SPEAKERS CONTENTS INSERTS
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52–554 CC
1998
1998
REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM
HEARING
BEFORE THE
SUBCOMMITTEE ON RISK MANAGEMENT
AND SPECIALTY CROPS
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
NOVEMBER 12, 1998
Serial No. 105–67
Printed for the use of the Committee on Agriculture
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COMMITTEE ON AGRICULTURE
ROBERT F. (BOB) SMITH, Oregon, Chairman
LARRY COMBEST, Texas,
Vice Chairman
BILL BARRETT, Nebraska
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
JOHN T. DOOLITTLE, California
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
ED BRYANT, Tennessee
MARK FOLEY, Florida
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
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ROY BLOUNT, Missouri
CHARLES W. (CHIP) PICKERING, Mississippi
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SCOTTY BAESLER, Kentucky
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
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MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
Professional Staff
PAUL UNGER, Majority Staff Director
GREG ZERZAN, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
VERNIE HUBERT, Minority Counsel
SUBCOMMITTEE ON RISK MANAGEMENT AND SPECIALTY CROPS
THOMAS W. EWING, Illinois, Chairman
LARRY COMBEST, Texas,
Vice Chairman
JOHN T. DOOLITTLE, California
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
RON LEWIS, Kentucky
ED BRYANT, Tennessee
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MARK FOLEY, Florida
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
GARY A. CONDIT, California
SCOTTY BAESLER, Kentucky
SANFORD D. BISHOP, Jr., Georgia
EARL POMEROY, North Dakota
JOHN ELIAS BALDACCI, Maine
VIRGIL H. GOODE,Jr., Virginia
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD BOSWELL, Iowa
(ii)
C O N T E N T S
Boswell, Hon. Leonard L., a Representative in Congress from the State of Iowa, opening statement
Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, opening statement
Peterson, Hon. Collin C., a Representative in Congress from the State of Minnesota, opening statement
Thune, Hon. John R., a Representative in Congress from the State of North Dakota, opening statement
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Witnesses
Christofferson, Dennis, president, AGForce Insurance Services, Inc., on behalf of Crop Insurance Research Bureau, Inc.
Prepared statement
Cyre, Phil, producer and vice-president, South Dakota Farmers Union
Prepared statement
Edinger, Chet, producer and president, South Dakota Wheat Inc.
Prepared statement
Gerdes, Ruth, producer and crop insurance agent, Auburn Agency
Prepared statement
Kauer, Thomas J., vice-president, Spreckels Insurance, on behalf of the Independent Insurance Agents of America
Prepared statement
Koester, Wally, producer and president, South Dakota Corn Growers Association
Prepared statement
Larson, Dennis K., region 4 national director, Crop Insurance Agents of America, L & S Agency
Prepared statement
Miller, Mike, president, Blakely Crop Hail, Inc.,
Prepared statement
Olsen, Thomas R., producer and vice-president, South Dakota Farm Bureau
Prepared statement
Tschakert, Delbert, producer and treasurer, South Dakota Soybean Association
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Prepared statement
White, James L., president, Norwest Bank South Dakota, N.A.
Prepared statement
Zirschky, John, Associate Administrator, Risk Management Agency, U.S. Department of Agriculture
Prepared statement
Submitted Material
Cruea, Cindy, national second vice-president, Women Involved in Farm Economics
REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM
NOVEMBER 12, 1998
House of Representatives,
Subcommittee on Risk Management
and Specialty Crops,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 9:02 a.m., in the County Administration Building, 415 North Dakota Avenue, Sioux Falls, SD. Hon. Jerry Moran (acting chairman of the subcommittee) presiding.
Present: Representatives Thune and Boswell.
Also present: Representative Peterson.
Staff present: Ryan Weston, deputy staff director, Subcommittee on Risk Management and Specialty Crops; Anne Simmons, minority consultant, and Robert J. Fouberg, office of Mr. Thune.
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OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS
Mr. MORAN. Good morning. This meeting of the Subcommittee on Risk Management and Specialty Crops will come to order. We are here to review the Federal Crop Insurance Program, and we are delighted to be in South Dakota and delighted to hear from those of you who are here today to tell us what we need to know about this topic.
