SPEAKERS       CONTENTS       INSERTS    
 Page 1       TOP OF DOC
REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM

WEDNESDAY, NOVEMBER 5, 1997
U.S. House of Representatives,
Subcommittee on Risk Management
and Specialty Crops,
Committee on Agriculture,
Washington, DC.
    The subcommittee met, pursuant to notice, at 1:00 p.m., in room 1301, Longworth House Office Building, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
    Present: Representatives Combest, Chambliss, Smith of Michigan, Chenoweth, Bryant, Lewis, Canady, Everett, Etheridge, Goode, Pomeroy, Boswell, McIntyre, Bishop, Baesler and Condit.
    Staff present: Stacy Carey, staff director, Subcommittee on Risk Management and Specialty Crops; Dave Ebersole, senior professional staff; Gregory Zerzan, associate counsel; Ryan Weston, Callista Bisek, Wanda Worsham, clerk; and John Riley.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
    Mr. EWING. The Subcommitte on Risk Management and Specialty Crop hearing to review the Federal Crop Insurance Program will come to order.
    The purpose of today's meeting is to review the Federal Crop Insurance Program. The importance of maintaining an adequate safety net for producers has and will continue to be important as the landscape of American agriculture continues to grow and change.
    The last subcommittee hearing was held on March 28, 1995—how time flies when you're having fun. It's been some time since we've had a hearing on our crop insurance program. At that time we were reviewing implementations of the 1994 reform legislation, which repealed authority for ad hoc disaster spending and required mandatory purchase of catastrophic coverage.
 Page 2       PREV PAGE       TOP OF DOC
    Also established was the non-insured assistance program for uncovered crops, especially crop coordinator, and a requirement to minimize the paperwork, complexity and cost associated with the catastrophic risk protection plan.
    Many advantages were achieved through the 1994 reforms. Producers assumed more of the risk management burden by shifting focus away from disaster assistance to crop insurance coverage. Mandatory linkage increased the strength of the program by increasing participation rates. In a very short period of time producers realized the benefit of crop insurance coverage that had not been apparent as long as the Government was providing disaster assistance.
    Much activity has transpired since March 1995. The 1996 farm bill erased the mandatory linkage and eliminated dual delivery of crop insurance in States that had adequate private delivery. Moreover, the 1996 farm bill enacted sweeping changes to U.S. agricultural programs. Supply management programs were eliminated, enabling the U.S. agricultural producer to better compete in the global market.
    For the first time in decades U.S. producers have full planting flexibility. This new flexibility also requires producers to bear more price and yield risk on the farm. This emphasis has driven a growing demand for adequate risk management tools for the agricultural community. The most important of these tools is crop insurance.
    However, new pressures have been placed on the program. Once again the industry finds itself facing a new environment and new challenges. The 1998 appropriations process has positioned the program as attempting future appropriations target. Regardless of whether you supported the 24.5 percent or the 27 percent reimbursement level, word is out about this nice pot of money earmarked for reimbursing crop insurance companies.
    This year members attempted to raid the program for their favorite programs, such as WIC and FDA funding. Ultimately, other agricultural programs were raided to restore adequate funding to the program. Next year's appropriation allocations will be much smaller, and there is no guarantee of future funding protection.
 Page 3       PREV PAGE       TOP OF DOC
    Improving the Federal Crop Insurance Program has been a personal goal of mine since I came to Congress. The subcommittee views its role as a responsibility to ensure that Government and the private sector work together in the most efficient manner to serve the consumer, the U.S. agricultural producer. The intent of this hearing is not to relive some of the frustrating battles that occurred throughout the year. The purpose of today's hearing is to focus on solutions and ideas. If there's a better way to do business, we want to hear about it. The subcommittee looks forward to your thoughts and ideas, and I welcome the first panel and all of our future panelists here today to discuss this important issue.
    If there are members of the committee that have an opening statement they may be inserted at this point in the record.
    [The prepared statment of Mrs. Chenoweth follows:]
Submitted Statement of Hon. Helen Chenoweth
    Thank you Mr. Chairman. I would like to commend this committee for holding this important hearing to review the Federal Crop Insurance Program.
    I would like to welcome Mr. Wayne Mai, a constituent of mine, and an onion seed grower. I am happy to have Mr. Mai here with us today, and I look forward to hearing from him.
    Mr. Chairman, during the 104th Congress I worked hard to properly re-introduce and incorporate seed crops into the noninsured assistance program under the 1996 farm bill.
    Unfortunately, due to unseasonably warm weather in Idaho, many of my farmers and ranchers have recently experienced onion seed crop loss.
    According to the Farm Service Agency Office in Boise, ID, 535 acres of onion seed crop in southwestern Idaho were affected by a natural disaster in 1996.
    Mr. Chairman of those 535 acres, 65 onion seed producers have sustained nearly 80 percent in damage to their crop.
 Page 4       PREV PAGE       TOP OF DOC
    According to the Idaho State Farm Service Agency Office, this amounts to $425,000 in payments—none of which has been paid.
    Mr. Chairman, I repeat, no payments have been made to my Idaho onion seed producers. This in spite of changes we made under the 1996 farm bill. This news is disturbing, and we must get to the bottom of this issue. I am not happy.
    Mr. Chairman, because onion seed production takes 2 years and production costs are high, financial loss to my Idaho producers is severe. In the last few years, the loss of promised money for repayment of production lines of credit has placed many Idahoans in a difficult position.
    Mr. Chairman, it is apparent that there's a pattern of inaction by the U.S. Department of Agriculture to responsibly enforce the noninsured assistance program for onion seed crop loss.
    The time has come to understand the problems associated with the noninsured crop disaster payment process. I look forward to hearing from USDA to explain these payment delays.
    Thank you Mr. Chairman.
    Mr. EWING. We'll go to the first panel, and it's always a pleasure to have Mr. Ackerman with us who, of course, heads up the Federal Crop Insurance Program, and we're pleased to have you with us today. Also with you is Dallas Smith, Deputy Under Secretary, Farm and Foreign Agricultural Services.
    Dallas, welcome.
    Mr. SMITH. Thank you, Mr. Chairman.
STATEMENT OF DALLAS SMITH, DEPUTY UNDER SECRETARY, FARM AND FOREIGN AGRICULTURAL SERVICES, U.S. DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY KEN ACKERMAN, ADMINISTRATOR, RISK MANAGEMENT AGENCY
 Page 5       PREV PAGE       TOP OF DOC
    Mr. SMITH. Mr. Chairman, members of the subcommittee, I am pleased to appear before you today on behalf of the U.S. Department of Agriculture to discuss the progress we are making in strengthening the safety net for our nation's producers.
    As you've mentioned, accompanying me today is Ken Ackerman, who is the Manager of the Federal Crop Insurance Corporation and the Administrator of the Risk Management Agency.
    I have a short statement that I would like to make and then provide the full testimony for the record.
    Mr. EWING. Without objection.
    Mr. SMITH. Thank you.
    I would like to thank the members of the subcommittee who have shown a deep, personal commitment to, and involvement in, the USDA's risk management programs. The support of Congress, and, in particular, this subcommittee has been, and will continue to be, crucial to the success of risk management, and, more importantly, to the economic stability of agriculture in this country.
    The Federal Agriculture Improvement and Reform Act of 1996 recognizes that agricultural producers in today's environment must take active steps to protect themselves from the inherent risk of farming. As a result of the Government Performance and Results Act of 1993, the Risk Management Agency has adopted a strategic plan vision statement, which focuses on, and I quote, ''transforming yesterday's crop insurance program into tomorrow's broad-based safety net to assure that American agriculture remains solid, solvent and globally competitive into the 21st century.'' This country cannot feed its hungry, nor can we assure foreign purchasers that America is the most dependable supplier of high quality agricultural commodities, without maintaining an economically stable and productive farm community.
    Keeping producers viable and productive remains the number one goal of the USDA's strategic plan. We simply cannot achieve our other strategic goals without, first, ensuring that producers and ranchers have a reliable economic safety net to help them overcome the effects of natural disasters and price volatility.
 Page 6       PREV PAGE       TOP OF DOC
    The Risk Management Agency plays a significant role in achieving this goal. The agency's mission under the 1996 act is broad, not only to administer programs for the Federal Crop Insurance Corporation, but also to ensure a meaningful safety net for today's producers. This mandate has taken the Risk Management Agency into many new areas beyond traditional crop insurance, including the development of innovative products based on proposals from the private sector spanning the breadth of the farm risk management community.
    I see that Mrs. Brookins is on a panel later, and we've been working with her on an idea that exemplifies this type of cooperative relationship between the private sector and the Government in developing new products.
    The Risk Management Agency will only accomplish this mandate by launching an educational program to ensure that producers are aware of the importance of active risk management and the current economic environment, and by developing a full range of risk management tools.
    Mr. Chairman, since we reported to you last April, many important issues have confronted the Risk Management Agency and the crop insurance program that are of great interest to members of this subcommittee, and I am happy to report on them today.
    While final statistics on the 1997 crop insurance year are not yet available, I can report that participation in the program remains at significantly high levels. This year 178 million acres of American crop production are covered by Federal crop insurance. This represents a small decrease from the 203 million acres covered in 1996 when linkage to other program participation was applicable. Total insurance liability stands at $24.9 billion, a small decrease from the $26.8 billion in liability in crop year 1996.
    While these national coverage levels are reassuring, many specific areas of the country have seen significant losses of participation since Congress rescinded the formal linkage of insurance participation to other major programs. In today's high risk environment, producers who pass up insurance protection are left with very few options when disaster strikes.
 Page 7       PREV PAGE       TOP OF DOC
    As we enter the insurance sales period for 1998 spring planted crops, it is vital to stress the need for producers to protect themselves. I am pleased to report that after 7 months of negotiation, the Risk Management Agency and the insurance industry has reached an agreement on the terms of the Standard Reinsurance Agreement for the 1998 crop year. The negotiated terms of the SRA were sent to the companies on October 3, 1997, and I am pleased to report that we actually increased the number of insurance companies providing crop insurance. The new entry into the field is NAU Country Insurance Company.
    Mr. Chairman, it was a long and informative negotiation, and I want to publicly thank the participating insurance companies and the key members of the Risk Management Agency staff for their hard work.
    Mr. Chairman, the USDA has embarked on an aggressive agenda to provide producers more risk management tools and make them aware of risk management strategies. For example, following the Secretary's announcement of a $5 million risk management education initiative, we convened a risk management education summit in Kansas City that involved nearly 500 agriculture leaders to formally launch the initiative. Regional coordinators are now conducting State and local meetings so that they are able to increase the ability of producers to effectively manage risk using a combination of ideas and products.
    The FCIC Board of Directors have made crop insurance available on several new crops and expanded the availability of existing programs, most notably Crop Revenue Coverage or CRC. The RMA is also reviewing private sector proposals for an innovative option pilot program for dairy. We anticipate a pilot program to be operational by the spring of 1998.
    Finally, Mr. Chairman, in response to concerns raised by farmers, we are reviewing existing policies and targeting areas for improvement, most notably the Preventive Planting Provisions and the Non-Standard Classification System. We anticipate modifications to preventive planting to be effective by the spring of 1998 and changes to the Non-Standard Classification System in 1999.
 Page 8       PREV PAGE       TOP OF DOC
    Mr. Chairman, the USDA is committed to providing a strong safety net for American producers. The USDA will continue to develop and facilitate the development by the private sector of new innovative products to meet the diverse needs of the agriculture sector, and we will use the leadership within the USDA to facilitate the educational producers on risk management strategies.
    These comments conclude my opening statement, and Mr. Ackerman and I will be pleased to answer any questions of the subcommittee.
    Thank you.
    [The prepared statement of Mr. Smith appears at the conclusion of the hearing.]
    Mr. EWING. Thank you very much, Mr. Smith.
    Ken, do you have a statement?
    Mr. ACKERMAN. No, sir, I do not have a separate statement.
    Mr. EWING. Thank you.
    The first question, in this year's appropriations process two amendments directing crop insurance funding into other programs, which I mentioned in my opening statement, were defeated.
    Do you have a real concern about the future funding for delivery expenses for the crop insurance program?
    Mr. SMITH. I would like to ask Mr. Ackerman to respond.
    Mr. ACKERMAN. Thank you, Mr. Chairman.
    We, obviously, follow the appropriations process very closely on crop insurance and on a whole range of issues. From our perspective we view the effective funding of the crop insurance program as an extremely high priority. In today's day and age, in the post-farm bill setting, crop insurance is the vital link of the farm program's safety net. For it to continue it needs to be stable and it needs to be effectively funded. So we watch this very closely.
 Page 9       PREV PAGE       TOP OF DOC
    The administration budget will be presented to Congress the first week of February, and at that point we can discuss the issue in much more detail, but, certainly, we view the future of this program as very important and the continued adequate funding of it very important, as well.
    Mr. EWING. If an amendment to reduce the reimbursement to 25 percent were to be adopted in next year's appropriations process, how would this affect the Standard Reinsurance Agreement? Would it override the 27 percent agreed level?
    Mr. ACKERMAN. On the specific legal matter, my understanding—and on this I would defer to counsel correcting me for the record, if need be—but my understanding is that the agreement is subject to appropriations, and so if there were a lower appropriated level, that would at least raise an issue.
    Mr. EWING. Do you believe that there are benefits to making reimbursement levels into mandatory—changing it from discretionary to mandatory spending?
    Mr. ACKERMAN. Mr. Chairman, this is a very interesting question and a very important question. I know it's one that has attracted a lot of discussion.
    The advantage of moving this spending to the mandatory side of the budget is that it makes it more stable, more predictable. People know in advance that it's there. It's not subject to the kinds of pulls, and tugs and conflicts that you were discussing earlier.
    The hurdle—the challenge to doing so is that if you were to move it to the mandatory side of the budget, it would require a piece of legislation which would have to have budget offsets, and the budget offsets would be significant. The challenge would be to find offsets to do it that would not have a serious detrimental effect either on other programs or on the crop insurance program.
    Mr. EWING. If Congress takes the initiative to pass the legislation to make reimbursement levels mandatory—I guess you really answered that. Are there other program changes that would need to be made at that time?
 Page 10       PREV PAGE       TOP OF DOC
    Mr. ACKERMAN. The major issue, as I understand it, would be the budget offsets that would be required to move it to the mandatory side.
    Mr. EWING. What's been your impression of the elimination of the mandatory linkage between other farm programs and the Federal Crop Insurance Program?
    Mr. ACKERMAN. Mr. Chairman, this is an issue that has been the cause of some concern.
    As a general matter, when linkage was created and was in effect for the 1995 crop year, the participation rate in crop insurance skyrocketed, not only because of linkage but also because crop insurance was made more accessible, catastrophic coverage was created at a very economical rate and disaster aid—ad hoc aid was eliminated that year. But the participation rate in crop insurance rose from about 80 million acres to about 220 million acres at the high point.
    Since the time that linkage was eliminated, that high level of crop insurance participation has drifted down somewhat. It has fallen for 1997, the current year, to about 180 million acres, a drop of about 30 or 40 million acres.
    Now, that drop on a national level is actually reassuring. It's a relatively small drop. A great part of it involves very small shares, and farmers who had very small insurable acreages were involved in multiple ownership situations. That would account for a lot of it.
    However, it is also very regionalized. While the national numbers show about 60 to 70 percent participation, you do have pockets in some parts of the country with participation as low as 40 percent or 30 percent. When disasters have struck in those parts of the country—for instance, the drought in the mid-Atlantic States this year—it has resulted in serious concerns for those farmers. We do not have a lot of alternative programs that could come into play in those situations.
 Page 11       PREV PAGE       TOP OF DOC
    Mr. EWING. Thank you both.
    I would just inform the committee and all the witnesses that we are going to be operating on the 5-minute rule. My 5 minutes are up, so we'll go to Mr. Combest.
    Mr. COMBEST. Thank you, Mr. Chairman.
    For the crop insurance program to work as we would like for it to as a risk management tool, obviously, it needs to be attractive to the producer. We would like to be able to encourage producers to participate in the program.
    What I would like to do is see if I can get some answers to why there is such a disparity between cotton and some other commodities in the crop insurance program. For example, a cotton farmer pays an average of $20 to $30 an acre, while other commodities pay from $4 to $12. There is a concern on replant coverage that all major commodities receive a replant coverage if it is determined that there is an insurable need to replant.
    Cotton does not have a replant coverage, despite data being provided that illustrate that cotton's replanting is comparable to other crops; the presence of a $25 deductible for quality loss for cotton where other commodities have no deductible, and, in addition, a cotton farmer must have an additional 25 percent loss below the insured coverage level before being eligible for quality adjustment.
    Now, why is it that these disparities exist?
    Mr. ACKERMAN. Mr. Combest, in some cases the points that you raise are disparities and we are looking at correcting them, particularly in the area of quality adjustment and quality loss. The reason often that premiums differ between cotton and other crops, or among crops generally, is generally a matter of the risk profile of the crop, the risk history of the crop and the value per acre of the crop. As a general matter, a matter of national averages, an acre of cotton often has a higher insurance guarantee than an acre of corn. The amount of money in insurance guaranteed per acre is higher than for other crops simply because of the size of the yield and the price selection. That would often result in a higher premium, even though the coverage level is very similar.
 Page 12       PREV PAGE       TOP OF DOC
    On the replant payment, my understanding is that the reason for that difference is that it would have a significant rating impact. For cotton replants are more common than for other crops. If we were to make that change, it would have an impact on the rates.
    We have had a number of discussions with cotton grower organizations, the Cotton Council, on these issues, and we hope to continue that dialogue over the next several months on these points.
    Mr. COMBEST. Well, I realize that some of these areas are up for discussion. Obviously, they have not been resolved as yet, and in a couple of instances you pointed out why this occurs. For example, on replant it's my understanding, and I don't have the specific data, but it's my understanding from more of a general sense that—you said that if there was replant coverage, that it would cause the rates to be higher.
    Mr. ACKERMAN. That's correct.
    Mr. COMBEST. But other commodities have replant coverage, and it's my understanding that the loss is comparable.
    Mr. ACKERMAN. My understanding is that, yes, other crops do have replant coverage and that is built into the rates. For cotton, since it's not covered, it's not built into the rates——
    Mr. COMBEST. But the rate is higher.
    Mr. ACKERMAN. The rate is higher currently because the rate reflects the liability and the loss—reflects the liability and the risk per acre. If replant coverage were to be added, that added risk factor would need to be built into the rates.
    Mr. COMBEST. Well, what is your anticipated time frame on coming to some decision on these items that under discussion currently.
    Mr. ACKERMAN. On a number of these items we have had discussions with cotton growers. The preventive planting regulation, as I'm sure you know, is currently being finalized and we are looking at the comments that have come in, both from the cotton community and from many other grower organizations and the crop insurance industry generally. We will be having an outcome on the preventive planting regulation by the end of November.
 Page 13       PREV PAGE       TOP OF DOC
    Many of the other points that we have been discussing with the Cotton Council and cotton growers generally—we expect to continue that dialogue over the next several months and perhaps be looking at additional regulations some time by early next year.
    Mr. COMBEST. Well, different parts of the country, of course, have different planting seasons, but, obviously, if there can be some positive results of these discussions, it would be nice if they would be in place for the next cotton crop. I would certainly encourage both arriving at a positive solution, as well as in a timely fashion.
    Mr. ACKERMAN. I can tell you, Mr. Combest, this is very high on our priority list.
    Mr. COMBEST. I'm very glad to hear that, thank you.
    Mr. EWING. Thank you, Mr. Combest.
    Mr. Goode.
    Mr. GOODE. No questions.
    Mr. EWING. Mr. Pomeroy.
    Mr. POMEROY. I thank the chairman and appreciate very much the Administrator being here today.
    Mr. Administrator, let me say that I am very concerned about whether or not crop insurance is filling the risk protection need that is now substantially greater for egg producers. I was, as we've discussed many times, very much a part of the effort for the 1993 reforms, which, I guess, passed in 1994, which I supported. I have subsequently been somewhat disappointed by the reach of the program.
    In those areas where actuarial demands that you have to run the program consistent with the 1 to 1 loss ratio just direct you to do things and you have to take that step I think is an on-going matter. Information from you to us about family farmers that are unable to get the protection they need because of how you're structured to run the program would help us understand how we need to change it.
 Page 14       PREV PAGE       TOP OF DOC
    Let me just talk about a few areas, one that is of growing concern. Having said that broad comment, let me get very quickly to some nitty-gritty specifics:
    In North Dakota we are experiencing a damnable run of wet weather, and, as a result, acreage that has been very much an essential part of family farms on a 10-year look, or even a 5-year look, has not been able to be cropped for the last 3 years. There is a proposed rule that would prevent land from crop insurance eligibility—it would prevent from crop insurance eligibility those acres that have not been planted and cropped in at least 1 of the last 3 years.
    I will tell you that there are thousands and thousands of acres in North Dakota that are literally the linchpin of a number of farms that would be unable to obtain coverage, and, therefore, unable to obtain financing, and they'll be out of business if you adhere to that rule.
    Now, I've had correspondence and discussions with your agency. As to this particular point, I'm wondering what the status of that proposed rule is, and, as you answer, let me make it very clear. That proposed rule, if enacted, will put a number of farmers I represent out of business.
    Mr. ACKERMAN. We do have a number of proposed rules. I'm not aware of a rule that would specifically say that a farmer is not eligible for the program if they have not planted a crop in one of the last three years.
    Mr. POMEROY. Let me consult my expertise here.
    All right, I'll ask you a different question while my expert digs up the paper.
    The CRC Program—you've had some experience with it. We've got half the State in it. It's not an optimal situation to have farmers in one part of the State able to get coverage that farmers in the other part of the State can't get. The only thing worse than that is none of the farmers in the State getting access.
 Page 15       PREV PAGE       TOP OF DOC
    I appreciate what you've done to bring half the State on-line, but we want to get the other half on-line. What's the status of that prospect?
    Mr. ACKERMAN. With the CRC we have been continuing to expand very rapidly based on the proposals that are coming to us from the sponsoring company, and I expect that that expansion will continue quite rapidly.
    I would point out that while the early rounds of expansion on CRC were controversial, the last two expansions were not. The FCIC, Federal Crop Insurance Corporation, Board of Directors adopted a significant expansion for wheat this year, and a significant expansion for spring crops. Both of those were done early and without a great deal of difficult policy level debate. So I would expect that that type of expansion will continue.
    Mr. POMEROY. Good.
    Your earlier experience with it is fairly satisfactory?
    Mr. ACKERMAN. Our earlier experience with it is very encouraging so far. Fortunately, the first couple of years have not been very bad loss years, so we're waiting for a real test. However, our experience so far is that many farmers find it very useful, very attractive, and the loss ratios at this point are very comparable with MPCI and in some cases they're lower than MPCI. So far our experience has been very positive.
    Mr. POMEROY. Good, great, excellent.
    One issue—canola is an emerging crop of great significance to North Dakota, especially in light of scabs and market price discouraging the traditional small grains production. We really need to have in a non-pilot status coverage for canola—you don't need to respond, but I hope you'll consider that one.
    On this one, I quote from the Federal Register, Tuesday, August 12, and it talks about insurable acreage: ''Acreage planted to the insured crop in which you have a share is insurable except for acreage sub–1 that has not been planted and harvested within 1 of the 3 previous calendar years, unless such acreage was not planted due to compliance with some other USDA program or crop rotation.''
 Page 16       PREV PAGE       TOP OF DOC
    Planted and harvested at least 1 of 3 years—unfortunately, we've got productive farm land that a 10-year look back, or even a 5-year look back, would see is very much in the deal that aren't going to make it under the one in three measurement.
    Mr. ACKERMAN. Mr. Pomeroy, two points. On canola we are working to finalize those regulations so that canola will be a permanent program. We expect that to occur for this coming spring for the 1998 crop year, and on your second point I am advised that, yes, that is a provision in the preventive planting regulations that we'll be taking a look at after this year.
    Mr. POMEROY. We've commented on it. It's a terrible concern to us and thank you for doing that.
    I want to let the members know, in closing, Mr. Chairman, how helpful Mr. Ackerman has been. He's come to North Dakota with me on several occasions, met with a number of viewpoints on crop insurance, and I appreciate all you have done to fully understand the needs of North Dakota's production agriculture relative to crop insurance.
    Mr. ACKERMAN. Thank you.
    Mr. EWING. And now we go to the very busy Mr. Nick Smith from Michigan.
    Mr. SMITH of Michigan. Mr. Secretary, Ken, welcome.
    Are there other companies still in the business that don't use the Federal subsidy? Are there other sunshine insurance companies, crop insurance companies, outside those that are government subsidized?
    Mr. ACKERMAN. There may be some very specialized forms of insurance, but generally for companies engaged in Multi-Peril Crop Insurance, they are within our program. They are participants in our program.
    Mr. SMITH of Michigan. Have you figured out sort of the winners and loses in terms of commodity or region in terms of how much is paid out for crop insurance in relation to the amount of premiums paid in?
 Page 17       PREV PAGE       TOP OF DOC
    Mr. ACKERMAN. As a general matter, our premiums are designed county by county. Our premium rates are calculated county by county so that the rates reflect the risk in a particular part of the country.
    I would guess in answer to your question insurance companies that have a broad portfolio, that operate on a broader geographical level, tend to do better because they can spread their risk more broadly. But, generally, our rates are designed on a level——
    Mr. SMITH of Michigan. Who designs the rates? Is the Department involved in designing the rates or is it a real, if you will, actuarial decision on the risk in relation to the premiums that are charged?
