SPEAKERS CONTENTS INSERTS
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83–025 PDF
2002
2002
IMPLEMENTATION OF THE FEDERAL CROP INSURANCE PROGRAM
HEARING
BEFORE THE
SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
SEPTEMBER 18, 2002
Serial No. 107–22
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Printed for the use of the Committee on Agriculture
agriculture.house.gov
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
Vice Chairman
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
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ERNIE FLETCHER, Kentucky1\
CHARLES 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
GEORGE W. GEKAS, Pennsylvania1\
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
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DAVID D. PHELPS, Illinois
KEN 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
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
1\ Resigned from the committee March 20, 2002
2\ Appointed to the committee July 27, 2002
Subcommittee on General Farm Commodities and Risk Management
SAXBY CHAMBLISS, Georgia Chairman
JOHN A. BOEHNER, Ohio,
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Vice Chairman
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
WILLIAM 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
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DAVID D. PHELPS, Indiana
KEN LUCAS, Kentucky
BARON P. HILL, Indiana
JOE BACA, California
MIKE ROSS, Arkansas
RICK LARSEN, Washington
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
COLLIN C. PETERSON, Minnesota
BOB ETHERIDGE, North Carolina
CHRISTY SEYFERT, Subcommittee Staff Director
(iii)
C O N T E N T S
Bishop, Hon. Sanford D., Jr., a Representative in Congress from the State of Georgia, prepared statement
Chambliss, Hon. Saxby, a Representative in Congress from the State of Georgia, opening statement
Rehberg, Hon. Dennis R., a Representative in Congress from the State of Montana, opening statement
Prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Witness
Davidson, Ross J., Administrator, Risk Management Agency, U.S. Department of Agriculture
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Prepared statement
Answers to submitted questions
Accompanied by
Hand, Michael, Director, Risk Management Services Division, Risk Management Agency, U.S. Department of Agriculture
Jenkins, Marian, Acting Deputy Administrator, Insurance Services, Risk Management Agency, U.S. Department of Agriculture
Westmoreland, Garland, Deputy Administrator, Risk Compliance, Risk Management Agency, U.S. Department of Agriculture
Witt, Tim, Deputy Administrator, Research and Development, Risk Management Agency, U.S. Department of Agriculture, Kansas City, MO
Submitted Material
American Association of Crop Insurers, submitted statement
Benham, James D., Versailles, IN
Ginseng Board of Wisconsin, submitted statement
Crop Insurance Research Bureau, Inc., submitted statement
Fireman's Fund AgriBusiness, submitted statement
Independent Insurance Agents & Brokers, submitted statement
National Association of Wheat Growers, submitted statement
National Cotton Council of America, submitted statement
National Grain Sorghum Producers, submitted statement
Young & Young Consultants, submitted statement
IMPLEMENTATION OF THE FEDERAL CROP INSURANCE PROGRAM
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WEDNESDAY, SEPTEMBER 18, 2002
House of Representatives,
Subcommittee on General Farm
Commodities and Risk Management,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 1:04 p.m., in room 1300, Longworth House Office Building, Hon. Saxby Chambliss (chairman of the subcommittee) presiding.
Present: Representatives Boehner, Smith, Moran, Thune, Gutknecht, Rehberg, Graves, Kennedy, Dooley, Lucas of Kentucky, Larsen, Peterson, Etheridge, and Stenholm (ex officio).
Also present: Representatives Osborne and Putnam
Staff present: Tom Sell, Christy Seyfert, subcommittee staff director; Dave Ebersole, Alan Mackey, Craig Jagger, Callista Gingrich, clerk; John Riley, and Howard Conley.
OPENING STATEMENT OF HON. SAXBY CHAMBLISS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
Mr. CHAMBLISS. The hearing of the Subcommittee on General Farm Commodities and Risk Management shall come to order. As chairman of the Subcommittee on General Farm Commodities and Risk Management, I welcome members, staff, our witnesses and other interested folks to this hearing. I especially would like to welcome the folks from the Southern Cotton Growers, who are joining us today, some of whom are from my State. Thank you for being here.
We are here to discuss a very important topic, the implementation of the Agricultural Risk Protection Act of 2000 and the effectiveness of the Federal Crop Insurance Program. A hearing of this subcommittee was held on this subject earlier in the year. At that time we received a status report on the implementation of ARPA from the Risk Management Agency's Acting Administrator, Ms. Phyllis Honor. Since that time, a new Administrator, Mr. Ross Davidson, Jr., has been appointed.
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We will a receive a report of agency activities related to the implementation of the 2000 act and we will hear about how the Federal Crop Insurance Program has served as a risk management tool. I have also asked Mr. Davidson to identify possible shortcomings of the program, be it administrative or legislative, and how the agency is working to address those issues.
Dr. Keith Collins, USDA's Chief Economist and chairman of the Federal Crop Insurance Corporation's board of directors, recently noted that early estimates project that crop insurance indemnities will be about $4.1 billion this year. He has stated that the program is ''well supported by the government and it is working.''
Since the enactment of the 2000 crop insurance reform measure, participation in higher coverage levels of the program has increased. Insured acres have increased. We have seen a number of positive results of this legislation. But there are also some areas of the crop insurance program with room for improvement, such as the availability of risk management tools for the livestock sector. As I review the weekly crop and pasture condition report from the Georgia State statistician, I notice few improvements over the past month and see areas of my State suffering as I know others are throughout the country. According to RMA's answers in response to written questions of the February hearing a feasibility study has been conducted on pasture and range land. A forage policy is available but for only about a dozen States.
In light of discussions surrounding disaster assistance, this subcommittee hopes to understand if the crop insurance program is, in fact, fulfilling its role as a tool for managing risk. Noticeably absent from the witness list are representatives of the crop insurance industry and producer groups. While it might appear at first glance that they were left out, this is not the case. Representatives from various walks of life were provided the opportunity to submit written statements for the subcommittee's review. We have taken these statements into consideration and those submitted by the designated deadline are in Members' folders and available to the public, along with Mr. Davidson's statement on the table outside of this room.
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As the Administrator has to catch a flight in a few hours to Kansas City for the FCIC board meeting tomorrow, we will now proceed with the hearing. Thank you all for being here today.
Mr. CHAMBLISS. I appreciate your interest in this important topic and I wish at this time to recognize my ranking member and my friend from California, Mr. Dooley, for any comment he wishes to make.
Mr. DOOLEY. Thank you, Mr. Chambliss, for organizing this hearing. In the interest of time, I will dispense with any opening statement.
Mr. CHAMBLISS. Thank you. We are also very pleased to have the ranking member of the full committee, Mr. Stenholm from Texas. Charlie, if you have any statement we will be glad to hear from you at this time.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman. Thank you for holding this hearing today. And I want to join in welcoming the new Administrator to the Agriculture Committee today and to thank him for appearing. Mr. Chairman, the statements we made when we supported the passage of ARPA are, this year, being put to the test. In your very fine work as a member of the Budget Committee, you secured for the Agriculture Committee budget authority that could be used to strengthen the Federal Crop Insurance Program. We used those funds to dramatically increase the amount of which producer premiums are subsidized and to great apparent effect.
We will hear today that not only has program participation increased since ARPA was enacted, but that many producers have increased the level of coverage that they purchase, exactly the desired result.
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What we face this year, Mr. Chairman, is a widespread drought again. Record indemnities estimated at $4.1 billion will be paid from the Crop Insurance Program according to the Department estimates. This is a hard year and many of our farmers and ranchers are experiencing devastating conditions. Even though crop producers have flocked to higher levels of crop insurance and indemnity payments will be large, Congress is called on to appropriate additional ad hoc disaster payments to crop producers to cover 2001 and 2003 losses. As we all know, 79 Members of the other body voted to provide them. This meeting today provides us with an excellent opportunity to explore the meaning of the continued desire for disaster payments in the aftermaths of ARPA's crop insurance program expansion. I am grateful for the Administrator's appearance and I look forward to his testimony.
Mr. CHAMBLISS. Thank you, Mr. Stenholm.
Due to time constraints, we will operate under the 5-minute rule. And at this time, we will open the floor to any Member who has a brief opening statement if anybody wishes to make a comment. Mr. Rehberg.
OPENING STATEMENT OF HON. DENNIS R. REHBERG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MONTANA
Mr. REHBERG. Thank you, Mr. Chairman. And in the essence of time, I would like to submit my testimony for the record, but I would like to just make a brief statement and that is, my questions, I will save most of my points for my questions, but Mr. Witt, I see you are back with us again, and my questions will remain the same. What are you doing about the multiple disaster drought years, and how are we going to adjust the 5 years so that for those of our States like Montana, which I represent, we have the multiple year droughts, how are we going to address the shortfall that that apparently creates?
We have good farmers that are following the rules that Congress has established. And I think it is having an unintended effect, and I would like to hear you address that specifically. I looked over the testimony that was provided to the committee, I can see a lot of time spent on that and I also want to ask the same question I asked last time, and I haven't ever received a response having to do with the problem that exists between malting barley and feed barley, and how are we going to address the premium price problems that exist within the current crop insurance dilemma?
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But other than that, Mr. Chairman, I thank you for calling this hearing today. This is something that while there were a lot of good intentions by prior Congresses to craft legislation that would address as many of the issues as possible, for Montana it hasn't worked particularly well. There are just so many areas that is not helping us. And while we can talk about the numbers, the dollar figures going up of the number of people that are covered, the people of Montana are having a hard time participating. I am not sure it actually addressed the problem from Montana's perspective. But thank you for having this hearing today.
PREPARED STATEMENT OF HON. DENNIS R. REHBERG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MONTANA
Mr. Chairman, thank you for holding this hearing to review implementation of crop insurance reforms and the effectiveness of the Federal Crop Insurance Program. As you may remember from the last hearing the committee held on this issue in February, my constituents have serious concerns with the program—most of which have been exacerbated by yet another year of drought in Montana.
While I want to thank the members of the committee who were involved in drafting the last reforms of the Federal Crop Insurance Program and also express my appreciation for their efforts to address the effectiveness of Federal crop during multiple years of drought, I do want to focus my testimony on the fact that, while those reforms are appreciated, they are still not getting the job done for many farmers, including most producers in my State.
To illustrate this problem, I want to read from a letter I received last Friday from a producer in my State, Mr. Steve Becker, who farms near Billings, Montana. Mr. Becker starts the letter:
A drought of this magnitude and duration is remembered by none. Springs and wells that were used by homesteaders in the ''dirty thirties'' are bone dry! We have not had a normal crop since 1997, and we have been in extreme to exceptional drought on the long term Palmer drought index from fall 1998 to the present. This prolonged period has resulted in a severe lowering of our Federal crop APHs, to the point we our paying larger and larger premiums for less and less coverage. As you know, Federal crop insurance is no substitute for a normal crop, but under more normal conditions of one in eight or so years of having a bad drought, crop insurance could do a fair job of covering your risk and keeping you in the game. Federal crop wasn't designed for and cannot in its present form adequately cover multiple drought years.
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Mr. Becker closes by saying:
We hope that you can provide some meaningful help in this desperate time of need. Keeping in mind that this year's drought came on the back of four previous in our area. The National Weather Service has ranked this the second worst drought since 1895, and has caused losses that are either uncovered or not adequately covered by crop insurance. Noting that these disasters have major impacts on our local businesses that support agriculture, this is truly a natural disaster that has triggered a corresponding economic emergency in our state. We desperately need emergency relief for the losses incurred in both the 2001 and 2002 crop years.
Mr. Chairman, since, as you know, Federal crop insurance coverage is based on past years' yields, which have mostly been disaster years, Mr. Becker finds himself in the most miserable position possible: he has no real crop, a level of crop insurance coverage that has been eroded by drought yields to the point of being trivial, and no emergency assistance payments on the horizon to bail him out.
Unfortunately, Mr. Chairman, I don't have a good answer to the legitimate problems Mr. Becker is facing. Simply put: he is a good farmer, works hard, and does all the things that we in society, Congress, and this Agriculture Committee expect of him. Yet, as good a farmer as he is and as good a person as he is, he finds himself on the verge of bankruptcy because the Federal crop insurance we have put in place simply does not address the very unique circumstances of one who is experiencing multiple years of drought.
Mr. Chairman, once again, I want to express my appreciation to you for calling this hearing and I look forward to hearing testimony from Mr. Davidson, which I hope will include some insightful suggestions to help folks like Mr. Becker.
Mr. CHAMBLISS. I thank you for your comments. That is why we are here today—to try to make sure we do whatever necessary so that it works for farmers all across America. So we appreciate your comments.
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Any other statements for the record will be accepted at this time for inclusion in the record.
PREPARED STATEMENT OF HON. SANFORD D. BISHOP, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
Chairman Chambliss, Ranking Member Dooley, distinguished witnesses, ladies and gentlemen, thank you all for gathering here today to discuss the progress of this legislation, which is so important to the American farmer. The Agricultural Risk Protection Act of 2000 was designed to ensure that more farmers are covered under the Federal Crop Insurance Program. By adjusting the formula that sets the premium assistance level, the act sought to increase the amount of Federal assistance that goes toward securing a crop insurance policy, thereby encouraging farmers to purchase higher levels of insurance coverage. This has been very effective. I believe that it is good business sense, and a wise use of the taxpayer dollar to spend a little more now, rather than having the farmer face greater economic hardships in the long term, rather than having to rely on ad hoc government assistance.
This law also sought to make changes to the old crop insurance program that would create a sense of fairness to the farmer. The act sought to level the playing field between the producers who responsibly cover both their revenues and operating costs, and those who simply choose to take the bare minimum coverage. This was accomplished by making the premium assistance levels the same for both yield loss and lost revenues.
Finally, the new law made some key procedural changes that would seek to improve the program for both the farmer, as well as the taxpayer. First, since disaster payments are based on production histories, the act made badly needed adjustments for multiyear crop failures, or total losses, either of which would negatively skew the disaster repayment amounts. Other improvements included speeding up the time in which claims are processed, and redesigning the system so that more crops can be included in the program. To protect the taxpayer, oversights to stop fraud, waste, and abuse were added to the program.
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While these changes have gone a long way towards improving crop insurance, we still must be vigilant in our efforts to continue to make improvements. I know that in south Georgia, where cotton is one of the most abundant crops, there have been suggestions that might improve the production yield estimates by using statistical estimates, based on regional production histories instead of one formula being put to use for cotton producers across the entire country.
We have already done much to make a good program even better. By listening to the experts, even more can be accomplished. Thank you Mr. Chairman.
Mr. CHAMBLISS. The subcommittee would like to welcome our witness, Mr. Ross Davidson the Administrator of the USDA's Risk Management Agency. Mr. Davidson was named the Administrator by Secretary Veneman on February 6, 2002. Most recently, Mr. Davidson was vice president, industry affairs, and vice president, corporate finance, for United Services Automobile Association from 1988 to 2001. He has more than 25 years of experience in enterprise risk management, corporate finance, treasury, investment and related public policy matters and insurance and energy. The Administrator is accompanied today by Mr. Michael Hand, Director of Risk Management Services Division, Risk Management Agency, USDA here in Washington; Ms. Marian Jenkins, Acting Deputy Director, Insurance Services, Risk Management Agency, USDA here in Washington; Mr. Garland Westmoreland, Deputy Administrator, Risk Compliance, Risk Management Agency, USDA here in Washington; and Mr. Tim Witt, Deputy Administrator, Research and Development, Risk Management Agency, USDA from Kansas City.
The Chair asks that our witness help us meet our time constraints by summarizing your oral testimony within approximately 10 minutes. We would like to give members adequate opportunity to ask questions.
Mr. Davidson, your entire written statement will be included in the record, and at this time we will be glad to turn it over to you for your comments and opening statement. Thank you again for being here, Mr. Davidson.
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STATEMENT OF ROSS DAVIDSON, ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. DAVIDSON. Thank you, Mr. Chairman and subcommittee members. I thank you again and all of you for inviting me here. I look forward to this opportunity to interact.
Thanks for the opportunity to report to this subcommittee on the effectiveness of the Federal Crop Insurance Program in providing risk protection for our Nation's farmers and ranchers and our progress towards implementing the changes in the program as a result of the Agricultural Risk Protection Act of 2000, or ARPA.
Let me begin by reiterating a few statistics. For this crop year, the program is expected to provide an estimated $38 billion in risk protection through nearly 1.3 million policies covering 212 million acres. And almost 80 percent of the Nation's insurable acreage is included in the program currently. Based on our current production conditions, we are estimating that the program will provide about 4.1 million in indemnity payments in 2002 mostly for production losses for the major commodities. As you can see from this chart prior to the enactment of ARPA, only about 8 percent of acreage was insured at coverage levels of 70 percent or higher.
However, in 2002, about 53 percent of the acres are insured at coverage levels of 70 percent or higher. And this, of course, means that the typical producer who is participating in the program could receive as much as 70 to 75 percent of their expected income for insured crops.
I believe that these statistics demonstrate how important the program is to American agriculture. Simply put, the program is the price of primary source of risk protection for our Nation's farm and ranchers. There are, of course, notable gaps especially for livestock producers. Only a limited amount of pasture and hay crops are insured, and only limited protection is being offered for livestock losses at the present time. And further, many specialty crops are without coverage.
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As Administrator of this agency, I am fully committed to working with the private insurance industry with producers and the board of directors of the Federal Crop Insurance Corporation to fill those gaps as soon as possible so that all of the Nation's farmers and ranchers will have access to adequate risk protection at an affordable price.
I would note that the board recently approved two new insurance products for livestock producers and coverage is also being expanded for aquaculture, nursery and speciality crops. I am pleased to report that much has been done to implement the productions of ARPA.
As you know, ARPA provided for a substantial increase in funding for subsidized premium rates, particularly for the higher levels of coverage. And RMA implemented the new subsidized rate structure almost immediately after the Act became law and all participating producers began receiving the benefits of this action, starting with the 2001 crop year. Virtually, all the substantive ARPA requirements that do not require a change to our basic insurance policy are implemented and working. And we have just published the proposed changes to our basic insurance policy for comment.
We will seriously and expeditiously consider all comments. We hope to have a fully implemented updated policy published by early December in time for the first early January 2003 filing dates for the 2004 crop year. This will avoid the confusion and costs of implementing these changes in the middle of a crop year. When finalized, these changes will improve the program for farmers and will protect program integrity and viability.
ARPA set forth a vision of an array of risk management tools being made available to well informed community of producers across a full range of agricultural commodities in all States. We were given the charge to help fulfill that vision in substantive ways. To go beyond the traditional role of providing crop insurance, to better serve America's enterprising in increasingly sophisticated agricultural producers and their markets. This is a strategic priority for the agency. And the private sector development system mandated by ARPA is fully implemented an has spurred a flurry of development of new products.
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This is a serious and intense process that requires a lot more time, resources, expertise and administrative support, board involvement and expense than is apparent on the surface. This chart shows that process. I thank RMA staff for their support and dedication and their ability and willingness to adapt to this high growth dynamic environment.
Our new board of directors is diverse and very active. Their insight integrity and serious attention to their responsibilities are impressive. I can say without reservation that the board and expert reviewers who assist them are proactive in their review and approval of proposed products to ensure that the legitimate needs of the producers are met and that the integrity of the program is maintained.
Since March, the board has met five times. There are 12 products currently under consideration, and four have been approved this year. The attachment to my testimony shows that many more are in various stages of research and evaluation piloting and introduction. Many of these proposals require substantial board guidance and staff assistance to bring them to fruition, as well as to implement and maintain them. This takes more time and resources than I would like, and we are evaluating this process to try to shorten the cycle time, simplify our product offerings and to prioritize our efforts to ensure full coverage of all significant risks, efficient and responsible oversight and administration of this process.
A lot of RMA's resources are focused on facilitating and overseeing new product development, reinsurance of the product portfolio. This includes many of our field representatives to ensure that products are tailored to and meet local needs. And as our submission shows, our products cover a long list of commodities and we are working feverishly to extend and increase coverage to more areas, more commodities and more producers. We are also working diligently to extend much needed protection to America's ranchers.
Our first two livestock pilots for swine were introduced this summer and other products are under board review. We are also endeavoring to refine, develop and expand forage and range land programs. In 2002, our regional offices approved 487 forage or forage seeding written agreements. For 2003, we have already expanded forage and production seeding coverage to 207 new counties. There are many complex challenges in designing a foraging and range land program, and we hope to strike a reasonable balance between producer need and program integrity, and we are seeking innovative solutions.
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We are striving to increase understanding and effective use of our many and expanding programs. This year, the funding and authorization you provided allowed nearly 20,000 limited resource, socially disadvantaged farmers and producers in underserved areas, to learn the principles and practices of effective risk management and how crop insurance can help them.
For 2003 we are currently negotiating over 100 projects to provide risk management education to underserved States commodities and limited resource producers.
Now RMA is both a participant and a regulator for the Crop Insurance Program. Ensuring sound development, broad coverage and fair and efficient delivery of the effective risk management products for all production agriculture is no small task, as you might imagine. We are very aware of the financial strength of insurance companies and efficient administration of these products, they are critical to ensure that contractual obligations and market expectations for payment and service are met and even exceeded. Tough years can exacerbate concerns about the financial or operating viability of individual companies. But if any company fails to meet its obligations we will ensure fulfillment either through prompt corrective actions or through other insurance companies in the system or even directly by RMA if necessary.
We have just released and have here for you the Secretary's first annual compliance report under ARPA. The report applies to 2001, and it was a long time in coming. But I hope you will appreciate the progress we have made in implementing new tools and processes for detecting fraud waste and abuse, including spot-checks by trained farm service agency employees and the Office of Inspector General hotline that gathers reports from concerned citizen.
We are also using data mining and data reconciliation and are successfully employing satellite imagery and aerial photography to support these efforts. These initiatives and the combined efforts of RMA investigators and Federal and State prosecutors resulted in $35 million in recoveries in 2001, and an estimated $94 million in cost savings as this chart shows. We are streamlining our processes, prioritizing our work and generally trying to be smart and responsible in the use of our limited resources in this area. But the integrity of this program is everybody's full-time job, including those who design, deliver and administer and use the products.
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I believe we must increase our efforts to discourage and deter fraud waste and abuse. I would much rather put a police car with flashing lights at an intersection to discourage people from doing things that would wreck their lives than to have one hiding behind the bush and catch them after the fact.
We also recognize the need to increase the accuracy and reduce the burden of data reporting by our farmers. We will continue to work with producers, insurance companies and their agencies and with FSA to that end.
How is crop insurance helping address the current drought? Let me tell you about my recent tour of drought-stricken Colorado, Kansas and Nebraska. I went to listen and learn so we could better serve producers. I didn't go away empty-handed. In the seven meetings I attended with nearly 800 participants, many expressed gratitude for crop insurance. They said that they would not have survived without it, but they also described and you saw firsthand the effects of widespread and extended drought. They were glad to have some of their questions and misconceptions about the program cleared up.
But just as important to me, they also had some good suggestions on how to improve our products and services. This year, crop insurance will be a Godsend to many, but we can still improve it. This prolonged drought has revealed areas in which we can make our products more responsive to extreme conditions and needs. For example, we have learned that even though ARPA allowed for substitute yields in extreme disaster years, extended droughts still results in lower guarantees at the worst possible time.
This is a difficult issue and we are exploring possible solutions. We have also learned that our rules for prevented planting coverage due to drought cause uncertainty and are not sensitive to individual situations that can differ from producer to producer, or even within one farming operation. Any viable solution to this will require a collaborative effort.