Let me express Mr. Ewing's regret. Mr. Ewing is a Congressman from Illinois, the chairman of this subcommittee, and he struggled with the weather most of the day yesterday to get here, and when I arrived last night, I discovered that he could not get on the plane from Minneapolis/St. Paul to Sioux Falls, the plane I was on. Had I known that my chairman was unable to get on the plane, I would have given him my seat, but it didn't turn out that way. He sends his regrets. The purpose of this hearing, and Mr. Ewing is very interested in this topic, and I think the next Chairman of the House Agriculture Committee will most likely be Mr. Combest of Texas, and he's expressed his interest in having improvements to risk management tools, particularly crop insurance as a major component of the total Agriculture Committee's agenda for 1999 and beyond.
Mr. Ewing had an opening statement that he was prepared to give. I have modified it a bit and made it mine, so the parts that you agree with can be mine and the parts that you disagree with can be Mr. Ewing's in his absence.
Again, let me tell you that we're pleased to discuss Federal Crop Insurance here in South Dakota. This hearing is intended to be the first in a series of hearings to be held around the country to hear views and opinions about this program from producers, agents, and from companies out in the field. As many of you are aware, the Federal Crop Insurance Program experienced a number of major changes in 4 short years beginning in 1994 with reform legislation, which repealed the authority for ad hoc disaster spending and required mandatory purchase of catastrophic coverage.
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Several major changes occurred in this year alone. In an effort to provide additional stability to the program, the 1998 agricultural research legislation transfers delivery costs of the program from discretionary spending, Congress's discretionary spending costs to the mandatory spending side. In large part that was accomplished by reducing the reimbursement rate from 27 percent to 24.5 percent. The most recent changes of the program occurred with our passing of the 1998 disaster relief legislation that occurred late in October. That was aimed at helping producers survive a double hit of disastrous low prices, something we certainly experienced in Kansas. The relief package provides about $2.5 billion in disaster assistance and $3 billion for market loss and $1 million in reductions in taxes.
In an effort to preserve of the integrity of the Federal Crop Insurance Program, Congress asked Secretary Glickman to provide incentives to those who purchased crop insurance in 1998. The legislation also requires that producers who waived crop insurance, but who also received disaster assistance must purchase crop insurance for the next 2 years. We remain hopeful that Secretary Glickman will uphold this long-standing commitment to the program by implementing this disaster package with the least amount of negative impact on the Crop Insurance Program. This program, I know, from visiting with your Congressman, Mr. Thune, and from what I know about agriculture in the Northern Plains, crop insurance is an awfully important part of South Dakota agriculture.
Policies cover everything from corn to wheat, oats, rye, soybeans, grain sorghum to popcorn and millet, barley, flax, potatoes, and sunflowers. Of all of the policies sold in South Dakota about 80 percent are buy-up policies, and 20 percent, catastrophic.
The USDA has sought to be responsive to South Dakota producers by announcing a number of new policies and initiatives over the last year. These initiatives include an increase of coverage levels, yield floors, and authorization for an 85 percent spring wheat income protection pilot plan for spring wheat only counts.
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FCIC has also authorized an income protection plan for barley, increased coverage levels to 85 percent for South Dakota corn and soybeans, and bank and revenue assurance on South Dakota corn and soybeans as well.
Improving the Federal Crop Insurance Program has been a personal goal of Mr. Ewing and is certainly a goal of this committee. Overall, it's a program that generally works, but like most things it has its problems and it can be improved. We are here today to learn your views about how the program is working or not working, what parts of the program work well, which elements of the program need improvements. If there's a better way to do business, we'd like to hear about it this morning. So this subcommittee is here for that purpose of learning about crop insurance in South Dakota, and we look forward for your testimony.
Mr. Boswell, do you have a opening statement?
OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA
Mr. BOSWELL. Short, but thank you. I do also appreciate the travelling to be here. In fact, in flying back and forth to Washington and talking about it on the various flights that the encouragement from John and you for me to be here, and I decided to come.
I'm glad to be here because I, too am a farmer. I live on a farm down in south central Iowa. In fact, if you drive down to Interstate 35 at the 5 or 6 mile marker along there and see my cattle, if there's something wrong, stop and do something about it.
I wasn't in Congress when this current farm bill was passed. I have made the statement that if I would have been there, I would have supported it. I know there are many things about it the farmers like, and I appreciate that. I was a long-time grain farmer myself, and of course, run livestock, but I have been concerned. We hear all this talk about safety nets and so on. I've been concerned about that, so I try to watch how the performance of the crop insurance works. I felt like there was a shortcoming there and I'm just not too sure what to suggest to try to repair it. So when we talked about it at the beginning of getting the year, I heard the Secretary say that, and I think he was sincere about it, that with the big disaster program we had to come up with, with all the grain and livestock prices being down, that's a disaster. At least, if you don't think so, get out and invest in farming. You would understand that, and I guess most of you understand that, but disaster can come in different ways, and so is the crop insurance adequate to meet our needs? And I don't think it is. So I'm very anxious to hear what you have got to share today and see what we can do to make whatever possible improvements if any and come to grips with it, and see what we can do.
