be performed during 2001. As a result, projected losses based on the past history of these producers fell by over $100,000,000.
Question: Have the insurance companies been included in the distribution of information obtained as a result of FSA monitoring and investigations?
Answer: Yes. The referral implementation team identified the procedures for sharing information gathered by FSA. These procedures were then published in the 4-RM Handbook and sent to reinsured crop insurance companies. RMA has provided the majority of FSA's referrals to the appropriate insurance providers for action.
Question: To the extent they have received the FSA information, is it your understanding that the companies have found that it is presented in a manner that helps to improve compliance and crack down on fraud?
Answer: While the quality of referrals to reinsured companies will get better with more experience and education, initial results are encouraging. Last year, RMA, FSA, and insurance companies identified, and avoided the payment of an estimated $15,000,000 of improper claims. Because companies share risk on these policies, they have a vested interest in only paying legitimate claims.
Page 77 PREV PAGE TOP OF DOCNEW PRODUCT DEVELOPMENT AND RESEARCH
New Policies: You note in your testimony that RMA has let 27 contracts for research and development. Nearly two calendar years and one full fiscal year (fiscal year 2001) have passed since the enactment of ARPA.
Question: Can you tell us what products have been delivered under those contracts?
Answer: Research reports, feasibility studies, and draft program provisions have been delivered to establish the need, feasibility, and approach for new product development. These deliverables represent essential steps in the development of risk management tools for producers.
Examples of research studies completed or nearing completion include a boll weevil APH adjustment study, a wild salmon risk management feasibility study and cost of production feasibility studies for cotton, soybeans, corn, wheat, rice, almonds, peaches, cranberries, apricots, nectarines, onions, and sugarcane. Other projects currently underway include: an aquaculture feasibility study; research investigating risk management options for quarantined crops; a survey of specialty crop producers to identify their special risk management needs; research on production input expenditures for a variety crops and practices, including organic production; investigation of the feasibility of developing a risk management program for Hawaiian tropical fruit and trees; research into the development of risk management products for livestock producers of dairy, cattle, poultry, sheep, goats and hogs; research into the possible application of satellite remote sensing as a potential tool for crop loss adjustment; and investigation of risk management tools to address specific weather risks, such as rain fall or heat. The diversity of projects illustrates the commitment of RMA to the continued development of risk Management programs through the contracts and partnerships with public and private entities.
Question: What new policies and policy provisions have been made available to producers as a result?
Page 78 PREV PAGE TOP OF DOC Answer: Given the time needed to prepare contracts, perform the work, and analyze results, no new policies have been made available to date. However, the results of these feasibility studies are being provided to RMA and RMA hopes that new policies or policy provisions will be developed based on these findings.
Adjusted Gross Revenue (AGR) Insurance: As you mention in your testimony, there is substantial interest in the Adjusted Gross Revenue crop insurance pilot program. Last year, the House Agriculture Committee adopted report language recommending that this program be made more widely availableparticularly for producers of crops that don't have specific MPCI products available.
Question: What is the current RMA plan for expanding the AGR program?
Answer: The AGR pilot program began in 1999 in five States (36 counties). In 2000, six more States and 52 new counties were added. In 2001, RMA made a number of significant changes to the program in order to increase the number of eligible producers, coverage available and producer acceptance. At the same time, AGR was expanded into six additional States and 126 new counties to provide a broader base upon which to test the pilot program. AGR is now available in 17 States and 214 counties.
In 2001, 561 policies providing $186 million coverage were sold. An average of four commodities are insured per AGR policy, equating to 2,244 individual Multiple Peril Crop Insurance (MPCI) policies if MPCI coverage was available for all of the commodities. RMA, in consultation with the Federal Crop Insurance Board of Directors, believes that the current pilot areas are sufficient in scope and diversity to test the pilot program, and no further expansion is prudent until an evaluation of program performance can be conducted. RMA plans to evaluate the AGR pilot program in 2004, when the 2003 data is available.
Page 79 PREV PAGE TOP OF DOC Boll Weevil APH Adjustment: Your testimony specifically mentions the impact of boll weevil damage on insurance yields. ARPA specifically requires that RMA develop methods for adjusting APH levels for producers in areas where programs such as boll weevil eradication are successful.
Question: In the nearly 2 years since enactment, has this method been developed?
Answer: RMA contracted for a study to evaluate the impact the boll weevil eradication program may have had on cotton production. The final report has been received by RMA and is currently being evaluated.
Question: What is the schedule for implementation of such an adjustment?
Answer: RMA has received the study and is evaluating what, if anything, needs to be done based on the report's findings.
Cost of Production Insurance: Your testimony mentions contracts awarded for review of plans of insurance based on costs of production. This effort has sparked the interest of producers throughout the country.
Question: What is the status of the cost of production plan and when can a pilot program be expected with regard to this policy?
Answer: The cost of production plan was awarded as a task order to AgriLogic, Inc., under RMA's base research and development contract, on July 6, 2001. The objective of the task order is for AgriLogic, Inc., to deliver to RMA the components of a cost of production insurance pilot program for 12 crops (soybeans, corn, cotton, wheat, rice, almonds, peaches, cranberries, apricots, nectarines, onions, and sugarcane) in selected areas.
If it is determined that a pilot program for cost of production is feasible, a program can be expected for the 2004 crop year. RMA is working with AgriLogic, Inc., to attempt to have a program available for one or two crops, including cotton, for the 2003 crop year.