As a first step, we are called a series of prevented planting forums to work with producers, agents, companies and FSA to clarify and improve the results. We hope to protect the integrity of the program and to provide clear and predictable guidance for drought-induced prevented planting coverage. We need easily understandable and practical rules on which producers can rely to make decisions without second-guessing months or years later. We also want to make sure that crop insurance does not induce or tempt producers to do things that they would not do if they did not have insurance.
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We thank the insurance companies and their agents and adjusters who have streamlined their processes and shifted resources to promptly serve hard-hit areas. Although in some areas the rush of business appears overwhelming, we have been assured that they are working diligently to adjust producer claims as quickly as possible and to get the money into producers' hands as soon as possible.
Two of our strategic priorities are a well-informed consumer and a fair and effective delivery system. We have a good start on these, but there is a lot of room for improvement. This system involves over 25,000 professionals including RMA, the insurance companies, insurance agents and loss adjusters. And it requires constant care and feeding. Our products are many and complex. And we need clear, correct, consistent and coordinated representation and administration of products by agents, loss adjusters, insurance companies and RMA staff.
Good communication and rumor control are full-time jobs. While I believe that we are rebuilding productive and functional relationships and good communication among the parties in this process, we need to do and are doing much more. When my friends congratulate me on this appointment, I say I would much rather be congratulated at the end of my service. I hope I can merit those congratulations upon my last report to this subcommittee. I thank you for your kind attention, and now my staff and I will be happy to entertain your questions.
[The prepared statement of Mr. Davidson appears at the conclusion of the hearing.]
Mr. CHAMBLISS. Thank you very much, Mr. Davidson.
I guess the most consistent thing I heard over the 2 years leading up to the passage of the Crop Insurance Reform Program from my farmers was that they wanted a cost of production policy. And we talked an awful lot about that during the debate on the bill that we finally passed and whatnot. I would like for you to tell us, give us an update on where we are, Mr. Davidson, with that cost of production policy, when we can look to have some sort of pilot program in place.
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Mr. DAVIDSON. Well, the board of directors is considering actively a proposal for cost of production. I have sat through a couple of board meetings where we have had extensive discussions trying to make sure where we can get to a pilot program that would work and maintain the integrity of the program, but also meet the needs of producers. I don't know if—Mr. Witt, would you like to add anything to where we are with regard to that and what we might expect?
Mr. WITT. Mr. Chairman, right now the part of the process that you saw on the chart was an expert review that the board of directors has authorized to be done for a cost of production program on cotton. The expert reviewer comments are due back the end of September and are likely to be considered at the board in its October meeting. Not knowing yet what those comments will render and whether there will be any significant issues, if not, we are targeting that program, if all goes well, for this spring 2003 crop year coming up.
After that, we have 11 other crops that are pending consideration by the board spending on the outcome of the cotton program. Right now the board, I believe, it is their view and the way we have looked at is it is an innovative new plan, new type of insurance concept and the idea is to see how the cotton pilot works as far as getting through the review process to make sure there is no major issues to be contended with and then move on to the other crops which are near completion as well. Those other crops would be targeted for the 2004 crop year.
Mr. CHAMBLISS. That is encouraging.
Mr. Dooley.
Mr. DOOLEY. I thank you, Mr. Chairman.
What are your current estimates for the underwriting gain or losses for this upcoming crop year?
Mr. DAVIDSON. It is really difficult for us at this point in time to know what those might be for the individual companies. We really have a lot of work going on adjusting the claims that are out there at this point in time. We haven't seen any of the quarterly reports from the companies. Of course they have to go through that.
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We have estimated, of course, an aggregate, which I reported to you what we would expect this to be. And it is our largest year yet in terms of losses. So we would anticipate that we would have some strain on the companies' financial statements as a result of that. But we don't have any specifics for individual companies yet.
Mr. DOOLEY. In reference to the Senate-passed disaster bill, the 6 billion or whatever the amount it was, have you folks done an analysis in terms of what that would do to producer income, and have you done the analysis that could demonstrate that if you have a program such that was presented in the Senate is once you added up the direct payments that producers get from the taxpayers, when you added up the indemnity, if they had a crop insurance product that we are also subsidizing part of the premium on, and then you had the disaster payment on top of that, have you done that analysis that shows that producer actually is advantaged by having a greater crop loss than he would have if he had no loss whatsoever and was reliant strictly on the marketplace?
Mr. DAVIDSON. The Risk Management Agency has not done that kind of an analysis, no.
Mr. DOOLEY. We ought to provide some of this information, some of the staff here has done some work on that which demonstrates that if a producer, a corn and soybean producer in one of these areas, if they had purchased 75 percent multiperil crop insurance product, and had the disaster payment on top of that as proposed in the Senate, they are better off having 100 percent crop disaster than they would have been if they had no disaster whatsoever. And I guess from your position is, do you think this has any impact in terms of future participation in the Crop Insurance Program?
Mr. DAVIDSON. Whatever Congress comes up with I hope it would be something that would try to recognize the key role that crop insurance would play. I have been told by our Chief Economist's office from the USDA from the Department that there has been some analysis done on your prior question, by the way. That is, we would hope that anything that coming would do to preserve the crop insurance role.
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Mr. DOOLEY. In past disaster programs, there have been some provisions that would add, at the minimum limit, the amount of assistance that one could receive to be no higher than what they would have received in the marketplace. Is the administration, if they are looking at terms of supporting some level of disaster program, is there a way that we can implement a policy of this nature to ensure that we don't have a perverse incentive in what is proposed in the Senate that actually encourages or provides an incentive for people to have a greater crop loss because they can get a greater return from their crop insurance and disaster payments?
Mr. DAVIDSON. I am sure there are a lot of bright minds that are working on that. I am sure the goal itself is a worthy goal that you enunciate.
Mr. DOOLEY. I will yield to——
Mr. BOEHNER. If the gentleman will yield. And not to prolong this, but in 1994 when we passed the crop insurance bill, we had a provision in that bill that made it clear if a producer did not have crop insurance they did not qualify for benefits. Now we got the 1996 farm bill we set that aside and since 1996 we have spend $33 billion in emergency benefits. And I guess my question is, do you believe that that policy undermined the willingness of producers to buy crop insurance?
Mr. DAVIDSON. It is hard to say what motivates a producer to buy or not buy crop insurance. I have heard from many producers that they recognize the very important role of crop insurance in their farming operations. Their bankers require it. So sometimes, regardless of what other incentives are there, if they want to get credit for their farming operation, they need to buy crop insurance to meet that credit requirement. Nonetheless, if there are a lot of other incentives that would suggest that maybe they don't need crop insurance, I would be a little bit concerned that they might not want to buy it.
Mr. BOEHNER. Let me follow up if I can, briefly. The disaster bill that is being talked about, do you believe that providing disaster money to program crops that you sell policies for, where the producer did not buy crop insurance, do you believe that that would diminish the willingness of farmers to purchase your product?
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Mr. DAVIDSON. Again, there are many things that go into their decisions. Insurance is fundamentally part of the farming operation, so I would hope that producers would continue to want to buy and need to buy insurance. It really depends upon the individual circumstance. If there is a program that would replace insurance, certainly if it is free and you don't have to pay for it, might have an impact on crop insurance appetite.
Mr. BOEHNER. Yes, it might. Thank you, Mr. Chairman.
Mr. CHAMBLISS. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman. Well, John is a farmer but I will tell you if I can get disaster relief without buying insurance just as easy as buying the insurance then, sure, the tendency is to buy less insurance. When we first started this program, this committee accepted my amendment that started the risk management effort in USDA. At that time, I had a broader—and I see Ken Ackerman over here, that I think did a great job of cranking this thing up. At that time, though, I was hoping this we could go maybe expanding from crop insurance to better, doing a better job of educating farmers. And that effort has tremendous potential in our having an office in every country.
I think the problem, the problem of of not being able to deliver when you get a contract in the commodity markets and with the 5,000 bushels in the case of corn or soybeans, it diminishes somewhat the flexibility for true hedging. So I wonder if that should be changed to allow farmers that are actually producing to hedge on a contract that more reflects what they are actually producing. There is a problem of delivery—hey, you guys over here. I have trouble enough thinking of good questions. But there is a problem of taking delivery or delivering when you get a contract with Chicago Board of Trade. And I see that as a problem.
Other areas of hedging or forward contracting all help reduce the risk of what you are going to get in terms of price for that commodity. But the whole other area of a farmer making a profit is the risk of a cost of inputs. So I think you should be looking, you, we the department, should be looking at the ways to minimize the risk or to lock in the price for a year or 2 years ahead of some of the costs of those inputs, and helping farmers better understand how they might accommodate that.
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One question I had is the language that we put in the 2000 bill that said we would adjust premiums based on how the history of risk in those particular areas. Apparently you are looking at that on individual farmers. Are you also looking at those areas of the country that have less potential for natural disasters, and therefore logically should have a premium that reflects that lower risk?
Mr. DAVIDSON. I frankly think our premium setting processes already take that into account sir, yes.
Mr. SMITH. Can you show me any evidence that that is true? My impression that that is—that you might consider it but it doesn't—the cost of the premiums to the farmers in the very high risk areas that might have a disaster every other year, every 3 years, isn't substantially different in reflecting that extra degree of risk? So can you provide me with those kind of statistics and the reflection on the premiums.
Mr. DAVIDSON. We would be happy to do that.
Mr. SMITH. Let me ask you the follow up on the language. Does the administration support the Senate disaster bill that gives slightly—that gives benefits to those farmers that didn't carry risk insurance when it was available?
Mr. DAVIDSON. My understanding of the administration's position is that there is support generally for some kind of disaster assistance, but it needs to be within the bounds that the President has set forward, which includes making sure that those that don't have other protections do get some help and that it is fiscally sound.
Mr. SMITH. Can you—is your department doing—do you have an effort—do you work in these other areas of reducing risk management, whether it is the cost of inputs or whether it is teaching farmers how to better utilize available tools for reducing risk management outside of the insurance program?
Mr. DAVIDSON. Yes, we do. In fact, we joint venture many times with the cooperative extension service to help with the education of producers particularly in underserved areas. The broader issue of managing risk in the whole farm operation is an important issue that we are also addressing through new products that go beyond just the traditional insurance, for example, the swine products that have just come out link in and reference to the commodities markets as an example to protect some give the farmer some price protection for their swine operations.
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And there are many other risk management tools that we are evaluating. We just had a request for application for a number of other risk management areas and we have had great response to that. It covers a broad range of risk management areas for farm operations. I think you would be pleased if you saw that list.
Mr. SMITH. Thank you for being here today and good luck on your adventure.
Mr. CHAMBLISS. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. I yield to members of the subcommittee before me.
Mr. CHAMBLISS. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. And I would like to call attention to what has been going on in my district. I think you all know about the problems I have had up there. We are in this wet cycle that actually was down in southwestern Minnesota 10 years ago, and now it has shifted up north. I understand what you are saying that we have improved the situation. But I am probably not telling you something that you don't know that these folks that have had a problem 3 or 4 years or 5 years out of 10, it just doesn't work. Because in spite of the fact that we allowed this plug to go in there, they just don't—it doesn't give them enough coverage to be able to even cover their variable costs. And they are going backwards every year.
And I have some of the similar concerns that others do about the fact that the Senate bill doesn't require them to have had insurance. But at this point, we, in some of my district in 2001, and now this year in 2002 in another area, if we don't get some kind of disaster help for those folks, we are going to have a lot of people that aren't going to farm next year. So at this point, I am willing to take it any way we can get it. Because it is my number one priority in this serious situation.
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But I want to point out an example of a farm in my area for those of you that might question some of this. This actually in an area where they haven't been hit as hard, but they have had problems 5 years out of 10. And this is a 500-acre farm that has wheat, soybeans and sugar beets which is kind of a normal rotation up there. And this year's expected income and expenses he was expecting to make $40,000 return primarily on his sugar beets and soybeans. The wheat actually was projected to lose money. But he lost about—a good part of his crop, just the yield on wheat is about half of what they expected, soybeans are coming in about normal and the beets are considerably down.
So instead of having a $40,000 profit, this person is going to have a $50,000 loss this year. And in spite of the fact that they have had these problems, they are—in spite of the fact that he has crop insurance that covers, I think he has 65 percent coverage, he is not going to collect any crop insurance help on his operation this year. And people say, well, why don't you buy a higher coverage?
Well, the folks that are in this kind of a problem, if you try to buy up to that 75 percent coverage, what you can get in additional coverage for your crop is probably less than what you have to pay in premium. So for these folks that have gotten into this situation where they have had a multiple year problem, in spite of the fact that we made a little bit better, it still doesn't work.
And I don't know if anything is being looked at within the Department to try to get at this problem, but I am convinced we are going to come out of the cycle. As I say, down in southwestern Minnesota, they had an area that got hit year after year, and now they are doing pretty good. They have had 5 or 6 years of good crops. I think this area that has been hit for 100 years produced some of the best crops in the United States. All of a sudden, in the last 10 years, we have been getting hit year after year. We are in some kind of cycle that is going to go away, but we may not have any farmers left if we don't get something in place. So do you have any ideas about how we can fix some of this problem?
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Mr. DAVIDSON. Well, I totally agree with your assessment as production goes down over a multiple year basic, some of these products are not as responsive as they need to be to that long-term situation. We have looked at multiyear products. I have instructed my staff to look at this situation specifically because if you get down to, say, the 60 percent floor that Congress put in, and you bought up to 70 percent, that gives you 42 percent of coverage. I think that is exactly what you are referring to. That needs to be addressed and we are looking at it.
Mr. PETERSON. Do you have the authority to do something within your agency or is it going to take some kind of legislative action or——
Mr. DAVIDSON. I think we probably have the authority, but if we needed something we would be back to you right away.
Mr. PETERSON. I appreciate the fact that you are working on it. I hope we can get, some way or another, get this disaster bill worked out for 2002. Because it is, at least in my part of the world, and we are not dry, we have too much water. So we would like to also get some money to build a pipeline to sent it down to Nebraska and Kansas some of this extra water if we could figure that out. Thank you, Mr. Chairman.
Mr. CHAMBLISS. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. Let me first thank Mr. Davidson for including western Kansas in his drought tour. Mr. Davidson was in Goodland, KS and heard from a number of my farmer constituents. Also, Mr. Davidson, my understanding is that you acted without a great deal of bureaucracy to implement a farm bill provision that we cared a lot about in Kansas, the State-inspected elevators, the crop insurance quality loss adjustment provisions that we had in the farm bill, and I appreciate you for reacting and acting quickly in that regard.
I want to ask a broad question, but first of all, before I lose my time, I want to outline issues that I think matter to us in crop insurance where it seems to me that we are having specific problems. And like most of my colleagues on the committee, we hear from our farmer producers daily, weekly with issues that would suggest that we have some ways to go in making crop insurance work for our producers. One, that you heard about in Goodland that I would encourage you to pursue is the idea that my irrigation farmers have to continue irrigating their corn after the corn crop is dead while they are waiting for the adjustments to occur. It is an expensive proposition.
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Water is a scarce resource now especially, but generally in Kansas. And it is very expensive to use the natural gas to bring the water out of the ground but yet they cannot get their crop adjusted until they—except for while they are waiting, they have to continue irrigating dead corn. Very much what one would describe as the way government should not operate but often does.
Mr. DAVIDSON. If you don't mind me just responding to that. We clarified to them that is not our policy. We do not require farmers to put water on dead crops.
Mr. MORAN. I noticed your response in the press was that you would not require any farmer to utilize water beyond their legal requirements or ability to use water but——
Mr. DAVIDSON. I was partially quoted.
Mr. MORAN. Okay. I can relate to that. And do the insurance companies now know that so that——
Mr. DAVIDSON. Yes, they do.
Mr. MORAN. They can turn off the pump.
Mr. DAVIDSON. As long as the crop is dead, we definitely do not want them to put water on it.
Mr. MORAN. That is encouraging. Planting wheat into failed milo acres, my farmers have been told they will not qualify for crop insurance if they plant wheat where the milo crop has failed. If that is the case, are they eligible for prevented planting?
Mr. DAVIDSON. Let me let Mr. Hand respond to that one.
Mr. HAND. Actually, we have heard several stories about what producers have been told, and I think we are still looking to find out exactly what the factual information is with this. The policy is structured for each county in the States and there are restrictions in some of the special provisions for some counties. But this particular situation, it was just brought to our attention in the last couple of days, so we are looking into it. We definitely will get you an answer.
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Mr. MORAN. Mr. Davidson, with your permission, I will submit to you these questions in writing. Another one is concern where we lack any subsoil moisture that to go ahead and plant would disturb the ground, cause erosion and we will still have a failed wheat crop. Again, we get back to prevented planting conditions which cause lots of problem.
Mr. DAVIDSON. There is a lot of confusion surrounding prevented planting that we are trying to clear up.
Mr. MORAN. We are encouraging RMA to allow coverage on continuous crop wheat in Kansas. It is allowed in Oklahoma and Colorado and surrounding States, but particularly in southwest Kansas, there is a desire for continuous crop wheat. And there is a provision in the farm bill encouraging that. So let me again encourage you to pursue that issue.
When Ms. Honor was here in February, I got a written explanation indicating a too high of a loss ratio. I would like for you to look at that again if you would, particularly in light of our surrounding States. That is always troublesome to a Member of Congress to have your farmers say they can do it in Oklahoma but they can't do it in Kansas.
And then quality loss insurance, our soybean crop in eastern Kansas. Last year we produced the number of bushels per acre but the quality of the crop was such because of drought that it was not available, usable for human consumption. We had a crop in quantity but not in quality. And we again would encourage you to develop a product that takes into account not just the quantity or the bushels of production but also the quality of those bushels produced. I thank you for your time. My broader question which I have run out of time is there a way to develop crop insurance that we would never need a disaster program and perhaps we will discuss that if we have an additional round of questions. Thank you, Mr. Chairman.
Mr. CHAMBLISS. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman. And thank you for holding this hearing today. Mr. Davidson, thank you for being here on a very important issue. Let me cover a portion of what I don't finish I will submit for to you respond to me. Two things very quickly. Mr. Peterson, talking about the multi year losses and North Carolina is not immune to that. We had the heavy floods and then 3 years of loss so you can understand where many of my farmers are this year with a really severe drought now hitting us for our corn, soybeans, cotton, tobacco is also in that category. And the problem we have is I want for you to address this a little later insurance companies are now telling the cause of the problem with soybeans they have gone so long they bloom a couple of times, the last time you may get something or frost and then they tell them they can't cut them for hay because they are short forage for cows, so at least we would have that until later which to me makes no sense because if they wait number one they lose that opportunity and No. 2 they are telling them they will getting less money from those acreage that they have insured. So I hope someone will look into that and let us know. I think that is, we lose both sides on that issue.
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The other one deals with what I am hearing from some of my tobacco farmers. And it goes back to a policy, I think, and if not, I would just like to know they brought it to our attention. I have heard from several folks. Some of them who have their crops insured on their individual units on their farm combinations have been told that if they try to transfer a quota from one unit to another, that they jeopardize any indemnity that they have that they would receive. But if they have insured the entire farm enterprise they are free to transfer a quota among units without risk of losing their insurance.
And in a lot of cases this year, we have farmers who farm a number of counties, across county lines and sometimes within counties even more appropriate within the county, I should say. Because we have parts of some counties and my home county they have had some rain during that portion of the growing season it was too late for the other crops. And then they farm in the Western part of the county they may have not had, and that is true where I live. Haven't had enough to buy enough rain to have any kind of crop. So they are going to have almost a total loss or at least 50 percent. And my question to you is they have been told that the requirements are RMA requirements, can you tell me if it is true and if so, what is the reasoning behind this regulation.
Mr. DAVIDSON. I am going to let Mr. Hand who is our expert help us out here.
Mr. HAND. Congressman can I go back to the soybeans for just a second. Since you brought it up. We hear that a lot from producers about I have been told I can't harvest, I can't put my crop to another use. We will look into it but what I think is probably happening is the soybeans are in a State right now where they have to determine the potential for the crop as it is. And they are probably being told if the crop continues to deteriorate it is likely that the insurance indemnity would increase as the deterioration takes place. But certainly if the producers want to do something else with their crop right now there isn't anything in our rules that would prohibit them from doing it. We have to give the crop a proper assessment based on today's condition.
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Mr. ETHERIDGE. I understand it. The point is they need to know pretty quick because if they don't, they are in a situation where if they wait until the frost——
Mr. HAND. I would hope if that was the right thing with the producers this they would be working with their companies to go ahead and get an adjustment and proceed with what is best for them.
As far as tobacco is concerned we do have an option, the enterprise unit that you mentioned. The reason that was put into place was because it was a program integrity issue. We had a problem with producers shifting production. So we do offer them two options. They can either establish an enterprise unit which does allow them to shift their quota or if they are on the regular program they have to leave the quota where it is at. So that is the way the policy is structured and that is the program integrity issue, and those producers are going to have to live with their decisions this year unfortunately.
Mr. ETHERIDGE. Is that uniform across all growing areas?
Mr. HAND. It is a special option for, I believe, just for North Carolina that was worked out with the growers and with the companies by our regional office down there.
Mr. ETHERIDGE. My question, though, is why is it not uniform across all growing areas and not just one area?
Mr. HAND. Well, you mean beyond North Carolina? Apparently the tobacco growers weren't interested in the rate productions in the other parts of the country. But in North Carolina, the producers did see there was an advantage to doing the rate reduction and also helping us maintain program integrity at the same time.
Mr. ETHERIDGE. They wanted the integrity. Thank you.
Mr. HAND. Yes, sir.
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Mr. CHAMBLISS. Mr. Rehberg.
Mr. REHBERG. Thank you, Mr. Chairman. Let me read to you then from the minutes of the last meeting so that you will get clear in your mind the question I asked before. 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 their irrigated practice.
In a drought year, the producer's only option is to claim prevented planting that only carries 60 percent of the producer's guaranty. 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 what malt and barley producers in my State get is about 23 percent coverage when the math is done.
What suggestion 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 producers? Have you looked at this issue and if you haven't, how long will it take to implement it? Your answer, Mr. Witt, was, Congressman, I am aware of your issue. There is authority within the agency to modify the policies in the amounts on prevented planting. This 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.
Is that under contract, that study, at this time?
Mr. WITT. Congressman, first let me apologize that your question did not get answered in the exchange from the questions in the last hearing. I was unaware it did not get answered. To answer your direct question, no it is not under contract. The prevented planting works on the feed barley portion. Malt barley is usually done. We have a separate, as you are aware, malt barley contract that has special features for quality and price to recognize that difference. Because the crop isn't grown there is no contract in place, so consequently, there is not a prevented planting payment based on the malt barley. That payment is today, as we speak, it is based on the feed barley.
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Mr. REHBERG. So in other words, your answer that there is authority within the agency, something we can look at, we would need to contract out for someone to evaluate it, you have no intention of evaluating it at this time then?
Mr. WITT. I wouldn't say we have no intention, and I actually have a big star by your comment that we need to—I need to get back and personally try to address this next week when we can. It may present some issues but I think we do have authority and I think we do have some options that we can look at it and we will try to give it its due attention.
Mr. REHBERG. Well, we are certainly getting to the end of our fiscal year. Have you expended all of your available funds that you have been authorized and appropriated for contracting?
Mr. WITT. We are running close to the end of the monies that we have for contracting for this fiscal year, but many of the monies do carry over and the Ag Risk Protection Act allowed those monies to continue into the next fiscal year. So I don't anticipate that money would be an issue, and I am sure the person beside me recognizes the importance of the issue to make sure we have the funding to do it.