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I'm happy to be here and looking forward to the rest of the morning.
Mr. MORAN. I appreciate Mr. Boswell being here and also Mr. Thune, our host—thank you for inviting the subcommittee to South Dakota to listen to your producers, and we appreciate the hospitality that's been extended to us both last night and today, and John, thank you for allowing to us come to your district.
OPENING STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. THUNE. Thank you, Mr. Chairman. Let me just echo what's already been said, and I'm delighted by the way. Welcome to South Dakota. The gentlemen from Kansas and Iowa and Minnesota, I think we have our States fairly well represented. We all have people in our districts that we represent that are very much interested in this issue and how to resolve it. I want to thank all of you for coming here. I know there were some adverse weather circumstances, and that's what prevented the chairman of this subcommittee, Mr. Ewing, from being here.
I do believe there is an interest in both the subcommittee level and in the whole committee level. I had a conversations with Larry Combest from Texas, who will be the chairman of our full committee to this fix this program. I think the objective of this hearing today is to hear from the producers and hear from insurance agents and others about what we can do to reform the program in such a way that it works. And I think the bottom line is, one, there are problems with multiple year losses; and two, problems with the coverage levels, and we need to figure out how we make the Crop Insurance Program work as a risk management tool in this current state, in the current farm policy we have today. My own view is there may be some necessity for additional resources being committed to this, and I think the Congress is going to have to decide whether or not we want to invest the additional dollars that are necessary to make that program work well and work right, or are we going to—as it has been as a pattern for the last few years, come in with supplemental disaster emergency assistance packages?
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My own view is we are much better served if we can come up with a public/private partnership knowing there's going to be a certain inherent Government involvement or a certain subsidy, but in the long run we are much better served if we have a program that incorporates private sector involvement along with the public partnership there and allows our producers to help hedge against the risk of loss on their own.
So, I'm very anxious to hear what our producer groups have to say today, what those who administer the program, insurance agents have to say, and others of the public who would like to comment because this is an important issue. It's something that I've been talking about for a long time. It's something that I think has an increased focus, increased level of awareness, certainly at the Agriculture Committee level in the Congress and I think, in the full Congress. Anybody who deals with agriculture today understands that with the current environment we were in, we have to have a crop insurance program that works for our producers which really achieves the objective I think that was set out for us to achieve. So, I'm anxious to hear from our groups this morning. I'm delighted to have all of you here, and I look forward to testimony and question and answer, and hopefully you can give some suggestions in terms of solutions. Again, I think the question we are trying to answer here today is how can we improve this program, and I think we can do so. Thank you, Mr. Chairman.
Mr. MORAN. Thank you, John.
Mr. Peterson of Minnesota.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. PETERSON. Thank you, Mr. Chairman for letting me join up with your subcommittee. I'm not a member of this subcommittee, but I'm very interested in this topic, and I hope that at this meeting somebody here can have a bolt of lightning, and tell us how to fix this so it works. I come from an area that demonstrates what the problems are. We have had multiple year disasters up in my district, and the current system just doesn't work when you get into that kind of situation. We are in a real mess right now. I'm not sure even if we fix the crop insurance system perfect that it would solve our problems. We have for the first time a lot of land up there that nobody wants to rent. It may go idle. It's a big mess. What I'm concerned about at this point is if we are going to make this whole thing work, we have got to get the crop insurance system so people can buy insurance to cover their risk, and what I'm concerned about kind of falls into what John was talking about is that, it's probably going to take considerable resources to do this unless we take some kind of a wholly different approach where we get the Government out all together and let the private sector do its thing. I'm not sure it will work.
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What I'm concerned about—after all of the money we put out in this last bill is how we are going to convince our colleagues, especially our urban and suburban colleagues, that we should put another few million dollars into agriculture, which is what the Secretary told me a few weeks ago he thought would be necessary, and I still think that this—as I understand why all of this happened, we just put a lot of money out to people that haven't lost any money at this point in commodities where they have been doing great. The way the transition payments are structured, they go the wrong way in my opinion. I think that this bill we just passed is going to come back and haunt us, myself, and it's going to make it much more difficult to get the resources we need to get to fix this crop insurance system. So one of the things that I'm going to try to do, and one of the reasons I'm here today is to get around the country and get to talk to other people around the country and try to figure out how we can put this together. Even if we came to an agreement in the Midwest, if we don't get California into this system or the South into this system, I just don't see how we can sustain it, and that's going to be one the big challenges is that, figuring out how to do that. Like I say, I hope there's somebody here today that's going to give us the answer, and I appreciate the chance to be with you.