Page 80 PREV PAGE TOP OF DOC
Sales Closing Dates: In many contiguous and even within some counties in Texas, the sales closing dates are merely two weeks apart for spring crops, such as coarse grains and cotton. For instance, Tom Green County has a February 15 sales closing date for coarse grains and a February 28 closing date for cotton. Other counties with similar discrepancies are Concho, Irion, McCulloch, Glasscock, and Schleicher. This results in two trips for either the farmer and/or his crop insurance agent.
Question: Would it not be more efficient to have the same sales closing dates in these situations?
Answer: RMA agrees having the same sales closing date for spring crops is efficient. However, the Federal Crop Insurance Act (508(f)(2)(B)) establishes the sales closing dates for all spring planted crops that were in existence in the 1994 crop year. RMA will review this situation the next time the applicable crop policies are revised to see what, if anything, can be done to harmonize the dates.
RMA Compliance: As a result of ARPA, for a little over a year, RMA has been using Tarleton State University to use the techniques of data mining and data warehousing to assist RMA Compliance to detect waste, fraud and abuse in the crop insurance program. Last week, I was briefed on the progress of the research and am very impressed with the results so far. In fact, after only a year the Tarleton project has identified possible crop insurance waste, fraud and abuse amounting to tens of millions of taxpayer dollars with the potential to save hundreds of millions annually. However, there seems to be internal resistance within USDA to continuing the research. Can you tell me why?
Answer: USDA is committed to the data mining and warehousing initiatives. Data mining efforts thus far have lowered projected losses based on the past history of selected policyholders by over $100,000,000.
Page 81 PREV PAGE TOP OF DOC However, we must make sure that contracts are issued in both a legal and cost-effective manner. The decision to transition from a sole-source cooperative agreement to an openly competed contract may have been translated as ''resistance.'' This is not our intent. USDA is simply striving to ensure that the best services are acquired with the taxpayers' funds.
- Question: Have you seen the research?
Answer: Yes, RMA has a full-time liaison in place at Tarleton who works closely with them on all aspects of the research project. RMA also has several analysts who collaborate with Tarleton on data mining research and products. Additionally, RMA managers and investigators play active roles in reviewing data mining research and providing feedback to Tarleton.
Question: I realize the project is in its early stages, however, will you explain and give some examples of the research findings that have come out of the data mining and data warehousing effort to date?
Answer: Data mining identified 1,700 producers for growing season inspections during the 2001 crop year. As a result, claims for these producers dropped an estimated $100,000,000.
Question: What is needed to enhance the research and results from the Tarleton Research Project and what do you see as its ultimate potential of data mining and data warehousing?
Answer: RMA must continue to improve data warehousing and data mining capabilities, regardless of the data mining source. Data mining research capabilities are only limited by the data in the warehouse. While our initial results are highly encouraging, we are only in the earliest stages of a new venture, with relatively few examples from the public or private sectors to emulate. We believe that the integration and application of this technology throughout the program could greatly enhance decision-making.
Page 82 PREV PAGE TOP OF DOC Data mining can show us where our policy terms and actuarial structures can be improved, how the insurance companies can improve their training and quality control, and how we can improve the data we capture, use, manage, and report.
Questions Submitted by Rep. Holden
he crop insurance program in Pennsylvania and much of the northeast U.S. has not experienced the popularity that has occurred in much of the rest of the country. In 1995 when producer participation was mandatory, only 28 percent of the eligible PA acreage was enrolled while the U.S. average was 85 percent. This difference was largely due to the fact that USDA programs do not fit the producer's needs as well in this part of the country.
We were optimistic when the 2000 ARPA law specifically recognized the lower participation states and gave the Secretary specific authority and resources to better address the needs of these areas. The results are encouraging. Today, its estimated that about 40 percent of the eligible acres are insured with policy counts and acres insured double what they were just a few years ago.
A great deal of the progress can be accredited to the many efforts the State of Pennsylvania has put forth. The State Department of Agriculture has taken important steps to foster improved risk management at the producer level. These include: (1) Establishment of a Crop insurance task force, (2) Initiating enhanced producer education programs, (3) Provided program improvement recommendations to RMA/USDA, and (4) Implemented a system of State crop insurance assistance grants that pay 100 percent of the policy fees and from 16 percent to 30 percent of the net producer premiums, to make higher coverage more affordable.
While considerable progress has been made, much remains to be done. I have a few questions for RMA and look forward to a response. Thank you
Question: For the past 3 years, the Pennsylvania Department of Agriculture has requested a statewide expansion of the Adjusted Gross Revenue (AGR) program. Last November, the PA congressional delegation also sent a letter requesting RMA's consideration of expansion for 2003. It is believed that program expansion is needed so that more producers are eligible for protections on more of their crops. Since we have received no response, would you briefly explain RMA's position on this issue?
Page 83 PREV PAGE TOP OF DOC Answer: The AGR pilot program began in 1999 in five States (36 counties). In 2000, 6 more States and 52 new counties were added. In 2001, RMA made a number of significant changes to the program in order to increase the number of eligible producers, coverage available, and producer acceptance. At the same time, AGR was expanded into 6 additional States and 126 new counties to provide a broader base upon which to test the pilot program. AGR is now available in 17 States and 214 counties.