    Mr. ACKERMAN. The crop insurance rates are set by RMA, the Risk Management Agency, and we do it based on a review of usually 20 years of loss history of the specific crop in the specific county.
    Mr. SMITH of Michigan. Can we ever assume that farmers and ranchers will pay for the crop insurance without subsidy some time down the road?
    Mr. ACKERMAN. I guess the best way to answer the question is this: Before the Federal Crop Insurance Program existed with the subsidies that it contains—and granted the levels of subsidies have changed over the years—but before the program existed crop insurance on this broader scale did not exist, and there were a number of reasons for that. The risk that an insurance company faces in agriculture, in crop agriculture, is different than the kind of risk that they face in other lines of insurance. The cost to farmers, as a result, can be very, very high.
    If subsidies, as we know them, were simply eliminated, the premium charges that farmers would pay would be much, much higher. All of the kinds of subsidies that exist, whether they are paid to the companies for expense reimbursement or to the farmers directly, end up affecting the farmers' out-of-pocket costs.
 Page 18       PREV PAGE       TOP OF DOC
    Mr. SMITH of Michigan. What percentage of farmers can or would sign up for crop insurance?
    Mr. ACKERMAN. If there were no subsidy at all?
    Mr. SMITH of Michigan. No, no, right now.
    Mr. ACKERMAN. Oh, right now we sell about a million and a half policies.
    Mr. SMITH of Michigan. What percentage—I don't know the correct way to phrase the question. Is there some relation to the number of farmers that might buy it compared to the number who do buy it?
    Mr. ACKERMAN. Our participation level right now is approximately 60 to 70 percent of eligible acres.
    Mr. SMITH of Michigan. Is that a problem of information getting out because it seems to me that all farmers with amount—as we move into this, as we have developed this kind of phase out in relation to phasing out Government subsidies, it seems to me that all farmers should seriously be considering signing up. Is it problem of information?
    Mr. ACKERMAN. It's a combination of things, and these numbers, as I mentioned earlier, are very regionalized. In heavy agriculture parts of the country in the midwest, for instance, the rates tend to be much higher than in other parts of the country.
    The level of participation today is far higher than it was 3 or 4 years ago. In 1993, the year of the large Midwest flood, crop insurance participation was at about 30 percent. At the time when linkage was at its height, we were up to about 70 to 80 percent. Now, as I said, it's in the high 60s, around 70. So it's at a high level, but you're right—farmers who are not insured, for whatever reason, today are very much exposed. The traditional programs don't exist to protect them.
    Mr. SMITH of Michigan. Can you furnish to me through the chairman what kind of profits these insurance carriers are experiencing? Right now they're trying to get their feet on the ground. They're trying to get some history to know what they can expect in terms of experience on payouts, but is there some way you can furnish to me what kind of profits they're showing for the last couple of years?
 Page 19       PREV PAGE       TOP OF DOC
    Mr. ACKERMAN. We would be happy to provide that data. That's data that we have.
    Mr. SMITH of Michigan. Thank you.
    Thank you, Mr. Chairman.
    Mr. EWING. Thank you, Mr. Smith.
    Mr. Boswell.
    Mr. BOSWELL. Thank you, Mr. Chairman.
    Thank you, gentlemen, for being here today. You may have addressed this since I got here late. I apologize for that if you have. I'll check the minutes, but there's some concern from time to time—I get follow-ons from Mr. Smith and Mr. Pomeroy about the commission allowed for the agents out there and are they available.
    Would you make a comment about that? Are they receiving what they need to be available to our farmers? Is there danger? What do you think about it?
    Mr. ACKERMAN. The commission that an agent receives is a matter of contract between the agent and the participating crop insurance company.
    As you know, one of the controversial items this past year in the discussions of the standard reinsurance agreement had to do with what level of expense reimbursement payment companies would receive from the Risk Management Agency, from FCIC.
    We did have a disagreement and we proposed a somewhat lower number. The industry was asking for a higher number, and in the end we came out with an agreement, which I think has a fair compromise. The agreement has a payment level of 27 percent expense reimbursement to the companies, and then it's up to the companies and the agents to essentially split that amount between them.
    Mr. BOSWELL. So you're satisfied that it's working and there's no danger involved there?
 Page 20       PREV PAGE       TOP OF DOC
    Mr. ACKERMAN. I'm satisfied that the agreement we came to on these numbers is a fair agreement.
    Mr. BOSWELL. Thank you.
    Thank you, Mr. Chairman.
    Mr. EWING. Mr. Chambliss.
    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    Gentlemen, it's a pleasure to have you here, particularly my long-time good friend, Mr. Smith. We have often been adversaries, but it's a pleasure to be on what I consider the same side of the table this time, Dallas.
    Mr. SMITH. Thank you.
    Mr. CHAMBLISS. Picking up on what Nick said there, I think he raises a good point, and that the closer we get to 2002 and our commodity programs are totally phased out, then I think there is going to be a heightened awareness in the availability and requirement for crop insurance, and I don't know where that's going to lead us but I see that coming.
    In our State, for example, there was always usually crop insurance purchased on the back of—sometimes on peanuts but that was about it, but over the last several years I think you all would agree that there's been a renewed interest, or at least a heightened interest, in crop insurance in Georgia, and probably throughout the southeast. It comes both from a grower perspective, as well as a banker perspective.
    So I see it becoming more and more important down the road, and that's why I think the ground rules that we lay right now that we're going to have to live with are so extremely important to us. And as we become more of a leader, both in the number of acres of cotton planted, as well as the number of bales that are being yielded in Georgia, it's particularly important to me, along the lines of what Mr. Combest was talking about with respect to this preventive planting coverage.
 Page 21       PREV PAGE       TOP OF DOC
    You all know our ratios are different. Cotton is reimbursed at 45 percent; everybody else is at 60 percent. That's not fair—there's nothing right about that, and I know you all are looking at it and trying to figure out something. But, folks, we're here in November and it's time to start looking at 1998 operating loans already, and this issue is going to be on us before we know it. I would like your comments on that as to what you think we're going to be able to come up with with respect to narrowing that gap on preventive planting coverage.
    Mr. SMITH. Congressman, you are correct. We are addressing that in our preventive planting regulations, and we are expecting to be able to address that issue before the end of the month, and give some attention to the issues that have been raised by those who commented, particularly the comments that we've heard from the cotton industry.
    I would like to ask Mr. Ackerman to further elaborate recognizing that we are in that time period between the comment period close in making a final decision, and we are not at liberty to go into too much detail exactly what the final decision will be, but elaborate a little bit more on the process.
    Mr. ACKERMAN. I'll just say very briefly, as Mr. Smith mentioned, we are reviewing the comments at this point. The proposed regulation that went out did have a different number for cotton on preventive planting coverage than for a number of other crops. That was based on a study performed by the Economic Research Service that looked specifically at what the costs were for any farmer—a cotton farmer, a corn farmer, a wheat farmer—up to the point of planting so that if they are prevented from planting, they would get a payment reflective of those costs.
    Because different crops have different liabilities per acre, different amounts of insurance coverage per acre based on their economic value, there were cases where the percentages varied. However, for cotton, again, as a matter of national averages, under the proposed regulation even though the percentage was lower, the actual dollars per acre were often somewhat higher.
 Page 22       PREV PAGE       TOP OF DOC
    Just to give you a sense, the proposed regulation did not simply single out cotton for different treatment. There were a number of other crops that had different percentages based on this analysis; for instance, sugar beets, rice, potatoes, onions, peas and several others all had different ratios, percentage levels, based on the economic analysis.
    But, as Mr. Smith mentioned, we're looking at the comments. We expect to continue to focus on this issue.
    Mr. CHAMBLISS. Let me point out two things: First of all, with respect to the cost, at the time that these farmers are prevented from planting, it should be basically the same with respect to other commodities and cotton at that point; and, second, the premiums that we're paying, as was alluded to, are significantly higher—not just higher but significantly higher.
    So I urge you to address that immediately and let's get that resolved.
    My second specific crop question is with regard to peaches. In 1997 we had this program that our farmers, I think all across the Southeast particularly, were very pleased with and I hope we're going to continue that for 1998.
    Do you all have any comments or thoughts on where we are there?
    Mr. ACKERMAN. As you know, for 1997—last year peaches had a very bad year. There was a very bad freeze and we made a——
    Mr. CHAMBLISS. In 1996.
    Mr. ACKERMAN. Excuse me, in 1996, and we made an adjustment in the APH's within the four corners of the regulations for that.
    We are looking at the issue for the following year—excuse me if I'm tripping over the crop years because different crops have different months involved—but we are examining that issue.
    Mr. CHAMBLISS. OK.
 Page 23       PREV PAGE       TOP OF DOC
    Mr. Chairman, may I have one more question?
    Mr. EWING. Go ahead.
    Mr. CHAMBLISS. Dallas, you and I have had some practical experience with some, I guess for lack of a better term, repeat offenders with respect to crop insurance claims, and I can just about ride through my county and tell you in February or March who's going to have a crop insurance claim. I know there have been a number of instances where there's been abuse of the system from that standpoint.
    Do we have any additional controls in place now with our new program or are we doing any monitoring of that particular abuse of the program that is going to hopefully hold down the cost of the program?
    Mr. SMITH. Yes, we too believe that program integrity is a major part of having a successful risk management program, and, in addition to that, the Risk Management Agency has that additional responsibility, making sure that the playing field is level for all of the participants, including the companies and the individual policyholders.
    For that reason, we believe that we need a very strong compliance program, one that is understood by all—from the policyholder right up to the agency, RMA. In those areas where we find that there is an opportunity for fraud and abuse, we believe that those loopholes have to be closed in order to maintain the confidence of our producers in the program.
    So under the new reformed risk management program we have placed a great deal of emphasis on maintaining a strong compliance program.
    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    Mr. EWING. Thank you, Saxby.
    Mr. EWING. Mr. Baesler.
    Mr. BAESLER. Thank you very much.
    I have a specific request that I want to make related to tobacco. Under the existing law on late plantings the tobacco, I think, is the only crop that has the following provisions: If you plant after July 1, you lose I think 10 percent or 5 percent—I forget what it is—10 percent, I believe, of your coverage. From July 1 to 5, the point is that any of those days you lose the coverage. If you plant after July 10, you lose another bracket. Other crops you're given a percentage each day after the planting date.
 Page 24       PREV PAGE       TOP OF DOC
    Do you understand what I'm talking about, Dallas?
    Mr. SMITH. Yes.
    Mr. BAESLER. Under tobacco—we had a lot of this last year in Kentucky, so the coverages we get for our crops they're grouped together. If you don't plant on the first, you lose so much percent. If you don't plant on the 5th, you lose so much more percent. Most other crops you lose—it's like 2 percent each day, not cumulative like on the 5th you lose all of it at once.
    I would like to recommend that you put us in line with the other crops and on late plantings we be treated the same as the other crops, and that is we lose certain coverages based on each day you might plant, not on brackets of days because it's not fair to us basically.
    For instance, if I plant on the 1st, I might as well wait to the 4th because I've already lost my whole coverage. Do you understand what I'm saying? Am I clear?
    Mr. ACKERMAN. Mr. Baesler, in the preventive planting regulation that we were discussing before that we're hoping to finalize by the end of this month this issue is being addressed, and my understanding is that tobacco will be moved more in line with other crops on this point.
    Mr. BAESLER. Well, you all were nice enough to talk to us last year when we're trying to do a lot of other things, and you were correct, I think, in not allowing—from the insurance perspective in allowing them to change their coverages after we already had it. I thought you were correct there, but if you can make this adjustment, then I think it would be more fair to the tobacco farmers because they will be treated like everybody else, and just keep the program going. We need it in Kentucky.
    Thank you.
    Mr. EWING. Thank you, Mr. Baesler.
    Mr. Bryant.
 Page 25       PREV PAGE       TOP OF DOC
    Mr. BRYANT. Thank you, Mr. Chairman.
    I have just a couple of questions, if I could. Regarding the intentions within the crop insurance program in the issuance of new policies, given the resources of the private industry in investing in new product development, what role does the Risk Management Agency play in new policy development, and have there been new policies approved during the last 2 years? I'm also interested in the time it takes to approve, the length of time for approval.
    And, finally, do you think that the private sector can develop these policies more cost-effectively?
    Mr. Ackerman.
    Mr. ACKERMAN. Thank you, sir.
    This is an important question and it's one that we have had a lot of discussion on, both internally and also in discussions with our private sector partners.
    The Risk Management Agency, our resources are best used if we do not use them in areas where we're competing in any way with the work of the private sector. Generally, when we work on new products at the Risk Management Agency, we focus on bringing either new crops on-line, or where we are developing revenue crop policies, they are generally in the area of specialty crops.
    The one area where we have developed a revenue product for the main row crops is the income protection program, a pilot program, which was created in response to specific Congressional mandates in the 1994 statute and in the 1996 statute. Those statutory mandates expire within the next year or so, and so we will be considering whether to extend that program or whether at that point with the mandates ended, whether that should be turned over to the private sector as well.
    Generally, we view the private sector as very effective in coming up with new products. The two principal revenue insurance products that are now being sold around the country, CRC and Revenue Assurance, are private sector products. Income Protection, again, is one that we set up but is only offered in very limited geographical areas.
 Page 26       PREV PAGE       TOP OF DOC
    As far as the time that it takes to come up with a new product, often that time is simply inherent in the process. We are required for a new product to set rates that are actuarially sound, to have underwriting rules that will be enforceable and meaningful, and often that does require quite a lot of work in terms of analysis, economic analysis. We hold focus groups with farmers. We talk with agents, we talk with companies, and so there is a lot of ground work that does go into it.
    Mr. BRYANT. Thank you.
    Quickly, an important reform adopted in the 1994 legislation mandated a reduction in regulatory burden and delivering crop insurance. The USDA was required to minimize the paperwork burden to private companies and reduce the cost of policies.
    Has the USDA met this mandate?
    Mr. ACKERMAN. We've taken this mandate very seriously. We provided a report to Congress earlier this year, which discussed in detail how we've addressed the mandate so far. It's a continuing over 5 years. We have taken a number of steps that we've developed in consultation with the insurance industry to relieve regulatory burdens.
    I would point out that one step that's being undertaken currently is to replace the old system of yields. It's based on old program yields from the old farm programs with a new set of yields based on mass averages. This has resulted not only in eliminating a number of burdensome steps in establishing yields for farmers, steps that were burdensome both on insurance agents, as well as on individual farmers, by making that system more rational and less arbitrary.
    We view this as an important mandate, simplification, regulatory burden lifting, and it's one that we intend very much to continue with.
    Mr. BRYANT. Thank you, Mr. Chairman.
    Mr. EWING. Thank you.
 Page 27       PREV PAGE       TOP OF DOC
    Mr. McIntyre.
    Mr. MCINTYRE. No questions at this time, sir.
    Mr. EWING. Mr. Condit.
    Mr. CONDIT. Thank you, Mr. Chairman.
    I just would like to real quickly ask—the nursery industry has been trying to develop a policy, and I think they were targeted for 1997, and it's been put off until 1999.
    Could you just briefly tell me are we on target for 1999? Are we going to shift it again and is that moving along or what's happening?
    Mr. ACKERMAN. Yes, sir, that's moving along. We have the proposed regulation developed. It's going through Departmental clearance. We hope to have it in the Federal Register for comment before the end of the year, and we would very much encourage nursery growers around the country to please comment on the regulation so that we can move it forward.
    Mr. CONDIT. Has the private sector been making any attempt to work with you to develop a policy?
    Mr. ACKERMAN. We've consulted with the private sector in the development of the proposed regulation.
    Mr. CONDIT. Thank you.
    Thank you, Mr. Chairman.
    Mr. EWING. Thank you.
     Mrs. Chenoweth.
    Mrs. CHENOWETH. Thank you, Mr. Chairman.
    Mr. Smith, I had some questions with regards to the coverage of seed crops. As you know, in 1990—in the last omnibus farm bill, the Freedom to Farm Act, seed crops were included for coverage under crop disaster insurance.
 Page 28       PREV PAGE       TOP OF DOC
    As I reviewed the information that you have so generously included in your testimony, I don't see seed crops listed there. I was wondering has there been a delay in recognizing seed crops, even though it's now law and especially with regards to the payment for loss of seed crops?
    Mr. SMITH. Well, I think there are two areas within our program. One is the NIAP program, which is addressing this issue, and the other one is being addressed by the Federal crop insurance side, and because of the uniqueness of dealing with the seed crop issue as it relates to other uses of the commodity, I would like to ask Ken Ackerman to address it from the crop insurance perspective. We have Chris Niedermayer here from the Farm Service Agency who has been working on that particular program from the Non-Insured Assistance Program.
    So I would like to ask Mr. Ackerman, first, to respond to crop insurance.
    Mrs. CHENOWETH. All right.
    Mr. ACKERMAN. Thank you.
    As you point out, the 1996 legislation added seed crop as a crop under the NIAP Program, the Non-Insured Assistance Program. There has been no delay in moving it into the program. It is covered under that program.
    As far as insurance goes, we are working with the States in the Pacific Northwest through our Spokane regional service office to try to develop a pilot program for seed crops for insurance separate from NIAP for actual insurance. We expect that this is perhaps a year or so away. We would probably be starting with, I believe, turf grass or other types of seed, and then once the bugs are worked out of it, we would probably expand it to a number of additional seed crops.
    But we are working very diligently at that and hope to have that on-line in the next year or so.
 Page 29       PREV PAGE       TOP OF DOC
    Mrs. CHENOWETH. You know, we have in my State a large number of onion seed growers. We have in my State a fairly large number of onion seed growers who lost their crops due to extreme heat last year, and their claims were denied because they said that onion seeds were not a crop that could be recognized because onions could—the bulb itself could be sold on the commercial market, which is not the case. It can't be. Once it goes for the production of seed, it cannot be sold on the commercial market. It's much smaller in size and so forth.
    Being the author of the legislation and having mothered that thing all the way through, I'm a little touchy about this, and then when it hit my constituents with an absolute flat-out denial, I became very, very concerned, and I thank the chairman very much for holding this hearing because I believe that what has happened is an indication of the intent of Congress. I mean, if it's covered, it's covered, and my problem is if it's covered, we can't afford to wait 2 or 3 years for studies. I mean, these people have lost 80 percent of their revenue. They will be broke, and so if it's covered, it should be covered, and I would very much appreciate your checking into this for me and then personally getting back to me through the committee because, like I said, this does torque the entire intent of that piece of legislation.
    I wonder if you could tell me who the participating insurance companies are?
    Mr. ACKERMAN. Mrs. Chenoweth, the coverage that you refer to for the seed crops under the change in the law that you refer to resulted in these crops being covered under the Non-Insured Assistance Program rather than the insurance program. As a result, there were no participating insurance companies. It is simply the NIPA program.
    One of the major differences between the NIPA program and insurance is that the NIPA requires that there be an area-wide loss before any farmer could get coverage. That's an inherent piece of the NIPA program. As I understand it, and as Mr. Smith said—FSA is here in the room to respond on a more detailed basis—but the question involved in this situation is whether the loss in Idaho and Oregon satisfied that 35 percent loss trigger given the different types and varieties of onion seed crops.
 Page 30       PREV PAGE       TOP OF DOC
    I do understand that a group from FSA is going to be going out to Idaho and Oregon in the next several weeks to visit with many of the affected producers and talk through this issue some more, and get a sense of how individual people have been harmed and affected, to see if there are some things that can be done on that.
    But on your question, we would be very happy to check into this and get back to you.
    Mrs. CHENOWETH. I would really appreciate it, and I would appreciate all of you keeping in mind the fact that onion seed crops are so isolated and so small that the method of making the comparables as to the percentage you were referring to is not normal, and most of our onion seed growers were affected, and severely affected.
    Thank you, Mr. Chairman.
    Mr. EWING. We have just a few minutes before we can make this vote, and I would ask the panel to remain seated at the table, and I'll recess this committee for just a few moments.
    [Recess.]
    Mr. EWING. We'll cut the recess short. I'm afraid it's going to be one of those afternoons with a number of interruptions so we'll try and keep things moving.
    I have just a couple of more questions. I do want to let you know that Mr. Canady, Mr. Pombo and Helen Chenoweth, all have questions that they will be submitting in writing and would appreciate your responding to them.
    Can you give us any assurances that the nursery industry will not have to wait longer before the 1999 crop year for their policy?
    Mr. ACKERMAN. Can I give you assurance of that? We are intending to put that proposed regulation, proposed policy, in the Federal Register this December, before the year is out, and we very expect to have it in effect for the 1999 crop year.
 Page 31       PREV PAGE       TOP OF DOC
    Mr. EWING. Thank you.
    Mr. Smith, you mentioned in your testimony that you had had some discussions with Carol Brookins about her concept for Federal crop insurance.
    Do you support that concept?
    Mr. SMITH. We are certainly looking into the proposal that she has put forth and explained to us, and in our ability to look at new ways of providing a safety net to our farmers, we are open to ideas such as the one that Ms. Brookins has put forth.
    It's still under evaluation at the Department, and, as we get more information on that, we'll be able to provide you with more specifics on our support for that type of program.
    Mr. EWING. I think it's important that we continue to look at these options and look at them very carefully. When we find a good idea to move on it, to keep ourselves close to the cutting edge in this business.
    I have no other questions. I do want to thank you both for being here. If your schedules permit, I would invite you to stay and listen to the other testimony. I think that it is probably as much for your benefit as it is for the benefit of the committee to hear what's on the minds of others dealing with the Federal Crop Insurance Program.
    With that, I would excuse this panel and thank you again for your attendance.
    Mr. ACKERMAN. Thank you.
    Mr. SMITH. Thank you, Mr. Chairman.
    Mr. EWING. I would ask the second panel to come forth, Mr. Richard C. Gibson, chairman and CEO of American Agrisurance, Inc.; Mr. Ernie Ross, chairman of the American Association of Crop Insurers; Mr. Roger Swartz, vice president and general manager of American Farm Bureau Insurance Services and a constituent of mine from Illinois—welcome, Roger; Ms. Ruth Gerdes, farmer and crop insurance agent, Auburn Agency, on behalf of the National Association of Crop Insurance Agents; and Mr. Robert Parkerson, president of the National Crop Insurance Service.
 Page 32       PREV PAGE       TOP OF DOC
    Welcome to all of you.
    I also welcome Mike McLeod and Lyle Marschand who are accompanying members on the panel and will be here for resources.
    So we'll start with you, Mr. Gibson.
STATEMENT OF RICHARD C. GIBSON, CHAIRMAN AND CEO, AMERICAN AGRISURANCE, INC.
    Mr. GIBSON. Thank you, Mr. Chairman.
    I would like to make one comment. I'm sorry that Mr. Pomeroy has left, but I'm not sure Mr. Ackerman gave a clear impression in regards to the expansion of CRC for spring wheat. When the FCIC Board of Directors did meet, they did approve the expansion of wheat for the 1998 crop season, which does include the entire State of North Dakota, so I would like to see that the record is correct with that.
    Chairman Ewing and members of the committee, thank you for the opportunity to present testimony today. The issue of how to cut the cost of the Federal Crop Insurance Program without decimating it is a thorny one. Congress faces a great contradiction: finally, the crop insurance program is successful; participation rates have reached a record level; farmer acceptance is high and crop insurance stands alone in providing a safety net for agriculture. Yet, with this success comes expense. A program that grows from 10 percent to 80 percent participation is also going to increase in cost, and every proposal to decrease those costs must be reviewed with an eye toward what it will do to the participation rate we have all worked so hard to attain.
     In fact, being here today reminds me of the many times I have been called before Congress to defend the program when we had only 35 percent participation. We in the industry have often said that the program is a victim of our own success.
    Having said all of that, let me also say that I think that there are ways that we can make this program run more efficiently and less expensively without reducing participation or eliminating service to the more risky areas. In my mind, the Government has only two basic obligations in this program—as a re-insurer and as a regulator. Everything else the private sector can do and will do better than the Government can. For reinsurance we in the private sector have never been able to put together a program that can stand without the Government, and, believe me, if we could, we would. But a combination of enormous agricultural risk, competition from the Government with disaster payments and underpriced rates make the Government's participation as a reinsurer essential. It follows then that when Government money is involved, Government oversight must also follow. These two roles as reinsurer and regulator are the Government's only mandatory functions.
 Page 33       PREV PAGE       TOP OF DOC
    Let me briefly lay out how this concept could work. The reinsurance entity would operate as a commercial reinsurer, charging companies reinsurance premiums sufficient to build reserves to cover catastrophic loss years. A key element of this reinsurance entity is that it would accumulate surplus in good years, minimizing the potential for huge losses to the Government. It would operate outside USDA and be governed by a Board of Directors. Potentially, it could be developed similar to FDIC or the Farm Credit System. The board would have a broad mandate to manage the reinsurance entity effectively as a reinsurance company, authorized to charge reinsurance premiums relative to the risk exposure it assumes and free to offer different types of reinsurance contracts depending on the market demand by companies. The only requirement would be that once an offer is made to one company it would have to offer a similar contract, rated for experience, to all other companies who would wish to purchase this type of insurance.
    The non-essential functions that RMA currently handles, like rating and product development, would be contracted out to NCIS or the private sector. Through NCIS, the structure is already in place to handle many of these functions. Additionally, the NCIS state committee system could easily be expanded to include a forum for agents and producers for input on operational problems and improvements.