Mr. MORAN. Mr. Peterson, thanks for joining our subcommittee.
Recently, I spoke to a Rotary Club in one of my communities, and the Methodist minister of the church there was president of the Rotary Club. He took me aside before I spoke to say you have to be done at 1 o'clock. We have very precise time limitations. I thought that was odd coming from a Methodist minister, different from what I was accustomed to in our church, but it's like the same thing this morning where an elected official is asking you all to be brief and to limit yourself to 5 minutes. There may be some credibility lacking there, but I would ask you to do that if you can summarize your remarks. We would like to hold ourselves to a 5-minute time limitation from each witness, and so summaries would be useful. Your written testimony will be made part of record and shared with our colleagues in Congress. And I'm now ready to begin with our first panel.
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Mr. Tom Olsen who is a producer and a vice-president of South Dakota Farm Bureau is our first witness this morning. Thank you for joining us.
STATEMENT OF TOM OLSEN, PRODUCER AND VICE-PRESIDENT, SOUTH DAKOTA FARM BUREAU
Mr. OLSEN. Good morning, Mr. Chairman and members of the subcommittee. My name is Tom Olsen of Wessington Springs, SD. I'm the vice-president of South Dakota Farm Bureau and raise corn, wheat, soybeans, and sunflowers on our family farm in east central South Dakota. I wish to thank each of you for holding this hearing and for your interest in participating today on behalf of over 10,000 farm bureau members and all South Dakota farmers and ranchers, we appreciate your attention to this important matter.
My comments this morning will deal in two parts. First of all, I will give the Farm Bureau philosophy and policy, and then my second part will be some personal reflections that I have on crop insurance. Farm Bureau supports development of risk management tools that can supplement or be an alternative to the current Crop Insurance Program. We support expansion of current revenue insurance products and development of new risk management tools that may be offered by private insurance companies and re-insured by the Federal Government. We continue to believe that participation in crop insurance should be voluntary, and that the purchase of crop insurance should not be a requirement for participation in other Government programs.
Participants should be able to opt out of the Crop Insurance Program, but if they do opt out, they should not be able to collect insurance or other disaster payments. Extra harvest expense coverage should also be available. The application and reporting and claim procedures must be simplified to make the Crop Insurance Program user-friendly and uniformly administered. We favor regional flexibility in setting dates for planting, harvesting, and reporting. Producers of specialty crops should have the opportunity to choose from price selections that accurately reflect market prices when making crop insurance purchasing decisions.
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The insurance industry must provide timely adjusting services. The Secretary of Agriculture should have the right to extend the planting deadline for crop insurance purposes, for untimely planting due to weather delays, but in the event that he or she does this, then the private companies should be given some loss protection from the Government. We support the availability of a crop insurance program for all crops, and we encourage education programs that provide risk management and risk assessment as well as professional education for farmers in marketing, financial management, and Government regulations.
As far as some personal reflections on crop insurance, in my opinion, MPCI in its present structure is not as attractive as it could be. The most often heard complaint I hear from producers is those who suffer a multi-year loss are subject to lower guaranteed yields in progressive years. Higher TDLs result in lower premiums and conversely lower TDLs cause premiums to increase. Accordingly, a single year event will cause yields to drop some, but when successive disasters occur, yields can decrease enough to make it questionable whether or not to continue coverage.
Crop revenue coverage and revenue insurance are good concepts, but producers that I visit with are concerned that current low commodity prices could make the CRC program unaffordable. I personally have elected for CAT coverage in the years since MPCI has been required to participate in the Federal farm programs, and I am glad that CAT has been an option, but the only situation I have seen where indemnity occurs is if there's virtually no production. That would normally occur only if wet field conditions totally prevented planting situations.
If wholesale changes are made to the program, I would suggest structuring MPCI more like hail insurance. Producers could select either a higher cost program with zero deductible or more economical coverage after a deductible was met, and I have never seen the justification in requiring MPCI for 1 or 2 years following a disaster relief program. What other type of insurance program does not require a decision to carry coverage before the policy is needed?