In 2001, 561 policies providing $186 million coverage were sold. An average of 4 commodities are insured per AGR policy, equating to 2,244 individual Multiple Peril Crop Insurance (MPCI) policies if MPCI coverage was available for all of the commodities. RMA, in consultation with the FCIC Board of Directors, believes that the current pilot areas are sufficient in scope and diversity to test the pilot program, and no further expansion is prudent until an evaluation of program performance can be conducted.
RMA plans to evaluate the AGR pilot program in 2004, when the 2003 data is available.
Question: Many Pennsylvania producers went into 2001 with the understanding that crop insurance provided protection against plum pox disease. There were instances where producers discussed their concerns about the disease with insurance representatives and then increased their level of coverage with the understanding that they would be covered if the disease occurred. However when losses occurred their insurance claims were denied. What is RMA doing to make sure programs are administered more carefully and consistently? Most importantly, what are you doing to improve producer understanding of what programs cover and how administrative rules apply?
Answer: The RMA is aware of the situation in Pennsylvania where peach producers believed plum pox virus was an insurable cause of loss. RMA has an ongoing effort to inform producers about the program while concurrently trying to improve the program.
Page 84 PREV PAGE TOP OF DOC Plum pox would be a covered cause of loss in the event a determination of a loss of production due to the disease could be determined prior to trees being destroyed due to the Government destruction orders. In most cases, the fruit trees were ordered destroyed before a determination of potential production could be made or the producers failed to notify the insurance company so an inspection could be made prior to the trees being destroyed.
In these cases, the policy requires companies to apply the full guarantee and declare no indemnity due. As RMA has indicated in past, we fully supported APHIS in their efforts to maximize the payments made to growers who were required to destroy their trees because it was recognized that ''Government takings'' are not generally covered under the current insurance policy.
In addition, RMA has awarded a contract to study the feasibility of developing quarantine coverage for crops that may include diseases like plum pox. Should the feasibility study indicate that a viable insurance program could be developed, additional contracts may be awarded for the actual development of such a program. The feasibility study was delivered to RMA the week of February 11, 2002, and is being evaluated.
QUESTIONS SUBMITTED BY REP. CHAMBLISS
GENERAL PROGRAM OPERATIONS
Question: Have performance-based discounts authorized in ARPA been applied to producers' premiums? What practices would make a producer eligible for a performance-based discount?
Answer: A contract to study the feasibility of a pilot program to provide producers with performance-based premium discounts has been awarded and the project is scheduled for completion by September 30, 2002. Practices that might make a producer eligible for a performance-based discount will be determined based upon the feasibility study's recommendations and RMA's past experience.
Page 85 PREV PAGE TOP OF DOC Question: Manual 14, Guidelines and Expectations for Delivery of the Federal Crop Insurance Program, details the responsibilities of the agency and the obligations of insurance providers with respect to quality control and program integrity. Has Manual 14 been revised since ARPA's enactment?
Answer: Manual 14 has not been revised since the enactment of ARPA. RMA was concerned that revising Manual 14 would constitute a renegotiation of the Standard Reinsurance Agreement (SRA). RMA plans to renegotiate the SRA, which will include Manual 14, effective for the 2004 reinsurance year.
Question: When will the Standard Reinsurance Agreement be renegotiated? ARPA authorizes a renegotiation of the SRA once during the 2001 through 2005 reinsurance years.
Answer: In addition to our budget proposal to cap underwriting gains at 12.5 percent of retained premium, RMA is preparing to renegotiate the SRA and amend the risk-sharing arrangement with private insurance providers effective for the 2004 reinsurance year.
RESEARCH AND DEVELOPMENT
Question: As I understand, as of August 30, 2001, only 4 contracts had been awarded for new crop insurance products. According to your written statement, in 2001, RMA awarded 27 contracts worth over $18 million for the research and/or development of new risk management programs. Was there a surge in product submissions or did RMA rush to award contracts in order to take advantage of the 01 funds? According to section 131(e)(3) of ARPA, unused reimbursement or contract funds may be used to carry out another research and development function under that section. If all funding was not utilized, what was done with the unused funds?
Answer: The passage of ARPA resulted in a dramatic change in the way RMA conducts business. RMA moved rapidly to put into place new processes to support the requirement of ARPA for new product development to be conducted via contract. Beginning with fiscal year 2002, we expect the contracting process to proceed more evenly throughout the year. Over $18.5 million was used in fiscal year 2001 to fund a variety of contracts and partnerships, leaving $1.4 million that was not obligated. On January 26, 2001, RMA awarded contracts to establish a pool of four contractors to provide new product development support for the agency.