    However, to make a reinsurance entity operate as a commercial reinsurer would also require substantial premium increases in markets that are currently actuarially unsound. Traditionally, the political process had judged increasing rates to an actuarially sound level as unacceptable. Let me be frank. Doing so would at least double the premiums for farmers in many areas effectively pricing most of them out of the market.
    The current system places these unrated and higher policies in the assigned risk pool, which is expected to have underwriting losses. In a private market, these contracts would be deemed uninsurable and insurance underwriters would simply turn them down. I believe that all of us have the interest in keeping crop insurance available universally. We can do this under the reinsurance-regulator concept, but it will likely be necessary to keep the assigned risk pool within the Government.
 Page 34       PREV PAGE       TOP OF DOC
    Within this system we could fix some of the immediate problems that we face today. First, we could change the delivery subsidies, making all of the expenses part of the farmer's premium. Congress could then increase or decrease the subsidy to whatever level it deems feasible within the budget. This would make farmers and policy makers more aware of the true cost of the program and would make the program more simple and more like traditional insurance.
    However, any attempt to make companies compete on administrative expenses when they cannot compete on rates would be foolish. With the competitive and highly volatile nature of this business, the result is easy to predict—companies would be forced to undercut each other on the administrative expense and would try to undersell each other in the areas with profitable business. Less profitable business areas like Texas would not see this competition. Administrative costs would be high in areas with historically poorer loss ratios. The first loss year would reveal the companies that had gambled on paying their administrative expenses out of the anticipated underwriting gain, driving more companies out of business and potentially leaving the Government liable for these policies.
    The CAT system would remain intact with companies free to allocate CAT policies between the commercial pool and the assigned risk pool. I do think these suggestions to modify the CAT program away from the $50 administrative fee toward a premium based system merit consideration. I agree that the CAT program offers some growers an indefensible amount of liability for almost nothing. I would urge caution, however, in making CAT premiums too high, as farmers do not consider CAT valuable. If it costs too much, we risk great numbers of farmers dropping out. When the inevitable disaster hits, Congress will be pressured to return to ad hoc disaster payments. This turns into a disaster for not only the budget, but also for confidence in the crop insurance program.
    I would propose keeping the $50 CAT fee for liabilities up to a certain level, perhaps $100,000. Farmers then could buy a liability in excess of the $100,000 for a premium. This would keep participation up without driving farmers out of the program.
 Page 35       PREV PAGE       TOP OF DOC
    In closing, let me summarize just a few of these ideas. I believe a large portion of the crop insurance program can operate simply and efficiently as a commercial reinsurer, but only if it operates outside of the structure of the USDA. All farmers' subsidies would be loaded into premiums. The Government would continue its role as a regulatory, as well as operation of an assigned risk pool for those higher risk areas to make up the social aspects of this program. CAT policies would continue to serve as a replacement for disaster aid with a premium for higher liability policies.
    This reinsurance entity offers Congress a simple and market-oriented system to fully utilize the private sector. It ensures that a high-quality crop insurance program will remain viable long-term. Additionally, the reinsurance entity-regulatory concept that I have laid out today solves several short-term problems facing the program. The discretionary funding problem, the problem of delivery a subsidy to farmers through companies and the perception that the Government is offering high liability policies to farmers for nothing.
    The ideas presented today are mine as part of my job description of the company that I work for, but I would also volunteer on behalf of the entire industry that we want very much to play an active role in these deliberations. We stand willing to work with this subcommittee and all those interested parties in making changes to the crop insurance program that will reduce Government expense, and we value the work of the private sector in helping us to continue to deliver a quality product to a great majority of America's farmers.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Gibson appears at the conclusion of the hearing.]
    Mr. EWING. Thank you very much, Mr. Gibson.
    Mr. Ross.
STATEMENT OF ERNEST ROSS, CHAIRMAN, AMERICAN ASSOCIATION OF CROP INSURERS
 Page 36       PREV PAGE       TOP OF DOC
    Mr. ROSS. Thank you, Mr. Chairman.
    I'm Ernie Ross, chairman of American Association of Corp Insurers representing insurance companies that write 80 percent of crop insurance premiums throughout the United States.
    Since the enactment of the Crop Insurance Act of 1994, crop insurance has become a tremendous success. Participation rates have reached 70 percent of eligible acres. Total protection has doubled from $13.6 billion in 1994 to $26.9 billion in 1996. Farmers are now able to purchase risk management protection at a reasonable cost. It protects against low yields, poor quality, and, as revenue coverage expands, protection of market prices. This is vital to the success of Freedom to Farm.
    Unfortunately, such rapid success frequently brings on problems, and I wish to address two: funding of the program and management of the program.
    Property insurance plus disaster payments were averaging $4 billion annually compared to the current cost of the cost insurance program of $1.8 billion, a huge savings for the taxpayers, as well as a dependable crop insurance program for the production of agriculture. Congress must accept the fact that 70 percent participation cost more than 30 percent participation in past years. A program that is saving $2 billion annually was in jeopardy this year over the appropriations and release of $188 million in discretionary funding. It was October 8, more than 3 months into the new crop year, before we knew whether the USDA would agree to release the money to us that was appropriated by Congress.
    The administrative operating expense subsidy has been cut from 31 percent to 27 percent for the 1998 crop year, a cut of 13 percent in 2 years. Crop revenue coverage expense subsidy will be 23 percent and one quarter percent in 1998.
    The requirements of 1998 Standard Reinsurance Agreement and its related requirements will result in insurance companies losing money on the operational side of our business. The 1994 Reform Act required the Risk Management Agency to simplify the crop insurance program equal to the cuts in our expense subsidy for operations. Unfortunately, the Risk Management Agency has not made those cuts. In fact, they have made it more expensive and more difficult to administer the program.
 Page 37       PREV PAGE       TOP OF DOC
    The simplification and cost reductions must occur before any further expense cuts. Reduced funding would also result in lower participation by farmers, agents and companies. If the private sector's current level of risk management, education, counseling and local services were reduced, farmers may no longer participate at sufficient levels to hold off ad hoc disasters.
    We have heard a lot of different proposals advanced to solve the funding problem of the crop insurance. Unfortunately, most have proposed further cuts in our operating expenses. It should be very clear that any proposal to solve the funding problem by additional cuts in delivery systems is not realistic. One more cut would put us in a position of losing a lot of companies and agents in the business. There is no free lunch. You can't continue to impose cuts on the private sector that delivers a program without seriously undermining the program. Any further solutions must focus on the entire crop insurance program, and it must look at the entire $1.8 billion, not just the cutting of $188 million in funding for agents' commissions.
    I understand that the FCIC Board recently discussed the producers paying a percentage of the imputed CAT premium, catastrophic coverage premium. This could be used as one way to help solve the funding problem. Also, part of the $1.1 billion in excess food stamp administrative cost is another potential source for a permanent funding fix.
    The second problem of management—I look and see about the same structure at FCIC today that I saw back in the early 1980's. The RMA needs to re-engineer and streamline to manage the current program that has expanded far beyond what anyone expected in 1980. We need a new mind set among the bureaucracy. The Government's role should over time gravitate toward financial support, regulatory, oversight and catastrophic reinsurance.
    Although the current program is a tremendous success, many improvements and expansions are before us. Many of us in the crop insurance industry have invested our careers and our financial assets to make the program work. We have made this program work in spite of many obstacles. Now we need to know the level of commitment that Congress has to make this program work.
 Page 38       PREV PAGE       TOP OF DOC
    What the crop insurance industry needs to know from Congress is, one, what level of participation is acceptable to Congress; two, is Congress committed to risk management as an affordable price for all farmers; and is Congress committed to provide a stable program for us to deliver?
    We at ACA pledge our cooperation in working with your committee and the Risk Management Agency to move the proper insurance program to a higher level of risk management for the American production of agriculture.
    Thank you.
    [The prepared statement of Mr. Ross appears at the conclusion of the hearing.]
    Mr. EWING. Thank you, Mr. Ross.
    Mr. Swartz.
STATEMENT OF ROGER SWARTZ, VICE CHAIRMAN AND GENERAL MANAGER, AMERICAN FARM BUREAU INSURANCE SERVICES, INC., ON BEHALF OF THE CROP INSURANCE RESEARCH BUREAU; ACCOMPANIED BY LYLE MARSCHAND, PRESIDENT, CNA AGRICULTURE
    Mr. SWARTZ. Thank you, Mr. Chairman, and committee members.
    My name is Roger Swartz, and I'm vice president and general manager of the American Farm Bureau Insurance Services, Inc., and chairman of the Governmental Affairs Committee of the Crops Insurance Research Bureau. I am joined by Lyle Marschand, president of CNA Agriculture.
    Speaking on behalf of CIRB, we wish to thank this subcommittee for calling this hearing as a first step to identifying the issues, problems and potential solutions to ensure the success of the crop insurance program in the coming years, especially considering the increasing risk based environment in agriculture today.
 Page 39       PREV PAGE       TOP OF DOC
    CIRB is a national trade organization of crop insurers whose members provide crop insurance to nearly every State in the Union. CIRB members are committed to delivering to the American agricultural producers quality crop insurance products.
    Crop insurance is currently more critical than ever to both our nation's agriculture producers and Federal taxpayers. Today 1.2 million producers are protected by crop insurance. Crop insurance is the producers only protection against crop loss, and the USDA officials call it, ''the primary remaining safety net for the American farmer.''
    In order to maintain the strength and efficiency of the program, and to continue to serve the American agricultural producers, we must preserve the long-term viability of the program. The development of a permanently funded crop insurance mechanism, which reinforces the fundamental objective of providing quality risk protection to agricultural producers is critical. Cooperative participation by all involved in the crop insurance program, including agricultural groups, crop insurance providers, financial entities and the government officials is essential for a successful program. CIRB members are committed to this goal.
    The critical nature of the crop insurance program leads us to review its original program goals, which are creation of a productive and efficient public-private partnership to deliver and service crop insurance products to ensure the financial security of our nation's agricultural producers; achievement of maximum producer participation of the program, which provides access to important risk management tools; ensuring long-term viability of the program as crop insurance remains the only safety net for the American agricultural producer, with the elimination of disaster relief and subsidy payments.
    Let's look at the current state of the crop insurance program and see if these program goals have been achieved:
    One, public-private partnership. We have not achieved an effective and efficient public-private partnership. Recent program changes have significantly increased the private insurer's share of many claim payments and overall servicing responsibilities. The fact is that private insurance companies are not merely servicing the business but have a large financial stake in the success of the crop insurance program.
 Page 40       PREV PAGE       TOP OF DOC
    Based on the increased financial stake and the responsibilities, the private sector must have a more substantial voice in all aspects of the program.
    Regarding participation levels, while producer participation has significantly increased over the last 2 years, we must do more to encourage producers to take individual responsibility for the risk management needs. Today's program does not adequately reflect the needs of American producers, as excessive regulations, compliance practices and reporting requirements work as a hinderance to producer participation.
    Let's take a lesson from the recent IRS hearings and ask our producer customers what they think of the crop insurance program and products available to them.
    Regarding new crop insurance products, in recent years the private sector has developed several new products to meet producers' ever-changing risk management needs. However, private insurers are increasingly discouraged due to the onerous regulatory process, which is inhibiting innovative product development.
    Fourth, regarding program funding, the Federal Government cannot afford to return to costly agricultural disaster programs, which have cost taxpayers an additional $2 billion a year. The current funding structure of the program is dangerous and places the future of the program in jeopardy.
    Regarding regulatory reform, essential to the continued strength of the crop insurance program and achieving the program goals is a regulatory reform program that's mandated by Congress in the 1994 Federal Crop Insurance Reform Act. This issue has become critical as excessive program regulations are making it increasingly more difficult for crop insurance companies to deliver quality risk management products to agricultural producers.
    For instance, the current crop insurance annual is over 800 pages in length and there have been over 360 changes since 1995.
    In conclusion, we make the following recommendations to the subcommittee:
 Page 41       PREV PAGE       TOP OF DOC
    One, implement a revised public-private partnership that utilizes the skills and resources of each partner with the objective of improving the quality and efficiency of the overall program.
    Two, define a common sense permanent funding mechanism to ensure continued viability of the program and the security of our Nation's producers who depend so heavily on this program.
    Three, reduce the regulatory burden on producers and crop insurance providers to improve efficiency in program participation at a reduced cost.
    And, fourth, form a cross industry working group, which will make substantial recommendations to Congress within a specified period of time. Additionally, analysis from an independent third-party consulting firm would be beneficial to this process, and we are including study proposals from two highly regarded firms to that end.
    As risk management becomes increasingly more important to agricultural producers, we must work together to ensure the continued strength of the program. Thank you for your consideration of this issue, and we would be glad to assist the subcommittee and chairman in any manner possible.
    [The prepared statement of Mr. Swartz appears at the conclusion of the hearing.]
    Mr. EVERETT [PRESIDING. Thank you very much.
    Ms. Gerdes.
STATEMENT OF RUTH GERDES, FARMER AND CROP INSURANCE AGENT
    Ms. GERDES. Thank you.
    I guess we've heard a lot about farmers. I guess I are one.
    Mr. EVERETT. I are too. [Laughter.]
 Page 42       PREV PAGE       TOP OF DOC
    Ms. GERDES. Good.
    My husband and I operate a diversified farm growing corn, wheat and soybeans, Angus cattle and a Hampshire Swine breeding operation. I also am a crop insurance agent, and I became a crop insurance agent because of the abuse that we suffered on our farm in our crop insurance policy in 1985.
    In 1985 I started with six clients, and today I have over 1,000 in Nebraska, Iowa, Missouri, Kansas and some in Illinois. I'm also an active member of the National Association of Crop Insurance Agents, and that's who I am testifying for today.
    We certainly appreciate the fact that the committee has given the agents an opportunity and a seat at the table today. I thought I would start by giving you somewhat of an overview of what a crop insurance agent is. I think there's a lot of misconception around the Hill on this issue. The vast majority of agents are independent agents. We do not work for a company. We actually chose with which company to place our business.
    In the past some of that choice was driven by commission—not any more. My choice as to where to place my business is based upon how I can get my farmers serviced properly.
    There was a question earlier about agents' commissions, and I would just refer you to the addendum in my written testimony that gives you an idea of what an agent actually makes and what those agreements can be. I'm a little concerned about the thought that we are getting 27 or 25 percent. That's not accurate and the documentation is there.
    Selling crop insurance is not particularly easy. It takes hours and hours of diligence, work, and education just to keep up with the rules. My responsibility is to keep up with those rules and then communicate with the farmer about what his obligations are, what his coverage is and all the options that he has available to him. That communication between the agent and the farmer is the critical link between having meaningful transfer of risk or simply having another insurance policy.
 Page 43       PREV PAGE       TOP OF DOC
    A major consideration I would like for you to know about today is that crop insurance is different from the farm program. The farm program is an entitlement program; crop insurance is something that has to be sold. You have to have some expertise to explain those options. I think therein lies some of the problem. The USDA tends to treat crop insurance like the farm program, but there are vast differences. A meaningful public-private partnership needs to develop for crop insurance to be successful. This partnership and program needs to be well-balanced between providing a policy of value to the farmer while protecting the taxpayer.
    There are several areas within the crop insurance program that I think need to be examined. We talked about the catastrophic policy. I would suggest that Congress explore the possibility of charging the policyholder up to 10 percent of the premium or some type of procedure of that nature.
    I have great concerns about the flat fee that we have for CAT, and this goes back to differentiating between an entitlement program and an insurance program. Also with reference to the CAT program, we have seen the development of association selling. Cooperatives, growing groups and associations are entering into exclusive contracts with some companies.
    One of the biggest concerns to me as an agent and also as a farmer with this practice is that since these policies are often times sold through the mail, producers do not receive an idea of what a comprehensive risk management should be. Attached to my testimony is an excellent letter to Mr. Schumacher from a California crop insurance agent outlining in detail some of these concerns. I don't believe that we have time to go through these in detail now.
    Another area that I would encourage the committee to look at is the structure of RMA. Starting with the question, does the current organization encourage the public-private partnership necessary to make crop insurance a long-term success?
    Let's get very specific; let's use one example. Significant resources in dollars, as well as time at RMA, have been used up in new product development. According to RMA's website, in 1997 the Income Protection Policy was developed at taxpayer expense as 2,456 policies earning premium in 1997. The CRC policy, which was developed and is being maintained by a private company, has 146,668 policies earning premium. I think the farmers have voted in overwhelming majority with their pocketbook.
 Page 44       PREV PAGE       TOP OF DOC
    The problems at RMA go beyond the structure of the overall agency and new product development. For farmers and agents one of the most frustrating things that I deal with is the lack of interaction between agents and farmers and RMA. Again, this is not an entitlement program. It is an insurance program. To solve policy problems the folks at RMA have to have an idea of the source of the problems and what can be done to address them. Without any mechanism to address agents' or farmers' issues, how can they be addressed in an adequate manner?
    Even within RMA there are organizational issues that block resolution, and a good example is preventive planting, which has already been brought up today. I sincerely hope that we are only a few days away from a final rule announcement that resolves this issue for 1998 spring crops, but it has taken over 3 years to get to this point.
    I anticipate with this proposed rule that we will solve 90 percent of the major problems of preventive planting, but the other 10 percent involved will not be solved with this proposed rule. That's because the planting dates are set by the Regional Service Offices who report to the Washington, DC office. The rest of preventive planting is handled by the Kansas City office. Tim Hoffmann, a member of the RMA staff in Kansas City, has done yeoman's work in bringing this issue forward and bringing it to consensus, but even with that work you're not going to be able to solve all the problems because he didn't have the authority to deal with the planting dates.
    It seems that every major issue that I have worked with RMA on is disjointed, and we need to consider how we deal with that.
    Finally, when you, as a committee, consider the issue of funding, you need to be concerned about the concentration——
    Mr. EVERETT. I'm afraid the 5-minute clock has gone off, and I beg your pardon, but I only have 1-minute to make it to the floor to vote. So I'm going to ask this panel—oh, here's Tom now.
 Page 45       PREV PAGE       TOP OF DOC
    Ms. GERDES. Finally, when the committee considers the big issue of funding, I hope that they will look at something that has not been addressed today, and that is the issue of concentration in the crop insurance industry. Attached is a memorandum on this from Dr. Barnaby at Kansas State that I asked him to prepare. In 1986 26 companies wrote 95 percent of the business; in 1996 7 percent of the companies wrote 95 percent of the premium; 4 of those companies wrote 71 percent of the business. Any decisions you make may have a very big impact on this concentration and could accelerate the process to the point where we would hurt farmers.
    Mr. Chairman, I thank you for the opportunity to testify. There are many addendum attached to my testimony.
    Thank you.
    [The prepared statement of Ms. Gerdes appears at the conclusion of the hearing.]
    Mr. EWING [presiding]. Thank you, Ms. Gerdes.
    And now, Robert Parkerson.
STATEMENT OF ROBERT W. PARKERSON, PRESIDENT, NATIONAL CROP INSURANCE SERVICES
    Mr. PARKERSON. Mr. Chairman, my name is Robert Parkerson, and I serve as president of the National Crop Insurance Service. We appreciate the opportunity to present this testimony before this subcommittee.
    The National Crop Insurance Services, or NCIS, is a non-profit trade association whose member companies include every crop insurance company that actively participates in the Federal crop insurance program. NCIS member companies write more than $1.7 billion in MPCI and related revenue products with liability totaling nearly $25 billion. These companies services over 1.9 million policies, encompassing all farmers participating in the Federal program, including limited resource and economically disadvantaged farmers. In addition to the Federal program, the NCIS member companies write approximately $600 million in private hail and named perils programs.
 Page 46       PREV PAGE       TOP OF DOC
    NCIS has historically researched and provided to the Government and industry highly technical crop risk information to support the development of crop coverage. Industry has directly supported an NCIS type trade association since the early 1900's. As an insurance advisory organization, the NCIS is licensed and approved to operate by individual insurance departments in all 50 States.
    Recently, our Board of Directors initiated a long-range planning committee to address the future needs of the crop insurance industry. As part of this process, the committee is discussing future alternative scenarios. Some of these alternatives being discussed and evaluated have been put forth by both the House and Senate staff committee members. All discussions are in the preliminary stages and will require additional evaluation.
    As we sit here today, participation in the Federal program is at historically high levels and the need for ad hoc disaster assistance in the agricultural sector is a thing of the past. Private insurance company participation, along with the Government's continued emphasis on risk management, as opposed to disaster assistance, is a more cost-effective way of handling the rising costs of crop damage and failure.
    The success of the revenue products in the current program are attributable to a public-private partnership. Certainly, since the 1994 Reform Act, the increases in farmer participation in unison with favorable growing conditions have buoyed the program. It is in many ways the successes of the programs more so than any failure that we are brought together in this room today.
    With the 1994 Reform Act and the Freedom to Farm Act, we have entered a new era of agricultural policy. The administration and Congress should be applauded for their efforts. However, these major policy changes have not had the opportunity to be tested beyond a few years of success. We have not observed a major weather shock since the 1994 Reform Act. Years such as 1993 and 1988 were not anomalies but are part of a weather cycle that can be anticipated and be expected in the future. We need to allow time for the current program to be stabilized and test it under favorable and highly volatile conditions before we try to reform the Reform Act.
 Page 47       PREV PAGE       TOP OF DOC
    Part of the stabilization process is to achieve a permanent solution to funding the program. The process of significant program changes and funding on an annual basis detracts from the primary goals of both the Government and the private sector to provide service and risk management to all farmers.
    As Congressman Ewing pointed out in a speech in Kansas City not long ago, there were definite mixed signals coming from the administration regarding this program during the past year, causing confusion and misunderstanding about this program, constant changes in the program, coupled with confusion and complexity of funding for benefits and services available for the farmers create an unnecessary atmosphere for uncertainty both for the farmers and the lending institutions that back agricultural production.
    Admittedly, there are problems with the program and issues that will need to be focused on between Government and industry. With the appointment of Gus Schumacher and the continuing efforts of Dallas Smith, industry is hopeful that some type of realignment or changes can be agreed on to resole unnecessary duplication, work and cost. Industry's fundamental concerns are stabilization of the program funding and consistent administration of the program with appreciation and recognition of the vital role that both Government and private industry have in agricultural risk management. Funding stabilization, consistent administration of the program and recognition of the private industry as a full partnership with Government are critical to continuing a viable private sector presence, which has been also proven as the most cost-effective way of delivering this program.
    This issue becomes even more critical with the ever-mounting concerns regarding El Nino. Obviously, no one can predict when and where the potential loss to the agricultural sector resulting from uncertain weather events, such as El Nino, can occur. Crop insurance is in place and can be an effective risk management tool for growers to protect themselves if they have confidence in the program, the stability of the program and purchase adequate coverage.
 Page 48       PREV PAGE       TOP OF DOC
    We would be remiss in our responsibilities to the American farmer and ultimately to the American taxpayer if we did not take the necessary steps to stabilize the crop insurance program, which is a primary safety net for the American agriculture community and our food supply.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Parkerson appears at the conclusion of the hearing.]
    Mr. EWING. Thank you, Mr. Parkerson.
    I want to indicate that if any of you are first-time witnesses, this little game we play here of roulette is, unfortunately, the way hearings too often have to be held here on the Hill when we are in session with people in and out and many demands on our time.
    Saying that is to get me off the hook for not having heard everything that you said, but then to lead to the point that what you say in writing is very important because it does go into our files and go into our staff and is analyzed. From that we do get many ideas and suggestions, and I want to say to this panel that represents the industry, the insurance industry, that your suggestions and ideas for improving our Federal Crop Insurance Program are very, very important because you know your industry. You know maybe better than anyone else what you can do as the insurers, and we welcome those suggestions and we will be going over them thoroughly to come up with some ideas that may be can be brought forth for either legislative enactment or maybe just for adoption down at the USDA in the administration of the program.
    I guess it goes without saying that every year you are concerned about the amount of money used for—or the percentage of money that's being allocated for reimbursement. I think that would probably get a nod from all of you that that is a concern.
    In your testimony any of you—and if you have, I won't ask you to repeat it, but if you haven't, did you give us a breakdown on the amount that goes to agents and did you——
 Page 49       PREV PAGE       TOP OF DOC
    Ms. GERDES. Yes, I submitted for the record a 1997 agreement between myself and the company I do business with, and it breaks it down in great detail.
    Mr. EWING. Could you give us just a rough idea of what the percentage was?
    Ms. GERDES. Certainly, I have done the commission schedule and it shows that 16.5 percent reimbursement to the agent on multi-peril as a maximum. There are certain levels and hurdles you have to reach as an agent to even be able to receive that, and 14.5 percent commission on crop revenue coverage.
    Those are if you have production of over $1 million and you do the paperwork timely. There are certain hurdles that you have to reach to get that level.
    Mr. EWING. Are the rest of you pretty much in line with all the companies? That is certainly something that is not—as many times as we say it during the debate, no one ever seems to get that message. We talk a lot about sky boxes. I have not been in any of your sky boxes, but that's unfortunate that we have that debate and that isn't a better known fact.
    So anything you can do to put out that information about what the agent really gets and what the company has I think is very important.
    I notice that or have learned that in Canada there's been a reduction of 30 percent in the reimbursement level. Are any of you familiar with just how they achieved that goal? Did they pass it on to the producer?
    Anybody? Mr. Gibson?