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These conclude my remarks, and I appreciate the chance to testify.
[The prepared statement of Mr. Olsen appears at the conclusion of the hearing]
Mr. MORAN. Mr. Olsen, thank you. Our next witness is Phil Cyre, producer and vice-president of South Dakota Farmer's Union. Mr. Cyre, welcome.
STATEMENT OF PHIL CYRE, PRODUCER AND VICE-PRESIDENT, SOUTH DAKOTA FARMER'S UNION
Mr. CYRE. Thank you. Mr. Moran, members of the subcommittee, I want to thank you for coming to our State to enable us to more easily access to the process. I appreciate that. I have participated in other testimonies and forums, and I have been very pleased with risk management's efforts to improve crop insurance especially for the prairie pothole region. We have been a significant supplier of information to the agency, and they have attempted to respond.
My remarks will be dealing with our support of certain changes in crop insurance that we feel may be beneficial in the near term. We feel we should expand levels of coverage including consideration of increased premium subsidy on the part of the Treasury. We also believe that improved preventative planning coverage in our area is essential. I once again restate our belief that the provision for contiguous and preventative planning must be removed, and I realize that we have talked about that before, but I am adopting the great State of Missouri's philosophy on this one.
I would like to see the FCIC Board expanded either in the form of a new advisory board or at least to include the presence of a person from this region of the country where we have a unique situation and the need to management risk in the case of preventative planting. We believe strongly that FCIC Board lacking that presence led to some of the shortfalls and failures of the policy for our region merely by lack of understanding of our needs.
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Expanding covered crops is essential especially as we seek to adapt our marketing and our growing patterns to a new or more open market philosophy rather than looking to grow crops on a structured system of a farm bill.
If possible, we would like to see livestock indemnification in cases of disaster included in some form in revenue insurance. We also believe that available options for weather-related disaster relief should be provided to allow producers to use several relief programs capping maximum benefits rather than the current law which requires producers to select from among several options and choose only one avenue of relief. We think we can be more flexible in times of disaster perhaps through the insurance program.
That summarizes the main points of my remarks. I do want to bring the attention of the committee to my comments and the conclusion of my testimony. We encourage the subcommittee to consider new pilot programs including policy options which couple benefits to voluntary production levels and conservation practices. We are working very hard developing new concepts coupling crop insurance to production levels and conservation practices that we believe after examination will provide significant savings to the Treasury and considerable benefits to the producers needing to manage risk.
In closing, I will comment to you on my belief in the need for risk management insurance. We have before us the FAIR Act, which in my opinion can best be related as the current version of the Titanic. It's a beautiful ship. It's a great, wonderful work of art, but it doesn't have a enough lifeboats on it because there are a lot of people who think it's unsinkable. It is not a perfect piece of legislation. I was present when the Agriculture Committee did not pass the FAIR Act. It didn't pass that day, and I doubt seriously in its present form and under our current conditions that it would pass today without some modification. I encourage this committee to share with us and to agree perhaps with me that crop insurance in its truest form is designed to provide insurance when we fail to produce. It is a very difficult challenge then to encompass in that in an actuary, sound manner coverage for when we overproduce, or when world economies fail and falter. I do not fault risk management for being unable to meet the current challenge. It was never designed to do so, and frankly, I hope we never have to pay the premiums that would be required to ensure against the world economic collapse.
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So as we move forward into 1999, we will not perhaps see the opportunity to market strategically that we did in 1998. That will be the true test of both the FAIR Act and crop insurance, and I challenge all persons involved to look to revenue assurance with some reason coupling it more to production losses rather than world economies. Thank you.
[The prepared statement of Mr. Cyre appears at the conclusion of the hearing.]
Mr. MORAN. Thank you, Mr. Cyre.
Mr. Delbert Tschakert, who is a producer and treasurer of the South Dakota Soybean Association. Mr. Tshakert.
STATEMENT OF DELBERT TSCHAKERT, PRODUCER AND TREASURER, SOUTH DAKOTA SOYBEAN ASSOCIATION
Mr. TSCHAKERT. Good morning, Mr. Chairman. I too would like to thank the Subcommittee on Risk Management for coming to South Dakota and listening to the concerns of the South Dakota producers. I guess I'm going to speak today on two issues that we feel pertinent particularly to the soybean side of it, and that is, at a meeting that I attended in Aberdeen last spring, we talked about the different levels of premiums being charged to soybean growers in South Dakota that varies depending on the row width in which they plant the soybeans, and as we have converted to no-till cropping situations for not only production reasons, but also for environmental reasons the people who are solid seeding their soybeans are, in essence being penalized by paying a higher premium on the soybeans than those that produce from 30 or 30 inch rows.