Page 86 PREV PAGE TOP OF DOCPROJECTS AWARDED DURING FISCAL YEAR 2001 AS TASK ORDERS ISSUED UNDER THE BASE RESEARCH AND DEVELOPMENT POOL CONTRACT INCLUDED:
Cut Flower Feasibility Study
Cotton Boll Weevil Eradication Program Impact on Actual Production History (APH) Yields (Research Report)
Multiple Year CoverageFeasibility Study
Feasibility of Revenue Coverage Plans that Maximize Producer Revenue Feasibility Study
Research and Development of a Cost of Production Insurance Program for Soybeans, Corn, Cotton, Wheat, Rice, Almonds, Peaches, Cranberries, Apricots, Nectarines, Onions, and Sugarcane
Fresh VegetablesFeasibility Study
Hawaii Tropical Fruits and Trees Feasibility Study
Pasture and Rangeland Program Feasibility Study
Perennial Pathogen Feasibility Study
Quarantine Feasibility Study
PROJECTS AWARDED UNDER OTHER CONTRACTING AND PARTNERSHIP VEHICLES DURING FISCAL YEAR 2001 INCLUDE:
Revenue Insurance for Cattle and Hog Producers
National Risk Management Feasibility Program for Aquaculture
Survey of Specialty Crop Producers' Risk Management Needs in California, Florida, New York, and Pennsylvania
Production Input Expenditures Study for Existing RMA Policies
Page 87 PREV PAGE TOP OF DOC Investigation of Producers' Management of Storage Problems for Onions
Forecasting the Occurrence of Potato Late Blight
Value Enhanced Products Research Report
Nursery Program Plant List Research, Updating, and Revisions
Wild Salmon Feasibility Study
Assess the Demand for Specific Weather Peril Insurance
Evaluate the Use of Satellite and Aircraft Remote Sensing for Crop Loss Adjustment
Pacific Northwest Grain Growers' Income Risk Management
Income Protection Rating and Pricing Evaluation
Performance-based Premium Rate Discount Report
Sweet Potato Pilot Evaluation Feedback and Issues Report
Pecan Pilot Evaluation Feedback and Issues Report
Avocado Pilot Rating Evaluation and Analysis
PROJECTS PLANNED FOR CONTRACT AWARD DURING FISCAL YEAR 2002 FOR THE BASE RESEARCH AND DEVELOPMENT POOL CONTRACT INCLUDE:
Cut Flowers and Cut Cultivated Floral Greens (Pilot Program Development)
Multiple Year Coverage (Pilot Program Development)
Revenue Coverage (Pilot Program Development)
Hawaii Tropical Fruits and Trees (Pilot Program Development)
Quarantine Crop Insurance (Pilot Program Development)
Perennial Pathogen (Pilot Program Development)
Fresh Vegetables (Pilot Program Development)
Additional Cost of Production Based Revenue Programs (Research and Development)
Page 88 PREV PAGE TOP OF DOC Biomass (Feasibility Study)
Livestock Disease Risk Management Tools (Feasibility Study)
Tree, Vine, and Bush Replacement Program (Feasibility Study)
Melon Pilot Program (Feasibility Study)
Lawn Seed Pilot Program (Feasibility Study)
Vegetable and Flower Seed Pilot Program (Feasibility Study)
Question: Under ARPA, Congress elected to remove the development of new products from the RMA, placed the responsibility in the hands of the private sector, and put approval authority in the hands of the Federal Crop Insurance Corporation (FCIC) Board. What new products have been approved and are there any new products under development at this point? How many projects are pending bids on awards for research reports?
Answer: Under section 508(h) of the Federal Crop Insurance Act, persons can submit insurance products to the Federal Crop Insurance Corporation's Board of Directors (Board) for consideration. If the product protects the interests of producers and premium rates are adequately appropriate, the Board can approve reinsurance and subsidies for the product. Products approved by the Board, under section 508(h) since passage of ARPA include the Livestock Gross Margin (LGM) and the Livestock Risk Protection (LRP) plans of insurance, and a Hybrid Seed Price Endorsement (HSPE). The LGM provides coverage to swine producers from production and marketing risks. It provides coverage for the difference between the Actual Total Gross Margin (actual swine price, as determined using lean hog settlement prices by the Chicago Mercantile Exchange, less feed costs as determined using corn and soybean meal futures settlement prices at the Chicago Board of Trade) and the Gross Margin Guarantee (Chicago Mercantile Exchange lean hog futures price less the price of feed based on the Chicago Board of Trade futures price for corn and soybean meal), and not for death or other loss or destruction of swine. The LRP program offers hog producers protection against decreases in price.
Page 89 PREV PAGE TOP OF DOC The HSPE is written with Multiple Peril Crop Insurance (MPCI) Hybrid Seed Corn crop insurance policy and uses a corn price derived from the Chicago Board of Trade futures price, instead of the MPCI price election, to calculate the amount of insurance.
The Board also conditionally approved the Nutrient Management/Best Management Practice (BMP) Insurance program. The BMP provides insurance protection from crop production loss when a producer applies a rate of fertilizer (nitrogen, phosphorus or both) for maximum crop yield as recommended by a Best Management Practice.
Two new pilot products for forage seed and raspberries/blackberries have been approved since the passage of ARPA. Under development are: Cost of Production insurance for cotton, almonds, peaches, cranberries, apricots, nectarines, onions, sugarcane, corn, soybeans, wheat, and rice. Other contracts or partnerships have been awarded to examine the feasibility of developing additional insurance products for a wide array of crops including cut flowers, Hawaiian tropical fruit and trees, pasture and rangeland, livestock, onions, potatoes, fresh vegetables, specialty crops, and wild salmon. Research into other risk management issues includes quarantine, multiple-year coverage, APH adjustments, and perennial pathogens. Contracts for product development will be awarded based on the results of the feasibility studies.
Question: What is the process for the development and reimbursement for a policy?
Answer: The process for the reimbursement of research and development cost for insurance products approved by the Board under section 508(h) of the Federal Crop Insurance Act is published at (7 C.F.R. part 400, subpart V). The regulation describes what research and development costs are eligible for reimbursement and when requests for reimbursements must be submitted. Requests for reimbursements must be received by FCIC no later than August 1 of any fiscal year. Actual costs submitted are examined for reasonableness and may be adjusted at the sole discretion of the Board. No payments are made prior to September 15 of any fiscal year.