Mr. REHBERG. Thank you. Mr. Davidson, I think Mr. Peterson and Mr. Etheridge and a number of others have talked about the continuing years of drought and the problems that it creates with the 5-year average and you had mentioned that you are in fact discussing considering and working on that issue. Can you give us a drop dead date so I can really start bugging you when it is not done?
Mr. DAVIDSON. Congressman, you can bug me at any time on this one. I am already bugged by myself.
Mr. REHBERG. What is your anticipated completion?
Mr. DAVIDSON. I really can't tell you right now when we can complete it because it is a complex issue, but we are looking at it, and it is probably one of the first things that I recognized when I came in on how producers over the years, especially in a multi-year drought, are affected. So it is important to us.
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Mr. REHBERG. Right, and I certainly appreciate what you are attempting to do. I recognize based upon Mr. Stenholm's comments and your comments about the money that is being spent, the additional number of people that are being covered, and the statistics. I find the definition of a statistician is someone who says that when your feet are in the oven and your head is in the refrigerator, on average you feel pretty good. And right now on average we don't feel particularly good about the coverage in Montana, and the sooner that you can complete that kind of a contract or that kind of a study the better for us. The statistics will be better, look better for our producers in Montana.
Thank you, Mr. Chairman.
Mr. CHAMBLISS. Thank you. Before I call on the gentleman from Nebraska we have been talking, Coach, about disasters. I know there was a disaster in Lincoln outside of the agriculture community, but I don't think there is any coverage for that, Coach.
The gentleman from Nebraska, Mr. Osborne.
Mr. OSBORNE. I had nothing to do with that. I would like to thank the chairman for starting out with that tone. What goes around comes around. Real quick question here I think you may be able to answer very quickly.
Aflatoxin is now appearing in corn in Nebraska due to the drought. And as you know, the elevator can't be a third party verifier and sometimes it is hard to find a third party. And so what we are wondering is, is there some type of waiver process where we can get this handled more quickly, because we just find that finding somebody that is a third party to verify the presence of aflatoxin is very difficult sometimes.
Mr. DAVIDSON. That is very important and actually we are discussing that currently. Mr. Hand is prepared to respond.
Mr. HAND. Yes, sir. We actually started hearing the complaints about aflatoxin. It is unfortunate that drought and aflatoxin tend to go hand in hand on corn. And so it wasn't completely unanticipated that we would start seeing it this year. We do have some requests for waivers and we are looking at it. The problem is, as you probably well know, aflatoxin is measured in parts per billion, and the quality of testing that is done at different elevators can be pretty far apart and varied. And so if we do a waiver we are going to have to do some assurances that whatever we do properly accounts for the aflatoxin testing while it is being done at those elevators and so we have to work through all that, and at the same time we are also working with the grain inspection packers and Stockyards Administration and their official agencies to make sure that they are handling the volumes of grain that are coming into them. So we are handling it on two fronts, but we are considering a waiver.
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Mr. OSBORNE. All right, thank you. I would also like to just make a couple of observations. I am glad you visited Nebraska. You realize this is in many areas the driest it has been in recorded history, over a hundred years. And even back in the Dust Bowl they had some crop. Now we have no dry land crop at all. And even the irrigated crop is substantially reduced, they just couldn't keep up with irrigation. And so we have experienced some of the problems with the multi-year drought situation that has already been discussed and how that has been a difficult situation.
Eighty percent of our farmers are insured so they have done a pretty good job, and yet I guess the—and I understand many of the concerns expressed by Mr. Stenholm and others about undermining the crop insurance, but the hard cold reality is that we are probably going to have more bankruptcies in Nebraska than we have ever had even with crop insurance, so the question is what do we do. And I realize the previous 3 or 4 years we have had emergency payments mostly due to low prices, and I think there is a distinction here. We now have a problem because of drought and it could be just like a hurricane, a flood or whatever. So it is a natural disaster, and I think something has to be done in terms of disaster payment. And so I guess my question to you is would something like this be appropriate. Let's say somebody that is insured at the 80 percent level and if you were to add 15 percent onto whatever, I am just taking an arbitrary number, add 15 percent onto whatever level of insurance or whatever insurance payment he would receive, so if they purchased no insurance at all, they would either get 15 percent or you could say, well, you didn't purchase any so you get zero. Fifty percent, you get a 65 percent return, but we need to do something. And I realize we don't want to undermine the desire to have people buy insurance though we need to come up with some vehicle whereby I think these people get some assistance because of the multi-year situation and the fact that they are just going broke.
I would just like to have you react to that. Most farmers understand that the cost of the new farm bill was supposed to be $19 billion. It is probably going to be $13 billion, and they realize that the reason for that is the drought. Higher prices, no LDPs, no countercylical payments. So these guys that have been hit by the drought are feeling a lot of pain and they realize that other people are going to make a pretty good profit.
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So anyway if you would just react to that particular question. I appreciate it is the concept—and I realize you have got a difference between multi-peril and revenue insurance and CAT and you might have to make some adjustment there. So it is not as easy as it sounds.
Mr. DAVIDSON. There are a lot of different insurance policies and coverages and so any particular thing that would be applied to everything, such as adding some additional coverage on, would really have to be evaluated in terms of its impact. I really am not sure how something like that would work, whether it would encourage or discourage or leave things the same. But certainly ideas like that need to have their due consideration.
Mr. OSBORNE. I appreciate it. And if I might just add, it certainly would encourage people not to purchase insurance if they were 85 percent and they went to 100 percent. So at least I think that might be one thought.
I yield back my time, Mr. Chairman. Thank you.
Mr. CHAMBLISS. Mr. Graves.
Mr. GRAVES. Thanks, Mr. Chairman. I am interested in the fraud aspect of it. It seems to me like we could do a lot for farmers and helping the system out, making it work better if we could clean up some of the fraud. And I have a little bit of firsthand experience with it. In 1998 my brother and I tried to rent a farm in our area and we were actually the highest bidder. The landowner brought us in and asked us if we would bump our bid up $20, which we couldn't understand why we would do that. We were obviously the highest bidder. And he made the statement, he said, well, I can get more off the crop insurance than I can off of what your bid is. And so he didn't accept it, and that kind of aggravated me a little bit. And he subsequently did rent it for the price that he wanted, which aggravated me even more, and I got to looking into this and then once I got elected I looked into it even more. I am amazed at the variety of ways you can go about, through multiple entities, hiding grain. I mean there is just a variety of ways you can do that, and it is very frustrating to me to see that take place.
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And I don't know if there is anything we can do. I know it is extremely tough. You obviously can't place somebody at every field, counting every truck that is coming out of every—that is coming out, and it is very easy to, particularly if you are farming in multiple states or multiple counties, to hide grain. It is very, very tough. But just simple things like—one of the things I was amazed at in finding out who had been caught or investigated was the fact that if you are caught committing fraud against the system, there is no provision there to keep you from ever getting crop insurance again. In fact, they are right back at it the next year in some cases, and so I would encourage you to do everything you can to try to look into that.
I would be very interested in coming up with ways to try to fix that because I do think it cheats particularly smaller farmers, but everyone out there. Obviously it makes premiums higher and makes it very tough to compete against some of those other entities.
Mr. DAVIDSON. Detection of fraud and preventing fraud, more importantly even, are very high priorities for the agency. I think some of the work that, for example, Congressman Stenholm has encouraged us and helped us to do in terms of looking at all of the data and doing some data mining and looking at broad trends has been very helpful in identifying areas that we should look into.
You are right, there are as many schemes as there are people that would like to perpetrate those schemes, and so it requires constant vigilance. It is important that we maintain the integrity of this program to lower its cost, but also to make sure that when people look at it they don't look at it as a program that is fraught with waste and abuse, but that it is a program that works.
So I appreciate your comments and we are encouraged and we would be happy to work with you on the specific thing that you referred to.
Mr. GRAVES. Well, at the very least I would think that if somebody did get caught they wouldn't be able to purchase crop insurance for a period of time or whatever the case may be. But I would love to work on that and I appreciate your comment.
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Mr. DAVIDSON. Yes, I would appreciate that.
Mr. CHAMBLISS. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. And Mr. Davidson, thank you for your testimony and for bringing your team up here. We are at a crossroads in farm country where producers are faced with one of the worst droughts in history, at least in the State of South Dakota, and this is a year in which I think the Federal Crop Insurance Program and the changes that we have made are going to be put to the test. And so what I would like to do is there are a couple of specific questions that have come to my attention as I travel across South Dakota and listen to what producers are saying about this, and I would like to ask a couple of them here and then maybe submit a couple of them for the record if that is possible.
Mr. DAVIDSON. Sure.
Mr. THUNE. But one of the things that—and I ask this general question, then I have a more specific question. But the whole question of pasture and forage products, how they are working. In my home area west of the Missouri River there was literally no pasture grass that grew where ranchers normally would graze their cattle, and it is my understanding that this is the time of year that ranchers are using forage policies. What I would like to see are more incentives that make it easier for new ranchers to get into these policies. My understanding is that producers have a difficult time proving history on forage and I am curious as to whether or not you might be open to allowing the full T-yield to be used for these products rather than 65 percent of the T-yield in establishing history.
Mr. DAVIDSON. We have——
Mr. THUNE. They are not using the program because they say it doesn't pencil out for them.
Mr. DAVIDSON. We have some experience with this with some of the pilots that we are conducting, and I would like to have Mr. Witt respond to your direct question if you don't mind.
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Mr. WITT. Mr. Congressman, currently, the way the regulations, as you are aware, don't provide for producers who we don't know anything about or bring very little information to the table, they do get a factored T-yield. They don't get the full T-yield. The way those rules are written, the basis was from the actuarial side of the program, we found that those were generally higher risk situations. And so the rules that apply to the forage side also apply to all the other crop programs the same way. And at the moment, at the least, we have not entertained changing that rule.
I understand the forage makes it difficult because production records are tough for them to maintain. Oftentimes they are fed on a farm. There isn't a good track record of it, and so it has been a difficult issue. But from the side that we look at for program integrity we know that that is an issue.
One of the things that we are doing is in the last couple of weeks Mr. Davidson has approved moving forward on a contract that we have in place for pasture and rangeland, and it is looking at a new concept of a model that would be used to look at measuring grazing, soils, plant growth, et cetera, which would possibly allow us to do a much larger, wider area should the model prove acceptable. In some of the feasibility studies and the grower group sessions we have found some great producer interest in moving forward in this kind of a concept that is similar to the group risk plan concept, but it would not require growers to have to maintain records and would get us around this issue that particularly is affecting your growers. Obviously, that won't be ready for 2003, but I think it would be a potentially significant step into the area of pasture and rangelands and we look to be moving forward on the development of that here within the next month or so.
Mr. THUNE. Well, I would like to see some steps made in that direction because the drought obviously has severely affected cattle producers and it is obviously devastating to see people liquidating their herds because they don't have water or feed for their animals. And there really aren't products that work for them and we don't have a farm program that applies to them. And if there is no insurance product that they feel they can utilize, then we are faced with the specter of having to do some form of disaster assistance package. And if we are going to move in the direction where we can get to where we are not doing these ad hoc emergency packages then we have got to have products that folks out there can use.
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And one of the other things I would ask, too, is having heard from a lot of livestock producers that would like more risk management tools available to them, how about the livestock pilot program in Iowa? How is that coming along? Is it something we could get off the ground nationwide that would help producers be able to benefit in a time of drought?
Mr. DAVIDSON. I am glad you asked that question. There were two products that were implemented earlier this year for swine specifically. Frankly, the sales were pretty low of those products. It is just Iowa and just for swine currently. We would hope that that is just because people are getting their experience with the products and that they would take off later on. The Board of Directors is also considering other livestock products for fed cattle, feeder cattle, dairy, et cetera, that would hopefully expand livestock coverage as soon as we can get to that point of board approval. So this is an area where we have a considerable amount of development and interest and we are moving forward as rapidly as is prudently possible in this area.
Mr. THUNE. I appreciate that. I have got a couple of questions that are more product specific that I will submit to you for the record if I could get you to answer those that are just again questions that have cropped up out there. But I realize this is a work in progress but I really believe we are going to have to do something I think to deal with the question of livestock and the fact that we don't have products out there that are workable for them or that there are enough, there is enough incentive for them to utilize those products to help hedge against the risk in a year like we have had.
And I am also interested as well in the debate that has gone on earlier here on multiple year losses because that is something, too, that a lot of our farmers are asking about. So thank you. Appreciate your testimony.
Mr. DAVIDSON. Thank you, sir.
Mr. CHAMBLISS. Mr. Stenholm.
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Mr. STENHOLM. Thank you, Mr. Chairman. When ARPA first passed there were specific legislative instructions regarding second and third and fourth crop. Just today or just recently, you, your agency has issued the regulatory comment period, et cetera. Interestingly, you mirror basically what the law said. My question, why did it take you this long to deal with something that the Congress instructed you, and you can't—I am not holding you responsible. You weren't there. But some folks in the agency that were there have drug their feet for some reason. Could you shed some light for the record why it has taken this long to do what everyone says waste, fraud and abuse, it is rampant regarding this? We had companies selling it in my district last year and, according to what you are saying now, is you will still be able to do it through 2004.
Mr. DAVIDSON. I think it is actually through 2003. We intend this to be implemented.
Mr. STENHOLM. But again, should we not just say to everybody today, go ahead and double insure 2003 so we don't let some companies do it and others not do it?
Mr. DAVIDSON. To answer your initial question about why it took so long, I don't know why it took so long. As soon as I got here I placed a very high priority on this and we got it out as soon as we could.
Mr. STENHOLM. Let me stop you right here because I have limited time. We have got a vote, and I do not hold you accountable and I am saying just as I make the next statement, not talking about the folks at the table because the data mining, the cooperation that your agency is doing now, in attempting to work on some of the waste, fraud and abuse problems that have been rampant in this program, I commend you and all the people at the table. I am talking past you now. Because here again in the farm bill Congress specifically said we ought to have Team USA and that we, both in ARPA and in the new farm bill, specifically have said to USDA, FSA and RMA, work together in order to help shepherd and be responsible for the taxpayer dollars. So I am talking past you. But for the record, I want to emphasize how strongly this member feels about what this body, this committee has passed and why some people out there continue to absolutely disregard it. Not to you, y'all are doing a good job. And as you said in your testimony, it is already paying dividends.
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Another one, not talking to you because I am very impressed with the management you are bringing to this agency, but regarding adjusters. We still have a major problem with adjusting. And are you satisfied that we are going to have enough quality adjusters to deal with this year's $4.1 billion loss?
Mr. DAVIDSON. I have talked to the insurance companies. We have actually sent requests out to make sure that everybody is doing everything that they can to put all of the adjusters where they need to be. It is taking longer to adjust in the hardest hit areas just because the press of business is so great. I do believe that there are enough quality adjusters, based upon the representations, to be able to get the adjustments done. But it will take a lot longer than I would like to have or any of the companies would like to have to get those things done.
Mr. STENHOLM. Well again——
Mr. DAVIDSON. It is kind of like Hurricane Andrew. When Hurricane Andrew blew through it took a long time.
Mr. STENHOLM. I know, but when my district had the major disaster, and I have got it again this year. I am in one of those multiples and I have got farmers in Minnesota, too much water, we have got too little. I can associate with Mr. Osborne and all of these. The help—the need is there. But when we had those major disasters before, before you got there, we had to send adjusters from Minnesota to Texas when we had perfectly qualified adjusters in FSA offices all over the State of Texas. But for some strange reason, the companies and everyone else continues to object to having non-biased adjusters, and this is a problem for us. It is a problem for us that you are going to have to work your way through, and I certainly want to work with all the interested parties because crop insurance is absolutely indispensable to agriculture in my district, my State and the other 49 States. We are making great progress. But for some strange reason, we continue to have foot dragging in areas that are critical to us, maintaining the quality of support that this Congress wants to give to you and your agency.
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Again, I am speaking past you. I am going to submit a large number of questions to you in writing regarding this, the T-yield question. Some of the folks at the table before you got here know my frustration with the way that was handled. And I am not going to going to call names but I share the same frustration of how that was handled. It was pitiful. You say in your testimony basically acknowledging that. So we all learn in hindsight. I do.
Mr. DAVIDSON. We do.
Mr. STENHOLM. I thank you for being here and we have got some other questions. We look forward to working with you to make for a better crop insurance. And also when we start looking at this disaster, back in 1988 to 1994, we always put language in the disaster bill that ensured that no one shall receive more in revenue from a disaster than you would have had you made a crop, and there are ways we can do that.
Mr. Dooley asked some very relevant questions. There are ways that that can be done. You can be very helpful to this body in helping us draft that legislation.
Mr. DAVIDSON. Thank you very much.
Mr. CHAMBLISS. Mr. Davidson, thank you very much for being here. There are a number of us that have written questions that we wish to submit to you. I would like to ask that you respond to those questions in writing within 15 days after they are given to you, and anyone else who wishes to submit anything for the record, the record will remain open for an additional 10 days.
Thank you again very much to you and all of your colleagues for being here today. It was a very informative hearing. We appreciate you. This hearing is adjourned. Thank you, sir.
[Whereupon, at 2:30 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
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Statement of Ross Davidson
Mr. Chairman, thank you for the opportunity to report to this subcommittee on the effectiveness of the Federal Crop Insurance Program in providing risk protection for our Nation's farmers and ranchers, and our progress toward implementing the changes in the program as a result of the Agricultural Risk Protection Act of 2000 (ARPA).
Let me begin with a few statistics. For this crop year, the program is expected to provide an estimated $38 billion in risk protection through nearly 1.3 million policies covering over 212 million acres. Almost 80 percent of the Nation's insurable acreage is included in the program. Based on current production conditions, we are estimating that the program will provide about $4.1 billion in indemnity payments in 2002, mostly for production losses for the major commodities. As you can see from the chart, prior to the enactment of ARPA only about 8 percent of acreage was insured at coverage levels of 70 percent or higher; however, in 2002, about 53 percent of the acres are insured at coverage levels of 70 percent or higher. This means that the typical producer who is participating in the program, could receive as much as 70 to 75 percent of his/her expected income for insured crops.
I believe that these statistics demonstrate how important the program is to American agriculture. Simply put, the program is the primary source of risk protection for our Nation's farmers and ranchers.
There are, of course, notable gaps, especially for livestock producers. Only a limited amount of pasture and hay crops are insured and limited protection is being offered for livestock losses at the present time. Further, many specialty crops are without coverage. As Administrator of the Risk Management Agency (RMA), I am fully committed to working with the private insurance industry and the Board of Directors of the Federal Crop Insurance Corporation to fill as much of the gap as possible—so that all our Nations' farmers and ranchers will have equal access to adequate risk protection at an affordable price. I would note that the Board recently approved two new insurance products for livestock producers. Coverage is also being expanded for aquaculture, nursery and many specialty crops.
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I am pleased to report that much has been done to implement the provisions of ARPA. As you know, ARPA provided for a substantial increase in funding for subsidizing premium rates, particularly for the higher levels of coverage. RMA implemented the new subsidized rate structure almost immediately after the Act became law and all participating producers began receiving the benefits of this action starting with the 2001 crop.
Virtually all of the substantive ARPA requirements that do not require a change to our basic insurance policy are fully implemented and working, and we have just published proposed changes to our basic insurance policy for comment. We will seriously and expeditiously consider all comments. We hope to have a fully implemented, updated policy published by early December in time for the first early January 2003 filing dates for the 2004 crop year. This will avoid the confusion and costs of implementing these changes in the middle of a crop year. When finalized, these changes will improve the program for farmers and will protect program integrity and viability.
FUTURE GROWTH
ARPA set forth a vision of an array of risk management tools being made available to a well-informed community of producers across the full range of agricultural commodities in all states. RMA was given a charge to help fulfill that vision in substantive ways - to go beyond the traditional role of providing crop insurance to better serve America's enterprising and increasingly sophisticated agricultural producers and their markets.
This is a strategic priority for the agency. The private sector product development system mandated by ARPA is fully implemented and has spurred a flurry of development. This is a serious and intense process that requires a much more significant amount of time, expertise, administrative support, Board support and expense than is apparent on the surface. This chart shows that process (See Attachment A). I thank RMA staff for their support and dedication, and their ability and willingness to adapt in this high-growth, dynamic environment.
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Our new Board of Directors is very active. Their insight, integrity and serious attention to their responsibilities are impressive. I can say, without reservation, that the Board, and expert reviewers who assist them, are proactive in their review and approval of proposed products. This serves to ensure that the legitimate needs of the producers are met and that the integrity of the program is maintained.
Since March, the Board has met five times. There are 12 products currently under consideration and four have been approved this fiscal year. The attachment shows that many more are in various stages of research and evaluation. Many of these proposals require substantial Board guidance and staff assistance to bring them to fruition, as well as to implement and maintain them. This takes more time and resources than I would like. We are evaluating this process to try to shorten the cycle time, simplify our product offerings, and to prioritize our efforts to ensure full coverage of all significant risks, efficient and responsible oversight, and administration of this process.
A lot of RMA's resources are focused on facilitating and overseeing new product development, reinsurance and administration of the product portfolio. This includes many of our field representatives to ensure that products are tailored to, and meet local needs. As our submission shows, our products cover a long list of commodities and we are working feverishly to extend and increase coverage to more areas, more commodities and more producers.
We are working diligently to extend much needed protection to America's ranchers. Our first two livestock pilots for swine were introduced this summer and other products are under Board review. We are also endeavoring to refine, develop and expand forage and rangeland programs. In 2002, our Regional Offices approved 487 forage or forage seeding written agreements. For 2003, we expanded forage production and seeding coverage to 207 new counties. There are many complex challenges in designing a forage and rangeland program and we hope to strike a reasonable balance between producer need and program integrity. We are seeking innovative solutions.
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We are striving to increase understanding and effective use of our many and expanding programs. This year, the funding and authorization you provided allowed nearly 20,000 limited resource, socially disadvantaged farmers and producers in underserved areas to learn the principles and practices of effective risk management and how crop insurance can help them. For 2003, we are currently negotiating over 100 projects to provide risk management education to underserved states, commodities and limited resource producers.
PROGRAM COMPLIANCE
RMA is both a participant and a regulator for the crop insurance program. Ensuring the sound development, broad coverage and fair and efficient delivery of effective risk management products for all of production agriculture is no small task. We are very aware that the financial strength of insurance companies and efficient administration of these products are critical to ensure that contractual obligations and market expectations for payment and service are met and exceeded. Tough years can exacerbate concerns about the financial or operating viability of individual companies. If any company fails to meet is obligations, we will ensure fulfillment through prompt corrective actions, through other insurance companies in the system, or directly by RMA, if necessary.
We have just released, and have here for you, the Secretary's first annual compliance report under ARPA. The report applies to 2001 and was a long time in coming, but I hope you will appreciate the progress we have made in implementing new tools and processes for detecting fraud waste and abuse, including spot checks by trained Farm Service Agency (FSA) employees and the Office of Inspector General (OIG) hotline, that gathers reports from concerned citizens. We also use ''data mining'' and RMA/FSA data reconciliation and are successfully employing satellite imagery and aerial photography to support these efforts.