    Mr. GIBSON. I would respond in this way—I know that the Canadian Government has held a number of conversations with some people here in the American system, and just recently—although I have also had a contact in regards to the crop revenue coverage, and they are not particularly happy with what they call the group system out there, and I think that they have significantly seen a reduction in participation. As a result of this, they are looking at alternative means, so I'm not sure that when you look at an overall program and say that they've reduced the cost of it, maybe they haven't effectively really dealt with the problem of participation in and of itself.
 Page 50       PREV PAGE       TOP OF DOC
    Mr. EWING. Some of those cost reductions were mandated on them I think by their parliament. Is that not so?
    Mr. GIBSON. I think that's true, but they also have a system in which a significant portion of the premium is also subsidized in the local provincial program, as well.
    So it isn't just totally national where the subsidy comes from. It is a cooperative effort between the provinces and the national Government as well. They have just pushed that cost over into the provinces.
    Mr. EWING. Their program is not one that we would necessarily want to emulate then. Maybe we're hopefully ahead of them on the curve.
    Mr. GIBSON. I haven't seen anything of their program that significantly would interest us, I think, or would meet the needs that I see of the American farmer. In fact, in the development of the CRC program we met with farmers on numerous occasions, and on several of those occasions they sent us back to our office with our tail between our legs because we didn't have a program that would give them the type of protection and the income protection from the price variations that they wanted.
    So I really don't see anything in the Canadian program that would be very beneficial to us.
    Mr. EWING. If we were to change the structure of our crop insurance agency, making it more of a regulatory and oversight agency, and leaving to the private sector the total responsibility for coming up with the types of crop insurance, how do you think that would play out? Would the private sector be able to come up with the policies to meet the needs as well as we're doing today or better than we're doing today?
    Mr. GIBSON. My particular vote would be in favor of the private sector can, and is willing, to develop policies that will meet the needs of the American farmer, and, frankly, I think that we can do it better at significantly less cost than what's being imposed upon the taxpayer today. I think that there was a proposal a year or so ago to the Federal Crop Insurance Corporation that would have allowed a reinsurance on a name-peril basis I think that would encourage the development of these policies, at least to start with, and I would hope that they would reenact or revisit that and allow that type of reinsurance because I think you will see a significantly higher interest in developing products for commodities that have less premium potential and have higher risk, such as some of the specialty crops.
 Page 51       PREV PAGE       TOP OF DOC
    Mr. EWING. Anyone else?
    Ms. GERDES. I would just respond as both a farmer and an agent, and in my testimony I did refer to the fact that the proof is in the pudding, as you say, and the farmers have already voted with their pocketbook as to where they want it. The IP policy has 2,456 policies earning premiums. It was developed solely by the Government. The CRC policy developed by private industry has 146,668. To me the numbers show where it is.
    Mr. EWING. The concern I have from this committee's jurisdiction, and coming from corn and soybean country, as I do, and being familiar with that, it appears that we have more options and policies out there. And, of course, we have many more producers and a great more volume and all of that, but as chairman of the Specialty Crop Subcommittee, I wonder would the private sector step in and provide policies for the specialty crops at a rate that those producers could possibly afford?
    Mr. GIBSON. I think that potential is there. Right now many of the companies are offering name-peril, specific peril policies—rain on cherries in California, excessive rain on Pima cotton in California and Arizona, excessive heat type of policies, or rainfall I think has been offered on strawberries, on a limited basis.
    The difficulty still comes back to the fact that these are very specialized and they're also very volatile in nature, and they have a very high potential for loss. As such, it's difficult to handle some of those volatility and liabilities within the private sector. If there is a mechanism within the Federal crop insurance, which they did allow but has not been implemented, I think you would see significant development and offering of these types of policies to the consumer, or the producer in the specialty crop area.
    Mr. EWING. We would probably need to continue some type of uninsured program then, or maybe some crops that wouldn't be covered by the private sector?
    Mr. GIBSON. I guess maybe I haven't made myself clear. I think that we can handle the development, and I think we can handle the risk to a certain point. Where we need the help in this is to handle the catastrophic risk side of it, which is the reinsurance that would go outside the normal because of the volatility and the high amounts of liability that would come from these specialty crops.
 Page 52       PREV PAGE       TOP OF DOC
    Mr. EWING. What I'm thinking about is you may have a small number of strawberry growers in central Illinois. Are you going to be able to protect them or are there going to be some of these types of producers falling between the cracks?
    I'm not being argumentative, Mr. Gibson.
    Mr. GIBSON. I know and I understand what you're saying, but if we have the opportunities to do as I've suggested, I think that we can build a book of business or a spread of business throughout the various States that we can handle that business, but, again, we do need that protection for the catastrophic losses.
    Mr. EWING. Mr. Ross, you mentioned the need to clarify the subsidy flow to farmers.
    Would you think about your type of system to growers for insurance fits that need, where there would be a voucher to each producer?
    Mr. ROSS. A similar program to the vouchers. I'm not sure that that extra piece of paper is that desirable to have to handle, but certainly today the subsidies both in premium and expense reimbursement subsidies do directly benefit the farmer. The perception is that it is not going to the farmer, but it does in fact do that, and it would probably be easier to get Congress to fund the insurance program if it was at least presented in such a way that the total subsidy goes to the farmer and the farmer then uses that to purchase crop insurance from whatever product and whatever company he chooses to do so.
    Mr. EWING. Helen, I'm sorry, I just went on and on.
    Mrs. CHENOWETH. That's all right, Mr. Chairman, I'm learning a lot.
    Mr. EWING. If you have some questions, please go ahead.
    Mrs. CHENOWETH. Well, I do, and, Mr. Chairman, please advise me if I'm asking some of the questions that you may have referred to. I know we both have the same concerns, and I was out for a vote.
 Page 53       PREV PAGE       TOP OF DOC
    I would like to address my questions to Mr. Marschand, and I wanted to ask you, do you believe that the Government competes with the private sector on policy development?
    Mr. MARSCHAND. I don't think the issue I would use would be compete. I think the issue I was trying to address in the testimony is that the process that is set up within the RMA, that the private sector is required to go through to try to develop and implement a new product that we want to bring to market, that we think can work for the agricultural producer is onerous, and, quite frankly, discourages that development process.
    Hence, I think there may be a lot of ideas, product ideas, out there that are not brought forward because of the process itself.
    Mrs. CHENOWETH. Well, if those barriers and those disincentives could be eliminated in the best of all worlds, do you believe that the private sector can develop these policies more cost-efficiently?
    Mr. MARSCHAND. Definitely.
    Mrs. CHENOWETH. They can?
    Mr. MARSCHAND. Yes, I think what you would find if we take a look at other lines of business that the private insurance companies deliver is—there's really two factors. One is, and Rick Gibson hit on it a minute ago, and that is the fact that we would be able to focus better on developing products that would sell to the farmer, and, again, as other testimony indicated, this is not an entitlement program anymore. It is an insurance program, so you have to have an interest and you have to have a need, and you have to get input from, in this case, the producer on what they want and what they'll pay for. There are processes that we have set up—that's how we develop products today. Any consumer company would have to develop a product and make sure it's going to see in the marketplace before they put a significant investment into that process, and we're able to do that, and I think deliver more products on a hit basis that, in this case, the producer would purchase.
 Page 54       PREV PAGE       TOP OF DOC
    Mrs. CHENOWETH. Well, you've adequately addressed some of the concerns about the barriers that are on your side, but do you believe that there are barriers that exist that discourage producers from producing crop insurance, from purchasing crop insurance?
    Mr. MARSCHAND. Yes, I think the barriers there have to do with the complicated paperwork that's required. Several of the testimonies have an exhibit that talks about the sales process, and Ms. Gerdes went through that sales process and the complexity of that process for both the agent, quite frankly, and for the producer.
    That, quite frankly, just discourages them because so much paperwork, so many things they really don't understand about what they're going to get paid for, and what they're not going to potentially get paid for from an indemnity stand, so why bother? Or perhaps purchase CAT coverage, which really meets such a basic need that you really question whether it's worth it even though it's, of course, very cheap at $50.
    Mrs. CHENOWETH. It's very cheap to what?
    Mr. MARSCHAND. It's a $50 flat fee for the base CAT coverage, which only gives the producer a 50 percent level of protection.
    Mrs. CHENOWETH. All right.
    Mr. Chairman, that's all I have. I would like to be able to submit written questions to you to see if we could——
    Mr. EWING. We would ask the panelists to answer those, and I will see that the they're submitted.
    Mrs. CHENOWETH. Thank you.
    Mr. EWING. Do any of you believe that there are benefits to making reimbursement levels mandatory spending over discretionary spending?
    Mr. ROSS. Yes, sir.
    Mr. SWARTZ. Definitely, there would be. I think one of the biggest reasons is the liability on the company to know that there is money there and how much is there so we can budget, but also I think it's just as important for the farmer, the producer, to know that just like we do in our everyday business, we have to keep ourselves financially strong so that we're there tomorrow and year after year for the American farmer.
 Page 55       PREV PAGE       TOP OF DOC
    If we have at least some base levels for mandatory spending and what is going to be in the budget for the companies, then we can budget with that and also give that security back to the American farmer.
    Ms. GERDES. From an agent's perspective, the mandatory funding is almost a necessity. It's very onerous right now to even try to become a crop insurance agent. First of all, you get paid once a year and that's after 12 months of work—the paperwork, the processing, everything that you have to do with it. If you had a mandatory, I think you could develop better agents. Without a mandatory, you're losing agents right and left in the countryside. The consolidation among agents is very enormous. I get an average of two to three calls a week from other agents trying to decide whether to stay in the business or get out, and what's happening is your agents that are going to be in the business are going to get larger, and larger and larger, and a vast majority of agents are getting out of the business because of the onerous paperwork and the inability, or rather, the stability of the funding.
    Mr. EWING. Of course, I'm not sure that changing it to mandatory would mean that you would get paid more often, or up front, or not have to wait as long. I guess I don't see it impacting those things that are running agents or discouraging people from taking this on in their agency.
    Ms. GERDES. Well, I guess I would very respectfully disagree because we just finished a negotiation on the SRA. We were already well into our sales season and expending a tremendous amount of expense just as an agent, and I'm sure on a company level that's much, much higher.
    Basically, we were betting that we were going to get that SRA done in a fashion that would allow us to do business—that's a very large risk. I'm saying that the way we get paid is not going to change, but if we know that we are going to get paid, we're going to take the risk to expand and grow our business. It means whether I buy a new computer or add staff. I mean, the big push is education, and if you want me to do the education, I've got to have the capacity to do the education whether it's a computer, or printed material or anything of that nature.
 Page 56       PREV PAGE       TOP OF DOC
    Mr. EWING. The agreement that you entered into has many other things in it besides just the payment, though, and those are some of the things that also cause you and other agents concern—I mean, the failure to get an agreement timely?
    Ms. GERDES. I'm probably not the best person to ask about the SRA. I'm telling you that the failure to get an agreement timely causes great disruption in the agent's office, and it causes great disruption to the farmer. I mean, I just expended about $30,000 in new computer equipment and it was to the point where I had to make the decision prior to the SRA being signed.
    I, basically, said in the end that Congress is really going to come through and do something. Had I been wrong, I would have been in some serious trouble.
    As far as the other parts of the SRA, the agents aren't really an active part of the negotiations on the SRA, and some of the other people on the panel could probably answer those questions better than I could.
    Mr. GIBSON. I would just comment that the SRA becomes effective on July 1. You enter into the fall sales season for winter wheat and also into California for many other additional crops, and, generally speaking, the appropriations process has never been completed or gets completed some time in October. So we've expended a fair amount of money on the basis, at least of blind faith, that we will be reimbursed even though the SRA says that it is subject to appropriations.
    So I think what Ruth is saying is we've gone forward with that, but we still don't really know what we have to deal with, how much money we have, or how much to budget, or how much we can handle in our preparations to process and service the business as we go forward.
    Mr. EWING. I want to thank all of you for your participation again, and I think it's been very good, and remind you that the process doesn't end here. If on the way home your light goes on and you get a brilliant idea and you want to share it with us, we're glad to have those anytime. Our committee staff and we certainly will consider them because we're part of an on-going process.
 Page 57       PREV PAGE       TOP OF DOC
    Thank you very much.
     I would like to ask the third panel to come up and take seats at the table: Mr. Jerry Newby, Alabama State Chairman, the Producer Steering Committee; Ms. Carole Brookins, chairman and CEO, World Perspectives, Inc.; Mr. Jim White, president of Norwest Huron, on behalf of the American Banking Association; Mr. Jim Caspary from the 15th Congressional District in Illinois who is also president of the First National Bank of Clifton—welcome, Jim; Reginald Brown, director, marketing and membership, Florida Fruit and Vegetable Association; Mr. Gene R. Anderson, vice president, operations services, Southern States Cooperative and also on behalf of the National Council of Farmer Cooperatives; and Mr. Wayne Mai, onion and seed producer, Nampa, Idaho.
    Welcome, all of you. We'll start with Mr. Newby.
STATEMENT OF JERRY NEWBY, CHAIRMAN, PRODUCER STEERING COMMITTEE, NATIONAL COTTON COUNCIL OF AMERICA, ON BEHALF OF THE AMERICAN FARM BUREAU FEDERATION, AMERICAN SOYBEAN ASSOCIATION, NATIONAL ASSOCIATION OF WHEAT GROWERS, NATIONAL BARLEY GROWERS ASSOCIATION, NATIONAL CORN GROWERS ASSOCIATION, AND NATIONAL GRAIN SORGHUM PRODUCERS ASSOCIATION
    Mr. NEWBY. Mr. Chairman, my name is Jerry Newby and I am a cotton and soybean farmer from Athens, AL. Today I am presenting joint testimony on behalf of the National Cotton Council, American Farm Bureau Federation, National Corn Growers Association, National Association of Wheat Growers, National Barley Growers Association, National Grain Sorghum Producers Association and American Soybean Association. We appreciate the opportunity to present our views regarding needed crop insurance reform that would ensure payment of delivery expenses through normal operation of the program.
    Earlier this year, Congress crafted a short-term solution for funding crop insurance delivery by redirecting funds from other agricultural discretionary spending accounts to the crop insurance account. Such a practice is not sustainable over the long term. A workable plan which shares the cost burden equitably among all parties—agents, companies, producers and the Federal Government—can be found. Furthermore, we believe it is imperative that the offset to fund the program be enacted into law no later than April 1, 1998 to avoid losing available funds to the appropriations process.
 Page 58       PREV PAGE       TOP OF DOC
    We suggest a significant portion of the funding offset can be achieved within the current crop insurance program. Collectively, we have concerns about cuts to other agricultural programs to fund crop insurance delivery expenses and would ask the opportunity for the farm organization to provide input before the committee proposes cuts outside crop insurance.
    Some savings can be achieved by reducing administrative and operating expense reimbursement to companies and agents. The current rate for the Multi-Peril Crop Insurance Program is set at 27 percent of the full premium and is paid directly to companies. A new maximum limit should be established at a lower level, 24 percent. Partial privatization of the crop insurance program would discontinue the direct reimbursement for A&O expenses from FCIC to private companies. Instead, such expense would be competitively priced by companies as part of the crop insurance premium charged to producers.
    Specifically, this would require insurance premiums be quoted in two parts—the first part would be the actuarially determined risk premium. It would continue to be the same for all producers of the same crop with comparable risk histories in a given country or other appropriately determined geographical area. However, we would also encourage a thorough exploration of an individualized risk rating system.
    The second part of the total crop insurance premium would be an A&O expense charge that explicitly identifies a portion of the total premium associated with commission, loss adjustment activity, education and other delivery expenses. This portion of the premium would be competitively determined by market forces, but would be capped at some level to shield producers from non-competitive market circumstances.
    Licensed companies, agents, trade associations and cooperatives would be encouraged to compete in the marketplace on the A&O expense portion of the total premium under the established maximum cap. A 3 percentage point reduction in the current A&O expense rate would provide savings estimated at $42 million per year, which would offset additional producer premium costs referenced earlier.
 Page 59       PREV PAGE       TOP OF DOC
    To help offset funding needs, make catastrophic insurance programs more like other insurance programs and to reduce moral hazard, we propose requiring producers to pay a modest portion of the total CAT premium. Payment on CAT policies are made to insurance companies and agents based on imputed premiums—i.e., what the premium would have been if it had been actuarially determined for 50 percent yield coverage at 60 percent of the expected price. In some areas, imputed premiums are high because the value of the crops and potential insurance liabilities are high. This introduces an element of moral hazard into the CAT program and might provide a disincentive for the companies to sell buy-up coverage rather than the CAT coverage. In essence, the companies are able to make significant underwriting gains and yet undertake very little risk. For example, in one instance, a 372-acre California grape policy carried $328,901 in liability, $15,459 imputed premium, and, yet, the Government only collected $200 in CAT administrative fees. For comparison purposes, a 372-acre California wheat policy carried $21,879 in liability, and $1,496 in premiums, and the Government collected $50 in CAT administrative fees. We propose changing the current CAT administrative fee of $50 per crop per county to a producer paid premium of up to 10 percent of the imputed premium but no less than $50, with allowance for a fee waiver for limited resource farmers.
    This would generate an estimated savings of $34 million per year. A review of the CAT financial considerations should be taken—including company receipts under excess loss adjustment provisions—in search of potential savings.
    We believe the Risk Management Agency should be streamlined with a savings target of at least $10 million per year. Savings should be accomplished primarily by eliminating authority to develop new products for the major commodities and reducing reporting requirements. We believe the private sector will be more cost-efficient in developing crop insurance programs that will be successful in the marketplace. For fruits, vegetables and minor crop acreage, we suggest that the FCIC either keep the responsibility to develop new products or develop an incentive for private industry to develop such products.
 Page 60       PREV PAGE       TOP OF DOC
    We also encourage the subcommittee to explore major structural changes to the crop insurance program that makes the RMA an independent oversight agency.
    Mr. Chairman, a couple of other issues deserve the subcommittee's attention as it moves a bill. One is the nonstandard underwriting classification system and the other is the FCIC Board. The USDA is currently conducting a review of NCS and is expected to propose new rules next year. Until such time as the USDA can implement a new system, we support a moratorium on the application of current regulations to new NCS selections and a nationwide review, based on the recent administrative adjustment to the NCS application of those individuals who are currently subject to the NCS.
    The makeup of the FCIC Board needs to be addressed. Under current law the management of the FCIC is vested in a board which is subject to the general supervision of the Secretary. The board is appointed by, and holds office at the pleasure of, the Secretary.
    While there is a significant debate on whether the makeup of the board should be altered, we believe that that decision is better made after we know about the future role of the FCIC. We do, however, believe that if the current board's roles and responsibilities are continued, the appointed non-government representatives should have increased autonomy in making decisions.
    We thank you for this opportunity to present these concepts and ideas for addressing the funding problems that will plague the crop insurance program over the next 5 years. There might be ideas presented today by others which would make more radical changes to the current program. We prefer a more cautious approach, which calls for fixing what is broke and leaving what works well alone. We look forward to working with you to craft legislation that meets the needs of the farmers and helps guarantee food and fiber security for this Nation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Newby appears at the conclusion of the hearing.]
 Page 61       PREV PAGE       TOP OF DOC
    Mr. EWING. Thank you for your comments.
    Ms. Brookins, you've already been mentioned and now you get a chance to talk back.
    Ms. BROOKINS. Mr. Chairman, I've been called a lot of things. I don't know if I've been called a radical before. [Laughter.]
    Mr. EWING. Did anybody call you radical?
    Ms. BROOKINS. I think I just was by Mr. Newby, but that's quite all right.
    Mr. EWING. OK.
STATEMENT OF CAROL L. BROOKINS, CHAIRMAN AND CEO, WORLD PERSPECTIVES, INC.
    Ms. BROOKINS. It's a privilege to be here with you today. My name is Carol Brookins and I'm chairman and CEO of World Perspectives. I founded the company and we do analysis and consulting on factors affecting agriculture and the global food system.
    Today you are reviewing the current operation of the Federal Crop Insurance Program, and as you begin this process, which is designed to deal with some very immediate problems that do not require radical solutions, I hope that you take this opportunity to consider what you want ultimately in the future so that any short-term fix or fine-tuning of the existing programs does not predetermine the way that you look at an agricultural safety net for the 21st century.
    So often agriculture policies are put in place to solve a short-term problem, and just like the Energizer Battery, they just keep going, and going, and going and going, despite major changes in the marketplace. Such as been the case with farm programs.
    Back in 1933 Federal officials determined that the easiest way to bolster the economy of rural America short-term during the Depression was to support the prices of individual commodities. I'm not saying that that is a bad idea, but they could have chosen any number of different alternatives to achieve the same goal of providing a financial safety net to farm producers. However, that policy became embedded into law for more than half a century, despite many problems in meeting changing market conditions.
 Page 62       PREV PAGE       TOP OF DOC
    With the important achievement of the FAIR Act in 1996, U.S. agricultural policy embarked on a new era of liberating America's farm producers and farm production. Unfortunately, the approach to Federal crop insurance programs operated under the USDA's Risk Management Agency remain complex, complicated to administer and require the costly maintenance of very detailed record keeping for both farmers and insurers. In fact, it was interesting to hear Mr. Ross on the previous panel who pointed out that the crop insurance program is very labor intensive and requires much more paperwork than any other line of insurance that they handle.
    Moreover, of the 1,500 eligible crops today the FCIC programs cover only 60 and don't cover any livestock production.
    Federal crop insurance, in my view, is not currently structured in a way that fully supports the FAIR Act's goals of market orientation of farm production, full production flexibility in farm management decisions, and private commercial risk management by farm producers.
    I think as you begin this process it's time also to think about the future, as well as the past, and the current dilemma. In looking at the future it's important to see where we're going. First, a rapidly changing and expanding production and price structure of distinct use-specific crops is already beginning to impact the market due to advances of biotechnology. In your own district, in the very near future, we're not going to be producing corn and soybeans. We're going to be producing many kinds of corn and many kinds of soybeans, all with different price structures and all for different end use purposes.
    This means that a continued crop specific insurance approach will just get much more complex and will not be able to give the farm sector an effective sustainable Federal safety net. Second, the inclusion of livestock into the safety net is important if the marketplace is to be totally flexible and market responsive.
    I first thought about farm support back in 1989 in terms of a concept, which I called a Farm Equity Protection Plan. With the important passage of the FAIR Act, I took this proposal further and developed a concept of a Farm Production Insurance Corporation, or FPIC. FPIC is based on the example of the highly successful independent agency, the Federal Deposit Insurance Corporation—which, by the way, was created by Congress in 1933 at the same time that we started commodity programs—in order to restore public confidence in the Nation's banking system.
 Page 63       PREV PAGE       TOP OF DOC
    I conceived the FPIC idea based on two premises: first, my belief that, yes, the Federal Government should have responsibility to provide some level of an important safety net for production agriculture; and, second, that the Government's financial support should be directed toward maintaining confidence in the vital equity base which support farm production.
    Since 1933 when the FDIC was created, what we have called farm policy has really been commodity policy. We have not had farm insurance, but crop insurance, and I think it's time to consider a new way to manage farm risk through farm insurance. Of course, any insurance that supports farms would have to include calculations based on the crops and livestock that compromise the farm's output. However, focusing solely on one or another crop doesn't look at the total picture of farm equity and farm operations.
    It would be worth considering the formation of a FPIC as an independent Federal agency to replace all current federally supported crop insurance programs. The FPIC could provide a safety net to offset severe losses in farm operations through insurance based on a 5-year moving average revenue calculation, and that would be based and extracted from a simple standard form. FPIC insurance could be available to all producers with the cost-sharing of premium payments funded jointly by farmers and the Federal Government. The FPIC could also serve in providing reinsurance against severe farm losses for private companies that are so important in providing insurance against crop losses.
    In the event of a catastrophic, systemic threat to the sector's equity base, the FPIC could, as in the case of the Federal Deposit Insurance Corporation, have a mandated call on the Treasury. It is my opinion that an FPIC insurance approach could build long-term confidence in the system, give farmers and ranchers affordable, competitive access to private risk management tools, facilitate a Government response to potential systemic crises and mitigate against ad hoc program mandates that distort markets.
    I have attached to this testimony my draft FPIC proposal with examples of the way that a FPIC could be structured to provide a safety net.
 Page 64       PREV PAGE       TOP OF DOC
    Mr. Chairman, I appreciate this opportunity to present this concept as a very preliminary approach to getting out of the box in which we have trapped the farm safety net for more than half a century. The U.S. Congress took a critical step toward improving the competitiveness of American agriculture when it took off the blinders of Depression-era farm policy and enacted the FAIR Act. I hope that you will consider other ways to support the competitiveness of our farmers and ranchers, as you develop a sustainable farm safety net for 21st century agriculture.
    In closing, I would like to share a quote from Machiavelli that I think is especially relevant at this time:
    There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.
    Thank you very much, and I would be happy to answer your questions.
    [The prepared statement of Ms. Brookins is no file with the committee.]
    Mr. EWING. Thank you very much, and I'm sure you're up to that challenge.
    Mr. White.
STATEMENT OF JAMES L. WHITE, PRESIDENT, NORWEST BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
    Mr. WHITE. Thank you, Mr. Chairman, and members of the subcommittee. I am pleased to be here on behalf of the American Bankers Association, or the ABA, to participate in this hearing on the Federal Crop Insurance Program.
    My name is James White, and I'm president of the Norwest Bank in Huron, SD. Our bank is a $90 million bank of which we have $55 million in loans, of which $42 million are loans to agriculture producers.