It is our concern with the proven technology and the no-till industry today that soybean production should be soy production and just that. I don't have a problem with there being a higher premium paid for going out and flying soybeans on and having them cultivated in some fashion to say that I have planted them to get coverage, but we certainly should not be penalizing those people who from normal cultivating practices are no tilling, protecting the soil, cleaning up the water, and all the other reasons that go along with no tilling. And in visiting with some of the individuals at the back of the room at the beginning of hearing today, they told me that that's been taking place.
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I guess I will go back to Mr. Cyre's comments that once we see that the premiums are the same, then we will leave it. The second issue comes with the area of the State that I live in, which is basically a pothole region. The northeast region of South Dakota, and we too have had several years of multiple losses as Mr. Peterson has in his area in Minnesota, but ours are basically being done with preventive planning. Areas that have been inundated with water, the lakes area, the land that used to be tilled is now not accessible.
I currently have about a third of my farm in a lake, and with that 90 percent of it was production land before it went under water. It had not been under water in a hundred years previous to that. It is now under water. I don't know if we will see it come back out of the water. It is my understanding that there was some legislation written into some of the crop insurance changes that would allow the crop insurance of preventative planning to take care of that for the first 2 years. After that, should the land not be producible or not come back from under water, it would be eligible to go into in a wetlands preserve program or some such thing like that so we could get it off of the actuarial rolls to stop the continual reduction of the APH, and get it out of the pool so to speak as far as crop insurance is concerned.
It does seem foolish to me as a producer to go in and sign up that land on an annual basis for preventative planning when we are guaranteed a loss from the beginning of the year, and it's pretty hard to understand how an insurance program can exist that way.
So I guess I would request that it be looked at one more time to find a way of getting that land out of—particularly in the prairie pothole region where it's very prominent now, and we don't know for sure how long it will be, to treat that land in some way like wetlands or something like that and take it off the roll for the time being until it does come back from the water. I guess at this point in time, these are the two areas that I would address.
[The prepared statement of Mr. Tschakert appears at the conclusion of the hearing.]
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Mr. MORAN. Thank you very much, Mr. Tschakert.
Mr. Chet Edinger, producer and president of South Dakota Wheat, Inc.
STATEMENT OF CHET EDINGER, PRODUCER AND PRESIDENT, SOUTH DAKOTA WHEAT, INC.
Mr. EDINGER. Good morning. My name is Chet Edinger. I am the president of South Dakota Wheat, Inc. I also farm with my father and brother west of Mitchell, SD. I raise wheat, corn, beans, sunflowers, and grain sorghum. I'm an avid user of crop insurance, and as a farmer, I am well aware of the high risks that farmers have when producing our crops.
Basically, we have a production risk and we have price risks. I use my production risk—I lay that off with crop insurance. My price risk, I lay off on the Kansas City Board of Trade and the Chicago Board of Trade. In fact, just yesterday, I'm starting to sell some 1999 crop rates for next fall's delivery. I'd like to echo what my fellow farmers from various groups have been saying this morning. There have been some problems with crop insurance in the past. Some changes have been made to strengthen it. In other words, eliminating nonstandard classification was a good change and taking the word ''contiguous'' out of preventative plant regulations. I understand those are on the works and those are going to happen, and I applaud those efforts.
There are some other changes that have not been made on additional work. We need to find a way to standardize the quality adjustment so that it follows the market and what it's doing. If you take these standards of say, No. 4 wheat with the crop insurance and allow the farmers to buy up additional coverage to say, No. 2 wheat, and charge an additional 30 cents an acre or whatever it is much like the preventative planting buy up that we had last spring. I took advantage of the preventative planting buy up, and it worked well on my farm.
Also, I would like to further use crop insurance to buy my coverage up from 65 percent to 75 percent. However, the difference in my premium is 133 percent more cost for 10 percent more coverage. So, it's my understanding that the difference in and the reason why it's so much more expensive for higher coverage is the difference in the subsidy coming from the Federal Government. We need to get that subsidy so it's equal and proportionate to the 65 percent and to 70 and 75 percent. That way I can buy it up for 75 percent for additional dollars, and it's not quite so exorbitant for my cost.