These initiatives, and the combined efforts of RMA investigators and Federal and State prosecutors, resulted in $35 million in recoveries in 2001 and an estimated $94 million in cost savings. We are streamlining our processes, prioritizing our work, and generally trying to be smart and responsible in the use of our limited resources. But, the integrity of this program is everyone's full time job, including those who design, deliver, administer and use the products. I believe we must increase our efforts to discourage and deter fraud, waste and abuse. I would much rather put a police car with flashing lights at an intersection to discourage people from doing things that would wreck their lives than to have one hiding behind a bush to catch them after the fact.
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We also recognize the need to increase the accuracy and reduce the burden of data reporting by our farmers. We will continue to work with producers, insurance companies and their agents, and with FSA to that end.
DROUGHT RELIEF
How is crop insurance helping address the current drought? Let me tell you about my recent tour of drought stricken Colorado, Kansas and Nebraska. I went to listen and learn so we could better serve producers. I did not go away empty handed. In the seven meetings I attended, with nearly 800 participants, many expressed gratitude for crop insurance. They said they would not have survived without it. But they also described, and I saw first hand, the effects of widespread and extended drought. They were glad to have some of their questions and misconceptions about the program cleared up. Just as important, they also had some good suggestions on how to improve our products.
This year, crop insurance will be a Godsend to many, but we can still improve it. This prolonged drought has revealed areas in which we can make our products more responsive to extreme conditions and needs. For example:
We have learned that even though ARPA allowed for substitute yields in extreme disaster years, extended drought still results in lower guarantees at the worst possible time. This is a difficult issue and we are exploring possible solutions.
We also have learned that our rules for prevented planting coverage due to drought cause uncertainty and are not sensitive to individual situations that can differ from producer to producer or even within one farming operation. Any viable solution will require a collaborative effort. As a first step, we have called a series of prevented planting forums to work with producers, agents, companies and FSA to clarify and improve the rules. We hope to protect the integrity of the program and provide clear and predictable guidance for drought induced prevented planting coverage. We need easily understandable and practical rules on which producers can rely to make decisions without second guessing months or years later.
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We also want to make sure crop insurance does not tempt producers to do things they would not do if they did not have insurance.
We thank the insurance companies and their agents and adjusters who have streamlined their processes and shifted resources to promptly serve hard hit areas. Although in some areas the rush of business appears overwhelming, we have been assured that they are working diligently to adjust producer claims as quickly as possible.
Two of our strategic priorities are a well-informed customer and a fair and effective delivery system. We have a good start on these, but there is a lot of room for improvement. This system involves over 25,000 professionals including RMA, the insurance companies, insurance agents and loss adjusters. It requires constant care and feeding. Our products are many and complex. We need clear, correct, consistent and coordinated representation and administration of products by agents, loss adjusters, insurance companies and RMA staff. Good communication and rumor control are full time jobs. While I believe we are rebuilding productive and functional relationships and good communication among the parties in this process, we need to do—and are doing—much more
When my friends congratulate me on this appointment, I say: ''I would much rather be congratulated at the end of my service.'' I hope I can merit those congratulations upon my last report to this subcommittee. I thank you for your kind attention. Now my staff and I will be happy to respond to your questions.
ANSWERS TO SUBMITTED QUESTIONS FOR ROSS DAVIDSON, RMA ADMINISTRATOR
Questions Submitted by Chairman Saxby Chambliss
Communication
Mr. Davidson, I have heard many positive comments about you, especially from crop insurance industry representatives. However, in a submitted written statement, one particular commodity group states its belief that RMA must show greater responsiveness to producer concerns and suggests that RMA has instituted policy and/or rule changes without ever seeking input from producer interests.
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QUESTION: How do you respond to such a criticism?
ANSWER: RMA believes that such criticism is unfounded. RMA seeks producer input in the rule making process, the development of new crop programs and revisions of existing crop programs. As part of the contracting process for the development of new risk management tools, RMA issues consultation memorandums inviting input from producers, producer groups and any other interested party on programs under consideration for development.
In its rule making process RMA staff often contact growers groups when making changes to crop programs. Some of the grower groups RMA has worked with in the past are the National Association of Wheat Growers, National Cotton Council, U.S. Apple Association and many State and Regional Crop Associations and Councils. These groups are very helpful in obtaining producer input from various areas of the country regarding crop program changes and relaying them to RMA for consideration.
In the next few weeks RMA will kick off a work group to evaluate issues regarding prevented planting in an effort to improve and streamline the administration of this coverage. RMA has already sent letters to many producer groups on crops eligible for prevented planting coverage requesting representatives to serve on the work group. RMA will also hold prevented planting forums to obtain producer and insurance industry input.
However, RMA does have the responsibility to protect program integrity. There may have been instances where RMA has addressed program vulnerabilities without obtaining input from produce groups.
Product Development
Mr. Davidson, your testimony suggests that thirty pilot programs are in various stages of operation covering approximately 100 crops in more than 1,500 counties. I'm sure policies for both specialty crops and livestock are included in these numbers.
QUESTION: Could you inform us of RMA's process and timeframe for expanding pilot programs?
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ANSWER: Counting livestock, RMA currently has 31 pilot programs in operation for the 2003 crop year, 25 of which include specialty crops. Most pilot programs operate for a four-year period; three years to test the program and one year for evaluation. Some pilots run longer if problems are identified or significant program changes are made. The pilot program evaluations consist of input from listening sessions with producers and producer groups, reinsured companies, and others impacted by the pilot program, such as processors for contracted processing crops. Specific information on the operation of the pilot program is evaluated and included in making a recommendation to the FCIC Board of Directors (Board) regarding converting the program to a permanent program through the rulemaking process or taking other actions including expanding the pilot scope or extending the pilot period if additional data testing is needed. If the pilot program is converted to permanent program status, expansion requests that were not fulfilled during the operation of the pilot program may be acted upon at that time. As an example, the Pilot Millet Crop Insurance Program that was initiated beginning the 1996 crop year was recently converted to permanent program status and expanded from 5 original counties in four States to 55 counties.
Product Development
You state in your testimony that you are fully committed to working with private insurance industry and the FCIC Board of Directors to provide access to all farmers and ranchers adequate risk protection at an affordable price.
QUESTION: Are products currently in the pipeline for livestock, pasture, hay, and specialty crops? When might some of these products acquire pilot status?
ANSWER: For livestock, a Livestock Gross Margin (LGM) Pilot Program, submitted by Iowa Agricultural Insurance Innovations, is currently available and provides coverage to swine producers from price risks for six months, and up to 15,000 hogs per period. The product protects the gross margin between the value of the hogs and the cost of corn and soybean meal. Prices are based on hog futures contracts and feed futures contracts. LGM protects producers if feed costs increase and/or hog prices decline, and is based on the coverage level selected by the producer, with coverage levels ranging from 85 to 100 percent. The LGM Pilot Program is available in all 99 counties in Iowa.
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Another livestock program, the Livestock Risk Protection (LRP) Pilot Program, submitted by the American Agri-Business Insurance Company, is currently available and protects against a drop in hog prices. Swine can be insured for 90, 120, 150, or 180 days, and up to a total of 32,000 animals per year. Unlike traditional crop insurance policies that have a single sales closing date each year, LRP is priced and available for sale continuously throughout the year. The LRP policy protects producers against declining hog prices if the price index specified in the policy drops below the producer's selected coverage price. Coverage levels range from approximately 70 to 95 percent of the daily hog prices. The LRP Pilot Program is available in all 99 counties in Iowa.
Other livestock programs for cattle and dairy have been submitted by the private industry and are currently in the review process prior to Board action. Privacy restrictions regarding private product submissions prevent us from discussing more about these programs at this time.
Also, RMA is currently working on three livestock projects through contracts and partnerships, and hopes to have pilot programs in place by the 2005 or 2006 crop year:
Revenue Insurance for Cattle and Hog Producers (Iowa State University) is to research the feasibility of providing beef cattle and hog risk management tools and determine the relative desirability of these tools.
Livestock Disease Risk Management Tools Research Report (Animal and Plant Health Inspection Service [APHIS], USDA) is to conduct research and provide RMA a research report providing information to facilitate developing disease risk management tools for livestock producers.
Livestock Risk Management Tools Feasibility Study (R&D Contract Pool) is to study the feasibility of developing risk management tools for livestock producers (Poultry [chicken broilers and layers], dairy, sheep, and lambs).
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For pasture and rangeland, there is one program that is currently being piloted and one program is ready for development. The Pilot Group Risk Plan (GRP) Rangeland program has been operating in 12 counties in Montana beginning with the 1999 crop year. The contract to evaluate this pilot program for potential conversion to a permanent program was awarded September 23, 2002, and the evaluation report is due to be completed in February 2003.
The feasibility Study for a Pasture and Rangeland Program that was awarded in fiscal year 2001 is complete. Based on the final report, RMA is moving forward with this program. The development contract is expected to be awarded in the first quarter of fiscal year 2003 and the development process is expected to last a year and a half. The program is expected to be available to be piloted by the 2005 crop year.
A Forage Program Improvement contract will be awarded early in fiscal year 2003 that is designed to research the feasibility of improving the existing forage production insurance program. In particular this study is targeted at improving loss determination procedures for determining the tonnage of forage remaining in a field or that has been cut and stored in various capacities (i.e., round bales, stacks, etc.). Changes to the forage program are expected to be made by the 2005 crop year.
Following is a listing of specialty crops projects currently under a feasibility study or development project. Upon completion of development and FCIC Board of Director approval, pilot programs will be initiated.
Christmas Tree Pilot Program (Feasibility Study)—The purpose of this project is to conduct research and provide RMA a research report on the feasibility of a pilot program
to provide Christmas tree producers a risk management tool to address their needs. Proposals for this project were received from the R&D Contract Pool and the task order is expected to be awarded in fiscal year 2003.
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Risk Management Crop Storage Options (Feasibility Study)—RMA contracted for a study to determine the feasibility, and potential development, of an insurance product that provides protection for producer-owned apple, onion, sugar beet, and sweetpotato crops during storage. This project was initiated in response to section 10001 of the Farm Security and Rural Investment Act of 2002 (2002 farm bill) that authorized insurance coverage for sweetpotatoes beyond the time the insured crop is in the field.
Cut flowers and Cut Cultivated Floral Greens (National Crop Insurance Services)—A feasibility study was conducted to research the best techniques for insuring cut flowers and cut cultivated floral greens. The Final Research Report for this project was accepted September 10, 2002, and RMA is evaluating options to proceed with program development during fiscal year 2003.
Direct Marketing of Perishable Crops—RMA contracted for research and to develop recommendations regarding the handling of direct marketing under existing crop insurance programs; and, if appropriate, develop a pilot program to address the specific needs of producers who market their crops directly to the consumer. A contract was awarded late in fiscal year 2002.
Fresh Vegetables—Research Report (AgriLogic, Inc.)—RMA contracted for a study to determine the feasibility of the development of a risk management strategy to provide coverage for asparagus, broccoli, carrots, cauliflower, celery, garlic, globe artichoke, lettuce-head, lettuce-leaf, lettuce-romaine, and spinach. The research report is completed and RMA is in the process of making a decision on proceeding with a program development project that would be awarded early in fiscal year 2003.
Hawaii Tropical Fruits and Trees (Research Report) (AgriLogic, Inc.)
A feasibility study was conducted to research the best approaches to provide risk management
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strategies for the following Hawaii Tropical Fruits and Trees: Bananas, Coffee, Guavas, Papaya, Pineapples, Mango, Lychee, Rambutan, and Atemoya (Moya). The feasibility study is completed and a program development project is expected to be awarded in late fiscal year 2002.
Maple Syrup (Included in the project Feasibility of Revenue Coverage Plans that Maximize Producer Revenue—Research Report (Watts and Associates))—A feasibility study was conducted to investigate opportunities for new and improved revenue coverage plans for various crops, including maple syrup. A task order for program development is expected to be awarded early in fiscal year 2003.
Melon Pilot Program (Feasibility Study)—A feasibility study will be conducted on the development of a pilot program to provide melon producers a risk management tool to address their needs, with consideration given to the experience gained and the comments received on the suspended watermelon pilot program. A contract has been developed and is in the process of being awarded in fiscal year 2003.
Organics Study (USDA, Economic Research Service)—The purpose of this project is to study and provide recommendations on yields, risks, and related issues regarding crops grown organically. Work is continuing on this project.
Perennial Pathogen Research Report (AgriLogic, Inc.)—A feasibility study was conducted for the development of a risk management strategy for tree, vine, and bush crop growers that are subject to perennial crop pathogens. The research for this project is virtually completed and, depending upon the decision of RMA, a program development project may be awarded early in fiscal year 2003.
Quarantine Research and Program Design Report (AgriLogic, Inc.)—A feasibility study is being conducted for the development of a risk management tool for producers of crops subject to quarantine regulations. Work is continuing on this project and will be completed in fiscal year 2003. Once complete, depending upon the recommendations of RMA, a program development project may be awarded in fiscal year 2003.
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Research Report Sesame, Hybrid Sunflower Seed, Emmer and Spelt Crop Insurance Programs (Feasibility Study)—A study will be conducted on the feasibility of a risk management tool to meet the needs of hybrid sunflower seed, emmer, and spelt producers. A contract is expected to be awarded early in fiscal year 2003.
Tree, Vine, and Bush Replacement Program (Feasibility Study)—A feasibility study is being conducted for the development of a tree, vine, and bush replacement program as an option for growers of grapes, citrus, tree fruit, nut, kiwi, blueberries, and other high-value, permanent crops. This contract was awarded late in fiscal year 2002.
Vegetable and Flower Seed Pilot Program (Feasibility Study)—A study is being conducted on the feasibility of a risk management tool to meet the needs of vegetable and flower seed producers.
QUESTION: With only a few days remaining in this fiscal year, have you utilized all available contracting funds for research and development for new crop insurance products?
ANSWER: During fiscal year 2002, RMA utilized approximately $20 million (over 99 percent of available funds) for research and development for new risk management products, including crop insurance, through more than 40 new contracts and partnerships.
Administrative Rules/Regs
Published in the Federal Register of September 18, 2002, is a proposed rule submitted by the Federal Crop Insurance Corporation.
QUESTION: Could you summarize for the Subcommittee what this proposed rule contains?
ANSWER: The major changes contained in the proposed rule are made to: 1) implement requirements in ARPA regarding double insurance, prevented planting and good farming practices; and 2) address program integrity concerns and other issues as follows:
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ARPA Issues:
Double Insurance—A 65.0 percent reduction in any indemnity for a first crop when a second crop is planted on the same acreage and sustains an insurable loss. The premium for the first crop is also reduced by 65.0 percent.
Prevented Planting—A 65.0 percent reduction in any prevented planting payment and associated premium for a first crop when a second crop is planted on the same acreage. In this case, a yield equal to 60.0 percent Actual Production History (APH) yield for the first crop is also included in the APH database for the first crop.
Good Farming Practices— Notice to insured producers that they may request an administrative review when they disagree with any loss determination made regarding good farming practices. The rule also requires FCIC to determine good farming practices and to develop a process companies can use to request these determinations.
Program Integrity Issues:
To prevent program abuse, insurance will be denied under the policy when a person with a substantial beneficial interest in an entity fails to provide a social security number.
Providing social security numbers by persons with a substantial beneficial interest is a specific requirement of the Federal Crop Insurance Act (Act). RMA has discovered that producers are changing entities and not reporting the social security numbers to prevent the discovery of persons who are ineligible to participate.
The insurance companies have been given authority to adjust yields when they are inconsistent with other units, based on a small number of acres, or if the farming practices have changed. RMA has discovered that there are producers who carefully tend a small number of acres to inflate the yield so that in subsequent years, the inflated yields can be applied to a much larger unit or change their farming practices such that the acreage could no longer produce the previous yields.
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It is now a breach of the contract, and no indemnity will be due, when a producer misreports acreage, yields, or any other material information. To avoid the burdens to producers and insurance companies, the producer is permitted to certify information. The integrity of the crop insurance program relies heavily on this certified information. The forms state that the certification is to the truth of the information submitted and producers can face civil, criminal or administrative sanctions for reporting false information. However, there were conflicting provisions in the policy regarding the misreporting of information. One provision simply stated that the information would be corrected but another provision stated that the policy would be void. To reconcile these provisions, RMA elected to treat the failure to accurately report as any other breach of the contract and deny an indemnity.
There is now a requirement to ensure all entities under one policy when the different entities are composed of the same persons. RMA had discovered that spouses, family members or other individuals were creating multiple separate entities made up of the same persons in order to permit, for example, the separate insurance of irrigated and non-irrigated land that would otherwise be insured under one policy or the shifting of production between policies. This permitted the entities to manipulate yields or acreages to guarantee losses under one or more of the policies.
There is no reduction in prevented planting payments when cover crops are hayed or grazed. Prevented planting payments are intended to compensate the producer for the loss of the production on the acreage and is currently reduced based on inputs that are not expended in the planting, production, and harvesting of the crop. The prevented planting payment assumes no financial benefit from the acreage. However, when cover crops are hayed or grazed, the producer receives an additional benefit from the acreage. Therefore, this additional benefit is now taken into consideration when calculating the prevented planting benefits.
Provisions have been added to indicate that coverage cannot be increased when there is a cause of loss present at the time the request to increase coverage is made. Previously, changes in coverage could be made prior to the sales closing dates. However, for prevented planting coverage, causes of loss that are covered by the policy could occur months before the sales closing dates. This provision ensures that producers are not able to increase their indemnities when they know that there is a loss.
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The liberalization provisions have been removed because they were in conflict with the provisions of the policy that state that no employee of the company or RMA can waive or modify the terms of the policy.
Producers are now required to report their prevented planting acreage earlier. Previously such acreage did not have to be reported until the acreage reporting date, which was 45 days after the final planting date. Reporting so many days after the acreage had been prevented from planting made it very difficult for insurance companies to verify the cause of loss or whether the acreage was actually prevented from planting.
The provisions regarding the insurability of acreage have been clarified. Previously, the provisions allowed insurance for acreage not planted and harvested in one of the last three years if the acreage was in a USDA program that prohibited harvest in one of those years. This was ambiguous with respect to whether the acreage had to be enrolled in the USDA program for one or two of the years. The provision now requires that the acreage was enrolled in the USDA program for at least two of the last three years.
Prevented planting payments are now disallowed anytime there is pasture or other forage in place on the final planting date for the insured crop. Since the producer is receiving the full benefit of a crop that was either previously established or planted by the final planting date, the acreage is not considered to be prevented from planting.
The arbitration provisions have been deleted because they have proven to adversely affect the program integrity. RMA has seen numerous decisions from arbitrators where they exceeded the scope of their authority and resolved disputes regarding policy interpretation, when arbitration is limited to factual disputes, and relied on state law, which is preempted by the terms of the policy. Further, the arbitration was binding, which is in conflict with the producer's right to bring suit against the insurance company.
Miscellaneous Issues:
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Coverage was added for losses due to failure of the irrigation equipment and facilities if caused by an insurable cause of loss that occurred during the insurance period. Previously only failure of the water supply was covered. However, there are causes of loss that can effect the irrigation equipment and facilities.
The definition of ''border'' has been added and included in the provisions regarding optional units to clarify how optional units must be separated from one another.
Provisions have been added regarding the insurance of crops grown using organic farming practices. This is to permit adequate coverage for these higher value crops and to reflect the correct premium rates, yields, and farming practices used.
Prevented Planting
We have heard complaints from both industry and producers regarding the absence of uniform implementation of prevented planting measures.
QUESTION: Do you have any plans to address this problem?
ANSWER: RMA has received similar complaints. In an effort to assure uniform implementation of prevented planting provisions, RMA has issued several bulletins addressing prevented planting issues. In addition, RMA is currently in the process of forming two prevented planting forums (an industry forum and a producer forum) to obtain comments, suggestions and ideas for potentially improving and simplifying prevented planting provisions. RMA has also contracted a study of localized prevented planting. The study should be complete within the next 2 months.
Compliance
This week, the Risk Management Agency submitted the Program Integrity and Compliance report to Congress. The report finds that compliance efforts achieved an estimated cost savings of about $94 million during the period of October 2000-December 2001.
QUESTION: What compliance actions were taken to achieve these savings and deter fraud and abuse of the program?
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ANSWER: The sources of the $94 million in cost savings, as reported in the Program and Compliance and Integrity Annual Report to Congress, is shown in Figure 1. Seventy-seven percent of the $94 million was attributed to the spot-check referrals process (established by the Agricultural Risk Protection Act of 2000) that included the use of data mining and data warehousing technologies to identify producers when losses exceeded those of other producers in the area. These spot-check referrals were sent to FSA, who conducted inspections on selected fields for the identified producers and reported the results back to RMA. The selected producers were notified that their fields could be monitored.
The remaining 23 percent in cost savings was attributable to the other referral processes, program reviews, insurance provider initiated, OIG hot line, and program reviews.
QUESTION: Would you explain the present status of the ARPA reconciliation of data, specifically the manner in which your agency is reconciling material differences between RMA and FSA records?
ANSWER:
September 2001—RMA transmitted 1.3 million records related to insured producer crop share, identification number and acreage to FSA.
December 2001- FSA downloaded to County Offices 1 million records to be reviewed based on FCIC Program Integrity 4—RM Handbook procedures. FSA County Offices forwarded 480,991 potential differences to FSA State Offices.
May 2002—FSA State offices referred to RMA 284,991 certified potential differences.
June 2002—RMA Administrator briefed on methodology for identifying 56,553 (80 percent reduction) potential differences based on Resolved, Immaterial Differences, Material Differences within Tolerance, and Material Differences Out of Tolerance.
August 2002—A statistical sample of 160 differences selected from 10,209 potential differences (ID mismatch, Share mismatch, at least a 10 percent acreage difference, and indemnity difference of greater than $1000) were forwarded to the 19 approved insurance providers for review.
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120 of the 160 have been received from the approved insurance providers.
24 percent of the 120 referrals have been validated as genuinely discrepant, with the remaining 76 percent due to allowable program differences (majority in the prevented planting provisions).
Final cost benefit analysis and materiality will be completed by the end of 2002.
The results of this sample will be used to manage the remainder of the reconciliation process. Those that are truly discrepant (not attributable to allowable program differences) and where the amount of the discrepancy justifies the cost of corrective action will be forwarded to the respective policy issuing company for action.
General Program Operations
QUESTION: ARPA authorizes a renegotiation of the Standard Reinsurance Agreement once during the 2001 through 2005 reinsurance years. In February, RMA suggested that it was preparing to renegotiate the SRA and amend the risk-sharing arrangement with private insurance providers effective for the 2004 reinsurance year.
Will the Standard Reinsurance Agreement be renegotiated for the 2004 reinsurance year?
ANSWER: The final decision to notify the companies that are party to the Standard Reinsurance Agreement (SRA) of RMA's intent to renegotiate the agreement will be
given by December 31, 2002. As stated previously, RMA has engaged the services of outside consultants to develop computer-assisted analysis tools to provide information regarding the impacts of various potential reinsurance structures. In addition, we are preparing for the eventual renegotiation of the SRA with internal discussions and analysis. If sufficient information is obtained and the analysis is complete enough to permit RMA to make an informed decision and effectually renegotiate the SRA, RMA intends to provide notice of cancellation by December 31, 2002. RMA will not complete its evaluation process until sometime in December.
QUESTION: ARPA authorized premium discounts to be applied to producers with good insurance history or production experience. RMA explained to the Subcommittee in February that a contract to study the feasibility of a pilot program to provide producers with performance-based discounts is scheduled for completion this month.
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What is the status and outlook of this provision?