 Page 65       PREV PAGE       TOP OF DOC
    As members of the subcommittee know, bankers have a very important role in our entire food chain. We finance a great deal of the U.S. agriculture production. Forty cents out of every dollar borrowed by farmers and ranchers in America today comes from banks. In 1996 banks had a total agricultural loan portfolio of $62 billion, and this figure represents only the amount that banks have loaned for production agriculture. Banks have many more billions in loans to agribusinesses of all kinds.
    With the changes in the farm support programs authorized by the 1996 farm bill, farmers will become more dependent on specialized information and advice than ever before. Increasingly, farmers will be looking to their bankers, professional risk managers, farm managers and market managers to guide them through the new era of the freedom to farm.
    For this reason, the ABA supports today's stable and reliable Federal crop insurance program with private sector delivery. America's bankers know that dependable crop insurance can, and frequently does, mean that bankers are able to approve operating loans and other types of credit for farmers struggling to stay ahead in high-risk situations. Crop insurance also ensures that the producer will be able to cover their input costs when damaged by unexpected circumstances, and, thus, be protected from financial disaster.
    At my bank all of our agricultural lenders are very knowledgeable about the aspects of crop insurance and the perils that it covers. We also asked producers to consider a marketing plan for the coming year. While the decision to purchase crop insurance and execute the marketing plan is entirely up to the producer, more and more of our customers are utilizing these tools to manage their risk.
    In March 1995 a majority of our customers signed up for multi-peril insurance as a risk management tool for that year's production. As the spring developed, we sustained a late winter storm and then received excess of April and May rains, leaving most of their operators with either severely reduced planted acres, or, in some cases, producers that weren't able to get any acres planted at all.
 Page 66       PREV PAGE       TOP OF DOC
    Due to the multi-peril coverage, our bank was able to advance credit to these same operators based on the guarantees that they had established with their multi-peril coverage. While these revenues weren't sufficient for the operator to turn a profit for the year, it did cover their expenses and keep them credit worthy for the upcoming year of 1996, which turned out to be one of the best crops recorded in our area. Without the Federal crop insurance funds assisting these operators, a significant number of them would not have been able to have the equity available in a program to take part in the 1996 recovery year.
    Simply put, today's crop insurance program works for the farmers that use it. In addition to being cost-effective to the taxpayers, catastrophic crop insurance is an affordable tool to producers, and it has proven to be a significant advantage for careful managers who face devastating weather conditions or unexpected set-backs.
    The ABA encourages the USDA's Risk Management Agency to work in partnership with the private sector to develop products and strategies that are cost-effective, understandable and reliable in meeting the needs of producers. The ABA recently worked with the Risk Management Agency to develop the National Risk Management Education Summit that was held in Kansas City last September. This summit was an important first step in the process of getting all of the stakeholders in American agriculture to focus on the need to develop new strategies, to help farmers ensure their business against catastrophic risk.
    At the conclusion of the summit, the participants were committed to work with farmers and their ranchers to increase their understanding of the benefits of developing a comprehensive risk management plan. Market risk continues to be an area of risk that concerns producers and their bankers, creating tools that enable our customers to find the best opportunities to either sell their production or protect a minimum price, which is something which we in the private and public sector should concentrate.
    As bankers, we have great faith in the ability of our farm customers to run their businesses. That is why banks are the lead lenders in American agriculture today. We share the optimism of our customers—the future of agriculture is bright. Market opportunities for the American farmers have never been greater, and we in the banking industry look forward to working with our customers to provide them with the financial products and services that they need to continue to be the most productive farmers in the world.
 Page 67       PREV PAGE       TOP OF DOC
    I thank you for the opportunity to testify, and I will attempt to answer any questions that you may have.
    [The prepared statement of Mr. White appears at the conclusion of the hearing.]
    Mr. EWING. Thank you, Mr. White.
    Jim.
STATEMENT OF JAMES CASPARY, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF AMERICA
    Mr. CASPARY. Thank you, Chairman Ewing.
    It's a pleasure to be here today to present testimony to you and other members of this subcommittee regarding crop insurance, which is an issue of great importance to the American agriculture.
    Mr. Chairman, I appear before you this afternoon in two capacities. I am the president and CEO of the First National Bank of Clifton in Clifton, IL, and I'm a member of the Agriculture-Rural America Committee of the Independent Bankers Association of America.
    The IBAA represents some 5,500 independent community bankers nationwide with more than 15,000 locations, serving consumers, small businesses, farms in the communities that they serve. Nearly 75 percent of the IBAA members are located in communities of under 10,000 population. The First National Bank of Clifton is a small midwestern agricultural bank with $24 million in assets that has been serving our community since 1902. It is located in the north central part of Illinois, in primarily corn and soybean country. The bank owns an insurance agency which primarily sells crop insurance, and is one of the largest providers of crop insurance in the State of Illinois.
    Mr. Chairman, our experience with the crop insurance program has been favorable, and we think the program is essential for many of our farm customers. From a banker's perspective, the program helps us to manage risk, as it guarantees the producer won't be wiped out if disaster strikes. Therefore, crop insurance provides a repayment potential when a banker extends a farmer loan, so both the farmer and the banker benefit from reducing their risk exposure, a fundamental part of risk management.
 Page 68       PREV PAGE       TOP OF DOC
    Agricultural lenders, due to the nature of their business, are in a good position to help growers make risk management decisions. Crop insurance protection can help the farmer in several ways—it can help establish minimum cash flow projections, improve profitability, liquidity, solvency, repayment capacity, financial efficiency, collateral and management ratios. Crop insurance can help keep customers financially healthy even if they have a good equity but weak cash flow projections.
    We have been pleased to see the increased acreage under coverage since adoption of the new farm bill. With the scrapping of the ad hoc disaster programs and with greater price volatility that will now be inherent in the market, adequate crop insurance protection will have to be considered by many producers if they are to remain viable in the long-run.
    We are pleased to see the development of new tools to add to the risk management arsenal of producers such as crop revenue coverage. Several of our crop farmers have used this program. The development of new tools will be essential as farm bill payments are phased down.
    It would be virtually impossible for a single tool, basic crop insurance, to meet all of the needs of all of the producers, for all of the crops, all of the time, in all the areas across the country. However, there are many areas of the country where CRC coverage is not available, and we urge the Congress to make the program available to all producers. Producers in certain States which have been hard hit by disasters could benefit from such a program. Obviously, we understand that the program needs to be actuarially sound.
    We would encourage Congress and the USDA to ensure that all crops have some mechanisms for insurance coverage. This is especially important under the new farm bill, which allows unlimited planting flexibility. Many producers in certain States will plant some non-traditional crops. For example, in North Dakota we producers are being hit hard by an unusually prolong scab infestation causing severe economic loss due to the reduced yield and crop quality. I am told that many growers are producing canola. However, canola is not covered by crop insurance in all areas of the State.
 Page 69       PREV PAGE       TOP OF DOC
    Mr. Chairman, let me emphasize the need to provide a multi-year funding approach to those who sell crop insurance. There simply needs to be a long-term commitment to ensure that those who provide crop insurance find it a profitable product to deliver to the farmers, to ensure that they stay in the business of helping farmers reduce risk.
    Mr. Chairman, my written testimony has a list of 10 points for your consideration. These 10 items probably won't appear on David Letterman, but we urge the Congress to keep them in mind as you make decisions that affect the future of the program.
    Thank you once again, Chairman Ewing, for the opportunity to testify before your subcommittee today. The IBAA and community bankers look forward to working with you on this important issue.
    [The prepared statement of Mr. Caspary appears at the conclusion of the hearing.]
    Mr. EWING. Thank you.
    Mr. Brown.
STATEMENT OF REGINALD L. BROWN, DIRECTOR, MARKETING AND MEMBERSHIP, FLORIDA FRUIT AND VEGETABLE ASSOCIATION
    Mr. BROWN. Mr. Chairman, and members of the committee, my name is Reggie Brown. I'm the director of marketing and membership for the Florida Fruit and Vegetable Association. FFVA is an organization comprised of growers of vegetables, citrus, sugarcane, tropical fruit and other agricultural commodities in Florida. I am here to discuss the concerns and challenges and opportunities that the Federal Crop Insurance Program presents to specialty crop growers in our membership.
    Florida's unique geographical location in the United States affords growers an opportunity to produce a very wide range of crops. Our members grow tropical fruit in extreme South Florida, citrus in Central and Southern Florida, vegetables throughout the entire State and many miscellaneous crops, such as blueberries and peaches. All these are specialty crops marketed in a supply and demand driven marketplace. This diversity of crops presents great opportunity and challenge to provide adequate coverage under the Federal Crop Insurance Program. This diversity presents many crop specific risk situations to be understood and incorporated into good programs if our industries' needs are to be met.
 Page 70       PREV PAGE       TOP OF DOC
    The nature of the fresh produce industry is such that the supply and demand factors determine to a large extent the success of the industry. It's important that programs in general be structured so as not to alter the market-orientation of our industry. Our industry is comprised of risk takers. They're driven by the opportunity to receive their awards in the market system. Recognition of this basic principle is important.
    The current Risk Management Corporation program to provide increased emphasis on risk education in the broadest sense is a positive step. Growers many times get themselves focused on immediate problems and fail to fully evaluate risk as it truly exists. The effort to develop a comprehensive, educational program that includes a wide range of industry groups such as finance, insurance, grower groups, cooperative extension and the risk management group of USDA should be applauded.
    Specialty crops, because of their unique and diverse nature, require careful review by the agency. Experiences over the last 15 years have brought both positive and negative impacts on the industry. The traditional disaster programs were developed for the major crops of the country. These ''well-meaning'' efforts often brought major challenges to other growing communities as they were implemented for specialty crops. Attempts to transfer existing crop insurance programs from crop to crop have also been problematic.
    There is no question that the effort to move the USDA programs into a soundly underwritten crop insurance program is in the interest of our growers. The specific types of coverage developed to meet their needs and the projected time to accomplish this effort is an area of great concern. The 3 to 4 years required to develop and conduct pilot programs for each of these policies is not acceptable. The current policy development rate of three or four new programs per year is also problematic.
    It will be extremely important that crop insurance programs and policies be developed with active grower input. Experience has shown that poor communications between policy development and industry is a sure ticket to conflict and frustration. These experiences are not in the best interest of the grower community. However, it is a challenge to obtain strong involved commitment from this very diverse agricultural sector. The grower community must recognize the need for communications to be extensive and open throughout the entire policy development process. With good communications and understanding, the two groups can develop useful risk management tools.
 Page 71       PREV PAGE       TOP OF DOC
    The policy development group needs to have the ability and the commitment to explore innovative approaches to meet the needs of this industry. It is not possible in the foreseeable future to develop individual policies for the crops currently outside the system. These crops currently fall in the NAP program. Ideas for how to include these and others in a broad whole farm income-driven policy may have merit.
    Revenue appears to be the most common approach to establishing a broad policy that can accomplish a large number of cropping systems. A consistent revenue stream is the key to survival in today's farm economy. A grower routinely maintains records to meet the filing requirements of the Internal Revenue Service. These filing documents are standardized throughout the grower community. Is it possible to structure a policy that insures some portion of the historic income?
    The development of a revenue-based policy will not be a simple task. The need to insure that such a policy is actuarially sound will require that many factors be considered. However, the opportunity to provide protection for a portion of the family farm's income during significant weather related events is a worthwhile goal. The ability to provide flexibility to the farmers to make market-driven decisions within the basic framework of a single policy is interesting.
    Grower understanding of the policies and their resulting coverage is essential. The transition to a private delivery system has placed an even greater responsibility on the farmer to insure that he has an accurate understanding of the policies. Agents that market these diverse policies to specialty crops producers must have an excellent understanding of the risk in the business and the role policies play in shifting that risk. Every effort should be made to provide simple, straight-forward examples of how the policy works. All to often, it is after a disaster that the grower discovers that what he thought he bought was not in fact what he had. This phenomena is not unique to crop insurance and has historically presented a challenge to the insurance industry.
 Page 72       PREV PAGE       TOP OF DOC
    We appreciate the opportunity to express our thoughts and concerns on the current and future Federal Crop Insurance Programs. It is through discussions such as these that creative productive risk management tools are developed to meet the needs of the 21st century.
    Thank you.
    [The prepared statement of Mr. Brown appears at the conclusion of the hearing.]
    Mr. EWING. Thank you, Mr. Brown.
    Mr. Anderson.
STATEMENT OF GENE ANDERSON, VICE PRESIDENT, OPERATION SERVICES, SOUTHERN STATES COOPERATIVE ON BEHALF OF THE NATIONAL COUNCIL OF FARMER COOPERATIVES
    Mr. ANDERSON. Thank you, Mr. Chairman.
    My name is Gene Anderson, and I'm vice president of operation services for Southern States Cooperative. Southern States is headquartered in Richmond, VA and serves over 116,000 farmer-owners in North Carolina, Virginia, Maryland, Delaware, West Virginia and Kentucky. We're primarily involved in the manufacture, distribution and sales of farm supplies, including petroleum products, feed, seeds, fertilizers, as well as grain marketing for our member owners.
    I am here today on behalf of the National Council of Farmer Cooperatives, which represents nearly 4,000 local and regional marketing, supply and credit cooperatives, and whose member-owners include a majority of America's nearly 2 million farmers.
    We appreciate this opportunity to share our views and want to express our strong support for changes in the Federal Crop Insurance Program to help achieve the following basic objectives:
    One is to provide adequate risk protection for farmers on a cost-effective basis; two, to encourage program participation and broaden insurance coverage; three, to improve the current delivery system; strengthen the private sector involvement; and, four, to reduce the administrative and related costs.
 Page 73       PREV PAGE       TOP OF DOC
    Many of these objectives can be achieved by clarifying the ability of farmers to join together with their cooperatives and associations to jointly purchase catastrophic and related crop insurance coverage. In fact, we believe that this is what Congress intended when it approved legislation which specifically provides that in carrying out the Federal Crop Insurance Program, the FCIC Board, and I quote, ''may, at its discretion, utilize producer-owned and producer-controlled cooperative associations.''
    Catastrophic insurance compensates producers for crop losses greater than 50 percent based on the average yield at 60 percent of the expected market price. Such coverage may be obtained by a producer for an administrative fee of $50 per crop per county, not to exceed $200 per county or up to $600, and you've heard those numbers several times today.
    Under the current law the producer is required to pay the administrative fee at the time the producer applies for the catastrophic risk protection. The USDA has taken the position that this requirement—that the producer pay the administrative fee—prohibits a farmer cooperative, or association of producers, from making such payment or purchasing coverage for or on behalf of its producer numbers. We believe that this is to be an overly-narrow interpretation that is contrary not only to Congressional intent, but long-standing Federal policy aimed at encouraging and assisting farmers in joining together in cooperative self-help efforts.
    Historically, farmers and their cooperative have been viewed as one and the same under the various Federal statutes, including farm programs. This is in general recognition that a farmer cooperative, such as Southern States, exists for the mutual benefit of its producer members. As a cooperative, earnings derived from activities involving business done with or for its members are returned to them each year in the form of patronage refunds, which further enhances their farm income.
    Prohibiting farmer cooperatives and associations from paying the administrative fee, or purchasing catastrophic or related insurance, prevents farmers from capitalizing fully on the benefits of cooperative self-help efforts as intended under existing law. It also reduces potential participation in the Federal Crop Insurance Program, and increases marketing, sales and other administrative costs.
 Page 74       PREV PAGE       TOP OF DOC
    For these reasons, we urge that current law and regulations be amended to clearly allow farmers through their cooperatives and associations to pay any required administrative fee and to purchase catastrophic and related insurance. Such action would help encourage and promote cooperative self-help efforts, improve the current delivery system for Federal crop insurance, provide needed risk protection in a more cost-effective manner, and help achieve the goals of expanding producer participation and coverage under the Federal Crop Insurance Program.
    As Federal farm programs are being gradually phased out, it is more important than ever that farmers have the ability to join together in cooperative self-help efforts to maintain and improve their income, minimize their risk, capitalize on potential new market opportunities and compete more effectively in a changing global economy.
    To meet these challenges, however, farmers and their cooperatives must be given the tools they need and the opportunity to be successful.
    Thank you, Mr. Chairman, and I will happily respond to any questions that you might have, or the members.
    [The prepared statement of Mr. Anderson appears at the conclusion of the hearing.]
    Mr. EWING. Thank you, and now last but not least, Wayne Mai.
STATEMENT OF WAYNE MAI, ONION SEED PRODUCER, ON BEHALF OF THE IDAHO FARM BUREAU FEDERATION
    Mr. MAI. Thank you, Mr. Chairman.
    I'm Wayne Mai from Nampa, ID. I am an onion seed producer. I suffered severe losses in 1996 due to the extreme heat. I filed, under the NAP Program, and I have not been paid. I am here today speaking for the onion seed growers of Idaho, as well as the Idaho Farm Bureau Federation.
 Page 75       PREV PAGE       TOP OF DOC
    The differences between commercial onion production and onion seed production for the fresh market are evident not only in the final product produced—onion seed as opposed to an onion bulb—but also in the cultural practices used to produce each crop.
    In commercial onion production a grower purchases seeds of choice, depending on type and variety from a seed distributor or agent. Planting is done from approximately March 15 to April 15, depending on weather conditions. These seeds are space planted to allow for maximum bulb growth. The goal is to produce the largest, highest quality bulbs meeting USDA standards. Harvest is normally late August through September. The grower then delivers this crop to the packer, broker or shipper. The price received depends on the market at that time. Many growers with onion storage facilities hold their crop for several months awaiting better market demand and price.
    Onion seed production, seed to seed, requires 2 years to produce. The grower signs a contract with a company for which the seed is to be produced, which includes providing the stock seed for the crop, as well as a set price per pound for that clean seed.
    Planting is normally done from the 25th of June to the 15th of July. Planting rates are 7 to 10 times greater per acre than for commercial onion production to achieve a high plant population per acre.
    To produce hybrid onion seed, two varieties are planted. One variety, called the seed parent or female, is sterile and cannot self pollinate. The other variety, called the pollen parent or male variety, is fertile. It takes from 5 to 7 years of research and development to produce a variety that contains the desired characteristics to meet the demands of the commercial market.
    Honeybees are used to transfer the pollen from the pollen parent to the seed parent. This cross pollination produces the hybrid variety. The first-year seedlings must then over winter in the ground. If the bulb growth is too large, they can sustain severe damage during the cold winter months, as well as during the freezing and thawing of the late winter and early spring. The second year they bolt and put up a scape or a seed stalk. On top of this seed stock is a bud that eventually matures and opens, producing an umbel with multiple flowers. As these are pollinated, they form seed pods containing from one to six seeds. An individual flower will only last about 7 days, and if not pollinated, will dry up. This pollination takes place in the latter part of June until the middle of July.
 Page 76       PREV PAGE       TOP OF DOC
    When pollination is completed, the male rows are normally destroyed to prevent contamination of the hybrid crop during harvest. The seed rows are then picked by hand into burlap sacks. They are then placed into a drying facility, either in bulk or in a sack. When drying is completed, a process that takes 3 weeks, the seed is thrashed out, cleaned and then sold for commercial production by the seed company.
    The summer of 1996 was exceptionally hot during the time of pollination. This excess heat combined with many days of hot wind had a devastating effect. Excessive heat causes the flowers to become sticky and bees do not like to work them. Excessive heat can also render the pollen infertile at the time of transfer. Many that do pollinate and form a seed pod abort or blast and then dry up. Many that survive produce flat seed, seeds without an embryo, that is milled out during the cleaning process. These factors all combined to produce a disaster in the 1996 onion seed crop.
    The bulbs from seed producing plants cannot be marketed commercially for a number of reasons. First, according to USDA specifications, commercial bulbs must be free of seed stalk damage. Virtually, all of the onion plants put up a seed stalk. This is their purpose. Second, the onion seed bulbs are normally small compared to commercial onions because of the thicker planting rates, not space planted as in commercial onion production. Third, they have gone through 13 months in the soil, including a winter, and many of the bulbs are soft, diseased and discolored. Fourth, many of the companies require that the residue from the seed crop be destroyed as soon as possible after harvest. Fifth, the grower has no legal right to market any part of the production, unless given specific permission by the seed company.
    Thank you, Mr. Chairman.
    Mr. EWING. Thank you, and thank you, to all of the panel.
    I'm going to turn to my colleague, Congresswoman Helen Chenoweth, for questions.
 Page 77       PREV PAGE       TOP OF DOC
    Mrs. CHENOWETH. Thank you, Mr. Chairman.
    Mr. Mai, I notice you have a good-looking onion or two there. Is there something you'd like to show the committee?
    Mr. MAI. Well, a picture is worth a thousand words. I brought a quantity of onion seed. This is a final product of onion seed production. This is the final product of commercial production. There's quite a contrast between them. There is nothing similar about them at all. [Laughter.]
    Mrs. CHENOWETH. Mr. Mai, do you have an onion bulb that has produced feed so that we can see a comparative size?
    Mr. MAI. Yes, I have ones that were taken out of the field that are probably—these have been in the ground for 4 months. You can see the size of the bulb of those, compared to what a commercial onion will be. These will not get a lot greater in size than what they are right now.
    Mr. EWING. How far do you have to search to get that big guy there? [Laughter.] I've seen a lot of them smaller than that.
    Mr. MAI. Not very far, Mr. Chairman.
    Mrs. CHENOWETH. And so it was the extreme heat that caused the failure of the onion crop in 1996. Is that right, Mr. Mai?
    Mr. MAI. Yes.
    Mrs. CHENOWETH. Well, did you file a claim with the USDA?
    Mr. MAI. Yes, I did under the NAP program.
    Mrs. CHENOWETH. What was their response?
    Mr. MAI. Their response was that those claims were not going to be paid because they had lumped the onion seed production in with commercial onion production, and because of the extensive acres, they didn't meet the 35 percent minimum total disaster and that crop could be—if it didn't make seed, it could have been marketed for commercial onion.
 Page 78       PREV PAGE       TOP OF DOC
    Mrs. CHENOWETH. And it's obvious to all of us who are here that there's no comparison.
    Is there any use for the bulbs once they have a seed stalk on them, any use at all?
    Mr. MAI. No, they're simply destroyed.
    Mrs. CHENOWETH. OK, thank you, Mr. Mai. I really appreciate your coming so far. I think, like you said, a picture is worth a thousand words, and I think we get the picture. I just wish the USDA had remained here so that they could have gotten the same picture, but we'll continue to help them with the pictures.
    Mr. White and Mr. Caspary, do your organizations require the high risk lenders to buy crop insurance?
    Mr. CASPARY. No, we do not.
    Mr. WHITE. No, we do not. We recommend that they consider it, but we do not require it.
    Mrs. CHENOWETH. You both seem to praise crop revenue coverage. Is this a superior product in the eyes of agricultural lenders?
    Mr. CASPARY. It's just one more tool to be used. I wouldn't say it's superior but one more expansion of it in the present products that we have to offer.
    Mr. WHITE. I think it has more flexibility. It fluctuates with the market where with your multi-peril you can buy up to standard coverage and that's it.
    Mrs. CHENOWETH. In your eyes, given the present set of circumstances, if we were to continue down this course, would you be more or less willing to lend to growers, such as Mr. Mai, if he didn't have adequate crop insurance in place or coverage?
    Mr. CASPARY. Probably, if they didn't have coverage of some kind, I would be less inclined to make loans because of that. In terms of what it takes to put the crop in the field of any particular one, you have to make a big investment at high risk until you get a crop and then the price after that. So this helps with one of the risk of lending to agriculture.
 Page 79       PREV PAGE       TOP OF DOC
    Mr. WHITE. I would say that we would have to look at the individual situation. You can't say that you wouldn't lend to them. It depends on the equity that the individual has available in their operation, which are some are more fortunate than others. You do take into consideration the crop insurance basis, as I testified, for people that have leverage to their operation.
    Mrs. CHENOWETH. Thank you very much.
    Mr. Mai, I do want to say if you don't want to pack that onion back to Idaho, I know where you can get rid of it. [Laughter.]
    Mr. Chairman, thank you.
    Mr. EWING. Thank you, Helen.
    Helen, Ken Ackerman is here in the audience from the Federal Crop Insurance Agency, and I would encourage you to submit questions on that. I think that's one of the areas where we can improve and should improve our system for those that fall through the cracks that don't appear to be taken care of.
    Mrs. CHENOWETH. Thank you, Mr. Chairman. I'm very glad to know that Mr. Ackerman is still here.
    Thank you.
    Mr. EWING. To Mr. White and Mr. Caspary, you don't require it, but do you know of many banks that do require crop insurance, particularly from lenders who may be a little closer to the line as far as the financial stability to get the loan?
    Mr. CASPARY. Yes, whenever the ratios get down to where if you aren't able to recover those costs and the risk is high, it may be one of the requirements that you would have to have to enable yourself to get a loan.
    Mr. WHITE. I would agree. Again, it comes back to my prior statement. It would depend on the individual situation and the individual's leverage with their loan to collateral position. It could be a part of that understanding with the borrower.
 Page 80       PREV PAGE       TOP OF DOC
    Mr. EWING. To you first again, Jim. Do you have any estimate as to the percentage of the farmers in your area that are using the Federal Crop Insurance Program?
    Mr. CASPARY. We are probably blessed with one of the higher ones. I checked with our people before I came, and they thought it would probably be over 90 percent.
    Mr. EWING. That's up considerably from a few years ago?
    Mr. CASPARY. Yes.
    Mr. EWING. Do the farmers tell you they are happy? I mean, are they ever happy? [Laughter.]