Page 90 PREV PAGE TOP OF DOC In addition to the development of new policies under section 508(h) of the Federal Crop Insurance Act, policies for new insurance products may also be developed through the contracting process. As directed by ARPA, RMA may contract with private entities to develop all components of a new insurance product, such as is being done with the development of Cost of Production for cotton, almonds, peaches, cranberries, apricots, nectarines, onions, sugarcane, corn, soybeans, wheat, and rice. Contracts for product development are awarded on a competitive basis.
We expect additional product development contracts to be awarded in fiscal year 2002 based upon the results of feasibility studies currently underway. Reimbursement for product development via contract depends on the schedule of deliverables. RMA may also enter into partnership agreements with public and private entities for the development of risk management tools. Partnership agreements require significant involvement on the part of RMA and will be competitively awarded in fiscal year 2002.
Question: On what basis does FCIC distribute payments associated with research and development? How are the reimbursements calculated? Is an entity eligible for different levels of funding depending on what stage they are at in the research and development process?
Answer: For a product submitted under section 508(h) of the Federal Crop Insurance Act, reimbursements for research and development costs associated with the product can only be considered once the Board approves it. The amount of reimbursement is limited by the amount authorized by the Federal Crop Insurance Act for each year and the total amount of reimbursements requested. Requests for reimbursement for research and development costs for each product is adjusted for the complexity of the product as determined by FCIC, and the size of the area in which the products may be offered (see 7 C.F.R. 400.712 for a detailed explanation).
Question: In your written testimony, you listed various contracts that had been awarded in 2001. When will these projects be offered as pilots? What is the earliest date one might become a pilot program?
Page 91 PREV PAGE TOP OF DOC Answer: The earliest release of most new risk management programs will begin with the 2004 crop year. RMA is working diligently with the contractors to make products available sooner if at all possible. RMA is working with AgriLogic, Inc., to attempt to have a program available for one or two crops including cotton, for the 2003 crop year.
Question: I understand from some agents that their companies are requiring them to get the social security number of a producer's spouse when purchasing a policy due to a RMA requirement. Is this true? Is this the case for all policies, regardless of a spouse's share in the crop? What does RMA hope to accomplish?
Answer: Current RMA procedure states if a spouse's interest is covered by the policy, the spouse must be listed as having a Substantial Beneficial Interest (SBI) and his or her SSN must be provided. This assures all entities having at least a 10 percent or greater interest are listed. Further, this requirement assures that producers are insuring all crops in which they have a bona fide share as required by the policy. This requirement also helps RMA ensure program integrity because we can track eligibility, verify yields, and accurately determine production for settling claims.
Question: Could you walk us through the process for reconciling producer data? What is the producer's role if his data has yielded a mismatch between RMA and FSA? What are the companies' and agents' roles? As stated in ARPA, we intended for this to be an annual reconciliation. What is the timeframe for completing the reconciliation this year?
Answer: All RMA policies for the 17 price support crops were summarized to the producer crop level. Initially, three data elements will be reconciled (Producer ID, Share and Acreage). RMA data was compiled in September 2001 and forwarded to FSA. Similarly, FSA compiled producer data for the three data areas. In December 2001, data was compared and summarized. Potential discrepancies were forwarded to the county for reconciling. If the county office cannot reconcile discrepancies, they will identify those policies for resolution by RMA. State FSA offices will certify all referrals before they are forward to RMA for resolution in April, 2002. RMA will analyze referrals and if warranted, forward discrepancies to the servicing company for action. Later this spring, production data will be reconciled.
Page 92 PREV PAGE TOP OF DOC Question: FCIC's program integrity handbook was dated April 2001. Amendments to the handbook continue to be written and published (such as Amendment 6), yet deadlines for data reconciliation still exist. Are these flexible deadlines? If so, do RMA regional and FSA state/county employees realize that additional procedural details are still under consideration?
Answer: Deadlines have and will continue to be adjusted as needed. As new amendments address specific data reconciliation issues, FSA state and county offices are notified. Further, RMA routinely briefs the crop insurance industry which includes the servicing companies and trade associations. In addition, amendments and procedures are posted on the RMA web site.
Question: Under data reconciliation, how many mismatches were sent to FSA field offices for verification? What tolerances were used to eliminate insignificant or de minimus discrepancies? Could a producer have a data discrepancy even if he had less than a 5 percent tolerance?
Answer: More than 480,000 records with discrepancies were identified. The consensus of the data reconciliation workgroup was to establish tolerances to ensure that only significant discrepancies are reconciled. As a result, reconciliation procedure identifies allowable program variances in the three data elements being reconciled. The current tolerance on acreage is one acre or 5 percent. If a producer had a less than 5 percent discrepancy, that discrepancy should not be reconciled because it falls within the allowable acreage tolerance.
Question: According to the written statement of the American Association of Crop Insurers, not all states have issued requests to producers to reconcile acreage information. Why is this the case? Is there not a uniform requirement and standard request letter out of the administration?
Page 93 PREV PAGE TOP OF DOC Answer: This process will be reviewed by the data reconciliation team (which has insurance company representation) during mid2002 and recommendations for improvement will be developed. In 2001, only the 17 price-supported crops were reconciled. A standardized data reconciliation letter is contained in the 4-RMA Handbook and should have been used to notify producers.
Question: When do FSA county offices engage in field monitoring and fact finding? What are the farmers' rights or obligations if they are investigated?