ANSWER: The contract time period was recently extended for this project, and the draft report is currently due in mid-December 2002, with the final report due from the Contractor January 31, 2003.
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: Consultation between RMA and FSA State Committees has been actively implemented and very useful. Last year, RMA and FSA issued procedures outlining the responsibilities of each Agency. FSA State Committees have been informed about the Federal Crop Insurance Act, the crop insurance cycle, RMA policies, program deadlines, how to access actuarial tables. The crop insurance filing schedule and its impact on the timing of program changes has been explained. FSA Offices have been provided with program fact sheets for each state as well as other important information.
RMA has consulted with FSA State Offices and State Committees about changes to t-yields, actuarial maps, special provision statements, additional types and practices, program dates, and proposed crop insurance program expansion. FSA has made recommendations on policy changes, date changes, program expansion, and loss adjustment. Several recommendations have been adopted by RMA. All have contributed to a greater dialogue and understanding about RMA programs, regulations, and procedures. Recently, RMA has developed an electronic system to log and track all consultation requests and recommendations to assure timely and appropriate implementation and results.
QUESTION: Please explain how price elections for MPCI crop policies are established.
ANSWER: Price elections for program crops are generally set using the higher of the USDA World Agricultural Outlook Board (WAOB) projected price or the loan rate. The WAOB price is the USDA price for the crop, derived from fundamental analysis of supply and usage data, and represents USDA's best estimate of the season average price for the crop.
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Tobacco
QUESTION: Tobacco growers have contacted several Members of Congress requesting a quality adjustment deviation to allow for the effects of this year's drought so that producers will not need to harvest a crop of inferior quality for which there is no market.
Do conditions warrant a standard deviation, and is your agency willing to recommend a standard deviation for this year's tobacco crop?
ANSWER: No crop insurance policy requires a producer to harvest a crop when, in the producer's opinion, it would be economically infeasible to do so. The tobacco crop insurance policy does not require producers to harvest a crop they believe is not profitable. However, it does require that an appraisal of production potential be made before the crop is destroyed or abandoned. The tobacco policy has provisions regarding tobacco with no market value. Those provisions cannot be waived or modified. Loss adjustment procedure deviations are only permitted when the established loss adjustment procedures would not accurately estimate the production potential. RMA's current loss adjustment procedure includes appraisal methods to adequately complete quality loss adjustment in a drought situation. Therefore, no deviation is permitted for this.
Furthermore, RMA will continue to monitor the situation to ensure the current procedures accurately determine production potential and that the private insurance companies administer RMA's procedures in accordance with the loss adjustment standards handbooks.
QUESTIONS SUBMITTED BY CONGRESSMAN JOHN THUNE
QUESTION: We are now at a crossroads in farm country where producers are faced with one of the worst droughts in history. This drought will put the Federal Crop Insurance Program and the changes we've made to the test. To that end, I'd like to ask a few questions that are drought related.
The drought has severely affected the cattle producers in my state of South Dakota. It has been devastating to see ranchers selling their herds because they do not have water or feed for their animals. I'd like you to update me on a couple different products:
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As I've traveled South Dakota through this drought, I have heard from livestock producers that would like more risk management tools available to them. I am very supportive of livestock products getting out there for producers.
What would be the advantages and disadvantages of such a product?
ANSWER: RMA sought input from more than 100 National and State level livestock organizations in May 2001 so their needs, concerns, and other input could be considered before the RMA entered into contracts and partnerships for the research and possible development of risk management strategies for livestock. As with virtually all risk management programs, significant advantages exist for producers who are better able to manage their risk and meet their obligations in the event they suffer loss. However, as is sometimes revealed in the feasibility studies that are conducted, market distortions, such as over-production and depressed prices may occur. For example, producers who might not otherwise feel comfortable or have the necessary knowledge, skills, or facilities to raise livestock, might be encouraged to do so if insurance is available or overly lucrative. Even with safeguards in place (including prohibiting claims involving poor livestock production practices), some producers may elect to not properly care for their livestock, and risk not only the health of their livestock, but neighboring livestock as well.
QUESTION: Can you tell me how the Livestock Pilot Program in Iowa is coming along? If this product gets off the ground nation-wide, would producers be able to benefit in a time of drought?
ANSWER: There are two pilot products available for swine in Iowa. One is the Livestock Gross Margin (LGM) pilot which provides coverage to swine producers from price risks for six months and up to 15,000 hogs per period. The product protects the gross margin between the value of the hogs and the cost of corn and soybean meal. Prices are based on hog futures contracts and feed futures contracts. LGM protects producers if feed costs increase and/or hog prices decline, and depend on the coverage level selected by the producer. Coverage levels range from 85–100 percent.
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The other is the Livestock Risk Protection (LRP) pilot which protects against a drop in hog prices. Swine, can be insured for 90, 120, 150, or 180 days, and up to a total of 32,000 animals per year.
Unlike traditional crop insurance policies, which have a single sales closing date each year, LRP will be priced and available for sale continuously throughout the year. The LRP policy protects producers against declining hog prices if the price index specified in the policy drops below the producer's selected coverage price. Coverage levels range from approximately 70–95 percent of the daily hog prices.
Unlike traditional swine market based risk management tools (future and option contracts), LGM and LRP are flexible and can fit any size operation. Traditional swine risk management tools are bounded by contact size and expiration dates, where as LGM and LRP are not. Producers may insure one hog or up to 32,000 (depending on plan).
LGM and LRP have been available for a little more than two months. As of September 23, LGM and LRP have insured 204,316 head, less than 2 percent of the swine in Iowa. Total premium for both plans is $841,721 and total liability is $11,642,184. This is the first year for both products and RMA anticipates that sales will increase as producers become more aware of these products.
The Agricultural Risk Protection Act of 2000, which provided RMA the authority to develop livestock pilot programs, also limited the amount that could be spent to support these programs. Given the current financial constraints, it is unlikely that RMA would be able to make either product available nationwide. Further, while not covered directly by either policy, the effects of drought may be covered if it affects the price of the swine or the price of the feed.
QUESTION: In my home area west of the Missouri River, there was literally no pasture grass that grew where ranchers normally had their cattle graze.
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Are the pasture and forage products working?
ANSWER: RMA offers the Group Risk Plan (GRP) Rangeland Pilot in twelve Montana Counties. Growers have expressed concern with the operation of this pilot program. RMA is doing everything possible to ensure that payment yields accurately and fairly represent the production experience of Montana's rangeland producers. RMA is actively working with the Montana Agricultural Statistics Service (MASS) as well as the Farm Service Agency (FSA) to obtain the best data needed to develop appropriate payment yields.
RMA has contracted for an evaluation of the GRP program and a feasibility study specifically for pasture and rangeland to determine if a risk management program can be developed for these crops that is based more on an individual level. A contract to develop a pasture and rangeland program is expected to be awarded early in fiscal year 2003.
Although the products are not working as well as RMA wants them to or as producers and ranchers need them to, RMA is taking measures to correct deficiencies and produce viable risk management tools to forage and rangeland products.
QUESTION: It is my understanding that this is the time of year that ranchers are buying forage policies. I would like to see more incentives and make it easier for new ranchers
to get into these policies. I understand that producers have a difficult time proving history on forage.
Would you be open to allowing the full T-yield to be used for these products, rather than 65 percent of the T-yield?
ANSWER: If the producer does not have production history, the producer must receive a yield of no less than 65 percent of the T-yield in accordance with RMA regulations. Under those regulations, all producers with no history receive 65 percent of the T-yield. Producers with one year of history receive 80 percent of the yield. Producers with two years of history receive 90 percent.
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QUESTION: I've had producers bring to my attention their frustration that from county to county millet is not always insurable in South Dakota. Can you share with me how this is decided? Is there room for more flexibility in some of these areas?
ANSWER: The millet crop insurance program was a pilot program through the 2002 crop year. RMA made it a permanent program beginning with the 2003 crop year. As a pilot program, it was offered in limited number of counties in order to gain experience in insuring millet and to refine this insurance product. The millet crop insurance program was expanded into an additional 24 South Dakota counties (Beadle, Corson, Day, Dewey, Faulk, Gregory, Haakon, Hand, Hughes, Hyde, Jackson, Jones, Lyman, Meade, Mellette, Pennington, Perkins, Shannon, Spink, Stanley, Sully, Todd, Tripp and Ziebach) beginning with the 2003 crop year.
Expansion of crop programs is based on a number of factors including the value of the crop in the county and producer interest. As a permanent program, there is more flexibility in expanding the program. In addition, RMA is now able to provide coverage to millet producers in counties without the program by written agreement if producers have at least 3 years of millet actual production history.
QUESTION: When the winter wheat crop was a bust in central South Dakota, many producers planted sunflowers in order to have something to harvest this year. In South Dakota, the sunflower planting time is between June 5–20th. However, the program sign-up is June 10th.
Is it possible to get that date changed to June 20th? I believe it would make it a lot easier on our farmers.
ANSWER: RMA has received requests from the South Dakota Farm Service Agency (FSA) State Office and the National Sunflower Association (NSA) to move the final planting date from June 10 to June 20 for at least southern South Dakota. This would make the sunflower final planting date for crop insurance purposes coincide with the latest sign-up date for the FSA's sunflower program. Final planting dates are set based on number of days to reach maturity and permit the crop to reach maturity before the normal frosts occur in the fall.
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In response to these requests, RMA has changed the sunflower final planting date to June 15 in 35 of the southernmost counties for 2003 crop year. It was not feasible to change the final planting date to June 20 due to the fall frost date. It was also not feasible to change the June 10 final planting date for the rest of the state for the same reason. The NSA was agreeable with this change. In addition, NSA has contracted with a university to study sunflower final planting dates. Based on the NSA study, RMA will consider additional changes in sunflower final planting dates in South Dakota.
QUESTION: Most producers can survive one year of drought, but in places where they've suffered from consecutive years, it becomes extremely difficult for producers to manage their risk.
Can you tell me about some of the solutions you are exploring for extended drought?
ANSWER: One aspect that has become readily apparent with the extended period of drought is that the current prevented planting provisions do not provide certainty to growers and are at times difficult to administer. RMA has recently issued letters
soliciting volunteers from both the insurance industry and commodity groups to serve on prevented planting workgroups. The workgroups will be tasked to review the current prevented planting rules and look for ways to improve them to provide more certainty in years of extended drought and make them easier to administer.
Another aspect of the current insurance program that attempts to mitigate the effects of prolonged periods of drought on APH yields and insurance coverage are yield limitations and adjustments in the form of yield substitutions. Yield adjustments may be elected by insured's who can substitute 60 percent of the applicable T-yield for actual yields that are less than 60 percent of the T-yield. RMA is currently evaluating the effectiveness of the yield substitution process to determine if more assistance can be provided. However, due to actuarial considerations and the elasticity of premium rate increases to account for any added benefits, any options currently available to RMA may be limited in scope and impact.
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QUESTIONS SUBMITTED BY CONGRESSMAN DENNY REHBERG
A multiple-year drought has the effect of lowering producer's crop insurance coverage because Actual Production History (APH) is calculated into the five-year average. As a result, producers insurable yield may be lowered by 25 percent or more after five years of major drought. In other types of insurance, such as homeowners, the insured is not penalized for a loss beyond their control. For example, if your house is destroyed by fire, the insurable value of your replacement house is not reduced.
QUESTION: What are some suggestions for providing producers with the same type of coverage?
ANSWER: RMA is somewhat limited in its ability to provide the same type of coverage that a homeowners policy may provide by the Federal Crop Insurance Act which mandates that a producer's APH yield for that crop be used to determine the amount of the insurance.
The Agricultural Risk Protection (ARPA) made some progress in attempting to address this very issue. ARPA authorized the RMA to implement yield adjustments that may be elected by insured's. Yield adjustments allow an insured to substitute 60 percent of the applicable T-yield for actual yields that are less than 60 percent of the T-yield.
Another possible solution would be to increase the number of years in the database. Based on the current ten-year period, several years of losses can have a significant impact on the APH yield. However, to increase the period to the number of years that the producer has records would mitigate the effect of those loss years. This would require a revision to the current statutory provision.
QUESTION: MGGA recommends that losses that exceed ninety percent of the crop's value should be written off as a total loss. In 2001 and 2002, thousands of acres of Montana crops were harvested even though the crop's remainder value was less than the cost of harvesting. This ended up costing our producers hundreds of thousands of dollars in lost insurance payouts. Nearly all other forms of insurance pay 100 percent on losses over 90 percent (referred to as ''de-minimus yield'' provision).
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Can RMA implement the same provision for crop insurance?
ANSWER: RMA has been asked to implement a ''de minimis yield'' in the past. RMA has declined because the risk associated with implementing such a procedure would require an increase in rates. If the production actually amounted to hundreds of
thousands of dollars as noted, those costs would have to be accounted for in the premiums paid by all producers.
Furthermore, no crop insurance policy requires a producer to harvest a crop when, in the producer's opinion, it would be economically infeasible to do so. Producers with minimal yields can ask for a field appraisal of their crops in order to determine how much production will apply to their insurance guarantee. If the amount of appraised production is less than the cost of harvesting, most producers will accept the appraisal and receive a release on their crop.
Under the insurance contract, producers who accept a field appraisal agree to put the
fields to another use without harvesting. If the producer subsequently decides to harvest after they have agreed to destroy the crop, they must notify their insurance company and report the production.
QUESTION: Current RMA policy is inadequate in addressing irrigated needs. If a producer does not expect to receive enough water to irrigate normal acreage then they can qualify for prevented planting for the acres, which lack water. Prevented planting only pays about 60 percent of a producer guarantee. So if a producer has 75 percent coverage then 60 percent of that would be 45 percent. If you have a drought that carries over for more than a year things get a little fuzzy. The only time a prevented planting payment would be made two years in a row (assuming an extended drought) is when a producer can prove normal snow pack would have brought them back to normal. This is very difficult to prove, in which case the second year of prevented planting is rejected.
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How could the agency improve prevented planted coverage for irrigators?
ANSWER: The amount of prevented planting coverage is determined based on an Economic Research Service study that compared pre-planting costs to liability. Since planting and production costs are not incurred, guarantees must be reduced to avoid over- insurance. However, RMA realizes that when a multiyear drought occurs, calculation of the prevented planting benefits is complex. RMA has worked extensively to provide clarification and guidance to insurance providers dealing with prevented planting and irrigation issues. However, RMA agrees additional improvements are needed in this area and has begun the work necessary to make such improvements. During 2003, RMA will utilize two forums—an industry forum and a producer forum—to obtain viewpoints and develop options that can be used to improve and simplify prevented planting provisions. RMA will evaluate the options and determine what changes are necessary and to determine whether the changes will require legislative or regulatory action, or whether procedural changes may be sufficient.
QUESTION: Also related to irrigation, prevented planting is only paid on feed barley and not on malt barley ($1.80/bushel for feed vs. $3.25/bushel for malt barley). What this
means is that a malt barley producer would only receive a crop insurance payment of about 1/4 of what a normal income would be. Malt barley is a significant industry for Montana.
What would it take to get RMA to allow prevented planting coverage for malt barley?
ANSWER: Prevented planting coverage levels were established based on an Economic Research Service study that compared pre-planting costs to insurance liability. Prevented planting was never intended to replace lost income, just cover pre-planting costs. It is RMA's understanding that the pre-planting costs associated with malting barley (land preparation, fertilizer, seed, etc.) are not different than for feed barley. Therefore, the
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prevented planting coverage level should be the similar for malting barley and feed barley. However, RMA plans to make this one of the items to be discussed in the upcoming producer prevented planting forums. A representative of the barley growers will be invited to participate in these forums. Depending on the outcome of these forums, RMA will re-evaluate prevented planting coverage for malting barley. Insurance experience under the malting barley endorsement has not been positive, which may also be a consideration when discussing any changes that may be made for malting barley growers.
QUESTIONS SUBMITTED BY CONGRESSMAN ADAM PUTNAM
Remarks:
I appreciate the efforts the Risk Management Agency (RMA) to work with my office and Florida agricultural groups and I look forward to continuing this cooperative relationship.
Florida ranks No. 9 in the Nation in crop production values, and therefore has a significant interest and need for workable affordable crop insurance polices that reflect its growing practices.
The Congressional intent of the Agricultural Risk Management Protection Act was to encourage development of crop insurance tools that meet the crop insurance needs of varying crops, including fruits, vegetables and nursery. In addition, to ensure that specialty crop farmers would receive consideration in crop insurance decisions, and encourage the development of crop insurance products for these sectors, special provisions were included in the Agricultural Risk Protection Act for specialty crop producing states.
Effective implementation of these provisions is imperative, including ongoing communication with commodity organizations in the development of crop insurance polices to suit their particular risk management needs.
Policy Development
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QUESTION: Under the Agricultural Risk Management Protection Act, Congress shifted policy development from RMA to outside organizations such as commodity groups or land grant universities who were believed have the greatest experience and knowledge of particular crops.
How is RMA implementing these policy development-contracting provisions, and what actions has the agency taken to encourage wide participation and input from producer and other outside organizations?
ANSWER: Various contracting and partnership vehicles were used to initiate approximately 30 new research and development projects during fiscal year 2001. RMA competitively bid the participation in a pool and once in the pool, the organization could individually compete for specific contracts. Four contractors were selected for the base research and development contract pool. Ten of the projects were initiated as task orders under the base research and development contract. The contractors are:
(1) AgriLogic, Inc., (2) National Crop Insurance Services, Inc. (3) Watts & Associates, Inc. Overland Park, KS; and Billings, MT.
Task orders describe RMA's work requirements for the research, development, implementation, and evaluation of new risk management programs.
RMA also entered into a number of partnerships and contracts with private and public organizations to initiate the other projects during fiscal year 2001.
In fiscal year 2002, the base research and development contract pool (and competitive contracts run through Gov works), were again utilized to initiate a number of projects.
In addition, on July 1, 2002, RMA published in the Federal Register a Request for Applications (RFA): Research Partnerships for Risk Management Development and Implementation announcing the availability of approximately $2 million for partnership agreements to fund research and development of risk management tools and other projects centered in section 522(d) of the Federal Crop Insurance Act. Priority was given to those activities addressing the need for risk management tools for producers of noninsured crop disaster assistance program (NAP) crops, specialty crops, and underserved commodities. Awards, on a competitive basis, may be for a period of up to two years. A list of partnerships and projects will be included on RMA's website at www.rma.usda.gov, when the agreements are announced.
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In total, approximately 40 projects were initiated during fiscal year 2002 through the various contracting and partnership arrangements. Approximately 25 of these projects involve universities.
To encourage wide participation and input from producers and other outside organizations, contractors and partners hold listening sessions with producers, producer groups, insurance company representatives or any other interested parties during the research and development of crop insurance programs and other risk management tools. RMA Regional Offices also serve as a local contact point to ensure that local issues, concerns, and differences are considered
RMA is also conducting four projects to identify the potential market for specialty crop insurance and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers. Through these partnerships with researchers at Cornell University, Penn State University, the University of California at Davis, and the University of Florida, specialty crops producers were contacted to determine how crop insurance programs could be designed to better meet
their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
QUESTION: How are crop insurance policy development contracts open for bid to producer and land grant universities?
ANSWER: These organizations have opportunities to compete for projects through other organizations, such as Gov works, that facilitate the contracting process with RMA. In fiscal year 2001 and 2002 approximately 25 projects were awarded to colleges and universities. In other instances, the pool contractors are subcontracting with subject matter experts, who are often university specialists and recognized experts in their field.
QUESTION: Does RMA or producer organizations ''from the ground up'' determine which polices will be developed?
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ANSWER: RMA, producers, and producer groups jointly determine the policies to be developed. When RMA enters a contract for product development, RMA ultimately makes the decision based on a number of factors including producer, producer group, and other requests for insurance (including indications of non-interest in some cases); legislative mandates (e.g., Livestock, Revenue Coverage Plans, a Cost of Production policy, and other programs required by ARPA); the economic value of the crop; the relative ease of developing an appropriate product to meet producers' needs; the magnitude of disaster payments made on the non-insurable crop; data availability; risks anticipated to be covered; expected participation; anticipated development costs versus expected benefits; resource constraints; and other factors. RMA maintains a general program development prioritization plan that takes the above, and other factors into consideration.
Furthermore, through the private product submission process, producer groups can also compete for partnerships to develop crop insurance policies. In this process, the producer organization directly determines the policies to be developed. Once developed, the policies are submitted to the Federal Crop Insurance Corporation Board of Directors for consideration.
QUESTION: How is RMA working cooperatively and openly with producer organizations on the specific components of a policy to ensure it reflect the growing practices of a particular crop?
ANSWER: With the enactment of ARPA, RMA has changed considerably from a position of working directly with producers and producer organizations in the research
and development of new programs to that of ensuring such activities take place through its contracts and partnerships with public and private organizations.
Contractors and partners hold listening sessions with producers, producer groups, and insurance company representatives during the research and development phase to ensure that the producer needs are met, including determinations of the farming practice for the crop to be insured. All listening session comments are provided to RMA.
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RMA Regional Offices also serve as a local contact points to ensure that local issues, concerns, and differences are considered, and; when deliverables are presented by the contractors or partners, to ensure that producers' interests and concerns are addressed. Prior to the offering of any new program, section 505(e) of the Federal Crop Insurance Act requires policies to be subject to independent reviews by persons experienced as actuaries and in underwriting who will also ensure that the policies reflect the growing practice for the crop.
Citrus
QUESTION: Common Sales Closing Dates—The Citrus Fruit and Citrus Tree policies, two interrelated policies for citrus, have different sales closing dates, often causing unnecessary confusion to growers.
Why are the date requirements not consistent among these related polices? What are RMA's plans to address these differing policy provisions?
ANSWER: While the Florida Citrus Fruit and Citrus Tree programs are interrelated, they are very different plans of insurance. The Florida Fruit Tree policy sales closing date was set to coincide with a period of little expected loss, between the hurricane and freeze periods. The date issue has been raised at several listening sessions between RMA and producers over the past year, yet there was no clear producer consensus as to which dates were preferred, the citrus tree dates or the citrus fruit dates. Moving the sales closing date for either policy would require policy revisions and a common billing date could result in hardship to producers who would have both premium bills due the same date. Currently the billing date for trees is January 1, and for fruit it is March 1, the latter allowing for two more months of producer revenue due to additional harvesting of fruit. RMA will continue to explore this issue, which does not have an easy fix.
QUESTION: Citrus Canker Peril in Fruit Policy—Currently, coverage is provided for the peril of Citrus Canker under the citrus tree policy only but not under the fruit policy. Clearly, if the trees are destroyed the fruit is lost as well. As such, it is not consistent to pay an indemnity for loss of the tree, but receive no coverage for loss of the fruit crop that was destroyed along with it. Citrus Canker should be considered as a cause of loss to the Citrus Fruit policy.
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Please give share RMA plans in this regard, or impediments to coverage? What steps must be taken in order to include Citrus Canker under the citrus fruit policy? (The citrus industry has requested this coverage change for 4 years.)
ANSWER: RMA recognizes some type of Citrus Canker coverage is likely needed and plans to make changes in the Florida Citrus Fruit policy to cover the loss of fruit on the trees actually destroyed. RMA is considering the rate implications that a policy change such as this would require and the most effective and efficient means to implement such a change if it is determined to be feasible from a producer acceptance standpoint.
Alternatives include providing the coverage as a condition of the policy (that would apply at additional cost to all policyholders), or providing such coverage as an option for producers to select (and therefore to increase the cost of coverage only for those selecting the option). Either option would have to be implemented through the rulemaking process.