    Mr. CASPARY. If disaster wasn't around the corner, yes, they are happy. I think, basically, they seem to be pleased with the program.
    Mr. EWING. Mr. White.
    Mr. WHITE. I would agree. I think that most operators recognize it as what it is, and I think it's taken a while to educate the operators to the benefits of it, and we have worked it into something that they feel more comfortable with their marketing side too.
    So overall most operators would say it's definitely a plus to the program.
    Mr. EWING. Did they buy a lot of the CRC in your area, either of you?
    Mr. CASPARY. No, not so much of the CRC. We were one of the ones on the one where you could buy crop insurance just for the value, and we had some that took that out, although probably not too many.
    Mr. EWING. I'm not sure CRC was available in Dakota, was it?
    Mr. WHITE. On soybeans it was, and, yes, we did participate in that quite substantially.
 Page 81       PREV PAGE       TOP OF DOC
    Mr. EWING. Both of you had been in the banking business back at the time when we didn't have much crop insurance?
    Mr. CASPARY. Yes.
    Mr. WHITE. Yes.
    Mr. EWING. Do you think it has made a major difference in the stability of the economy in your area, and I know Jim's area is very rural and it is the major industry.
    Do you think that it has saved a lot of farmers from being eliminated in bad years?
    Mr. CASPARY. Yes, probably—and I'm just thinking about this particular year with the crop insurance. Even though we had excellent crop in Iroquois County, I think in Livingston County, for example, you didn't get very much rain, and even in some pockets in Iroquois County, you didn't get a lot of rain. So, consequently, there would not have been any ''disaster'' type of payments that would have been made under the old program such as if you had a major crop failure due to weather.
    With the crop insurance you can take those pockets and transfer some of the risk by charging premiums to all the rest of the farmers. It becomes a true insurance product, and it serves its purpose by being able to selectively get those smaller users, whereas you could have never done that with the old program under disaster payments.
    Mr. WHITE. I would concur. I think that as the years have gone by, and you can tell by the gray in my hair here that it's been a few of them, but the margin of profit that an operator is receiving today versus what it was in the past has diminished quite some amount, and there's no question that there isn't room for a major financial loss or bad decision. So with the crop insurance it is definitely—especially those that have some leverage to the program. It has allowed them to continue to operate.
 Page 82       PREV PAGE       TOP OF DOC
    Mr. EWING. Ms. Brookins, you and Mr. Brown both discussed the idea of a whole farm insurance policy. You go into some depth describing the possible structure. Structural change is needed for this to occur.
    The fact that approximately 61 out of every 1,500 crops and no livestock are covered by Federal Crop Insurance programs makes this a very compelling idea. However, is it feasible to develop an actuarially sound system?
    Ms. BROOKINS. Mr. Chairman, I don't know. I would tend to believe that, we need to analyze this now, as we move forward, it's going to be even harder to develop an actuarially sound system for our existing crop insurance programs. As I mentioned, we are developing all types of new biotech crops that have very different pricing structures, and in many cases where risk is transferred to someone different in the marketplace, and, in some cases, apart from the producers.
    So I'm only at the beginning stage of hoping to build some people who want to take a look at this and put some money into this. This was all done on my own initiative. No one has supported it. It's been my own time, it's been a pro bono experience, and in order to develop that—that's when I'm hoping I can either get RMA and some of the other agricultural groups interested in looking at it, and there are people we can go to to find out.
    But if we can rate price times yield, and price times yield produces revenues, and we have histories on farmers and ranchers going back, we can begin to start to take a look at the variables to determine whether this is a potential and is possible. I think it's time to begin, and, as I said, if our agriculture develops the way we all believe it will, I think, and hope it will, there are going to be many problems with the current crop insurance system even in the rating structure and the actuarial tables for the existing programs.
    Mr. EWING. What would become of the role of the Risk Management Agency if a farm production insurance corporation were to be developed?
 Page 83       PREV PAGE       TOP OF DOC
    Ms. BROOKINS. Well, I don't see any reason for a Risk Management Agency at that point. The Farm Production Insurance Corporation would handle what it does. You could have a risk management agency, which would provide some educational assistance and training assistance to producers in helping them to manage risk, but I would not see a role other than that because the FPIC would have the true regulatory and reinsurance mandate. Maybe some people in the RMA would go to work in the FPIC, but I don't know. That's what I would see happening. It would be more of an educational operation.
    Mr. EWING. Thank you very much.
    Mr. Newby, you mentioned—or I think you indicated that possibly producers should shoulder a higher part of the cost of both the catastrophic and the buy up coverage.
    What do you think higher costs will do to the participation rate?
    Mr. NEWBY. Well, according to figures that we have worked with, it would be about $140 average increase in cost per cotton policy. I don't have any available information on other crops, but we feel that that would not deter participation in the catastrophic insurance program.
    Mr. EWING. Do your banks require insurance coverage in your area?
    Mr. NEWBY. Like Mr. White said, it depends upon the individual, what kind of assets he has, or the the ability to repay the loan.
    Mr. EWING. You talked about partial privatization that would require insurance premiums to be quoted in two parts. Could you please explain how this system is different than the current system, and how it increases competition between companies?
    Mr. NEWBY. Yes sir.
     First of all, it would be different in that the Federal Government would no longer supply the money for the A&O expenses directly to private companies. Instead the A&O expenses would be paid directly by farmers as part of the premium. How it would make it more competitive is if one company could operate its A&O expenses cheaper than other companies, he would be at an advantage and would be able to sell his insurance at a lesser premium, and, therefore, it would be more competitive.
 Page 84       PREV PAGE       TOP OF DOC
    Mr. EWING. Thank you.
    Mr. Brown, do you believe that the private sector should have control over new products and policy development?
    Mr. BROWN. I think it needs to be a joint partnership between the private sector and the industry themselves in working out products that could be useful in managing risk. That does not necessarily exclude the Risk Management Corporation, but I think it needs to be a productive aggressive partnership in trying to meet some of these needs in a timely fashion.
    Mr. EWING. Thank you.
    Mr. Anderson, you discussed the concept of allowing producers to purchase catastrophic and related crop insurance coverage through their cooperatives and associations.
    Have you had any discussions with the USDA or RMA regarding this idea, and, if so, where have these discussions led you?
    Mr. ANDERSON. I don't know of any discussions specifically. I believe there have been some discussions through the National Council on a broad base to get some ideas out on the table. I believe that having the ability for the producer-owned unit like a co-op to be able to purchase it, certainly helps the whole self-help effort of cooperatives, and I believe it would enhance participation greatly, which I'm assuming that the bankers would like as much as we do.
    So it would certainly help our farmers. It would put them in the program for catastrophic protection and that's the area that we think is important because it begins to get those people interested in and understanding the process, which I believe is educational.
    Mr. EWING. Are there other benefits such as that offered through the cooperatives now or insurance of other types, or other types of mutual protection? Do you have a good example of something that is already very widespread?
 Page 85       PREV PAGE       TOP OF DOC
    Mr. ANDERSON. I can think of our marketing activities certainly helping our farmers maintain a base between the field and the sale of their commodities to improve their economic viability to lock in price. We provide that service, and we also provide services in the purchasing side of input.
    So, yes, that already works with the cooperative effort, and we think this just is a nice additive for our farmers in the risk management area.
    Mr. EWING. Well, panelists, thank you for your comments and for your testimony and for your being here. I appreciate it very much, and the comments I had to the other panelists about your continued interest and input is very welcome. We look forward to hearing from you as we move along with this review of our Federal Crop Insurance Program, and you are excused.
    The meeting is adjourned.
    [Whereupon, at 4:16 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Statement of Dallas R. Smith
    Mr. Chairman and members of the subcommittee, I am pleased to appear before you today on behalf of the U.S. Department of Agriculture to discuss the progress we are makingin strenghening the safety net for our Nation's producers.
    I would like to thank those on this subcommittee, and elsewhere, who have shown a deep personal commitment to, and involvement in, USDA's Risk Management Agency (RMA). The support of Congress, and in particular this Subcommittee, will be crucial to the success of RMA and, more importantly, to the economic stability of agriculture in this country.
    The Federal Agriculture Improvement and Reform Act of 1996 (1996 Act) recognizes that agricultural producers in today's environment must take active steps to protect themselves from the inherent risks of farming. As a result of the Government Performance and Results Act of 1993, RMA has adopted a strategic plan vision statement which focuses on ''transforming yesterday's crop insurance program into tomorrow's broad-based safety net to assure that American agriculture remains solid, solvent, and globally competitive into the 21st century.'' This country cannot feed its hungry, nor can we assure foreign purchasers that America is the most dependable supplier of high quality agricultural commodities, without maintaining an economically stable and productive farm community.
 Page 86       PREV PAGE       TOP OF DOC
    Keeping producers viable and productive remains the number one goal of USDA's strategic plan. We simply cannot achieve our other strategic goals without first ensuring that producers and ranchers have a reliable economic safety net to help them overcome the effects of natural disasters and price volatility.
    RMA plays a significant role in achieving this goal. The Agency's mission under the 1996 Act is broad—not only to administer programs for the Federal Crop Insurance Corporation (FCIC), but also to ensure a meaningful safety net for today's producers. This mandate has taken RMA into many new areas beyond traditional crop insurance, including the development of innovative products based on proposals from the private sector spanning the breadth of the farm risk management community. RMA will only accomplish its mandate by launching an education program to ensure that producers are aware of the importance of active risk management in the current economic environment and by developing a full range of risk management tools.
    Mr. Chairman, since we reported to you last April, many important issues have confronted RMA and the crop insurance program that are of great interest to members of this Subcommittee, and I am happy to report on them before you today.
    Overview
    While final statistics on the 1997 crop insurance year are not yet available, I can report that participation in the program remains at significantly high levels. This year, 178 million acres of American crop production are covered by Federal crop insurance. This represents a small decrease from the 203 million acres covered in 1996 when linkage to other program participation was applicable. Total insurance liability stands at $24.9 billion, a small decrease from the $26.8 billion in liability in crop year 1996.
    While these national coverage levels are reassuring, many specific areas of the country have seen significant losses of participation since Congress rescinded the formal linkage of insurance participation to other major USDA programs. In today's high risk environment, producers who pass up insurance protection are left with very few options when disaster strikes. As we enter the insurance sales periods for 1998 spring planted crops, it is vital to stress the need for producers to
 Page 87       PREV PAGE       TOP OF DOC
protect themselves. This becomes more evident given the impending ''El Nino'' effect, which I will discuss later in this statement.
    Renewing the Partnership
    I am pleased to report that after seven months of negotiations, RMA and the insurance companies have reached agreement on the terms of the Standard Reinsurance Agreement (SRA) for the 1998 crop year. The negotiated terms of the SRA were sent to the companies on
October 3, 1997, and, I am pleased to report that a majority of the companies have returned signed agreements.
    In our view, the 1998 SRA is a fair agreement. It assures that American farm producers will continue to enjoy the same high level of professional service from participating insurance companies and agents as they have come to expect over the years. The negotiation process provided an important forum of mutual learning and communication between USDA and the insurance companies. As a result of these talks, we feel we have come to a better understanding of their needs, and they better understand our requirements. The result will no doubt yield a stronger relationship. By incorporating greater discipline to program procedures and program integrity, the new agreement creates the basis for a sustainable delivery environment and will give participating companies the ability to plan for the future with confidence and insight.
    Mr. Chairman, I would not want to leave this subject without taking the opportunity to publicly thank the participating insurance companies and key members of the RMA staff for their hard work during these negotiations.
    Risk Management Education
    Since our last oversight hearing with this Subcommittee, we have taken several important steps toward launching an effective risk management education and outreach program for American producers. In September, RMA convened a forum of nearly 500 agricultural leaders to formally kick off its risk management education drive. This effort has drawn support from a wide range of organizations spanning the farm and agribusiness communities. Representatives of the futures, options, insurance, and banking industries; the grain trade; educational institutions; media; Government; commodity groups; and farm organizations have discovered common ground in this arena, and we are extremely gratified to see so many individuals from across the agricultural spectrum united by this initiative. The broad commitment to pursue a common goal gives us great hope for the success of the risk management education endeavor.
 Page 88       PREV PAGE       TOP OF DOC
    Following up on the education forum, regional coordinators are now holding State and county meetings to train local agricultural-related leaders on the benefits of risk management education. These leaders will ultimately work with producers to increase their awareness of, and need for, new risk management strategies. To accomplish our goal of reaching all producers, RMA will continue to rely on local leaders—local insurance agents, local futures brokers, local lenders and elevator operators, local extension agents and Farm Service Agency offices—to interact face-to-face with producers on their risk management needs. The message of planning and preparation will be communicated best if producers hear it from the people in their communities whom they trust and rely on to assist them in making sound business decisions.
    In the next few months, USDA will also issue a formal request for proposals to glean the best ideas from our private sector partners on other ways to meet the risk management needs of producers. These proposals will be reviewed by members of the Risk Management Education Steering Committee, comprised of RMA, the Cooperative State Research, Education and Extension Service, and the Commodity Futures Trading Commission, and will be used to competitively award risk management education funds.
    Program Expansion
    Recognizing the growing demand for better access to risk management products, RMA has continued the process of expanding crop insurance across the country. To keep you apprised, we have recently provided Congress with a report entitled ''Risk Management—New and Speciality Crops'' detailing the extent of our efforts, a copy of which is attached to my testimony. For the 1997 crop year, RMA expanded coverage on 29 insured crops to 343 additional counties in 26 states. For crop year 1998, coverage will be expanded on 25 crops to 144 additional counties in 16 states.
    Crop insurance pilot programs provide a safe, reliable method to begin new crop insurance programs and are currently underway for avocado revenue insurance, blueberries, canola and rapeseed, and Florida fruit trees. A pilot program for sweet potatoes is being implemented for the 1998 crop year. Revenue insurance products have been particularly popular with producers. Over the past two years, three major revenue-based insurance products have been launched in conjunction with the insurance companies: Crop Revenue Coverage (CRC), Revenue Assurance (RA), and Income Protection (IP). On October 6, the FCIC Board of Directors approved sales of CRC in many additional States and several counties for the 1998 spring crops. CRC is now available on almost 90 percent of the corn, wheat, cotton, soybean, and grain sorghum acres in the U.S. I have attached a map showing the States, counties, and crops for which CRC and IP are currently available.
 Page 89       PREV PAGE       TOP OF DOC
    Again, while complete statistics on the 1997 crop year are not yet complete, sales of revenue insurance products this year have increased substantially. Also attached to my testimony is a table which lists the total number of policies earning premium and the amount of total liability for CRC, RA, and IP for the 1996 and 1997 crop years.
    Looking to the future, RMA is reviewing a number of crops for pilot program development. Included with RMA's report to Congress on new and speciality crops is our 1997 and 1998 existing program expansion summary. As always, we would appreciate comments from this Subcommittee on these plans. We are also looking at alternative forms of risk management that will cover all crops in an operation on a farm, as opposed to crop-by-crop programs. We are excited about the possibilities for these programs and hope that they will mark a significant advance toward addressing the needs of highly diversified agricultural producers and provide a vehicle for bringing protection to currently noninsured crops.
    Finally, RMA is actively reviewing proposals for an innovative options pilot program for dairy which was developed by the private sector. The market for milk futures is growing rapidly, and we are working closely with the dairy community and the participating commodity futures markets to develop the program by spring 1998.
    Program Improvements
    In response to concerns from farm producers and the insurance companies, RMA has been working to revise several important regulations that have been of great interest to this subcommittee. Chief among these are proposals to revise rules on prevented planting and the nonstandard underwriting classification system (NCS).
    For the past three crop years, prevented planting coverage has been a subject of controversy. Producers, commodity groups, and insurance companies have voiced concerns ranging from the levels of prevented planting payments to the difficulties in determining eligible prevented planting acreage. Based on extensive consultations, RMA has proposed a significant rewrite of its prevented planting regulation designed to improve coverage for producers and simplify program administration. The proposed regulation would increase prevented planting coverage levels, eliminate substitute crop benefits, and simplify the payment method. Following publication in the Federal Register on August 12, 1997, RMA received approximately 260 comments on the proposed rule, which are now being reviewed. RMA expects to complete its work on this proposal so that the final regulation can take effect for the 1998 spring-seeded crops.
 Page 90       PREV PAGE       TOP OF DOC
    RMA is also working to address producer concerns about NCS, which was created in the early 1990's to enable RMA to improve the actuarial soundness of the Federal crop insurance program and limit across-the-board rate increases for producers whose losses are consistent with county averages. Concerns have been expressed that NCS can inadvertently capture producers who have suffered loss from widespread disasters beyond their control, which certainly was not the intent of the NCS program. To address this issue, RMA has undertaken a two-step approach. For the 1998 crop year, RMA regional offices were instructed to carefully determine whether producers met all criteria under current regulations to assure against unfair listings. This process was a key factor in substantially reducing the number of producers selected for NCS nationally in crop year 1998.
    For crop year 1999, RMA published in the Federal Register an Advanced Notice of Proposed Rule Making seeking comments on a wide range of potential changes in the system. We are now in the process of reviewing the comments that were received. Our goal is to develop a proposed rule for improving NCS. We want to assure that producers are not penalized with adverse rate adjustments due to factors beyond their control, and that the large majority of producers with good insurance experience are protected from inappropriate increases in premium rates.
    Charting the Future
    Reflecting the newness and importance of RMA's mission, the agency is vigorously working to implement requirements of GPRA. RMA is exploring a variety of ways to share its strategic plan with its customers, including a series of town hall meetings in areas around the country which would give producers, companies, and grower groups the opportunity to comment on the Agency's plan and suggest changes and improvements. RMA is also initiating a Business Process Re-engineering process which will focus on improving key business processes central to its interaction with its private sector partners.
 Page 91       PREV PAGE       TOP OF DOC
    In closing, I would like to point out that, if predictions of a significant El Nino effect in the Nation's weather are borne out, we may face in the coming year a major test of our risk management system in the post-farm bill environment. Every year, producers face a wealth of unpredictable hazards that can jeopardize their ability to produce a crop and maintain economic viability. According to projections from the National Oceanic and Atmospheric Administration, this year's El Nino is one of the strongest in decades and may produce very unusual and adverse weather patterns. What does this mean for producers? We do not know for certain. No one can predict exactly where on a map or on what date on a calendar the severe impacts will be felt. Vigilant monitoring is required because real time observation remains the essential ingredient for accomplishment of risk analysis.
    However, if any producer has doubts about buying insurance coverage to protect their financial stability this year, the projections for El Nino should settle the issue. By contacting a local crop insurance agent today, producers can take a major step toward protecting themselves against the potential ravages of El Nino or other catastrophe and avoid major disruptions in their lives and their livelihoods over the next year if disaster strikes. There is no safety net for producers who waive their rights to purchase crop insurance protection.
    Mr. Chairman, USDA is committed to providing a strong safety net for American producers and encouraging them to use every protection available. RMA will continue to develop new, innovative products to meet the diverse needs of the agricultural sector, and will use its leadership role to facilitate the education of producers on risk management strategies. By ensuring a strong risk management safety net, we are taking measures to help guarantee that the nation's current and future producers and the agricultural community remain viable well into the next century.
    Mr. Chairman, this concludes my testimony. I appreciate the opportunity to address this Subcommittee on behalf of the Risk Management Agency, and I will be glad to answer questions that you or other members of the subcommittee may have.
 Page 92       PREV PAGE       TOP OF DOC
     
Statement of James White
    Mr. Chairman and members of the subcommittee, I am pleased to be here on behalf of the American Bankers Association to participate in this hearing on the Federal crop insurance program.
    My name is James White, and I am president of Norwest Bank Huron in SD. Norwest Bank Huron is a $90 million bank with a total of $55 million in loans, of which $42 million are loans to agriculture producers.
    The American Bankers Association brings together all categories of banking institutions to best represent the interests of the rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks—makes ABA the largest banking trade association in the country.
    As Members of the subcommittee know, bankers have a very important role in our entire food chain. We finance a great deal of U.S. agriculture production. Forty cents out of every dollar borrowed by farmers and ranchers in America today comes from banks. In 1996, banks had a total agricultural loan portfolio of $62 billion, and this figure represents only the amount that banks have loaned for production agriculture. Banks have many more billions in loans to agribusinesses of all kinds.
    With the changes in farm support programs authorized by the 1996 Farm Bill, farmers will become more dependent on specialized information and advice than ever before. Increasingly, farmers will be looking to their bankers, professional risk managers, farm managers and market managers to help guide them through the new era of freedom to farm.
    For this reason, the ABA supports today's stable and reliable Federal crop insurance program with private sector delivery. America's bankers know that dependable crop insurance can, and frequently does, mean that bankers are able to approve operating loans and other types of credit for farmers struggling to stay ahead in high-risk situations, volatile weather and, in some cases, challenging agricultural markets. Crop insurance also ensures that the producer will be able to recover their input costs when damaged by unexpected circumstances, and thus be protected from financial disaster.
 Page 93       PREV PAGE       TOP OF DOC
    At my bank, all of our agricultural lenders are very knowledgeable about the aspects of crop insurance and the perils that it covers. We also ask producers to consider a marketing plan for the coming year. While the decision to purchase crop insurance and execute the marketing plan is entirely up to the producer, more and more of our customers are utilizing these tools to manage their risk.
    In March of 1995 a majority of our customers signed up for multi-peril insurance as a risk management tool for that year's production. As the spring developed we sustained a late winter storm and then received excessive April and May rains, leaving most of our operators with either severely reduced planted acres or in some cases producers that weren't able to get any acres planted at all. Due to the multi-peril coverage, our bank was able to advance credit to these same operators based on the guarantees that they had established with their multi-peril coverage. While these revenues weren't sufficient for the operator to turn a profit for the year, it did cover their expenses and keep them credit worthy for the upcoming year of 1996 which turned out to be one of the best crops recorded in our area. Without the Federal Crop Insurance Funds assisting these operators, a significant number of them would not have had the equity available in their program to take part in the 1996 recovery crop.
    Simply put, today's crop insurance program works for the farmers that use it. In addition to being cost-effective to the taxpayers, catastrophic crop insurance is an affordable tool for producers, and it has proven to be a significant advantage for careful managers who face devastating weather conditions or other unexpected set-backs.
    The Need for Risk Management Education and New Tools to Enable Producers to Manage Risk
    Crop insurance is an important component of a risk management strategy that farmers must become more adept at deploying. The biggest challenge facing bankers when dealing with their farm and ranch customers is getting them to evaluate the risks in their businesses and to understand how failure to adequately manage risk may impact their ability to get credit.
 Page 94       PREV PAGE       TOP OF DOC
    The ABA encourages USDA's Risk Management Agency to work in partnership with the private sector to develop products and strategies that are cost effective, understandable, and reliable in meeting the needs of producers. The ABA recently worked with the Risk Management Agency to develop the National Risk Management Education Summit that was held in Kansas City this September. The summit was an important first step in the process of getting all of the stakeholders in American agriculture to focus on the need to develop new strategies to help farmers insure their business against catastrophic risk. At the conclusion of the summit, the participants were committed to work with farmers and ranchers to increase their understanding of the benefits of developing a comprehensive risk management plan.
    At the Summit, five areas of risk were discussed: production, marketing, financial, legal and human resources risk. While crop insurance is an effective tool for farmers to use to protect themselves from production risk, it is important to note that production risk is only one part of the risk management puzzle.
    Market risk continues to be an area of risk that concerns producers and their bankers. Creating tools that will enable our customers to find the best opportunities to either sell their production or protect a minimum price is something on which all of us in the private and public sector should concentrate. Some of the new products being offered, Crop Revenue Coverage and Income Protection offer price as well as yield guarantees. These products offer producers the ability to further insure themselves against production and market risk. They are an important first step. At present they are all offered on a limited number of crops and in a limited area. We encourage the Risk Management Agency and the private sector insurers to expand these programs as rapidly as possible to allow all producers the opportunity to better manage market risk.
    As bankers, we have great faith in the ability of our farm customers to run their businesses—that is why banks are the lead lenders to American agriculture today. But more needs to be done, and much needs to be done in a relatively short period of time. With declining direct Federal payments to producers, American farmers will have to be much more adept at protecting their production, marketing it, and managing their business for growth in a global marketplace.
 Page 95       PREV PAGE       TOP OF DOC
    Bankers play a key role in all of agriculture. Bankers work with their customers to provide the best possible financial products and services for farmers and ranchers to use to grow their businesses. With over $62 billion loaned to American farmers and ranchers today, we have committed ourselves to agriculture. We share the optimism of our customers; the future for agriculture is bright. The market opportunities for American farmers have never been greater, and we in the banking industry look forward to working with our customers to provide them with the financial products and services that they need to continue to be the most productive farmers in the world.
    Thank you for this opportunity to testify. I will answer any questions that you may have at this time.
     
Statement of Reginald L. Brown
    Mr. Chairman, members of the committee, my name is Reggie Brown. I am Director of Marketing and Membership for the Florida Fruit & Vegetable Association. FFVA is an organization comprised of growers of vegetables, citrus, sugarcane, tropical fruit and other agricultural commodities in Florida. I am here today to discuss the concerns, challenges and opportunities that the Federal Crop Insurance program presents to specialty crop growers in our membership.
    Florida's unique geographical location in the United States affords growers an opportunity to produce a very wide range of crops. Our members grow tropical fruit in extreme south Florida, citrus in Central and Southern Florida, vegetables throughout the entire state, and many miscellaneous crops such as blueberries and peaches. All of these are specialty crops marketed in a supply and demand driven marketplace. This diversity of crops presents great opportunity and challenge to a provide adequate coverage under the Federal Crop Insurance program. This diversity presents many crop specific risk situations to be understood and incorporated into good programs if our industries' needs are to be met.