Answer: FSA was provided a list of about 1,700 producers with unusual loss history for monitoring during the 2001 growing season. The results of the inspections were provided to the insurance providers. This information was only used if the insureds filed a notice of loss during the 2001 crop year. Also, FSA forwarded about 450 referrals to RMA on possible abuse in the crop insurance program during crop year 2001. The majority of the inquires were performed by the insurance providers as prescribed under the insureds' policy.
Question: What is the purpose of data mining? Has this procedure produced any results? Who will have access to the data when the database is complete?
Answer: The purpose of the data mining is to detect fraud, waste, and abuse in the crop insurance program by identifying patterns in farm program data that raise concerns. USDA is committed to the data mining and warehousing initiatives. Data mining efforts thus far have lowered projected losses based on the past history of selected policyholders by over $100,000,000. At this point, only RMA has access to the database because the warehouse only has RMA data.
Question: Does the agency intend to refer flagged agents and adjusters to FSA or the insurance providers for monitoring? When?
Page 94 PREV PAGE TOP OF DOC Answer: As soon as the data mining process has been refined to only identify agents and loss adjusters who are suspected of committing waste, fraud, or abuse, referrals of such agents and loss adjusters will be made to insurance providers.
Question: Do you perceive that there is adequate communication between the RMA, FSA, and the SRA holders? What could be done to improve that relationship so that farmers and the agricultural community are better served?
Answer: Generally speaking, communications between the RMA, FSA, and reinsured companies are routine and effective. However, given the aggressive rate at which we were implementing ARPA there is little doubt that unintentional lapses occurred. How we can improve the level of communication will be formally discussed later this month when RMA and crop insurance representatives meet to discuss a range of issues. Further, RMA and FSA are working to bridge gaps before implementation of a new farm bill further complicates the issue.
Question: What is the status of consultation between RMA and FSA state committees? In what states and under what conditions has it been utilized?
Answer: As of February 2002, RMA has had meetings with several State Committees and State Executive Directors or made contacts with FSA Point of Contacts in all 50 States to (1) plan meetings, (2) share information about the consultation process and RMA program information, and/or (3) solicit recommendations for program changes or improvements.
The consultation process is a means for RMA to share program information with the State Committees of FSA, and to allow the committees to make timely recommendations to RMA on policies, plans of insurance, and other important program issues. These recommendations will help RMA identify program discrepancies and vulnerabilities. Sharing information is also useful in helping FSA understand risk management programs.
Page 95 PREV PAGE TOP OF DOC Question:How has this worked?
Answer: Initial contacts have gone very well. The purpose of initial meetings is to familiarize FSA State Committees and POCs with RMA programs, actuarial filing requirements, and how to find RMA program information. The roles and responsibilities of the two Agencies, which were developed jointly by RMA and FSA and published in an Agency handbook, are also discussed.
RMA has developed an internal guide to assist Regional Offices in implementing consultation activities consistently. Some delay in implementation was created while offices waited for RMA internal guidelines to be released and for FSA State Committees to be formed. All offices expect full implementation in the near future.
Question: What feedback have you received from committees? What has RMA done with the feedback?
Answer: Because internal procedures had to be developed and a knowledge base established at the State offices, feedback on RMA programs has been minimal to date. As program knowledge grows at the State offices, we expect to benefit from the additional reviews FSA will be able to provide.
FCIC BOARD MEMBERS
Question: In your testimony, you stated that ARPA increased the Board's authority. Are all of the Board positions filled? What is the role of the Board?
Answer: On March 8, the Secretary appointed six new members to the FCIC Board of Directors. They include four farmers (one of whom is a specialty crop producer), one person experienced in the crop insurance business, and one person experienced in reinsurance or the regulation of insurance. Only one additional Under Secretary position is temporarily vacant.
The FCIC Board of Directors is responsible for the management of the crop insurance program. Principal duties include reviewing and approving policies and plans of insurance, as well as related materials or modifications. The Board can also reimburse organizations for their research, development, and maintenance costs for new products.
Page 96 PREV PAGE TOP OF DOC Price Election Press Release
Question: Regarding RMA's press release on price elections dated January 15, do you think it is possible for producers to be contacted of the additional price election and have the ability to make the change within 5 calendar days of the announcement?
Answer: Due to the pending farm bill legislation and possible impacts that legislation may have on loan rates or other farm program changes, a decision was made to delay the announcement of additional prices. Normally, the additional prices for corn, cotton, flax, grain sorghum, rice, sunflowers, and soybeans would have been released no later than January 15, 2002. The modification allows for additional prices for these commodities to be announced no later than July 1, 2002. This deviation from the January 15 release date is intended as a one-year anomaly only.
Established prices have already been announced and prices cannot be reduced below that established level; however, if conditions warrant, they may increase. RMA is currently evaluating the requirement for producers to act within 5 days, and will consider any extension when it releases operating procedures.
Question: Have you heard concerns from companies or producers regarding this issue?
Answer: Yes. RMA has heard from reinsured companies, commodity groups and others regarding this issue and is taking their concerns into consideration as it drafts additional operating guidelines.
FARM SERVICE AGENCY
Question: Does the Risk Management Agency have concerns with FSA's handling of ARPA related responsibilities?
Answer: Based upon the results of the first year efforts, RMA believes that FSA effectively monitored selected policyholders resulting in significant savings to the Federal Government. All five ARPA implementation teams will review performance to date and make recommendations for improvement by mid2002.