QUESTION: Update Ratings on Citrus Fruit policy. The Citrus Fruit and tree policies have not been re-rated in several years. Within that time, there has been a large increase in program participation and relatively few claims resulting in a low loss ratio not reflected in the premium structure. Due to the current ratings structure, premiums are still too expensive for many growers. (The 2002 average loss ratio was .06) Crop plantings have also moved to a much more southerly distribution in the state in the last 12 years, thereby reducing the risk of catastrophic freeze damage.
Does RMA have plans to conduct a review of the ratings under the citrus policy given these circumstances?
ANSWER: Florida citrus rates were most recently reviewed and updated for the 1998 crop year. The 1998 review would have reflected the southward shift in plantings during the 1990's. In general, data is available for several years; however, only a small number of policies were issued each year. There is insufficient information to conclude that the premium rates are not appropriate. As additional information is obtained, the rates will be reviewed.
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QUESTION: Increase Coverage Available for Citrus Tree insurance. The current maximum coverage available under the citrus tree and fruit policy is 75 percent. If producers could cover a larger portion of their crop, such as 85 percent as available for some other policies; this would increase their risk management protection, and lesser the need for Citrus Canker compensation aid.
ANSWER: RMA is currently contracting for a review and potential modification for the Florida Fruit Tree Pilot program. The contract includes a review of rates and prices. Crops must meet specific criteria to be considered to receive the 80 or 85 percent coverage level. If a higher level of coverage is considered feasible and meets producers' risk management needs, it will be considered when the Florida Fruit Tree Pilot policy is modified.
QUESTION: Citrus growers would like the option to purchase a higher level of coverage if they so choose and offering this type option could reduce the need for disaster compensation. Is this currently under consideration by RMA?
ANSWER: The current Florida citrus fruit program allows producers to purchase up to 85 percent coverage, which is the highest level of coverage for MPCI crops as authorized by section 508(b) of the Federal Crop Insurance Act of 2000.
See the response to the previous question as it pertains to the Florida Fruit Tree Pilot Program.
Nursery
QUESTION: The nursery industry, which represents 11 percent of the value of all crops nationwide (USDA Census of Agriculture), has sought to work cooperatively and openly with RMA since 1988 to improve the nursery policy to reflect the growing practices of the nursery industry. However, communication between RMA and nurserymen must be improved, as nurserymen have experienced years of difficulty in communicating their specific growing practices to RMA, and in turn receiving meaningful information from the agency. Most recently RMA has declined to adopt several longstanding recommendations of the nursery industry and then indicated it could no longer carry out communications because a proposed rule was going through the agency.
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ANSWER: Regulatory changes to the Nursery Crop Insurance Provisions are under development now. Since this effort has been classified as a significant rule, a cost-benefit analysis must be completed before the proposed rule can be published in the Federal Register. It is expected that changes to the nursery program would be announced as a proposed rule during the 2003 calendar year. Once the proposed rule is published, the nursery industry will have the opportunity to provide comments on the proposed rule before RMA develops a final rule. This rule is intended to:
(1) Make container and field grown plants separate crops.
(2) Provide coverage for plants in containers equal to or greater than 1-inch in diameter.
(3) Provide separate basic units by share and will be further divided into basic units by plant type and a basic unit for all liners when additional coverage is purchased.
(4) Offer one coverage level and price election for each basic unit when additional coverage is purchased.
(5) Offer optional units by location for field grown plants.
(6) Allow increases to plant inventory value report if made on or before August 31st.
(7) Change the provision that precludes acceptance of an application for insurance for any current crop year after May 31st of the crop year.
(8) Add a Rehabilitation Endorsement to provide a rehabilitation payment for field grown plants that will recover from an insured cause of loss.
(9) Make changes to the Nursery Peak Inventory Endorsement to reflect the changes made in the Nursery Crop Provisions.
QUESTION: If a proposed rule has not been published in the Federal register, why has RMA ceased communication with outside producer organizations? What is RMA doing to work cooperatively and these producer organizations?
ANSWER: RMA has not ceased communication with the outside producer organizations. It is just that the rule is currently in the departmental clearance process. To make any more changes would require pulling back the rule and delaying the process.
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If the rule was delayed each time a producer organization expressed a concern, the rule and any proposed changes, might never be implemented. As indicated above, once the proposed rule is published, the nursery industry will have the opportunity to provide comments, which will be considered before a final rule is published and the changes implemented.
QUESTION: On September 3, I forwarded to RMA specific revisions to the Federal nursery crop insurance policy, that were originally submitted by the Florida Nurserymen
and Growers Association to RMA on March 1, 2002. I would appreciate thorough consideration of these policy recommendations as well as ongoing open communication to resolve any concerns or issues that may be raised.
ANSWER: RMA has received your letter and will thoroughly consider the recommendations. RMA is preparing a reply to the specific issues addressed in your letter. Many of the recommendations have specifically been discussed at various meetings with nursery producers and insurance industry representatives in Florida. RMA will make every attempt to ensure that any proposed changes meet the needs of the nursery growers and will be actuarially sound.
Question Submitted by Rep. Marion Berry
QUESTION: There is growing sentiment in the ag community that producers have relatively less input into RMA's policy and rule development processes as compared to the reinsured companies. And, it can be a source of great frustration when policy and/or rule changes are announced by the Agency following minimal, if any, consultation with producers.
Do you have any thoughts regarding how this issue can be addressed such that producer interests are provided with more equal access to the Agency's deliberative processes?
ANSWER: RMA does seek producer input in the rule making process, the development of new crop programs, and revisions of existing crop programs.
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In its rule making process, RMA staff often contact grower groups when making changes to crop programs. Some of the grower groups RMA has worked with in the past are the National Association of Wheat Growers, National Cotton Council, U.S. Apple Association and many State and Regional Crop Associations and Councils. These groups are very helpful in obtaining producer input from various areas of the country regarding crop program changes and relaying them to RMA for consideration. The development of new policies now require listening sessions with producers and producer groups.
For example, in the next few weeks RMA will kick off forums to evaluate issues regarding prevented planting in an effort to improve and streamline the administration of this coverage. RMA has already sent letters to many producer groups on crops eligible for prevented planting coverage requesting representatives to serve on the work group.
RMA realizes that the ultimate intended beneficiaries of the crop insurance program are the producers, and RMA will ensure that they have a voice in the rule development process.
QUESTIONS SUBMITTED BY CONGRESSMAN STENHOLM
Government-Crop insurance company partnerships. Rulemaking
QUESTION: Crop insurance companies were recently notified that a major rulemaking is being published in today's Federal Register. RMA has announced that the rulemaking will be subject to a 30-day comment period, and that such a relatively short period is necessary in order for a final rule to be available to apply to the 2004 crops.
Are you aware of concerns that the 30-day period will not be sufficient for interested parties to analyze the details of the proposal? If so, what is your response to those concerns?
ANSWER: RMA is aware of concerns that the 30-day comment period may not be sufficient for interested parties to analyze the details of the proposed rule and provide comments within the 30-day period. However, because most of the proposed changes deal with ARPA requirements, which have been in place since June 2000, changes previously requested, or repetitive changes, RMA believes most of the proposed changes have been anticipated. Further, RMA has kept interested parties apprised of anticipated publication to ensure that they maximize their available time to comment. Accordingly, the proposed rule asks for interested parties to provide comments within 30 days of publication
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Companies' financial condition
QUESTION: You estimate that crop insurance indemnity payments will be $4.1 billion for this crop year. What are the current estimates for the underwriting gain or loss picture for the participating insurance companies?
To the extent an underwriting loss is expected, is RMA monitoring the financial condition of the companies and assessing their ability to meet their obligations?
ANSWER: An insurance company's underwriting gain or loss is calculated based on State reinsurance fund loss ratio. Applying an estimated state loss ratio to each of the reinsurance funds in that State, for each company, yields an estimated total underwriting loss of $223 million industry-wide. Consequently, an underwriting loss appears likely and RMA is closely monitoring the situation to enable it to take the appropriate actions if any reinsured company has financial difficulties. As of this time, RMA does not anticipate the failure of any reinsured company to meet its obligation.
Adjuster workforce
QUESTION: Is there any concern that an insufficient number of trained crop insurance adjusters will be available to adjust claims on a timely basis?
ANSWER: In situations like this year's drought, reinsured companies generally shift loss adjusters to acres of high demand to ensure the timely adjustment of losses. RMA has not heard that such measures will be inadequate this year, however, RMA will continue to monitor the situation.
Program implementation, Information Technology
QUESTION: 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. The farm bill separately requires the Secretary of Agriculture to develop a comprehensive information management system to be used in implementing the programs administered by the FCIC and the Farm Service Agency.
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Can you tell the Subcommittee what steps have been taken to implement these requirements?
ANSWER:
To date, RMA has taken the following steps to improve program integrity in accordance with section 121 of ARPA.
RMA has enhanced edits to validate reported land units against the public land survey system (PLSS). This is the precursor to utilizing RMA data and matching to other agencies' geospatial data.
Current information allows RMA to use geographically coded policy information to show where RMA's business is located, including, program participation, loss ratios and causes of loss. RMA can also compare crop insurance participation with demographic information in order to identify underserved and minority populations. RMA utilizes common USDA software for its GIS applications and is working with other USDA agencies to identify methodologies of sharing data and developing a consistent, agency-wide system architecture that will support GIS implementation in the short and long term.
Enhanced edits for Program Integrity
Enhanced validation of producers, entities and tax identification numbers to track producers from year to year and between other agencies. This improved the linkage and data reconciliation processes between RMA and FSA.
Implemented edits to determine if producers are new to the program. This reduces the ability of producers to receive benefits of new producer status defined by the crop insurance policies.
Added new fields for loss adjuster signature date and notice of loss date. Allows Compliance to analyze the length of time between completion of the claim and reporting to RMA, and strengthens data reconciliation efforts.
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Implemented maximum yield edits. RMA will not allow producer yield information to exceed certain limits specific to county crop programs based on the actuarial documents.
RMA has just completed matching FSA crop disaster payments to RMA producers to assure they are fulfilling linkage requirements defined in the 1999 and 2000 crop disaster bills. The information was provided to FSA on July 29, 2002.
RMA is also committed to complying with standard specifications for its desktop environment that are consistent with the common computing environment (CCE) initiative of USDA. All of the PC's, laptops, printers, telecommunications equipment and software RMA has purchased in the last five years have complied with or exceeded CCE requirements.
Data Mining and Warehousing
September 2001—Established data warehouse with over 750 million records.
67 data mining products have been produced to date supporting ongoing research, investigations, program reviews, field monitoring program and ad hoc requests. Some examples include:
November 2001—Added Land and New Producer Provisions program analysis for Policies and Procedures.
Missouri prevented planting analysis using GIS to identify disparate claims.
January 2002—Prevented planting analysis to identify anomalous claims that violated the Crop Insurance Handbook definition for prevented planting.
February 2002—Updated software developed to detect potential fraudulent yield switching by producers.
March 2002—Completed input for fiscal year 2002 Spot Check List for FSA growing season inspections, (ARPA mandated Field Monitoring program).
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April 2002—Identified producers with 7 consecutive years of losses exceeding premiums by 200 percent or more.
May 2002—Tillman and Comanche Counties, Oklahoma analysis to identify uninsurable/poor farming practices
September-October 2002- HQ and regional office user interface developed and deployed providing investigators with seamless access to producer, agent, and adjuster acreage, claim, and yield data RY1997–2001
Grain Sorghum Yields (to be submitted for the record)
QUESTION: The National Grain Sorghum Producers have submitted a statement for the subcommittee's hearing. Please respond to the following characterization in that statement:
''Throughout much of the U.S. sorghum belt, multiple-year droughts on the Plains, which have led to disaster assistance, have destroyed guaranteed yields for crop insurance purposes, unfortunately making the program largely ineffective. We are concerned that crops like grain sorghum still are not being rewarded for being a lower-risk cropping alternative. Policy traditionally has favored high gross revenue, riskier crops over sorghum, which has more yield stability.''
ANSWER: RMA does not believe that its policies provide any disparate treatment to grain sorghum producers over other crops. RMA is aware that in some cases grain sorghum producers believe that price elections offered under the crop insurance program favor, for example, corn over grain sorghum. However, RMA employs the same methodology for establishing grain sorghum price elections, such as Actual Production History Yields, etc., as it does for other similar crops. Under the Crop Revenue Coverage (CRC) plan of insurance the sorghum Base and Harvest Prices are computed by using 95 percent of the appropriate corn futures prices traded on the Chicago Board of Trade. Historically this has been the price relationship between corn and grain sorghum prices. The National Grain Sorghum Producers Association (NGSPA) has also discussed this issue with RMA. RMA advised NGSPA to contact American Agrisurance, who developed CRC, about possible changes to the CRC grain sorghum pricing methodology.
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With respect to the impact of multi-year droughts on guaranteed yields the Agricultural Risk Protection Act of 2000 (ARPA) made some progress in attempting to address this very issue. ARPA authorized the RMA to implement yield adjustments that may be elected by insured's. Yield adjustments allow an insured to substitute 60 percent of the applicable Transition Yield (T-yield) for actual yields that are less than 60 percent of the T-yield. Yield limitations and adjustments in the form of yield cups, yield floors and yield substitutions are provided to help mitigate the effects of loss years on producers' yields.
Yield cups limit the amount a carryover insured's approved yield may decline to less than 10 percent compared to the prior year's yield. Yield floors limit a carryover insured's approved yield from declining below a percentage of the applicable T-yield, based on the number of years of actual records the insured has provided for the crop and county (yield floors are not available for CAT coverage or most perennial crops).
RMA is currently evaluating the effectiveness of the yield substitution process to determine if more assistance can be provided. However, due to actuarial considerations and the elasticity of premium rate increases to account for any added benefits, any options currently available to RMA may be limited in scope and impact.
Another potential remedy is to extend the APH period because the more years of yields that are used will decrease the impact of a few bad crop years.
T-yields
QUESTION: Last year, RMA updated T-yields for spring planted crops. For many Texas counties, cotton T-yields were reduced dramatically as a result. While RMA
continues to support cupping APH reductions for individual producers, no such relief was provided ''though comparable'' for producers who were affected by dramatic T-yield declines.
Please provide your analysis and justification for this disparate use of program cups.
ANSWER: Cotton T-yields were updated for the 2002 crop year. They were based on the 1991–2000 NASS county yield data. T-yields were previously updated for the 1998 crop year. Since the 1998 update, cotton yields in the area have generally been lower;
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consequently, higher yields were replaced in some cases with lower yields. This process of T-yield determination is the same process used for all crops and areas and was applied in the same manner to the Texas cotton counties.
Waste, fraud, and abuse. Double Insurance
QUESTION: At the February implementation hearing, RMA testified that the double insurance provisions contained in section 108 of ARPA ''will take several years to implement.'' Naturally, a provision will take several years to implement if the agency declines to act for several years.
It has now been over two years since the enactment of ARPA, when can we hope to finally see this provision implemented?
ANSWER: RMA published the proposed rule for comment on September 17, 2002, that contains the double cropping provision and plans to have the final rule published in the Federal Register by the end of this year. This will make the double cropping provisions effective for the 2004 crop insurance programs.
RMA/FSA Data Reconciliation
QUESTION: 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.
In February, RMA testified that the data reconciliation process began during the fall of 2001, and that FSA is matching producer identity, crop share, and acreage.
While this level of data reconciliation represents some progress, it would seem that a substantial number of additional data fields would need to be added in order for reconciliation to serve as an effective tool. Do RMA and FSA intend to expand the data-set and fields to be reconciled?
If so, when can results from this effort be expected?
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ANSWER: The RMA/FSA Data Reconciliation Team (Team) explored in detail reconciliation limitations due to distinct program differences and possible short or long
term solutions to improve the quality and accuracy of RMA/FSA program data. The Team prepared a data requirements document that discusses other potential data elements for reconciliation, collection methods, data use, possible necessary data manipulation that would allow reconciliation at a lower level, contractual and/or statutory limitations and a general timeline for possible implementation.
The 2001 crop year reconciliation results and lessons learned will be incorporated into subsequent reconciliations including the possible expansion of data elements. RMA feels more study is needed with focus on eliminating redundancy in data collection and reporting before expanding the data sets and fields to be reconciled.
Also, please see our response to your earlier question on Information Technology.
Data warehousing, mining, and analysis
Yesterday, your Agency's first annual Program Compliance and Integrity Annual Report was submitted to Congress. In the section regarding future possibilities for data mining and automated data analysis, it is said that the identification of illegal activity requires comprehensive investigation and analysis that would be improved with the expansion of the database to include producers who are not currently in the crop insurance program.
QUESTION: What steps need to be taken in order for such a database to be realized?
ANSWER: Research in other insurance industries reveals that producers who commit fraud in one insurance program frequently commit fraud in others. RMA compliance has entered into a contract with a claims search service that will assist in identifying all persons with claims histories for all lines of insurance.
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QUESTION: What plans does RMA have to handle compliance issues through upgrading their use of GIS technology?
ANSWER: RMA has established a GIS workstation in every office using the ESRI software that was acquired through a USDA agreement. RMA has completed the first round of introductory training, which included training on the use of satellite imagery.
RMA has also joined the USDA's Imagery Archive, operated by the Foreign Agricultural Service to subscriber agencies. This allows RMA access through September 30, 2003, to the extensive collection of Landsat, Spot, Spot Vegetative Sensor, IRS, AVHRR and other satellite imagery. Use of this imagery provides timely and historical imagery analysis of individual fields, tracts and common land units, to assist in making compliance determinations.
RMA is working with it business partners, private industry and other government agencies to determine which processes and systems will need to be modified in order to effectively integrate operational data, customer information, spatial and other relevant data. GIS technology is being used to examine RMA policy data and insurance experience at the county and sub-county levels.
Internal and external work groups of RMA employees, contractors, insurance industry representatives and other government agency employees have identified processes and new applications on data integration within RMA, between business partners and across agencies that could benefit from GIS technology. Integration of new technology into policy and procedure can ensure the highest level of service at a savings to the Federal Government and reduce abuse of the program.
Some of the proto-type applications are:
A Risk Assessment Tool—Enables field staff to analyze geospatial data (e.g. soils, flood zone, slope, aspect, etc) and identifies ''risk'' areas and create digital maps that can be utilized by processing systems.
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Double Insurance Identification—Identifies insured entities who have insurance on more than one crop in a reported location, i.e. section. ARPA limited insurance coverage when a producer has a loss on a crop and insures a second crop on the same land. This application is to assist reinsured companies and RMA in the identification of possible violators.
Underserved Areas—By comparing census data to participation data, RMA's educational and outreach programs can target small and specialty crop producers by identifying geographical areas with an absence of insurance programs for producers or areas where RMA participation is low.
Analysis of Loss Areas—By integrating RMA policy data with agronomic, (soils, elevation, etc.), and climactic conditions, (rain, hail, temperature), allows the agency to identify and confirm conditions that led to losses.
Prevented Planting—Initiated two pilots to identify the potential prevented planting payments in Stutsman County, North Dakota and we are working with FSA using Landsat Imagery to monitor the impacts of late spring floods in Rouseau County, Minnesota. The North Dakota pilot provides insurance companies with reported planted and prevented planted acreage at the section level. The Minnesota pilot provides the same information but the data is shared between the two agencies.
Compliance successes
Yesterday, your Agency's first annual Program Compliance and Integrity Annual Report was submitted to Congress. In a summary table (Table 10; pages 28–29), the Report includes ten types of Compliance Case Sources, and the general status and performance results of each and in total.
QUESTION: What general conclusions do you draw from the data and the findings in this table and throughout the report?
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ANSWER: In section 121 of ARPA, RMA was directed to create processes by which FSA could assist in the monitoring of the crop insurance program. This approach facilitated RMA in focusing on prevention of waste, fraud, and abuse rather than relying on after- the- fact reviews. FSA, through its field infrastructure, became the eyes and ears of RMA. Early alerts from FSA helped RMA, working through the approved insurance providers, to investigate and, if applicable, stop improper or erroneous payments or make other appropriate corrections.
QUESTION: Of the compliance methods used by RMA, which are found to be most effective in uncovering abuse, in recovering taxpayer funds, and in deterring future abuse?
ANSWER: The data mining technologies enabled RMA to better focus the scope of its reviews and referrals to FSA. This technology allowed RMA to identify producers with a history of losses, which was not consistent with other producers in their area. Referrals of those producers to FSA for field inspections resulted in approximately $ 72 million of cost savings.
QUESTION: Within the various Compliance Case Sources listed, how do the Cost Avoidance results compare to the investigative expenses incurred?
ANSWER: The $94 million in cost avoidance results in a return on investment of approximately $900,000 per compliance investigator, (approximately 100 compliance investigators).
FSA Field staff
Yesterday, your Agency's first annual Program Compliance and Integrity Annual Report was submitted to Congress. It includes descriptions of the cooperation between FSA and RMA required under ARPA.
QUESTION: How would you generally characterize the status of the relationship?
ANSWER: Since the passage of ARPA, RMA and FSA have worked diligently to implement the provisions mandated. The 4-RM Program and Integrity Handbook was published in April 2001. RMA and FSA relationships have been guided by the procedures outlined in the Handbook. Their efforts have resulted in over 4,500 referrals/policies (to and from FSA) that support prevention/deterrence efforts (a 700-percent increase over the previous year). This working relationship is one that needs constant attention in order to improve and adjust processes in place. Amendments to the Handbook have already been put in place.
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QUESTION: Do you believe that the goals Congress intended to achieve by requiring RMA/FSA cooperation are being met?
ANSWER: Both FSA and RMA have worked hard to achieve the goals set forth by Congress. From October 2000–December 2001, the deterrence efforts (with the assistance of FSA) have resulted in $94 million of cost savings in the crop insurance program, with many more payments still being investigated. RMA reviewed over 12,000 crop insurance policies (540 percent increase over the previous year) that represented $1.5 billion in liability during this same period. Traditional criminal, civil, and administrative processes continue to be ongoing and have generated recoveries of about $35 million.
Agent-Adjuster Independence
Through the years, anecdotal complaints about crop insurance integrity have been made that agents and adjusters collude to benefit unscrupulous policyholders. Data mining tests described in your Compliance Report were designed—in part—with that concern in mind.
QUESTION: Is RMA concerned over the question of agent-adjuster independence?
ANSWER: RMA is concerned about anything that could adversely affect program integrity. RMA recognized the adverse affects of agent-loss adjuster collusion when it included provisions in the SRA requiring loss adjuster independence. As part of the disparate agent and loss adjuster analyses, RMA is looking for patterns indicating loss of agent-adjuster independence and such indications will be reviewed by RMA and the approved insurance providers and appropriate action taken.
QUESTION: What steps have been taken to ensure that adjusters' appraisals are not biased in favor of producers in order to boost crop insurance sales?
ANSWER: Analysis of past appraisals by loss adjusters are being made by RMA. Adjusters with a pattern of appraisals inconsistent with other appraisals in the same area, on the same crop and in the same time have been flagged for review and subsequent monitoring by RMA and the approved insurance providers
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RMA Compliance Activity
Yesterday, RMA submitted its first annual report to Congress regarding Program Compliance and Integrity as required by ARPA.
QUESTION: Can you summarize for the Subcommittee the provisions of that report which you think are of greatest interest?