 Page 96       PREV PAGE       TOP OF DOC
    The nature of the fresh produce industry is such that the supply and demand factors determine to a large extent the success of the industry. It is important that programs in general be structured so as to not alter the market-orientation of our industry. Our industry is comprised of ''risk takers'' that are driven by the opportunity to receive their rewards in the market system. Recognition of this basic principle is important.
    The current Risk Management Corporation program to provide increased emphasis on risk education in the broadest sense is a positive step. Growers many times get themselves focused on immediate problems and fail to fully evaluate risk as it truly exists. The effort to develop a comprehensive, educational program that includes a wide range of industry groups such as finance, insurance, grower groups, cooperative extension and the risk management group of USDA should be applauded.
    Specialty crops, because of their unique and diverse nature, require careful review by the agency. Experiences over the last 15 years have brought both positive and negative impacts on the industry. The traditional disaster programs were developed for the major crops of the country. These ''well meaning'' efforts often brought major challenges to other growing communities as they were implemented for specialty crops. Attempts to transfer existing crop insurance programs from crop to crop have also been problematic.
    There is no question that the effort to move the USDA programs into a soundly underwritten crop insurance program is in the interest of our growers. The specific types of coverage developed to meet their needs and the projected time to accomplish this effort is an area of great concern. The three to four years required to develop and conduct pilot programs for each of these policies is not acceptable. The current policy development rate of three or four new programs per year is also problematic.
     It will be extremely important that crop insurance programs and policies be developed with active grower input. Experience has shown that poor communications between policy development and industry is a sure ticket to conflict and frustration. These experiences are not in the best interest of the grower community. However, it is a challenge to obtain strong involved commitment from this very diverse agricultural sector. The grower community must recognize the need for communications to be extensive and open throughout the entire policy development process. With good communications and understanding, the two groups can develop useful risk management tools.
 Page 97       PREV PAGE       TOP OF DOC
    The policy development group needs to have the ability and the commitment to explore innovative approaches to meet the needs of the industry. It is not possible in the foreseeable future to develop individual policies for the crops currently outside the system. These crops currently fall in the NAP program. Ideas for how to include these and others in a broad whole farm income driven policy may have merit.
    Revenue appears to be the most common approach to establishing a broad policy that could encompass a large number of cropping systems. A consistent revenue stream is the key to survival in today's farm economy. A grower routinely maintains records to meet the filing requirement of the Internal Revenue Service. These filing documents are standardized throughout the grower community. Is it possible to structure a policy that insures some portion of the historic income?
    The development of a revenue based policy will not be a simple task. The need to insure that such a policy is actuarially sound will require that many factors be considered. However, the opportunity to provide protection for a portion of the family farm's income during significant weather related events is a worthwhile goal. The ability to provide flexibility to the farmers to make market-driven decisions within the basic framework of a single policy is interesting.
    Grower understanding of the policies and their resulting coverage is essential. The transition to a private delivery system has placed an even greater responsibility on the farmer to insure that he has an accurate understanding of the policies. Agents that market these diverse policies to specialty crops producers must have an excellent understanding of the risk in the business and the role policies play in shifting that risk. Every effort should be made to provide simple, straight-forward examples of how the policy works. All to often, it is after a disaster that the grower discovers that what he ''thought he bought'' was not in fact ''what he had.'' This phenomena is not unique to crop insurance and has historically presented a challenge to the insurance industry.
 Page 98       PREV PAGE       TOP OF DOC
    We appreciate the opportunity to express our thoughts and concerns on the current and future Federal Crop Insurance programs. It is through discussions such as these that creative productive risk management tools are developed to meet the needs of the 21st century.
     
Statement of James Caspary
        Chairman Ewing, it is a pleasure to be here today to present testimony to you and other members of the House Agriculture Committee's Subcommittee on Risk Management and Specialty Crops regarding our views on crop insurance, an issue of great importance to American agriculture.
    Mr. Chairman, I appear before you this afternoon in two capacities. I'm the president and CEO of the First National Bank of Clifton in Clifton Illinois and I'm a member of the Agriculture-Rural America Committee of the Independent Bankers Association of America.
    IBAA represents some 5,500 independent community banks nationwide with more than 15,000 locations that hold nearly $375 billion in insured deposits, $445 billion in assets, and more than $240 billion in loans for consumers, small businesses and farms in the communities they serve. IBAA members also employ more than 200,000 people in their communities. IBAA is the only national trade association that exclusively represents the interests of community banks. IBAA maintains its web site at www.ibaa.org.
    The First National Bank of Clifton is a small Midwestern agricultural bank with $24 million in assets that has been serving our community since 1902. It is located in the north central part of Illinois, in primarily corn and soybean country. The bank owns an insurance agency which primarily sells crop insurance and is one of the largest providers of crop insurance in the state of Illinois.
    Crop Insurance—A Lender's Perspective
    Mr. Chairman our experience with the crop insurance program has been favorable and we think the program is essential for many of our farm customers. From a banker's perspective, the program helps us to manage risk as it guarantees the producer won't be economically wiped out if disaster strikes. This repayment potential is an important factor when a lender is considering advancing the farmer a loan and can be a fundamental part of risk management for both the producer and the lender.
 Page 99       PREV PAGE       TOP OF DOC
    Agricultural lenders, due to the nature of their business, are in a good position to help growers make risk management decisions. Crop insurance protection can help the farmer in several ways. It can help establish minimum cash flow projections; improve profitability, liquidity, solvency, repayment capability, financial efficiency, collateral and management ratios. Crop insurance can help keep customers financially healthy even if they have good equity but weak cash flow projections.
    We have been pleased to see the increased acreage under coverage since adoption of the new farm bill. With the scrapping of ad hoc disaster programs and with the greater crop price volatility that will now be inherent in the market, adequate crop insurance protection will have to be considered by many producers if they are to remain viable in the long run.
    We are also pleased to see the development of new tools to add to the risk management arsenal of producers such as Crop Revenue Coverage (CRC). Several of our farmers use this program. The development of new tools will be essential as farm bill payments are phased down.
    We do believe that it would be virtually impossible for a single tool—basic crop insurance—to meet all of the needs of all of the producers for all of the crops all of the time in all of the areas across the country. However, there are many areas of the country where CRC coverage is not available and we urge the Congress to make the program available to all producers. Producers in certain states which have been hard hit by disasters could benefit from such a program. Obviously we understand the programs need to be actuarially sound.
    We would encourage Congress and USDA to ensure that all crops have some mechanism for insurance coverage. This is especially important under the new Farm Bill which allows unlimited planting flexibility. Many producers in certain states will shift to non traditional crops. For example, in North Dakota, wheat producers are being hard hit by an unusually prolonged scab infestation causing severe economic losses due to reduced yield and crop quality. I'm told that many growers have switched to producing Canola. However, Canola is not covered by crop insurance in all areas of the state.
 Page 100       PREV PAGE       TOP OF DOC
    We're encouraged by the USDA efforts to develop risk management educational opportunities for producers that can be delivered at the State and local level and that will involve the active participation of community leaders such as community banks.
    Mr. Chairman, let me also emphasize the need to provide a multi-year funding approach to those who sell crop insurance. There simply needs to be a long-term commitment to ensure that insurance agents and banks which provide insurance find crop insurance a profitable product to provide to farmers to ensure they'll stay in the business of helping farmers reduce risk.
    Concluding Recommendations
    Mr. Chairman, I would like to offer the following recommendations as a summary of some key concepts to keep in mind for the future in regards to crop insurance.
    1. Importance—Crop insurance is the foundation for farm management; it protects against low yields, poor quality and can be the basis for early season hedging to reduce risk.
    2. Continuation—The program is working. Let's stick with the crop insurance approach so that growers have the liquid collateral to secure ag loans for crop production and hedging. It's vital to the success of the ''FAIR'' Act.
    3. Availability—Consider two aspects: 1) We need a way to provide at least basic blanket revenue coverage on all crops not currently covered by MPCI; and 2) Let's encourage the expansion of the CRC program.
    4. Participation Levels—High farmer participation is critical. Otherwise when disasters occur, a very costly ad-hoc disaster program may be initiated. Ensuring that the paperwork burden on both providers and farmers is as streamlined as possible will encourage high participation levels.
    5. Long Term Commitment Let's ensure there is a long term commitment to the program so growers can plan their crops 12 to 18 months before harvest and be assured that the program will be available for the crop that will be produced.
 Page 101       PREV PAGE       TOP OF DOC
    6. Maximize Choices—Provide a maximum number of coverage choices to give growers maximum flexibility to tailor a package to fit their individual risk management needs.
    7. Expense Reimbursements—Provide adequate expense allowance for the private industry to assure that local private sector delivery is convenient for all growers.
    8. Promotes Economic Growth—Crop insurance fosters rural development because it creates local jobs and utilizes the goods and services of local merchants.
    9. Economic Stability—Crop insurance provides broad protection for rural communities during times of disaster. When farmers can pay their bills the whole community benefits.
    10. Broad Industry Cooperation—Let's work to ensure all segments of the crop insurance industry continue working together in a cooperative fashion, especially as new ideas are brought forward.
    Thank you Mr. Chairman for the opportunity to testify today. The IBAA and community bankers look forward to working with you on this important issue.
     
Testimony of Ruth Gerdes
    Good afternoon, I am Ruth Gerdes from Auburn, NE. My husband and I operate a diversified farm growing corn, soybeans and wheat. We also have an Angus cattle herd and a registered Hampshire Swine Breeding operation. I am also a crop insurance agent. I started as an agent in 1985 due to problems that we encountered with crop insurance on our own farming operation. I started with six clients and today work with over 1000 policyholders in Nebraska, Iowa, Missouri, Kansas, and Illinois. I am also an active member of the National Association of Crop Insurance Agents (NACIA), a national trade association for crop insurance agents. We appreciate the committee giving agents the opportunity to be a part of this hearing.
 Page 102       PREV PAGE       TOP OF DOC
    I thought I would start by giving you an overview of a crop insurance agent. I think there is some misconception about agents, and how we interface with companies, as well as the Risk Management Agency. The vast majority of crop insurance agents are independent agents. This means that we are free to choose the company that we place our business with. There seems to be a tendency here in Washington to lump agents into the same category as companies, but that is not an accurate portrayal of the independent agency system. Agents choose which company to place their business with based upon a variety of issues. Years ago that decision may have been driven by the commission offered by a company. Not any more. Crop insurance is a unique insurance business, and the decision I make as an agent to place my business with a company is primarily driven by how well that company can service my clients. During the recent funding debate here in the House there was much discussion about agents' commissions. Due to that discussion many in Congress were left with the impression that agents receive a 27 percent commission. That is not correct. I have for you today a commission schedule that documents the commission that an agent would receive. As you can see the maximum commission was 16.5 percent on MPCI and 14.5 percent on CRC. I point this out to you because I have had several staff and members tell me that 27 percent commission is too much for an agent.
    Selling crop insurance is not easy and to be successful takes commitment from the agent. It takes hours of diligence each year just to attempt to keep up with the changes made in the program. My responsibility is to explain the rules, regulations, and obligations of a policyholder in a manner that the producer can understand. The communication between an agent and farmer is the difference between the farmer having meaningful transfer of risk or just another insurance policy. Crop insurance is different than the farm program. The farm program is an entitlement program, crop insurance is something that has to be sold. Therein lies some of the problem. USDA tends to treat crop insurance like the farm program, but there are vast differences. A real public/private partnership needs to develop for crop insurance to be successful. The program needs to be balanced between providing a policy of value to the farmer while at the same time protecting the taxpayer against abuse. If that balance is to be achieved, we need to recognize that MPCI is an insurance program that also has some social aspects to it. Without a workable crop insurance program, a farmer and his family are out of business.
 Page 103       PREV PAGE       TOP OF DOC
    There are several areas within the crop insurance program that need to be examined. Congress needs to explore the possibility of charging the policy holder up to 10 percent of the premium, rather than a flat fee. I have grave concerns about the flat fee, and this goes back to differentiating between an entitlement program and an insurance program.
    With large farmers, and with high value crops we have seen the development of association selling. Cooperatives, grower groups and associations are entering into exclusive contracts with some insurance companies. The purpose of these contracts is to provide these organizations with money for their help in influencing their members to buy crop insurance from the specified agent of the company. One of the biggest problems with this practice is that since the policies are often sold through the mail or by a central processing unit of a big insurance company, producers do not always receive a thorough discussion of risk management options. Attached to my testimony is an excellent letter to Mr. Schumacher, Under Secretary, USDA from a California crop insurance agent outlining some of her concerns with this practice.
    Mr. Chairman, I believe your subcommittee should consider examining the structure of RMA. Does the current organization encourage the public/private partnership necessary to make crop insurance a long-term success. For example, significant resources in dollars and time are tied up in product development. Is this an appropriate role of RMA? I would suggest that RMA be the regulator of new products, not the developer. According to RMA, in 1997 the Income Protection (IP) policy which was developed at taxpayer expense has 2456 policies earning premium. CRC, which was developed and is managed by a private company, has 146,668 policy's earning premium. I think the numbers give the answer.
    The problems at RMA go beyond the structure of the overall agency and new product development. I think the biggest problem at RMA is the lack of interaction between the agency with the agents and farmers. Again this is not an entitlement program, it is an insurance program, and to develop a policy that works for farmers you have to have some idea of what is needed. To solve problems with the existing program, you need to have a feel for the source of the problems and input from the users of the program how these problems can be solved. Right now there is no mechanism, formal or informal, for agents and farmers to work in cooperation with RMA to address current problems or future growth.
 Page 104       PREV PAGE       TOP OF DOC
    In addition, even within RMA there are organizational issues which block resolution of problems. One good example is the prevented planted issue. I hope that we are only a few days away from a final rule announcement that resolves this issue for 1998 spring crops. But it has taken well over three years to get to this point. I anticipate that we will solve 90 percent of the major problems of prevented planting with this new rule. But the other 10 percent involved the planting dates. The planting dates are set by the Regional Service Offices (RSO's), who report to the Washington, DC office of RMA. The rest of prevented planting is handled by the Kansas City office. Tim Hoffmann, a member of the RMA staff in Kansas City, has done yeoman's work in bringing this rule forward and trying to resolve the problem. Even with some modifications to the proposed rule, RMA will not be able to completely resolve the issue because the Kansas City RMA does not have authority over the plant dates. This power is with the RSO's. This is a case where decentralization only equals confusion for agents and producers alike.
    It seems that every major issue I have worked with RMA are this disjointed. Regulatory authority is scattered around the country depending on the issue. I am not clear what the rational is for continuing Regional Service Offices. As an agent, I have little or no need for this office. I realize RMA may need some people in the field, but certainly not at the current staffing level of the RSO's. I also question the amount of staff in RMA's Washington office. What role do these staff play, especially in light of the delay in addressing problems like prevented planing and non-standard classification? A core RMA staff could remain in Washington to deal with strategic and political issues. Perhaps a consolidation of regulatory staff in the Kansas City office would facilitate more timely program changes and adjustments. Maybe fewer layers would mean quicker decisions.
    No matter how the structure of the organization is put together some mechanism for working with agents and farmers needs to be incorporated into the system. Agents like myself will keep pounding on doors until someone at RMA answers. Think of all the ideas from farmers, agents and companies that RMA is not able to utilized because there is no mechanism to incorporate these suggestions into the process.
 Page 105       PREV PAGE       TOP OF DOC
    The issue of Non-Standard Classification (NCS) is another example of this type of problem. I agree with the general concept of NCS. However, implementation is a mess. I am including with my testimony the response that I made to RMA on this issue. It is a complex issue which we do not have time to go into depth today. But reforming NCS for 1999 should be a top priority for RMA. To continue the current system is not acceptable to agents, nor to me as a farmer.
    Of course, with all the regulatory changes the big issue is timing of administrative changes in policy. For the last couple of years trying to stay current of the rules and regulations has been difficult at best and impossible on many occasions. This is in large part due to the short notice that RMA gives farmers, agents and companies when policy changes are announced. We must resolve the problems and get the rules out in a timely and affective manner.
    I would also like to commend Mr. Schumacher for his scheduling and handling of the last FCIC Board meeting. He made a great start by having this meeting in early October rather than December so issues could be discussed before next spring and some decisions could be made in a timely fashion.
    Finally, the subcommittee needs to be concerned about concentration in the crop insurance industry. Attached is a memo on industry concentration from Art Barnaby, Kansas State University, Extension Agricultural Economist. In 1986, 26 companies wrote 95 percent of the premium. In 1996, only 7 companies wrote 95 percent of the premium. Four of the companies wrote 71 percent of the premium in 1996. Industry concentration is happening now and the Subcommittee and USDA need to be aware of decisions which could accelerate this process.
    The big issue is fully funding of the crop insurance program and providing adequate reimbursement for agents and companies so the industry does not consolidate to the point that producers do not have choices. I know that the agents want to work with the subcommittee, commodity organizations and companies to find a solution to the funding shortfall. As a matter of fact, there is an ad hoc group of agents and commodity organizations which have been meeting for over a year to discuss many of the issues I brought before the subcommittee today. This is a clear demonstration of our commitment to the crop insurance program. We look forward to working with RMA and the House Agriculture Committee on program and funding issues.
 Page 106       PREV PAGE       TOP OF DOC
    Mr. Chairman, thank you for the opportunity to testify before your subcommittee. I would be happy to answer any questions.
     
Statement by Ernest L. Ross
    Mr. Chairman, it is my pleasure to appear before you to comment on the Federal Crop Insurance program. I am happy to report that the crop insurance program has been a tremendous success since the enactment of the Crop Insurance Reform Act of 1994. Participation rates have doubled in the two year period since the new program was put in place. Currently, about 70 percent of eligible acreage is protected by crop insurance. Total net acres insured increased from less than 100 million acres in 1994 to over 200 million acres in 1996. Total protection in force also doubled from $13.6 billion in 1994 to $26.9 billion in 1996.
    Thus, by any objective standard, the crop insurance program has succeeded in providing farmers much better protection than was ever possible before the 1994 reforms. With crop insurance, farmers are able to purchase at a reasonable price the protection they need. They do not have to hope for a Government bailout in the case of a natural disaster.
    The Program Works for Both Farmers and Taxpayers
    In fact, the program has worked for both farmers and taxpayers because there has been no disaster bail-out since the reformed crop insurance program has been implemented. The new program has been a bargain for taxpayers because traditionally, prior to 1994, the combination of disaster bailouts, disaster loans, and crop insurance have cost the taxpayers an average of $4 billion annually. The current crop insurance program is costing about $1.8 billion annually while providing farmers with superior, predictable protection.
    Crop insurance has a new and expanded role in the new risk environment. The 1996 farm bill ushered in a new era of ''Freedom to Farm'' and made each grower responsible for arranging his own risk management. The Crop Insurance Reform Act of 1994 had already eliminated disaster payments. Crop insurance is now the only federally-sponsored program that responds when disasters occur.
 Page 107       PREV PAGE       TOP OF DOC
    In the new risk environment crop insurance provides growers with the opportunity to purchase protection tailored to their individual needs. It provides protection against low yields, poor quality, and it is the foundation for hedging the price of a crop at reduced risk. This application of crop insurance replaces the old disaster and deficiency payments and can maximize profits. It's about the only tool available that can provide liquid security for agricultural credit. A strong crop insurance program is vital to the continued success of America's farmers and the stability of the agricultural economy.
    The Funding Problem
    Despite the huge savings to the American taxpayer and the demonstrable benefits to the American farmer, we seem to have a huge problem in the crop insurance program. We don't know whether Congress will fund delivery of the program from one year to the next. We did not know until late this year that there would be adequate funding for the delivery of crop insurance. We did not know until later, October 8, whether the Department of Agriculture would agree to release the money that is being appropriated for crop insurance delivery. This is in spite of the fact that we had already begun insuring crops for which the crop year had begun, such as winter wheat.
    I submit, Mr. Chairman, that it makes no sense to have this kind of uncertainty for a program that delivers $26 billion of crop protection to American agriculture each year. It would be the height of folly to forgo the protection of American Agriculture of a program that is saving the taxpayer over $2 billion annually because of failure to appropriate $188 million in discretionary funding.
    We know why this problem exists. Because there was not enough money to fully fund the program out of mandatory accounts when the 1994 program was enacted, it was necessary, beginning with fiscal year 1998, to fund the sales commissions of agents out of discretionary funds. Because that funding had not been necessary for the previous two years, it was extremely hard to obtain that funding through the appropriations process this year.
 Page 108       PREV PAGE       TOP OF DOC
    Proposals to Cut the Delivery System Are Folly
    We have heard of a lot of different proposals to solve the funding problem for the crop insurance program. Unfortunately, most of these proposals have one thing in common—they would further reduce the already diminished reimbursement to the private sector for delivery of the program. Already, the private sector has gone from 31 percent reimbursement to 27 precent reimbursement for the 1997–1998 crop year, a cut of 13 percent over two years.
    Let's be clear: any proposals that are designed to solve the ''funding problem'' in crop insurance by additional cuts in the delivery system are shortsighted and completely unrealistic! We are already delivering crop insurance more cheaply than all other comparable lines. This is graphically demonstrated in the attached chart from an April, 1997 study by Price Waterhouse.
    The crop insurance program is very labor intensive. It requires much more paperwork than any other line of insurance. However, it has succeeded because of the exceptional service that crop insurance agents and the companies they sell for have delivered to American farmers. If this service is reduced, farmers may no longer buy crop insurance in sufficient numbers to maintain a viable national safety net for American agriculture.
    We often hear the comment ''we want to cut funding for crop insurance, but not benefits to farmers,'' or ''We want to 'fix' the funding problem for crop insurance but farmers cannot pay more for this 'fix.' '' It is sheer folly to think, for any program that involves the delivery of an important labor-intensive service, that you can help the beneficiaries by continuing to cut the delivery system. We can no more continue to cut payments to crop insurance professionals, and expect the same quality and level of service that has made the program successful than we could radically cut payments to other professionals and expect to receive the same quality of service.
    A Funding Solution Must Focus on the Entire Program
 Page 109       PREV PAGE       TOP OF DOC
    To cut the level of reimbursement further will only strangle the delivery system. It will be farmers who will suffer. They will lose the ''safety net'' which Congress intended. Many farmers will not receive adequate service or will have no service at all. The smaller, less profitable farmer would be the hardest hit. Any realistic effort to provide a multi-year legislative solution must look at the entire $1.8 billion program, not just focus on a way to cut the $188 million in funding for sales commissions to agents or on some scheme to reduce the potential for crop insurance companies to earn a profit. Such measures will have only one predictable result—they will force many companies and agents out of the delivery of crop insurance.
    We are willing to work with Congress, the administration, and farm groups, as well as all other interested stakeholders in addressing the funding problem of crop insurance. However, we must insist on looking at the entire program rather than just the part of the funding that goes to the delivery system.
    Improved Management at RMA is Essential
    The Risk Management Agency must be reorganized and streamlined to create a new mindset among the bureaucracy. We need a new partnership mentality in the agency, rather than the command-and-control mentality that exists. We must have more flexible and innovative management that can both reduce delivery costs and allow the development of new products to meet modern agriculture's needs.
    Under the 1994 Crop Insurance Reform Act, FCIC was required to alter their procedures and administrative requirements in order ''to reduce the administrative and operating costs of approved insurance providers and agents in a manner that corresponds to any reduction in the reimbursement rate required under paragraph (4) during the year period beginning on the date of enactment of this paragraph.''
    Unfortunately, the agency has made the program more expensive and burdensome to administer rather than less. The agency has not even quantified the cost of its paperwork and administrative requirements. We in the crop insurance industry feel that the agency must deliver on the cost reductions that were promised before there is any discussion about reducing reimbursement rates further.
 Page 110       PREV PAGE       TOP OF DOC
    We Should Clarify that the Subsidy Flows to Farmers
    In addition, we believe that any changes in the program should eliminate the perception that the subsidy under the program is going to the companies and agents. We might wish to amend the law to more clearly demonstrate what is already a fact of life - the crop insurance subsidies inure to the benefit of the farmer. The farmer's premium could be expense loaded so that the delivery cost is included in the premium. This would conform crop insurance to all other kinds of commercial insurance. All subsidy would go to the growers to apply to the insurance they purchase. The net cost to farmers would be stabilized and the Government expenditures would not increase, but Congress might find it easier to appropriate the needed funds if it is clear that the farmer is the recipient of those funds. Under this approach the delivery cost would be paid by the growers.
    All of you are familiar with the old saying ''If it ain't broke, don't fix it.'' We in AACI don't believe the crop insurance program is broken. On the contrary, we believe it is a tremendously successful program that can and should be improved.
    However, we are fearful that the gains made in this program since 1994 could be lost if the wrong kind of multi-year funding fix is enacted. Thus, we hope this committee will move toward a solution that improves the entire program, a solution that enhances the public-private partnership that delivers this program to the American farmer.
    It would be helpful to know the goals of Congress for crop insurance. What is an acceptable level of farmer participation? Is Congress committed to making the program available at an affordable price to all areas of the country? Is Congress committed to the program stability that is so vital to insuring that some farmers don't fall through the cracks? Is Congress willing to commit to insuring that crop insurance will be available to American farmers well into the next century? We in AACI pledge our cooperation in working with you, as you grapple with these and other issues.