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Question: How many of the claim audits for crop year 2000 have been referred to FSA? What were the results of the referrals?
Answer: The claims audit process requires FSA to assist in detecting and correcting improperly paid claims. The most significant aspect of FSA involvement in claim audits is its unique ability to provide producer information that may assist insurance providers and RMA in validating that crop insurance indemnities are accurately calculated and only paid for unavoidable loss of production due to insured causes of loss occurring during the insurance period.
PRESIDENT'S BUDGET PROPOSAL/UNDERWRITING GAINS
Question: The President's fiscal year 2003 budget proposes to cap underwriting gains at 12.5 percent of the retained premium. Did this proposal initially come from RMA?
Answer: As is the case every year, RMA's budget proposal is part of an overall Federal budget proposal that reflects the spending priorities of the administration.
Question: What document currently controls the underwriting distribution?
Answer: The Standard Reinsurance Agreement (SRA).
Question: What are the expected underwriting gains under the current Standard Reinsurance Agreement (SRA)? Whose responsibility is it to negotiate the terms of the SRA? Are underwriting gains/losses legislated or are they negotiated and included in the SRA?
Answer: For the 2002 reinsurance year, the underwriting gain for all reinsured companies is estimated to be $367 million. Generally, RMA negotiates the Standard Reinsurance Agreement with the private insurance providers. However, Congress has also legislated changes to the SRA.
Page 98 PREV PAGE TOP OF DOC Question: What is the current status of the reinsurance market for crop insurance in light of September 11? Has it affected the crop insurance industry? If underwriting gains are capped, will crop insurance companies be able to attain commercial reinsurance?
Answer: Considering the profitability of the crop insurance program over the last several years, we do not anticipate that commercial reinsurance capacity will be affected; however, certain commercial reinsurers may slightly increase the rates they charge for such coverage to smooth out losses suffered as a result of the September 11 attacks. Further, RMA has issued a communication to each insurance provider stating that acts of terrorism are excluded from the crop insurance policy, so there are no terrorism risks associated with commercial reinsurance and the crop insurance program.
Question: Does the proposal impact all companies equally?
Answer: The proposed savings were based on limiting each company's underwriting gains to 12.5 percent. Data on the underwriting gains and losses for each company as well as the amount of premium retained by each company shows considerable variation among these companies. In general, companies that operate primarily in areas with less risk have tended to retain more premium and to have received more underwriting gains in both absolute terms and percent of retained premium. Further, the companies can reduce their risk by retaining less premium or by reinsuring the risk they retain from FCIC with a private re-insurer. While we are continuing to analyze the potential impacts of the underwriting gains at 12.5 percent of retained premium, we have no evidence to suggest that there would be significant adverse impacts on the companiesregardless of size or the areas where they operateexcept to limit their earnings to a reasonable level.
Reports: What is the status of the following reports due Congress?
Question: Sec. 103 Catastrophic Risk Protection: Not later than April 1, 2002, the Secretary shall submit to the House and Senate Agriculture Committees a report that evaluates the payment of administrative fees on behalf of producers and the impact of this on the participation in the Federal crop insurance program, including the impact on levels of coverage purchased.
Page 99 PREV PAGE TOP OF DOC Answer: On October 3, 2001, RMA issued its guidance to private insurance providers to implement 508 (b)(5)(B) of the Federal Crop Insurance Act. With the annual filing of the Plan of Operations due each year when the Standard Reinsurance Agreement is renewed, each insurance provider involved in this activity is required to disclose information on each organization through which such payments will be made.
Insurance providers are also required to contact the State insurance department to determine whether the return to the producer of licensing fees or other payments made by the insurance provider to the cooperative or trade association is in compliance with State law. Insurance providers cannot proceed with the activity until there is knowledge that such activity is compliant with State law.
Obtaining this clearance from each State where the activities are pursued is taking considerable time. So far, only two insurance providers have revised their Plans of Operations to reflect this marketing activity. Based on the information received from insurance providers to date, it is unlikely that RMA will have sufficient data to report on the impact on participation and on levels of coverage by April 1, 2002. However, RMA will provide an interim report on the status of activity to date.
Question: Sec. 131 Research and Development: Study of Multiyear Coverage: The corporation shall contract with a qualified person to conduct a study to determine whether offering policies that provide coverage for multiple years would reduce fraud, waste, and abuse by persons that participate in the Federal crop insurance program and submit to the House and Senate Agriculture Committees a report that describes the results of this study no later than one year after the date of the enactment of this section (June 20, 2001).
Answer: RMA has awarded a contract to conduct research to determine if multiple-year coverage is feasible and would, in fact, reduce fraud, waste and abuse. The final research report is due May 20, 2002. The results of this study will be provided to Congress as soon as the findings are analyzed.
Page 100 PREV PAGE TOP OF DOC Question: Sec. 131 Research and Development: Contract for Revenue Coverage Plans: A report that describes the results of the contract entered into by the Corporation for the purposes of research and development regarding one or more revenue coverage plans that are designed to enable producers to take maximum advantage of fluctuations in market prices and thereby maximize revenue realized from the sale of an agricultural commodity. A revenue coverage plan may include the use of existing market instruments or the development of new market instruments. Not later than 15 months after the date of enactment of this section (September 20, 2001), the report shall be submitted to the House and Senate Agriculture Committees.