ANSWER: ARPA has resulted in RMA working more closely with FSA State and County Offices on identifying potential crop problems and establishing more timely oversight. The referrals (to and from FSA) that support prevention/deterrence efforts alone now encompass over 4,500 policies (a 700-percent increase over the previous year). The establishment of the data warehouse and use of data mining technologies has played an integral role in the detection and prevention of potential waste, fraud, and abuse. Data mining results were forwarded to the Regional Compliance Offices who reviewed and analyzed the data. This information became the basis for the referrals to FSA requesting their assistance in monitoring the crop insurance program. This new emphasis on prevention has resulted in RMA identifying $94 million of cost savings in the crop insurance program during the period of October 2000—December 2001, with many more payments still being investigated.
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: The section regarding the use of FSA's field structure has been fully implemented.
QUESTION: To what extent have FSA employees received the necessary training as required by the law?
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ANSWER: Training that has been or will be provided:
Compliance and Oversight Training
RMA provided 16 hours of classroom training to FSA State Personnel on the Standard Reinsurance Agreement, the referral process, RMA's administrative process, as well as, the criminal and civil process of our cases. 280 personnel were trained at this session. Training was completed in March 2001.
Classroom Loss Adjustment Training-Phase 1
RMA provided 28 hours of classroom instructions on MPCI loss adjustment procedures, compliance and oversight, and the referral process.
Over 2,500 FSA personnel were trained and tested at 28 sessions throughout the United States. The sessions were held from April–June 2001.
Anti-Fraud Training
September 2001—contract awarded to video production company to develop anti-fraud training modules that are self-interactive/computer based or facilitated in a classroom setting
September 2002—CD/video training modules presented to FSA and insurance providers for final comments.
RMA will be providing the approved 8-hour training package to FSA State Offices and the approved insurance providers.
Field Monitoring Training—Phase II
Training modules on performing growing season, conducting pre-harvest inspections, prevented planting, establishing production, special farming practices, verifying causes of loss, general overview of the plans of insurance, and update training on the referral process are being developed by RMA.
USDA's Office of Communications is coordinating development of the distance (i.e., online/web based) learning package.
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The 24 hours of training will complete the 60 total hours of training required.
QUESTION: Has this provision led to the identification of losses that have been or might be paid in error?
ANSWER: Data reconciliation results:
September 2001—RMA transmitted 1.3 million relevant to insured producer crop share and acreage records to FSA for insured producers
December 2001- FSA downloaded to County Offices 1 million records to be reviewed based on FCIC Program Integrity 4-RM Handbook procedures. FSA County Offices forwarded 480,991 potential differences to FSA State Offices.
May 2002—FSA State offices referred to RMA 284,991 certified potential differences.
June 2002—RMA Administrator briefed on methodology for identifying 56,553 (80 percent reduction) potential differences based on Resolved, Immaterial Differences, Material Differences within Tolerance, and Material Differences Out of Tolerance.
August 2002—A statistical sample of 160 differences selected from 10,209 potential differences (ID mismatch, Share mismatch, at least a 10 percent acreage difference, and indemnity difference of greater than $1,000) were forwarded to the 19 approved insurance providers for review.
Out of the 120 differences received back from the approved insurance providers; 24 percent have been validated, and 76 percent have been due to allowable program differences (majority due to prevented planting programs
QUESTION: Have the insurance companies been included in the distribution of information obtained as a result of FSA monitoring and investigations?
ANSWER: RMA routinely distributes the FSA spot check results that disclose questionable activity to insurance providers. The insurance providers are requested to conduct their own internal review or assessment of the spot check results and take the appropriate corrective action.
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RMA also provides the insurance companies copies of FSA referrals made against insureds that are allegedly involved in questionable or fraudulent activities. If a referral alleges a company official is involved in questionable activities, RMA conducts its own internal review or investigation.
RMA carefully screens the cases forwarded to insurance providers to ensure they are not compromised and confidentiality is maintained.
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: The approved insurance providers have used FSA information very effectively in their compliance efforts. As with any new process that is put in place, it has been necessary to fine tune and adjust procedures. The referral team (representatives from RMA, FSA and the approved insurance providers) that was established after the passage of ARPA continues to evaluate and improve the communication process.
New Product development and research
New Policies
QUESTION: In February, RMA testified that research studies were complete or near completion on a number of areas.
Please update the Subcommittee with regard to further agency actions regarding these product development efforts.
ANSWER: The following update is provided from the draft 2002 Report to Congress (New and Specialty Crops) that is expected to be finalized and forwarded to Congress very soon.
Current Status of Fiscal Year 2001 Projects and Initiatives. Following is a list of research and development projects and initiatives funded during fiscal year 2001 in the areas of program research, development, and evaluation.
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Assess the Demand for Specific Weather Peril Insurance (University of Georgia)—This project is being conducted to research the feasibility of developing a general class of insurance products to protect against specific weather risks such as high or low precipitation or temperature. Work is continuing on this project.
Avocado Pilot Rating Evaluation and Analysis (Gov works/Signal)—This project is being conducted to evaluate the existing pilot avocado crop insurance program as required under section 523(a)(5)(A) and (B) of the Act. Evaluation is necessary to determine whether the program can be converted to permanent status. This project is scheduled to be completed by January 31, 2003, at which time RMA will proceed with a determination on the disposition of the pilot program for the future.
California Crop Insurance Utilization (University of California)—This project is being conducted to identify the potential market for specialty crop insurance in California and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers. Through this partnership with researchers at the University of California, Davis, specialty crops producers in California were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Cotton Boll Weevil Eradication Program Impact on Actual Production History (APH) Yields (Research Report) (Watts and Associates)—This project was conducted to analyze changes in cotton yields where measures have been taken to reduce boll weevils. The project was undertaken pursuant to section 508(g)(5) of the Act which requires the development of a methodology for adjusting the actual production history of a producer when specified conditions apply and crop yields are increased as a result of successful pest control efforts. The study was completed and indicated no APH yield changes should be made due to the Cotton Boll Weevil Eradication Program.
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Cut Flower Research Report (National Crop Insurance Services)—This project is being conducted to research the best techniques for insuring cut flowers and cut cultivated floral greens. The Final Research Report for this project was accepted September 10, 2002, and RMA is evaluating options to proceed with program development during fiscal year 2003.
Evaluate the Use of Satellite and Aircraft Remote Sensing for Crop Loss Adjustment (Agricultural Research Service National Soil Tilth Laboratory)—This project is being conducted to determine the feasibility of using various remote sensing measures of yield to field-scale evaluations of crop yield and yield loss for the purposes of insurance adjustment. Work is continuing on this project.
Feasibility of Revenue Coverage Plans that Maximize Producer Revenue—Research Report (Watts and Associates)—This project was conducted to investigate opportunities for new and improved revenue coverage plans. The results were positive and the program development was approved. A task order for program development is expected to be awarded early in fiscal year 2003.
Florida Specialty Crops Survey (University of Florida)—This project is being conducted to identify the potential market for specialty crop insurance in Florida and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers. Through this partnership with researchers at the University of Florida, specialty crops producers in Florida were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Forecasting the Occurrence of Potato Late Blight (University of Idaho)—This project is being conducted to develop a Potato Late Blight forecasting model for potatoes. Weather stations were calibrated in March and April 2002, and were deployed in nine commercial potato fields and one research plot location. Research plots were established at Bonners Ferry and Aberdeen, Idaho, and researchers are in the process of creating the predictive model, performing fungicide tests, and scouting fields.
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Fresh Vegetables—Research Report (AgriLogic, Inc.)—This project was conducted to research the potential for development of a risk management strategy to provide coverage for asparagus, broccoli, carrots, cauliflower, celery, garlic, globe artichoke, lettuce-head, lettuce-leaf, lettuce-romaine, and spinach. The research report is completed and RMA is in the process of making a decision on proceeding with a program development project that would be awarded early in fiscal year 2003.
Hawaii Tropical Fruits and Trees (Research Report) (AgriLogic, Inc.)—This project was conducted to research the best approaches to provide risk management strategies for the following Hawaii Tropical Fruits and Trees: Bananas, Coffee, Guavas, Papaya, Pineapples, Mango, Lychee, Rambutan, and Atemoya (Moya). The feasibility study is completed and a program development project is expected to be awarded in fiscal year 2002.
Income Protection Rating and Pricing Evaluation (GovWorks/Signal)—This project is being conducted to evaluate the existing Income Protection pilot crop insurance program as required under section 523(a)(5)(A) and (B) of the Act. Evaluation is necessary to determine whether the program can be converted to permanent status. Evaluation of the pilot and reporting on the recommendations are nearing completion.
Investigation of Producers' Management of Storage Problems for Onions (University of Idaho)—This project is being conducted to research how producers can minimize losses to stored onions. Work is continuing on this project and the study is projected to be completed by May 2005.
Multiple Year Coverage—Research Report (Watts and Associates)—This project was conducted to determine if a multi-year policy would reduce fraud, waste, and abuse of crop insurance in certain geographic areas. The feasibility study was completed and RMA expects to award a project for program development early in fiscal year 2003.
National Risk Management Feasibility Program for Aquaculture (Mississippi State University)—The purpose of this project is to conduct a large-scale and thorough investigation into the feasibility of developing and implementing risk management programs for producers of selected aquaculture species (catfish, salmon, trout, and baitfish) in the United States, and to develop the risk management products, policies, and related materials necessary to implement these programs. The partnership has conducted the first National Technical Exchange meeting. This meeting brought together a broad base of aquaculture experts, researchers, and State and National Association members from across the United States. Teams were organized to begin research into the four species identified in the partnership. Upcoming activities include listening sessions with producers and development of preliminary reports.
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New York Specialty Crops Survey (Cornell University)—This project was conducted to identify the potential market for specialty crop insurance in New York and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers.
Through this partnership with researchers at Cornell University, specialty crops producers in New York were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Nursery Program Plant List Research, Updating, and Revisions (DataScape LLC)—The purpose of these projects was to conduct research on the nursery plant listing and make recommendations for changes, to provide expertise for continued expansion of the nursery eligible plant list, to review and revise winter storage requirements as needed, and to address other nursery issues. Work was completed on these projects. RMA updated the nursery program beginning the 2003 crop year, including updating the software from a 16-bit to a 32-bit application to improve efficiency. RMA will be using the information to insure additional nursery plant species for the 2004 and subsequent crop years.
Organics Study (USDA, Economic Research Service)—The purpose of this project is to study and provide recommendations on yields, risks, and related issues regarding crops grown organically. Work is continuing on this project.
Pasture and Rangeland Program—Research Report (AgriLogic, Inc.)—This project was conducted to investigate possibilities for risk management programs for pastures or rangeland for forage. A program development has been approved and a task order is expected to be awarded early in fiscal year 2003.
Pecan Pilot Evaluation Feedback and Issues Report (GovWorks/Signal/North Carolina A&T)—This project was conducted to evaluate the existing pilot pecan crop insurance program as required under section 523(a)(5)(A) and (B) of the Act. This project is complete. On September 19, 2002, the FCIC Board of Directors approved expansion into 79 additional counties in Georgia for the 2003 crop year and conversion of the pilot program to permanent status as soon as the regulatory process to covert the pilot program is complete (expected to be effective beginning the 2004 or 2005 crop year).
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Pennsylvania Specialty Crops Survey (Penn State University)—This project was conducted to identify the potential market for specialty crop insurance in Pennsylvania and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers. Through this partnership with researchers at Penn State University, specialty crops producers in Pennsylvania were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Perennial Pathogen Research Report (AgriLogic, Inc.)—This project was conducted to research the potential for development of a risk management strategy for tree, vine, and bush crop growers that are subject to perennial crop pathogens. The research for this project is virtually completed and, depending upon the recommendations of RMA, a program development project may be awarded early in fiscal year 2003.
Performance-based Premium Rate Discount Report—This project is being conducted to examine, develop, and evaluate the effect of good experience discounts on RMA program loss experience and producer participation. Work is continuing on this project.
Production Input Expenditures Study for Existing RMA Policies (University of California)—This project is being conducted to develop a methodology for determining and updating production input expenditure data for certain crops, particularly specialty crops, to facilitate the research and development of new and modified risk management products for producers. The major use of the data will be to update crop budget information for current Dollar Plan crops. The study is scheduled for completion in August 2003.
Quarantine Research and Program Design Report (AgriLogic, Inc.)—This project is being conducted to research the potential for development of a risk management tool for producers of crops subject to quarantine regulations. Work is continuing on this project and, depending upon the recommendations of RMA, a program development project may be awarded in fiscal year 2003.
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Research and Development of a Cost of Production (COP) Insurance Program for Soybeans, Corn, Cotton, Wheat, Rice, Almonds, Peaches, Cranberries, Apricots, Nectarines, Onions, and Sugarcane (AgriLogic, Inc.)—This project is being conducted to research and deliver cost-of-production based revenue insurance programs for the 12 specified crops in select areas. The first COP program for cotton was delivered to RMA. A cotton COP package was sent to expert reviewers with a due date of September 23, 2002. In its October meeting, the Board asked RMA to address concerns of reviewers, Office of General Counsel, and the Board, and bring it back for reconsideration when concerns have been addressed. Work is continuing on the other crops.
Revenue Insurance for Cattle and Hog Producers (Iowa State University)—This project is being conducted to research the feasibility of providing beef cattle and hog risk management tools and the relative desirability of these tools. Work is continuing on this project.
Sweetpotato Pilot Evaluation Feedback and Issues Report (GovWorks/North Carolina A&T)—This project is being conducted to evaluate the existing pilot sweetpotato crop insurance program as required under section 523(a)(5)(A) and (B) of the Act. Evaluation is necessary before a decision can be made to convert the pilot program to permanent status. The feedback and issues report was completed and an evaluation contract was forwarded to Gov works, to be awarded in late fiscal year 2002.
Value Enhanced Products Research Report (USDA, Economic Research Service)—The purpose of this project is to address identity-preserved and other value-enhanced products including specialty grains, and/or to recommend actions to ensure that risk management programs appropriately address the needs of producers. Work is continuing on this project.
Wild Salmon Feasibility Study (CSREES/Univ. of Alaska, Fairbanks)—The purpose of this project was to research the feasibility of developing a risk management strategy for wild sockeye salmon that addresses the economic needs of Bristol Bay fishermen. The feasibility study was completed and indicated it is not feasible to develop a wild salmon crop insurance program for Bristol Bay. RMA may pursue the development of another risk management tool if a feasible option is identified.
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Boll Weevil APH Adjustment
QUESTION: ARPA specifically requires that RMA develop methods for adjusting APH levels for producers in areas where programs such as boll weevil eradication are successful. In February, RMA testified that a final report evaluating the impact of the boll weevil eradication program had been received by the agency, and that the report was being evaluated.
ANSWER: The research report has been evaluated and it appears that, based on the statistical and producer data from 101 counties in Alabama, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, and Texas, adjustments in APH yields are not supported by the findings. The report specifies that more data may strengthen the analysis in certain areas, and recommends that North Texas be re-evaluated after more data becomes available from ongoing or recently initiated Boll Weevil Eradication areas. RMA does not anticipate making any APH adjustments unless additional data supports doing so.
QUESTION: What further progress has been made in this matter and when can cotton producers expect to have an opportunity to adjust their APH levels appropriately?
ANSWER: See previous response.
Cost of Production Insurance
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 COP 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 to deliver to RMA the components of a COP insurance pilot program for 12 crops (soybeans, corn, cotton, wheat, rice, almonds, peaches, cranberries, apricots, nectarines, onions, and sugarcane) in selected areas. A COP program for cotton has been delivered to RMA. The FCIC Board of Directors directed that the cotton COP proposal be sent to Expert Reviewers with a due date of September 23, 2002.
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The results of their reviews were considered by the Board at its October 2002, meeting. Unfortunately, the expert reviews indicated that a considerable amount of work remained in order to successfully bring a COP policy to producers. Consequently, the Board directed RMA to return the proposal to AgriLogic for additional work. Work is continuing on the other crops.
Cotton Quality Loss Adjustment
QUESTION: Please update the Subcommittee on progress in the project to update and improve cotton quality loss adjustment provisions.
ANSWER: The ARPA required RMA to contract for the development of improved quality adjustment procedures for crops that currently have quality adjustment provisions and to consider a cotton quality program, which may be adjusted on a less-than-unit (bale-by-bale) basis. RMA has received the contract's final deliverable and is reviewing the study. However, it does not appear that the contracted study was able to determine a reasonable solution to this issue. The study concludes that offering coverage on a bale-by-bale basis would be extremely expensive and most likely cost prohibitive to insured producers. However, after reviewing the study, RMA plans to release the study to all interested parties and seek their comments as to the feasibility of implementing any recommendations or to offer alternative ideas that can be considered.
Livestock
RMA has recently taken steps to accomplish the ARPA directive that at least two pilot programs be conducted to help livestock producers manage risk. ARPA directs that the programs be operated so as to limit costs to not more than $15 million in fiscal year 03 and to $20 million in each subsequent year.
QUESTION: Based on your experience with these programs to date, do you believe that these dollar limits will be reached?
ANSWER: For fiscal year 2002, the two available livestock pilot programs have used $277,469.68 of the $10,000,000 in available underwriting capacity. However, sales were limited by the fact that programs were implemented very late in the fiscal year. It is anticipated that sales will increase during fiscal year 2003 and there are additional livestock products being evaluated and developed. However, it appears unlikely that the limit will be reached during fiscal year 2003. For future years, depending on any expansion of the availability of livestock programs and increased participation, it is possible that these limits could be reached.
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QUESTION: Do you foresee a time in the future when these limits should be increased?
ANSWER: Yes. The two existing livestock pilot programs are limited to swine in all 99 counties in Iowa. RMA has contracted for the development of additional livestock products, and; private products for other types of livestock have already been submitted for Board consideration. In the event additional livestock pilot programs are approved, or if the two existing programs are expanded to other areas, it will likely be necessary to increase the underwriting capacity to support those programs.
Enhanced GRP for cotton
QUESTION: In a statement submitted for today's Record, the National Cotton Council notes that more cotton producers would buy Group Risk Protection policies were it not for the lack of individual coverage for named perils (e.g., hail). The Council recommends an ''enhanced GRP'' policy that would provide such coverage.
Has RMA considered contracting for the development of such a policy?
What is the agency's general reaction to this suggestion?
ANSWER: The Group Risk Plan of insurance (GRP) is designed as a risk management tool to insure against widespread loss of production on a county basis. It is primarily intended for producers whose farm yields trend with the county average yield. By its very nature, GRP is an area coverage policy. However, RMA will examine the feasibility of creating an endorsement that would permit individual coverage for named perils.
Crop Insurance and Disaster Questions
QUESTION: The justification for past disaster assistance is that insufficient acreage was participating in the insurance program or that the purchased coverage was inadequate to protect producer income. You have said that of the nearly 80 percent of insurable acres that is covered by RMA policies, 53 percent is insured at coverage levels of 70 percent or higher for the 2002 crop year. Yet, the Senate has passed disaster assistance legislation.
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Can you suggest what, in this coverage or in lower levels of coverage, is inadequate to protect producers from yield loss?
ANSWER: The crop insurance coverage levels offered by FCIC for most grain crops range from catastrophic risk protection (50 percent of the producer's average yield at 55 percent of the expected market price) to 85 percent of the producer's average yield at 100 percent of the expected market price. Coverage levels greater than 75 percent are offered on selected crops in selected counties as determined by FCIC. At this time the highest coverage level offered by FCIC is 85 percent. The availability of these coverage levels provides an adequate safety net for most producers.
However, coverage level may not be the problem for some producers. Of greater effect may be multiple year's loss effect on the producers actual production history, although the 60 percent yield plug option authorized by ARPA appears to be having a positive effect in assisting with the decline of actual production history yields. RMA is conducting further analysis to determine how significant the effect is and whether more can be done.
One possible remedy may be to increase the ten-year period upon which the produced APH yield is based. The more yield in the data base, the less effect loss years will have. This would require a legislative change.
Furthermore, the protection currently available for specialty crops and forage production is limited. While we are working to improve the availability of crop insurance coverage in these areas, there remains a gap in the protection offered to these producers.
QUESTION: If Senate-passed disaster assistance is added to the indemnity provided at various levels of coverage, the total gross revenue that a producer would receive from the market, direct payments under the 2002 farm bill, and disaster assistance as well insurance indemnity, would increase as his harvested yield per acre fell.
At 70 percent coverage, this gross revenue would exceed the level the producer would have expected at the time of planting for such crops as corn and soybeans.
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Are you concerned that producers would have an incentive to maximize their income by destroying their crop to obtain greater indemnities and disaster assistance?
ANSWER: Fraud, waste, and abuse are always a concern. The possibility that an insured may change his or her behavior in order to maximize an indemnity payment is a concern for all forms of insurance. Crop insurance is no exception. This is especially true when producers realize that failure of their crops can result in greater potential income than harvest. RMA and insurance providers will have to be especially vigilant in reviewing claims to ensure that producers properly care for the crop. RMA has tools to assist in these efforts. The ARPA provision regarding good farming practices will assist in combating the effort of producers to fail the crop. Further data mining will assist RMA to identify producers whose losses are anomalous to the area or the weather conditions.
QUESTION: Would this not raise premium rates for all producers in future policy offerings?
ANSWER: The crop insurance program is required by law to be actuarially sound. Therefore, premiums collected must cover indemnity payments over the long run. Any increase in indemnity payments, will cause premiums to increase as well.
QUESTION: If producers receive greater income than they would without a crop failure, what concerns arise with U.S. commitments under the World Trade Organization?
ANSWER: Paragraph 7 of Annex 2 of the Uruguay Round Agreement on Agriculture sets forth the policy-specific criteria for green box characterization of government financial participation in income insurance and income safety-net programs. Similarly, paragraph 8 of that Annex sets forth the requisite criteria for ''payments (made either directly or by way of government financial participation in crop insurance schemes) for relief from natural disasters.'' Among these, subparagraph 8(e) states that ''where a producer receives in the same year payments under this paragraph and under paragraph 7 (income insurance and income safety-net programs), the total of such payments shall be less than 100 percent of the producer's total loss.'' With higher coverage levels, some producers could receive such total payments in excess of total loss, a result which would have implications for characterization of certain disaster payments as green box under paragraph 8.
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QUESTION: The supporters of disaster assistance might argue that those without insurance require assistance. Is there justification for providing assistance at a level greater than the 50 percent coverage provided by CAT policies that are available to producers for $100?
ANSWER: The greater the amount of disaster assistance, and the more consistently it is offered, the less incentive producers have to purchase crop insurance. Disaster assistance is essentially the provision of an insurance payment without charging a premium. To maintain a high level of participation in the crop insurance program, disaster assistance should be kept to a minimum.
Where crop insurance is available, producers may choose the coverage level that best suits their needs—ranging from 50 percent to 85 percent. If a producer chooses a low level of coverage, or no coverage at all, it should be an indication that the producer is able to absorb the risk, and disaster assistance, especially at higher levels of coverage, should not be needed.
Where crop insurance is not available, producers may be forced to accept risk that they are not able to handle. In these areas, disaster assistance consistent with CAT may be appropriate.
QUESTION: Earlier disaster legislation, such as that enacted from 1988 through 1994, provided that a producer could receive no more disaster assistance, along with market revenue and insurance indemnity, than his gross revenue would be without a crop loss.
Would such a requirement in disaster assistance legislation adversely affect the purchase of crop insurance? How might it be designed so that it would not affect the insurance program?