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Also agriculture is changing at a very rapid pace. A pace so fast crop insurance sometimes cannot keep up. USDA needs to have flexibility in administering the program. Without the flexibility, numerous regulations get outdated and useless. Crop insurance needs to be more responsive to the customer. Along those lines, I would like to encourage more representation on the RMA Board of Directors. Mr. Cyre mentioned having an appointed person from this area, hopefully a producer, to sit on the Board for RMA. I would like to encourage that and see if we can get more farm representation. Basically, the farmers are out there in the trenches. They see a problem quicker, and they can respond quicker than a lot of people elsewhere.
As I've stated, these groups represent all of the farmers of South Dakota. There are also great ideas here. Please take them back with you to make a better and stronger crop farm insurance thus making a better and stronger farm economy. I thank you for your time, and thanks for having us here.
[The prepared statement of Mr. Edinger appears at the conclusion of the hearing.]
Mr. MORAN. Thank you, Mr. Edinger.
Mr. Wally Koester, who is also a producer and president of South Dakota Corn Grower's Association. Mr. Koester, good morning to you.
STATEMENT OF WALLY KOESTER, PRODUCER AND PRESIDENT, SOUTH DAKOTA CORN GROWER'S ASSOCIATION
Mr. KOESTER. I'd like to thank the folks for coming today to South Dakota and listening to what we have got to say. I really don't have an awful lot more to add to what these gentlemen have already said, but the last person to talk sometimes doesn't have a chance, but just make some basic comments, I guess.
I farm up in Flandreau. I'm president of South Dakota Corn Growers, and basically our mission is to promote corn, improve corn profitability. One of the ways we can do this is through working through legislative efforts on issues such as crop insurance. I think crop insurance is a good program. It does need to be tweaked a little bit, and there's some things I guess I would like to see. As mentioned before, the subsidy rate coming from the FCIC—right now the 65 percent level is 42 percent. At 75 percent level, it's only 23 percent. I would like to see that level brought up to 42 percent from the FCIC share to make it more affordable for me. It gives me an opportunity when you look at the thing, I get more bang for my buck at 65 percent level because of the amount that FCIC puts in.
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I don't believe that the crop insurance ought to be a give away program. I don't believe in a situation where catastrophic insurance at 50 percent just doesn't kind of cut it, if I could use that term in our situation. When you look at the insurance rates, if I could insure my crops so I'm guaranteed X number of bushels, that gives me the opportunity to use those bushels in a marketing program as was mentioned, that we could go ahead and sell board contracts or board of trade or whatever, and use those as a marketing tool.
Basically, we want to help ourselves, but we want the Federal Government to get involved with it in that respect. We appreciate recent decisions to discontinue the Nonstandard Classification System, dropping the word, ''contiguous.'' I've heard that mentioned by the other fellows, and working to be able to combine separate units for prevented planting under the 20/20 rule would allow the producer to take advantage of millions of dollars in prevented planning payments rather than just putting a hand out and saying, give me some money.
I think we can use a program and use crop insurance from a safety net standpoint as insurance in our situation there.
Also it was mentioned the multiple year losses, our proved production history, it can really drop. They say only 10 percent per year, but 10 percent over 3 years all the sudden, it's not 30 percent, but it's close, and the insurance premium goes up, and I believe that also, that if we have a lot of losses, we ought to pay more for it because we do have some people that, I don't want to say they just go out and plant their beans to say they planted them, but they made not put any herbicide on or they made not use good fertilizers. It's not a good program to work with.
Revenue insurance has been talked about for some time. Producers who use the CRC who work the program and forward contracted their corn as we have talked about and use it as a marketing program are very happy. Those who didn't forward contract are very disappointed. There's a huge gap in the educational process that needs to be filled. When producers buy CRC, they need to be taught how to maximize the results so that the coverage does what it's supposed to do for them and so that he can provide risk management for himself.
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I appreciate the opportunity to visit with you and give you my thoughts on what risk management is about. Thank you for coming to South Dakota and listening to us. If you have any questions, I'll try to answer them. Thank you.
[The prepared statement of Mr. Koester appears at the conclusion of the hearing.]
Mr. MORAN. Mr. Koester, thank you.
We will have questions now from the members of the subcommittee. Also we'd like for us to abide by the 5-minute rule as well, and having given that admonition, I'd allow our host, Mr. Thune of South Dakota, to ask the first question.
Mr. THUNE. Let me ask a couple of general questions and then maybe some more specific ones, but I think that right now there's a significant number of producers who don't participate in the Crop Insurance Program, and I realize there are probably a lot of reasons for that, but I'd like for you to comment on why is that. Is it because the premiums are too high or because of coverage is too little? Do you think that producers would be willing to pay higher premiums for better coverage?