Answer: A contract was awarded to investigate opportunities for new and improved revenue coverage plans on September 20, 2001. The final report is scheduled for delivery to RMA by the contractor in April 2002. The report will provide information for subsequent program development activity. RMA will provide a report to Congress on the results of this research as soon as the contractor's findings are analyzed.
Question: Sec. 121(i) Annual Report on Program Compliance and Integrity Efforts: The Secretary shall submit to the House and Senate Agriculture Committees an annual report describing the operation of the section on Improving Compliance and Integrity during the preceding year and efforts undertaken by the Secretary and the Corporation to carry it out.
Answer: The report has been drafted and is in Departmental clearance.
Question: Sec. 132 Pilot Program Evaluation: After the completion of any general pilot program under this section, the Corporation shall evaluate the pilot program and submit to the House and Senate Agriculture Committees a report on the operations of the pilot program. The report shall include an evaluation by the Corporation of the pilot program and the recommendations of the Corporation with respect to implementing the program on a national basis.
Page 101 PREV PAGE TOP OF DOC Answer: Evaluations are conducted on all pilot programs prior to any action to convert the program to permanent status or prior to termination of the pilot program. At least 12 pilot evaluations are scheduled to be either contracted out or to be conducted by RMA in fiscal year 2002. The evaluation of the blueberry pilot program has been completed and will be provided to Congress within the next 90120 days.
Question: Sec. 107 Quality Adjustment: Review of Criteria and Procedures: The Corporation shall contract with a qualified person to review the quality loss adjustment procedures of the Corporation so that the procedures more accurately reflect local quality discounts that are applied to agricultural commodities insured under this title. Base on the review, the Corporation shall make adjustments in the procedures, taking into consideration the actuarial soundness of the adjustment and the prevention of fraud, waste, and abuse.
Answer: A contract to review the quality adjustment procedures was awarded to Science Applications International Corporation (SAIC) on May 24, 2001. SAIC has subcontracted the work to Milliman USA who provided a preliminary report on February 28, 2002, seeking RMA input prior to completing their final report. RMA will take into consideration actuarial soundness of any recommendations and the prevention of fraud, waste, and abuse as stipulated in ARPA before taking any action.
QUESTIONS SUBMITTED BY REP. JERRY MORAN
COVERAGE ON CONTINUOUS CROP WHEAT:
Question: Coverage is offered in eastern Colorado and the Oklahoma panhandle, but not in southwestern Kansas. Many of my producers are interested in purchasing coverage, even if it is for a low yield. Are steps being taken to make this product available in western Kansas?
Answer: While producers may be interested in purchasing crop insurance at a very low yield, our past written agreement experience indicates that producers are not willing to purchase coverage at a low yield and a very high premium price, which would likely be the case. Low average annual precipitation in several Southwestern Kansas counties indicates that we would have to establish very high rates to support this coverage.
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STATE LICENSED WAREHOUSES:
Question: I have been contacted by producers who delivered grain samples to state-licensed warehouses for quality grade adjustments. When they take the samples to their agent to be reimbursed for quality losses, they're told they can't be reimbursed because the requirements state the tests must be done at a federally-licensed warehouse. This regulation has apparently been on the books for a while, but RMA is now starting to enforce it. The result is that producers who are doing the same thing they always have, are now unable to collect their money. What are the reasons why RMA will not accept tests from state facilities? Is anything being done to better communicate this new enforcement policy?
Answers: The sampling and grading requirements for quality adjustment are a longstanding part of the Federal crop insurance policy and provide an internal control to limit the ability of grain buyers and producers to defraud the Federal crop insurance program. The policy provides two options producers may use in order to qualify for a quality adjustment on their crop insurance policies.
First, producers may deliver their grain to a warehouse licensed under the United States Warehouse Act (USWA). The licensed graders at these warehouses are responsible for all aspects of grain grading at the facility. Earlier this year, the FSA was asked to work with any State-licensed facilities that expressed interest in obtaining a USWA license.
Second, the policy allows for samples to be tested by a grader licensed under the United States Grain Standards Act (USGSA). Official samples for USGSA testing must be collected by personnel of the Grain Inspection, Packers and Stockyards Administration, or by a representative of a inspection agency licensed under the USGSA. However, the crop insurance program also accepts the results of ''submitted'' samples. To qualify, these samples must be collected and submitted by the insurance provider or a ''disinterested third party'' who has been approved by the insurance provider. To ensure program integrity, RMA has determined that elevator employees are not ''disinterested'' and may not draw ''submitted'' samples for crop insurance.
Page 103 PREV PAGE TOP OF DOC It is important to note that insurance companies that do not provide a requested service within a reasonable time frame may be subject to sanctions under their contract with the RMA. This includes providing timely service to producers in the middle of harvest who need to have grain sampled to determine the grain quality for crop insurance purposes.
ALFALFA COVERAGE IN NORTH CENTRAL KANSAS:
Question: About a year ago, I forwarded requests from producers to collect the necessary information to proceed with insurance on alfalfa crops. Is this product now available in north central Kansas counties?
Answer: Yes, but it is only available by written agreement. Forage Production coverage is available in Kansas. However, few producers have provided the necessary production history records to support the yields that they attempt to use to build coverage. Several written agreements were authorized and issued for crop year 2001 forage production. However, none were found to be acceptable to the producer. High premium rates, low price elections, and the lack of quality adjustment provisions, were cited as reasons for rejection. Additionally, any request for coverage for 2002, had to be submitted by September 30, 2001.