ANSWER: When a producer's assistance is reduced by the amount of his or her crop insurance indemnity, the producer is discouraged from purchasing crop insurance in the future. It would not make sense to pay a premium to get the same amount of compensation the producer would have received without crop insurance. To the extent that the producer believes there will be disaster assistance in the future, it is optimal for the producer to purchase a lower level of insurance coverage at a lower premium.
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One solution may be to limit disaster payments to remedy situations that are not covered by insurance.
QUESTION: As you have noted, the risk management tools for livestock producers are limited.
What are the problems with current forage crop policies?
ANSWER: The current forage production policy requires individual production records and crop appraisals to adequately determine losses. However since most production is fed on farm, adequate records are not available. Further, there are questions regarding whether the current loss appraisal method accurately determines production losses. In addition, the GRP forage policies have been criticized for their mechanisms for calculating the yield that are used to determine whether qualifying losses have occurred and for delays in loss determinations.
QUESTION: How will the new forage and rangeland programs you mentioned address this need?
ANSWER: The new pasture and rangeland program being studied is expected to more adequately serve the needs of producers by its capability of being tailored to reflect the conditions and needs in local areas. The study indicates that a program using a computer model to compute plant growth is feasible and development will be started on it. This will not require ranchers to provide extensive records and it will not involve individual (on-farm) loss adjustment. Payments would be based off the results of the inputs into the model. However, legislative authority to base insurance on other than the APH or price will be required. It is anticipated this model may have application to the area-based GRP Forage policy to improve the credibility of the triggering of losses and the timeliness of indemnity payments. It also may simplify loss calculations. In addition, the Forage Program Improvement contract is expected to find ways to improve forage appraisals currently used to adjust losses under the individual-based forage production program.
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QUESTION: Area yield forage policies appear to be well-suited and cost-effective means for providing this protection. Please describe RMA's experience with such policies.
ANSWER: Although cost effective, there are problems with these area coverage policies. The first is determining the yield upon which payment will be based. Currently data from the National Agricultural Statistic Service (NASS) data is used but it is alleged that this data, which is obtained voluntarily from producers, is not an adequate reflection of yields. Further, there is a delay in payments because the current years production must be determined, which may not occur until months after the insured period has ended.
QUESTIONS SUBMITTED BY CONGRESSMAN DOUG OSE
QUESTION: When did RMA last examine the per acre value and yields of California almonds?
ANSWER: RMA last examined the per acre value and yields of California almonds for the 2003 crop year.
QUESTION: If yields and per acre values have been updated since the inception of the program, how long did it take for RMA to institute the new yields and per acres values?
ANSWER: Almond price election and individual yields are updated annually. If program yields are re-evaluated, this process requires 3 to 6 months before a change is instituted.
QUESTION: What about other stone fruits grown in California?
ANSWER: Yields and per acre values for stone fruit are updated in the same manner as stated in almonds. Prices are updated annually and program yields are reviewed every 3 years. Program yield reviews for stone fruit will take place this year and changes would be implemented for 2004.
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QUESTION: Considering there have been natural disasters in California over the last couple of years and growers have complained yields and per acre values are incorrect, does RMA have any plans to update the almond and stone fruit yields and per acre values for California?
ANSWER: As stated above, individual yields and price elections are updated annually. The program yields for almonds were updated for the 2003 crop year and program yields for stone fruit will be reviewed this year and changes would be implemented for the 2004 crop year.
QUESTION: Since California has a wide growing region where almonds are produced, are there regional differences in yield and per acre value within the state?
ANSWER: The price election developed by RMA incorporates data collected by the National Agricultural Statistics Service (NASS). The data collected by NASS reflect an aggregate grower price and are not segregated by region or variety. Therefore, RMA has no data upon which to calculate regional prices. However, yields are based on actual production history, so regional differences are considered yields.
QUESTION: Are these recognized within RMA's insurance program?
ANSWER: Yes. For each county, RMA develops an individual insurance offer based on actual county level yield data. The insured's coverage is based on their individual proven yield. The insured's premium cost will vary based on their individual proven yield and the coverage level they purchase.
The almond price elections do not reflect differences based on either region or variety.
QUESTION: Same question for stone fruits in California.
Answer: Yes. Stone fruit yields vary by type of stone fruit (apricots, peaches, etc.) and by county. RMA develops an individual insurance offer for each county based on actual county level yield data. The insured's coverage is based on their individual proven yield. The insured's premium cost will vary based on their individual proven yield and the coverage level they purchase.
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For purposes of pricing, the stone fruit price elections do not reflect differences based on either region or variety because such information is not maintained by NASS.
QUESTIONS SUBMITTED BY CONGRESSMAN JERRY MORAN
QUESTION: Farmers being forced to continue to irrigate dead crops.
Kansan constituents have questioned RMA's policy of allowing insurance companies to force producers to continue irrigating even after the crop is dead. Some producers have been told by their agent to keep irrigating until a claim adjuster can come out to inspect the crops, even after corn has not pollinated and is obviously worthless. This is a waste of water, particularly in a drought year like this one, and does nothing to help the conservation of the Ogallala Aquifer.
Administrator Davidson stated during a drought forum in Goodland, Kansas, that RMA would not force any producer to irrigate beyond the legal limits on their crops; however, the legal limit is not the issue. Producers are under their legal limit, but have no crop to put the water on, plus they're paying pumping costs when they will have no crop revenue to cover this variable cost. It's doubly frustrating because not only are they being forced to continue to waste water on dead crops, but they are also forced to continue spending money they don't have, to maintain and run the irrigation pumps (crop insurance policies do not cover this cost).
At the hearing, Administrator Davidson clarified that RMA policy does not require a producer to continue irrigating a dead crop. Has this message been communicated to companies, agents, and regional offices?
ANSWER: After hearing that some companies may have required continued irrigation on failed crops, RMA immediately called on six major insurance companies doing business in Kansas. None of the Claims Managers contacted supported continued irrigation of failed crops and all indicated that they would follow-up to make sure individual loss adjustors or agents were not requiring unnecessary irrigation. After these phone calls, RMA has not heard of further problems with this issue.
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QUESTION: Planting wheat into failed milo acres.
With the late August rain, some producers have just enough moisture to put wheat in the ground where they lost their milo crop. They're being told that if they do plant wheat, it won't be eligible for insurance. Will the wheat be eligible? If so, has that been communicated to companies? If not, are they eligible for prevented planting?
ANSWER: Unfortunately, there is no simple answer for your question. RMA is prohibited from offering insurance for multiple crops on the same acreage if it is not a common practice to plant/harvest multiple crops. If it is typical in that area to plant a wheat crop after grain sorghum (milo) has been harvested, then the wheat crop may be eligible for insurance. Provided there is a reasonable expectation that adequate moisture will be available for the wheat crop.
Prevented planting coverage may also be available for the wheat crop if in a typical year the producer would expect to harvest a milo crop and plant wheat into the same acreage. If, on the other hand, the wheat crop is only being considered due to the loss of the milo crop, then insurance would not be available.
Rest assured that RMA will make sure the companies understand that a producer should not be prevented from following their normal farming practices simply because they have suffered a loss.
QUESTION: Drought and prevented planting.
If producers are suffering drought, is there a provision regarding prevented planting that would cover them? The concern is that in some parts of the state that lack any subsoil moisture, they will disturb ground and cause excessive wind erosion if they try to plant wheat this fall.
ANSWER: Prevented planting coverage is provided for most annual crops. Qualifications for payments include: (a) the applicable area must have experienced a prolonged period of drought; (b) available and expected moisture must be inadequate for germination of seed and continued crop growth; and (c) other producers in the impacted area must also be prevented from planting the insured crop. If conditions are such that disturbing the soil would result in excessive erosion, it would likely be considered to be a poor farming practice to plant and it is also likely that the qualifications for a prevented planting benefit would be met.
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QUESTION: Coverage on continuous crop wheat.
Coverage is offered in eastern Colorado and the Oklahoma panhandle, but not in southwest Kansas. Several constituents indicate a desire to purchase coverage, even if it's for a low yield. Rep. Moran inquired about this problem with the previous administrator, Phyllis Honor, at the February 13, 2002, subcommittee hearing and received a written response explaining why RMA isn't offering it (too high a loss ratio). However, we continue to get requests from constituents stating that they would be willing to purchase coverage at a low yield and high premium price. In addition to earlier report language in the Senate version of the Ag Risk Protection Act, there's also a recent provision in the farm bill, Sec. 10005, expressing support for the expansion of coverage in southwest Kansas:
SEC. 10005. SENSE OF CONGRESS ON EXPANSION OF CROP INSURANCE COVERAGE.
It is the sense of Congress that the Federal Crop Insurance Corporation should address needs of producers through the expansion of pilot programs and coverage under the Federal Crop Insurance Act (7 U.S.C.1501 et seq.), including—(1)crop revenue insurance for the producers of pecans in the State of Georgia; and (2)coverage for continuous crops of wheat produced in the State of Kansas.
ANSWER: In recent years several individuals have expressed an interest for insurance coverage of their continuous crop wheat. In an effort to offer such coverage through a
written agreement, members of the Topeka Regional Office performed the necessary field inspections needed to accurately judge soil moisture and the adequacy of weed control. Few of the agreements were accepted and even where the written agreement was accepted, the wheat crop acreage reports most often revealed that there had been no continuous crop wheat acreage reported for insurance. Making insurance available in these counties would likely have the same result because the terms and conditions would be substantially the same as those offered under the written agreements
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QUESTION: Quality loss insurance.
Two years ago, eastern Kansas experienced drought conditions similar to those currently plaguing most of the western two-thirds of the state. However, due to different cropping practices in the eastern region, producers suffered different types of losses than the total acreage loss or abandonment we're seeing in western Kansas this year. Eastern Kansas is soybean-oriented and those producers actually harvested a crop during the 2000 drought, but because of the drought the beans were damaged and were smaller-than-normal size
and green in color. They were heavily discounted by processors because the green pigment made the oil virtually unusable for the food industry.
The present method of insuring commodity crops reflects yield reduction as the principal determinant for losses. Yet in cases like the green soybeans, quality is equally important for profitability. Have program improvements been considered that would better reflect the losses associated with quality reductions, in case this scenario occurs again?
ANSWER: Under the current Coarse Grains Crop Insurance Provisions, soybeans not meeting the grade requirement for U.S. No. 4 because of test weight or kernel damage (excluding heat damage) or having a musty, sour, commercially objectionable foreign order (except garlic odor) or which meet the special grade requirements for garlicky soybeans will be eligible for quality adjustment. The Federal Grain Inspection Service (FGIS), under the United States Grain Standards Act, defines all of the aforementioned terms including damage. If the soybeans are sufficiently green to be considered damaged and the percent of damage is so great so as to render the soybeans less than U.S. No. 4 grade, then quality adjustment will apply. To protect the integrity of the crop insurance program quality adjustment is based on official standard grades not discounts that may be imposed by local buyers in any given year. To allow soybeans, although green, that are not sufficiently green to be defined by FGIS as damaged soybeans to be eligible for quality adjustment, because some local buyers may severely discount them, could subject the program to fraud, waste and abuse.
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The Agricultural Risk Protection Act of 2000 required the Risk Management Agency (RMA) to contract for the development of an improved quality adjustment procedure for crops that currently have quality adjustment provisions. The purpose of this study is to ensure that the quality discounts accurately reflect local market quality discounts and the price producers actually receive; and that the discounts not be subject to manipulation, fraud, waste, or abuse, and are administratively feasible to implement. RMA has received the contract's final deliverable and is reviewing the study; however, it does not appear that the contracted study was able to determine a reasonable solution to this issue. We plan to release the study to all interested parties in the near future to seek their comments as to the feasibility of implementing any recommendations or to offer alternative solutions.
QUESTION: Change in 2003 crop handbook for wheat.
In the past, producers in continuous crop counties were allowed to insure their wheat as fallow if that was still a standard practice on their farm. Continuous crop and fallow were insured as such, even if both practices were followed on the same farm.
We have heard that RMA has changed the handbook and if a producer has both continuous crop and fallow wheat, all must be insured on the continuous crop policy, resulting in higher rates and premiums. Has this change actually occurred? If so, what was the rationale for the change in policy?
ANSWER: RMA has not made any change in its handbook that requires an insured producer, who has both continuous crop and summer fallow wheat, to insure both as continuous crop. RMA requires producers to report all planted wheat acres and indicate the associated farming practice (i.e., irrigated, summer-fallow or continuous crop). Premium rates are charged based on the report of acreage under each practice.
QUESTIONS SUBMITTED BY CONGRESSMAN TIM HOLDEN
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QUESTION: The farm bill made some needed changes to the crop insurance program. In particular, we expanded the Adjusted Gross Revenue Pilot program in Pennsylvania. Could you update me on the progress that is being made?
ANSWER: As required under the farm bill, RMA worked with the Pennsylvania Department of Agriculture in June and July to select eight counties to receive the Adjusted Gross Revenue insurance program for 2003. On July 23, 2002, Agriculture Secretary Ann Veneman announced that AGR would be expanded into Crawford, Columbia, Erie, Fayette, Lancaster, Schuylkill, Westmoreland, and York counties in Pennsylvania. RMA has been working with the Pennsylvania Department of Agriculture, the Pennsylvania Agricultural Statistics Service, state and county level Farm Service Agency (FSA) and Cooperative State, Education and Extension Service (CSREES) employees, the Pennsylvania State University and producers in the selected counties to set up the AGR program.
On September 16–20, two teams from RMA traveled to the eight selected counties, visited farms, talked with producers, and worked with the partners listed above to set up the actuarial and underwriting structures for these counties. Rates will be released in October and sales will begin in December and continue until January 31, 2003 for coverage for the 2003 crop year. The regional RMA office will coordinate a risk management education effort later this fall in conjunction with FSA, CSREES, and insurance companies. Since Pennsylvania has been identified as an underserved state, a 50 percent cost share paid by the Federal Government will apply to the producer portion of the premium.
You may also be interested to know that at its October 2002 Board meeting, the Federal Crop Insurance Corporation Board of Directors gave final approval for the development of a pilot program called AGR-Lite for all counties of Pennsylvania, except Philadelphia. AGR-Lite was developed by the Pennsylvania Department of Agriculture and contains many features of AGR, but was designed to appeal to the many small, diversified producers in Pennsylvania who have not taken advantage of the currently available risk management tools.
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QUESTION: I still hear a lot of complaints, especially from fruit and vegetable farmers, about limited policy choices. I know we are trying to educate farmers about the many different polices, but there are still farmers without options. What are you doing to address this issue?
ANSWER: Following are a number of projects RMA has undertaken or is planning for the near future to address the needs of fruit and vegetable growers, taken from the draft 2002 Report to Congress (New and Specialty Crops) that is expected to be finalized and forwarded to Congress very soon.
Fiscal Year 2001 Projects and Initiatives. Following is a list of research and development projects and initiatives funded during fiscal year 2001 in the areas of program research, development, and evaluation for fruit and vegetable programs.
Assess the Demand for Specific Weather Peril Insurance (University of Georgia)—This project is being conducted to research the feasibility of developing a general class of insurance products to protect against specific weather risks such as high or low precipitation or temperature. Work is continuing on this project.
Feasibility of Revenue Coverage Plans that Maximize Producer Revenue—Research Report (Watts and Associates)—This project is being conducted to investigate opportunities for new and improved revenue coverage plans. A decision has been made to proceed with program development and a task order for program development is expected to be awarded early in fiscal year 2003. This project includes a number of fruit and vegetable crops.
Forecasting the Occurrence of Potato Late Blight (University of Idaho)—This project is being conducted to develop a Potato Late Blight forecasting model for potatoes. Weather stations were calibrated in March and April 2002, and were deployed in nine commercial potato fields and one research plot location. Research plots were established at Bonners Ferry and Aberdeen, Idaho, and researchers are in the process of creating the predictive model, performing fungicide tests, and scouting fields.
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Fresh Vegetables—Research Report (AgriLogic, Inc.)—This project was conducted to research the potential for development of a risk management strategy to provide coverage for asparagus, broccoli, carrots, cauliflower, celery, garlic, globe artichoke, lettuce-head, lettuce-leaf, lettuce-romaine, and spinach. The research report is completed and RMA is in the process of making a decision on proceeding with a program development project that would be awarded early in fiscal year 2003.
Investigation of Producers' Management of Storage Problems for Onions (University of Idaho)—This project is being conducted to research how producers can minimize losses to stored onions. Work is continuing on this project and the study is projected to be completed by May 2005.
Multiple Year Coverage—Research Report (Watts and Associates)—This project was conducted to determine if a multi-year policy would reduce fraud, waste, and abuse of crop insurance in certain geographic areas. The feasibility study was completed and RMA expects to award a project for program development early in fiscal year 2003.
Bew York Specialty Crops Survey (Cornell University)—This project is being conducted to identify the potential market for specialty crop insurance in New York and to provide the data necessary to evaluate options for new or modified insurance programs to meet the needs of specialty crop producers. Through this partnership with researchers at Cornell University, specialty crops producers in New York were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Organics Study (USDA, Economic Research Service)—The purpose of this project is to study and provide recommendations on yields, risks, and related issues regarding crops grown organically. Work is continuing on this project.
Pennsylvania Specialty Crops Survey (Penn State University)—This project was conducted to identify the potential market for specialty crop insurance and to provide the data necessary to evaluate options for new or modified insurance programs to meet the
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needs of specialty crop producers. Through this partnership with researchers at Penn State University, specialty crops producers in Pennsylvania were contacted to determine how crop insurance programs could be designed to better meet their needs. The results of the survey are being analyzed and are expected to be available in November 2002.
Perennial Pathogen Research Report (AgriLogic, Inc.)—This project was conducted to research the potential for development of a risk management strategy for tree, vine, and bush crop growers that are subject to perennial crop pathogens. The research for this project is virtually completed and, depending upon the recommendations of RMA, a program development project may be awarded early in fiscal year 2003.
Quarantine Research and Program Design Report (AgriLogic, Inc.)—This project is being conducted to research the potential for development of a risk management tool for producers of crops subject to quarantine regulations. Work is continuing on this project and, depending upon the recommendations of RMA, a program development project may be awarded in fiscal year 2003.
Research and Development of a Cost of Production (COP) Insurance Program for Soybeans, Corn, Cotton, Wheat, Rice, Almonds, Peaches, Cranberries, Apricots, Nectarines, Onions, and Sugarcane (AgriLogic, Inc.)—This project is being conducted to research and deliver components of cost-of-production based revenue insurance programs for the 12 specified crops in select areas. The first COP policy for cotton has been delivered to RMA and was sent to expert reviewers with a due date of September 23, 2002. The Board considered the cotton COP policy at its October 2002, meeting and, based on the comments of the expert reviewers, voted to send the policy back to AgriLogic for additional work. However, work is continuing on the other crops.
Value Enhanced Products Research Report (USDA, Economic Research Service)—The purpose of this project is to address identity-preserved and other value-enhanced products including specialty grains, and/or to recommend actions to ensure that risk management programs appropriately address the needs of producers. Work is continuing on this project. It is expected that this project could ultimately provide benefits for value enhanced fruits and vegetables.
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Fiscal Year 2002 Projects and Initiatives. Following is a list of research and development projects and initiatives funded during fiscal year 2001 in the areas of program research, development, and evaluation for fruit and vegetable programs.
Direct Marketing of Perishable Crops—The purpose of this project is to conduct research and develop recommendations regarding the handling of direct marketing under existing crop insurance programs; and, if appropriate, development of a pilot program to address the specific needs of producers who market their crops directly to the consumer. A contract was forwarded to GovWorks, to be awarded late in fiscal year 2002.
Melon Pilot Program (Feasibility Study)—The purpose of this project is to conduct research and provide RMA a research report on the feasibility of the research and development of a pilot program to provide melon producers a risk management tool to address their needs, with consideration given to the experience gained and comments received on the suspended watermelon pilot program. A contract has been developed and is in the process of being awarded.
Tree, Vine, and Bush Replacement Program (Feasibility Study)—The purpose of this project is to conduct research and provide RMA a research report on the potential research and development of a tree, vine, and bush replacement program as an option for growers of grapes, citrus, tree fruit, nut, kiwi, blueberries, and other high-value, permanent crops. Proposals for this project were received from the R&D Contract Pool and the task order was awarded late in fiscal year 2002.
Research Partnerships for Risk Management Development and Implementation—On July 1, 2002, RMA published in the Federal Register a Request for Applications (RFA): Research Partnerships for Risk Management Development and Implementation announcing the availability of approximately $2 million for partnership agreements that will fund risk management research and development activities. Priority was given to those activities addressing the need for risk management tools for producers of noninsured crop disaster assistance program (NAP) crops, specialty crops, and underserved commodities. Awards, on a competitive basis, may be for a period of up to two years
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Details on projects awarded under this RFA during fiscal year 2002 are not yet available.
Program Development Methodology for Small-Value Crops—The purpose of this project is to conduct research and develop a methodology for developing risk management tools economically and efficiently to address the specific needs of producers who grow small-value crops for which developmental costs are generally considered high in relation to the expected value of the crops (including the use of rates for one crop to rate another crop).
Risk Management Crop Storage Options (Feasibility Study)—The purpose of this project is to determine the need and direction of research and potential development of an insurance product that provides protection for producer-owned apple, onion, sugar beet, and sweetpotato crops during storage. This project was initiated in response to section 10001 of the Farm Security and Rural Investment Act of 2002 (2002 farm bill) that authorized insurance coverage for sweetpotatoes beyond the time the insured crop is in the field.
Vegetable and Flower Seed Pilot Program (Feasibility Study)—The purpose of this project is to conduct research and provide RMA a research report on the feasibility of a pilot program to provide vegetable and flower seed producers a risk management tool to address their needs.
QUESTION: The State of Pennsylvania has put forth a great educational program to inform farmers about crop insurance. We have had great success over the past several years, but a lot of people are still not listening. What else can we do and what else are you doing to help with outreach?
Many producers in Pennsylvania are experiencing multi-year drought, which reduces their APH. What are you doing this correct problem?
ANSWER: The Agricultural Risk Protection Act of 2000 (ARPA) made some progress in attempting to address the APH issue. ARPA authorized the RMA to implement yield adjustments that may be elected by insured's. Yield adjustments allow an insured to substitute 60 percent of the applicable Transitional Yield (T-yield) for actual yields that are less than 60 percent of the T-yield. Yield limitations and adjustments in the form of yield cups, yield floors and yield substitutions are provided to help mitigate the effects of loss years on producers' yields. Yield cups limit the amount a carryover insured's approved yield may decline to less than 10 percent compared to the prior year's yield.
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Yield floors limit a carryover insured's approved yield from declining below a percentage of the applicable T-yield, based on the number of years of actual records the insured has provided for the crop and county (yield floors are not available for CAT coverage or most perennial crops
RMA has enjoyed a strong partnership with the Pennsylvania State Department of Agriculture to deliver a crop insurance education program to farmers in the State. However, more can be done. Part of the answer may be found in a soon-to-be released ''Needs Assessment'', which was commissioned by RMA on behalf of Pennsylvania and the other 14 states identified as underserved. An over-shadowing theme in the assessment is that many farmers in the Underserved States lack a foundation in basic record keeping, financial, and business skills. Without such skills, farmers are not prepared to fully understand the benefits of crop insurance and other risk management tools. The authorizing legislation for RMA's education program for Underserved States (Federal Crop Insurance Act, section 524(a)(2)) limits program content to ''crop insurance.'' According to the assessment, fundamental education programs that focus on more basic skills are needed to complement existing crop insurance education.