 Page 111       PREV PAGE       TOP OF DOC
     
Testimony of Gene Anderson
    Mr. Chairman, my name is Gene Anderson and I am vice president, operations services, for Southern States Cooperative. Southern States is headquartered in Richmond, VA, and serves over 116,000 farmer-owners in North Carolina, VA, Maryland, Delaware, West Virginia, and Kentucky. We are primarily involved in the manufacture, distribution and sale of farm supplies, including petroleum products, feeds, seeds, fertilizers, as well as grain marketing, for the benefit of our members.
    I am here today on behalf of the National Council of Farmer Cooperatives, which represents nearly 4,000 local and regional marketing, supply and credit cooperatives, and whose member-owners include a majority of America's nearly 2 million farmers.
    We appreciate this opportunity to share our views, and want to express our strong support for changes in the Federal crop insurance program to help achieve the following objectives:
Provide adequate risk protection for farmers on a cost-effective basis; encourage program participation and broaden insurance coverage;
Improve the current delivery system; strengthen private sector involvement; and reduce administrative and related costs.
    Many of these objectives can be achieved by clarifying the ability of farmers to join together through their cooperatives and associations to jointly purchase catastrophic and related crop insurance coverage. In fact, we believe this is what Congress intended when it approved legislation (7 U.S.C. 1507 (e)), which specifically provides that in carrying-out the Federal crop insurance program, the FCIC Board ''may, in its discretion, utilize producer-owned and producer-controlled cooperative associations.''
    Catastrophic insurance compensates producers for crop losses greater than 50 percent, based on average yield, at 60 percent of the expected market price. Such coverage can be obtained by a producer for an administrative fee of $50 per crop per county, not to exceed $200 per county, up to a total of $600. Under current law (7 U.S.C. 1508(b)(5)), the producer is required to pay this administrative fee at the time the producer applies for catastrophic risk protection.
 Page 112       PREV PAGE       TOP OF DOC
    USDA has taken the position that this requirement ''that the producer pay the administrative fee-prohibits a farmer cooperative, or association of producers, from making such payment or purchasing such coverage for or on behalf of its producer members.'' We believe this to be an overly narrow interpretation that is contrary not only to Congressional intent, but long-standing Federal policy aimed at encouraging and assisting farmers in joining together in cooperative self-help efforts.
    Historically, farmers and their cooperative have been viewed as one and the same under various Federal statutes, including farm programs. This is in general recognition that a farmer cooperative, such as Southern States, exists for the mutual benefit of its producer members. As a cooperative, earnings derived from activities involving business done with or for our members are returned to them each year in the form of patronage—which further enhances their farm income.
    Prohibiting farmer cooperatives and associations from paying the administrative fee, or purchasing catastrophic or related insurance, prevents farmers from capitalizing fully on the benefits of cooperative self-help efforts as intended under existing law. It also reduces potential participation in the Federal crop insurance program, and increases marketing, sales and other administrative costs.
    For these reasons, we urge that current law and regulations be amended to clearly allow farmers through their cooperatives and associations to pay any required administrative fee and to purchase catastrophic and related insurance. Such action would help encourage and promote cooperative self-help efforts, improve the current delivery system for Federal crop insurance, provide needed risk protection in a more cost-effective manner, and help achieve the goals of expanding producer participation and coverage under the Federal crop insurance program.
    As Federal farm programs are being gradually phased-out, it is more important than ever that farmers have the ability to join together in cooperative self-help efforts to ''maintain and improve their income; minimize their risk; capitalize on potential new market opportunities; and compete more effectively in a changing global economy.''
 Page 113       PREV PAGE       TOP OF DOC
    To meet these challenges, however, farmers and their cooperatives must be given the tools they need and the opportunity to be successful.
     
Testimony of Richard C. Gibson
    Chairman Ewing and members of the committee, thank you for the opportunity to present testimony today.
    The issue of how to cut the cost of the Federal crop insurance program without decimating it is a thorny one. Congress faces a great contradiction: Finally, the crop insurance program is successful. Participation rates have reached a record level, farmer acceptance is high, and crop insurance stands alone in providing a safety net for agriculture. Yet with this success comes expense. A program that grows from 10 percent to 80 percent participation is also going to increase in cost. And every proposal to decrease those costs must be reviewed with an eye toward what it will do to the participation rate we have all worked so hard to attain. In fact, being here today reminds me of the many times I was called before Congress to defend the program when we had only 35 percent participation. We in the industry have often said that the program is a victim of its own success.
    Having said all of that, let me also say that I think there are ways we can make this program run more efficiently and less expensively, without reducing participation or eliminating service to more risky areas. In my mind, the Government has only two basic obligations in this program: reinsurer and regulator. Everything else the private sector can do and will do better than the Government can. For reinsurance, we in the private sector have never been able to put together a program that can stand without the Government—believe me, if we could, we would. But a combination of enormous agricultural risk, competition from the Government with disaster payments, and underpriced rates make the Government's participation as reinsurer essential. It follows, then, that when Government money is involved, Government oversight must follow. These two roles as reinsurer and regulator are the Government's only mandatory functions.
 Page 114       PREV PAGE       TOP OF DOC
    Let me briefly lay out how this concept could work. The reinsurance entity would operate as a commercial reinsurer, charging companies reinsurance premiums sufficient to build reserves to cover catastrophic loss years. A key element of this reinsurance entity is that it would accumulate surplus in good years, minimizing the potential for huge losses to the Government.
    It would operate outside of USDA and be governed by a board of directors. Potentially, it could be developed similar to FDIC or the Farm Credit System. The Board would have a broad mandate to manage the reinsurance entity effectively as a reinsurance company, authorized to charge reinsurance premiums relative to the risk exposure it assumes and free to offer different types of reinsurance contracts depending on the market demand by companies. The only requirement would be that once an offer is made to one company it would have to offer a similar contract, rated for experience, to all other companies who wish to purchase that type of reinsurance.
    The non-essential functions that RMA currently handles, like rating and product development, would be contracted out to NCIS or the private sector. Through NCIS, the structure is already in place to handle many of these functions; additionally, the NCIS state committee system could easily be expanded to include a forum for agents and producers.
    However, to make the reinsurance entity operate as a commercial reinsurer would also require substantial premium increases in markets that are currently actuarially unsound. Traditionally, the political process has judged increasing rates to an actuarially sound level as unacceptable. Let me be frank—doing so would at least double the premiums for farmers in many areas, effectively pricing most of them out of the market.
    The current system places these underrated and higher risk policies in the assigned risk pool, which is expected to have underwriting losses. In a private market, these contracts would be deemed uninsurable and insurance underwriters would simply turn them down. I believe that all of us have an interest in keeping crop insurance available universally. We can do this under the reinsurance-regulator concept, but it will likely be necessary to keep the assigned risk pool within USDA.
 Page 115       PREV PAGE       TOP OF DOC
    Within this system, we could fix some of the immediate problems we face today. First, we should change the delivery of subsidies, making all of the expenses part of the farmer's premium. Congress can then increase or decrease the subsidy to whatever level it deems feasible within the budget. This would make farmers and policymakers more aware of the true costs of the program and would make the program more simple and more like traditional insurance.
    However, any attempt to make companies compete on administrative expenses when they cannot compete on rates would be foolish. With the competitive and highly volatile nature of this business, the result is easy to predict: companies would be forced to undercut each other on the administrative expense and would try to undersell each other in the areas with profitable business. Less profitable areas like Texas would not see this competition—administrative costs would be high in areas with historically poorer loss ratios. The first loss year would reveal the companies that had gambled on paying their administrative expenses out of anticipated underwriting gain, driving more companies out of business and potentially leaving the Government liable for those policies.
    The CAT system would remain intact, with companies free to allocate CAT policies between the commercial pool and the assigned risk pool. I do think suggestions to modify the CAT program away from the $50 administrative fee toward a premium based system merit consideration. I agree that the CAT program offers some growers an indefensible amount of liability for almost nothing. I would urge caution, however, in making CAT premiums too high because farmers do not consider CAT valuable. If it costs too much, we risk great numbers of farmers dropping out. When the inevitable disaster hits, Congress will be pressured to return to ad hoc disaster payments. This turns into a disaster for not only the budget, but also for confidence in the crop insurance program.
    I might propose keeping the $50 CAT fee for liabilities up to a certain level, perhaps $100,000. Farmers could then buy liability in excess of the $100,000 for a premium. This would keep participation up without driving farmers out of the program.
 Page 116       PREV PAGE       TOP OF DOC
    In closing, let me summarize just a few of these ideas. I think a large portion of the crop insurance program can operate simply and efficiently as a commercial reinsurer, but only if it operates outside the structure of USDA. All farmer subsidies would be loaded into premiums. The Government would continue its role as regulator as well as operation of an assigned risk pool for those higher risk areas that make up the social aspect of this program. CAT policies would continue to serve as the replacement for disaster aid, with a premium instituted for high liability policies.
    This reinsurance entity offers Congress a simple and market-oriented system to fully utilize the private sector. It ensures that a high-quality crop insurance program will remain viable long-term. Additionally, the reinsurance entity-regulator concept I have laid out today solves several of the short-term problems facing the program: the discretionary funding problem, the problem of delivering a subsidy to farmers through companies, and the perception that the Government is offering high liability policies to farmers for nothing.
    I would also volunteer on behalf of the entire industry that we want very much to play an active role in these deliberations. We stand willing to work with this Subcommittee and all the other interested parties in making changes to the crop insurance program that will reduce Government expense, value the important work of the private sector, and help us continue to deliver a quality product to a great majority of America's farmers.
     
Testimony of Robert W. Parkerson
    Mr. Chairman, my name is Robert W. Parkerson. I serve as president of National Crop Insurance Services, on whose behalf my testimony is presented today. We appreciate the opportunity to present this testimony before the Subcommitte on Risk Management and Specialty Crops.
    National Crop Insurance Services
 Page 117       PREV PAGE       TOP OF DOC
    NCIS is a nonprofit trade association whose member companies include every crop insurance company that actively participates in the Federal crop insurance program. NCIS member companies write more than $1.7 billion in MPCI and related revenue products premium with liability totaling nearly $25 billion. These companies service some 1.9 million policies, encompassing all farmers participating in the Federal program, including limited resource and economically disadvantaged farmers. In partnership with the Government, these private companies are the safety net that equitably provides risk management to the American farmer.
    In addition to the Federal program, NCIS member companies write approximately $600 million in private hail and named perils programs.
    NCIS brings significant resources to address the requirements of the agricultural risk management process. NCIS has historically researched and provided to Government and industry highly technical crop risk information in order to:
    develop fair underwriting guidelines so that crop risks may be adequately evaluated and rated prior to executing an insurance contract;
    (2) develop and test accurate loss adjustment procedures to appraise crop damage at any stage of plant growth;
    develop appropriate and adequate premium rates and insurance policy terms and conditions specific to each crop and location;
    develop professional training and educational programs for agents, adjusters, farmers and the agricultural community; and
    develop research programs and innovative procedures that look beyond the traditional agricultural programs to provide risk management solutions to meet the future agricultural environment.
    Industry has directly supported an NCIS type trade association since the early 1900's. As an insurance advisory organization, NCIS is licensed and approved to operate by the individual insurance departments in all fifty states. Internally, NCIS has a diverse, well-trained professional and technical staff, many holding advanced degrees in Agricultural Economics, Statistics, Soil Chemistry, Botany, Plant Science, Actuarial Science, Computer Science, Computer Engineering, Education and Mathematics.
 Page 118       PREV PAGE       TOP OF DOC
    The NCIS organizational structure of member-companies taps a reservoir of talent and experience within the crop insurance industry through a series of technical standing committees and regional/state committees which deal with a diverse set of subject matter including loss adjustment procedures, statistical data gathering, industry public relations and industry legal issues.
    Recently, our Board of Directors initiated a long range planning committee to address the future needs of the crop insurance industry through the optimal utilization of NCIS resources. As a part of this process, the committee is discussing future alternative scenarios for NCIS as the industry continues to evolve. Some of the alternatives being discussed and evaluated have been put forth by House and Senate staff members. All discussions are in the preliminary stages and will require additional evaluation. Future meetings are scheduled and as our process takes form, we envision sharing this information with Congress, the Administration and the Agency.
    As we sit here today, participation in the Federal program is at historically high levels and the need for ad hoc disaster assistance in the agricultural sector is a thing of the past. Private insurance company participation along with Government's continued emphasis on risk management as opposed to disaster assistance, have ensured that the American farmer, the American taxpayer and the American consumer are protected from absorbing the full cost of crop damage and failure in the United States.
    Revenue products are developing and gaining acceptance as they are tested in various states with an expanding list of crops. Continued research and testing are necessary to ensure that new revenue programs are sound and economically feasible. Again, it is the private companies working with major agricultural universities and the Government that have brought these products forward and will continue development in this area.
    The successes of the current programs are attributable to the public-private partnership. Certainly, since the 1994 Reform Act, the increases in farmer participation coupled with extremely favorable growing conditions have buoyed the program. It is, in many ways, the successes of the programs more so than any failure, that have brought us to this room today.
 Page 119       PREV PAGE       TOP OF DOC
    With the 1994 Reform Act and the Freedom to Farm Act, we have entered a new era of agricultural policy. The Administration and the Congress should be applauded for their efforts in bringing this new agenda to agriculture. Congress drew a blueprint and it is working better and more economically than anticipated. However, these major policy changes have not had the opportunity to be tested beyond a few years of success. We have not observed a major shock since the 1994 Reform Act. Years such as 1993 and 1988 were not anomalies but are part of weather cycles that can be anticipated to be repeated in the future. We need to allow time for the current program to stabilize and test it under extremes of favorable and highly volatile conditions before we try to reform the Reform.
    Part of the stabilization process is to achieve a permanent solution to funding the program. The process of significant program changes and funding on an annual basis detracts from the primary goals of both the Government and private sector to provide service and risk management to all farmers.
    It is the nature of private companies to develop in three, five and even 10 year planning horizons which allows economic distribution of research and development costs, market growth and focus on key business areas. The shifting sands of program funding tied to the complex political process of appropriations places all participating companies, both regional and national carriers, at a disadvantage and inhibits potential entrants into the marketplace. It also increasingly risks the ability of private companies to adequately provide full benefits and services to all farmers in all regions of the country.
    For the Government, the instability of funding places program benefits and delivery services at jeopardy and puts increasing pressure on Government's ability to respond to the needs of all farmers equitably. The annual debate on funding results in confusion and instability within the public-private partnership and puts at most risk the farmers that the program is designed to protect.
 Page 120       PREV PAGE       TOP OF DOC
    The uncertainty over the Federal crop insurance program deprives the farmer of the chance to hedge planting decisions when early opportunities occur (12 to 18 months before harvest time), which is a fundamental part of sound risk management. Constant changes in the program coupled with concerns over funding for the benefits and services available to the farmer, creates an unnecessary atmosphere of uncertainty for both the farmer and the lending institutions that back agricultural production.
    Admittedly, there are problems with the program and issues that will need to be the focus of cooperative efforts between the Government and industry to resolve. It is not our intent to present a laundry list of these issues in this forum today. Suffice it to say, we believe these problems are manageable and long-term solutions can be developed in an atmosphere of mutual cooperation. With the appointment of Gus Schumacher, and the continued efforts of Dallas Smith, industry is optimistic that a dialogue can be established in order to provide an effective resolution of program issues as they emerge. The benefits and cost incentives for achieving resolutions that provide long-term equitable solutions to the issues facing agricultural risk management programs are shared by both the Government and private industry. Cooperation and consensus can only benefit all participants.
    Industry's fundamental concerns are stabilization of program funding and consistent administration of the program with appreciation and recognition of the vital role that both Government and private industry have in agricultural risk management. Funding stabilization, consistent administration of the program, and recognition of private industry as a full partner with Government are critical to continuing a viable private sector presence.
    These issues become even more critical with the ever-mounting concerns regarding El Nino. Obviously, no one can predict when and where the potential losses to the agricultural sector resulting from uncertain weather events such as El Nino will occur. Crop insurance is in place and can be an effective risk management tool for growers to protect themselves, if they have confidence in the stability of the program and purchase adequate coverage. We would be remiss in our responsibilities to the American farmer and ultimately the American taxpayer if we did not take the necessary steps to stabilize the crop insurance program, which is the primary financial safety net for American agriculture.
 Page 121       PREV PAGE       TOP OF DOC
     
Testimony of Jerry Newby
    Mr. Chairman, my name is Jerry Newby and I am a cotton and soybean farmer from Athens, AL. Today I am presenting joint testimony on behalf of the National Cotton Council, American Farm Bureau Federation, National Corn Growers Association, National Association of Wheat Growers, National Barley Growers Association, National Grain Sorghum Producers Association, American Soybean Association, and Alabama Farmers Federation. We appreciate the opportunity to present our views regarding needed reforms of the crop insurance program and our support for legislation that would ensure payment of crop insurance delivery expenses through normal operation of the program.
    Earlier this year, Congress crafted a short-term solution for funding crop insurance delivery for FY 1998 by redirecting funds from other agricultural discretionary spending accounts to the crop insurance account. We do not believe that such a practice is sustainable over the longer term, thus creating a desire to find a more permanent, mandatory spending solution to the reimbursement problem. Additional needs for administrative and operating (A&O) expenses are projected to be approximately $220 to $240 million per year for the period 1999 to 2003. Finding a solution will be difficult, but we believe that a workable plan which shares the ''cost'' burden equitably among all parties with an interest in the crop insurance program—agents, companies, producers, and the Federal Government—can be found. Furthermore, we believe it is imperative that the offset to fund the program be enacted into law no later than April 1, 1998 to avoid losing available funds to the appropriations process.
     We will focus our testimony on this point and suggest to the committee that a significant portion of the funding offsets can be achieved within the current crop insurance program funds. Collectively, we have concerns about cuts to other ag programs to fund crop insurance delivery expenses and would ask the opportunity for the farm organizations to provide input to the committee before proposing cuts in any other ag programs.
 Page 122       PREV PAGE       TOP OF DOC
    Funding offsets: Offsets by companies and agents:
    Under the new Standard Reinsurance Agreement, the Administrative and Operating (A&O) expense reimbursement rate for the Multi-Peril Crop Insurance program is set at 27 percent of the full premium. Partial privatization of the crop insurance program would discontinue the direct reimbursement for A&O expenses from FCIC to private companies. Instead, such expenses would be competitively priced by companies as part of the crop insurance premium charged the producer. To offset this additional premium that creates a portion of the needed Federal budget savings, the amount previously paid to companies for A&O expenses (currently 27 percent ) and savings created through other modifications I'll discuss later would be added to the Federal premium subsidy already applied to multi-peril crop insurance.
    Specifically, partial privatization would require insurance premiums to be quoted in two parts. The first part of the premium could be the actuarially determined risk premium. It would continue to be the same for all producers of the same crop with comparable risk histories in a given county or other appropriately determined geographical area. However, we would also encourage a thorough exploration of an individualized risk rating system.
    The second part of the total crop insurance premium would be an A&O expense charge that explicitly identifies the portion of the total premium associated with commissions, loss adjustment activity, education and other delivery expenses. This portion of the premium would be competitively determined by market forces. However, the A&O portion of the premium would be capped at a maximum percentage of the risk premium to shield producers from noncompetitive market circumstances.
    A new maximum limit should be established at a lower level (e.g. 24 percent), with comparable adjustments being made to other crop insurance policies such as Crop Revenue Coverage (CRC). The A&O expense rate should be computed as a percentage of the risk premium which would provide for a level of comparability to the current calculation. Licensed companies, agents, trade associations and cooperatives would be encouraged to compete in the marketplace on the A&O expense portion of the total premium under the established maximum cap. A three percentage point reduction in the current A&O expense rate would provide savings estimated at $42 million per year which would offset additional producer premium costs referenced earlier.
 Page 123       PREV PAGE       TOP OF DOC
    Offsets by producers: To help offset funding needs, make catastrophic insurance program (CAT) more like other insurance programs, and to reduce moral hazard, we propose requiring producers to pay a modest portion of the total CAT premium.
    Currently, CAT provides coverage at 50 percent of the producer's Actual Production History at 60 percent of the expected price, with producers paying an administrative processing fee instead of an insurance premium. The processing fee is $50 per crop, per county, although the producer's total fees for CAT coverage cannot exceed $600 per farm. The fee is waived for limited resource farmers, defined as having less than $20,000 in income from all sources in the previous two years.
    Payments on CAT policies are made to insurance companies and agents based on an imputed premium (i.e. what the premium would have been if it had been actuarially determined for 50 percent yield coverage at 60 percent of the expected price). In some areas of the country, imputed premiums are high because the value of the crops and potential insured liability are high. This introduces an element of moral hazard into the CAT program and might provide a disincentive for the companies to sell buy-up coverage rather than the CAT coverage. In essence, the companies are able to make significant underwriting gains and yet undertake very little risk. For example, in one instance, a 372-acre California grape policy carries $328,901 in liability, a $15,459 imputed premium, and yet the government only collects $200 in CAT administration fees. For comparison purposes, a 372-acre California wheat policy carries $21,879 in liability, a $1,496 premium, and the government collects $50 in CAT administrative fees. Obviously, the government is assuming a great deal of liability in the grape example, and yet collecting only a small administrative fee.
    We propose changing the current CAT administrative fee of $50 per crop per county to a producer-paid premium of up to 10 percent of the imputed premium but no less than $50—with allowance for a fee waiver for limited resource farmers. This would generate estimated savings of $34 million per year. A review of other CAT financial considerations should be undertake—including company receipts under excess loss adjustment provisions— in search of potential savings.
 Page 124       PREV PAGE       TOP OF DOC
    Offsets by RMA: We believe the Risk Management Agency (RMA) should be streamlined with a savings target of at least $10 million per year. Savings should be accomplished primarily by eliminating authority to develop new products for the major commodities and reducing reporting requirements. We believe that the private sector will be more cost effective in developing crop insurance products that will be successful in the marketplace. For fruits, vegetables and minor crop acreage, we suggest that FCIC either keep the responsibility to develop new products, or develop an incentive for private industry to develop such products.
    We also encourage the Subcommittee to explore major structural changes to the crop insurance program that makes RMA an independent oversight agency.
    Summary
    In summary, it is desirable for all parties concerned with crop insurance to find a permanent solution to the A&O expense reimbursement problem. Federal budget reality severely limits the opportunity for a long-term discretionary funding solution. Therefore, crafting a mandatory spending solution through legislation appears to be the best, albeit not very attractive, alternative.
    The concept of partial privatization and mandating other program adjustments are efforts to spread the cost of the solution across the wide spectrum of program beneficiaries to achieve the level of funding necessary to maintain a viable Federal crop insurance program. At issue for all interested parties is the question of ''who pays the bill?'' associated with finding an A&O funding solution. We have suggested:
    1. Insurance companies and agents be allowed to charge a reduced maximum level of A&O expenses, and are subject to competition in determining the A&O charges within the cap.
    2. Insured farmers shoulder an increase in their total crop insurance cost. Those utilizing CAT insurance, except those with small liability coverage, will become subject to premiums, although still at least 90 percent subsidized, that are more reflective of the liability or benefit associated with their farm size and/or crop value. Farmers purchasing ''buy-up'' policies will pay for the A&O expenses, but will have at least a portion of that increased cost offset through additional subsidies based on savings from other suggested program changes, and in many cases, will benefit from competition among insurance providers.
 Page 125       PREV PAGE       TOP OF DOC
    3. The Risk Management Agency should be restructured to create greater efficiency
    within the agency and further limit its cost to the government through elimination or reduction of specific activities. Their authority to work on new product development should be eliminated, turning that responsibility over to the private sector.
    USDA is engaged in a review of the Nonstandard Underwriting Classification System (NCS) and is expected to propose new rules next year. Until such time as USDA can implement a new system, we support a moratorium on the application of current regulations to new NCS selections and a nationwide review, based on the recent administrative adjustments to the NCS application, of those individuals who are currently subject to the NCS.
    One final issue we would like to bring to your attention does not deal with the funding issue but should be addressed in any legislative effort. It is the issue of the Federal Crop Insurance
    Corporation board representation. Under current law, the management of the FCIC is vested in a board which is subject to the general supervision of the Secretary. The Board consists of:
    (1) The FCIC manager; (2) The Under Secretary responsible for the FCIC program; (3) one additional Under Secretary of Agriculture as designated by the Secretary (past and current representative has been the Under Secretary for Research, Extension and Education); (4) one person experienced in the crop insurance business who is not otherwise employed by the Federal Government; and (5) three active farmers who are not otherwise employed by the Federal Government.
    The board is appointed by, and holds office at the pleasure of, the Secretary.
    While there is significant debate on whether the make-up of the Board should be altered, we believe that decision is better made after we know more about the future role of FCIC. For example, will it continue as it does now, or will it become more of a regulator? We do, however, believe that if the current board roles and responsibilities are continued, the appointed non-government representatives should have increased autonomy in making decisions.
 Page 126       PREV PAGE       TOP OF DOC
    We thank you for this opportunity to present these concepts and ideas for fixing the funding problems that will plague the crop insurance program over the next five years. There might be ideas presented by others which would make more radical changes to the current program. We prefer a more cautious approach which calls for fixing what is broken and leaving what works well alone. We look forward to working with you to craft legislation that meets the needs of farmers and helps guarantee food and fiber security for this nation. I would be happy to answer any questions.
     
    "The Official Committee record contains additional material here."