Mr. KOESTER. I think part of thing is the old Government insurance program where you had to have just about a disaster to collect anything, and the rules and regulations—the changes have been made. People don't understand that. I think that's part of it, and I guess if anybody else has got any other comments, but that's the way I would see it. I think people would be willing to buy up to get the more coverage.
Mr. CYRE. I think it's an educational process too. I think some of the people who have not participated have traditionally not participated before at all, and they don't understand the available coverage for the premiums involved. I think if there were more information available on a per acre basis, for instance, the person would look at it.
Mr. EDINGER. We are very fortunate here in South Dakota. I think we have an 80 percent coverage level for crop insurance for the producers in our State. Where we don't get some coverage is in our neighboring states further east from Minnesota to Iowa, a lot of those guys don't participate due to the fact that they very rarely fall below 65 percent levels. They can't go in and buy a 75 percent level, but because it's way too expensive. If we were to subsidize the 65 percent level equal to the 55 percent level, as I stated before, we would have a lot more participation from guys who have very consistent yields, consistent production, and the more we have coming in for premiums, the better risk management is to manage on a larger level, and it can lower the premiums for everybody then.
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Mr. THUNE. Given the fact, provided that the Feds were to cover more of the premium at the higher level of coverage, and most of you seem to agree that the producers would be willing to buy up, how much would premiums need to be covered in order to do that? You alluded to that a little bit.
Mr. EDINGER. I feel basically that equal to the 65 percent level, 42 percent.
Mr. THUNE. Which is what you said, Wally. You talked about going to 10 percent right now, possibly an additional 135 percent.
Mr. EDINGER. That is what the premium cost is on my farm for wheat.
Mr. THUNE. One question, Delbert, you raised your hand for one, but a question to anybody on the panel. How would you recommend changing the actual production history in a way that more accurately reflects what you think how the program should work.
Mr. TSCHAKERT. The one thing that we talked about is that if, in fact, the Government comes in and quote/unquote declares a disaster area for that year that you basically go back and say your production history will be the same as it was last year.
Mr. THUNE. So you would just basically drop the current, the disaster year, figure it before your average.
Mr. TSCHAKERT. If in fact, it's a broad scale, wide-based disaster, and in that way if some guy comes in and he got hailed out or did poor farming or he had a loss, but the county doesn't have a loss or the State doesn't have a loss, you're not going to do it, but if the State comes in and actually says this is a disaster, then you just go back and say, OK we are not going to put that year's production history, and we're going to continue then to forward the—rather than dropping the 10 percent on that year versus the next year. I don't know if that would take care of the situation that you have in Minnesota or not, in this current state, but it would go a long ways toward rectifying it.
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Mr. PETERSON. In Minnesota we asked them to do this 3 or 4 years ago and it hasn't happened.
Mr. TSCHAKERT. What I understand from an actuarial standpoint, it's difficult to make that program work. If it's going to work and if the producers are going to make it work or work with it, then that's something you to have to do. Because if my production history drops to a point where I'm only insuring that disaster to begin with, there's not much sense in me spending more money to insure that disaster because you have to come up with that money to pay the premium as well.
Mr. THUNE. Would you tie that to some formal disaster declaration?
Mr. TSCHAKERT. Correct.
Mr. KOESTER. I guess I would like to see an accounting situation because you mentioned a hail storm or something like that. I have seen it when it came through and basically wiped out a county. For example in Moody County, and we were declared a disaster area, but the next year my premiums jumped up because I had a loss, and I realize that's maybe the way the insurance investor works. When you have a loss, your premium goes up, but under this kind of a situation with disaster, I would like to see it on an accounting thing, and I think that's very necessary.
Mr. MORAN. Mr. Boswell.
Mr. BOSWELL. I appreciate this last discussion, John, you asked my question. I know for farmers to participate, it's got to be affordable, and that's kind of a basic statement, and if it's not, why you're looking at some other way by increasing the risk to buy by something they can't afford. So they let it go. We see that with other things in insurance, in our lives. When things aren't going well what's the first thing you give up? I think this is a very key thing.
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We have got to work this to where it's attractive and affordable, and they have got to understand it through the extension service agencies and through our Government agencies and through our groups that you represent. We have got to do better, and I think we can do that. And we have got to press on to make sure people understand that—what their options are, so I think this is an interesting discussion. Thank you.
Mr. MORAN. Mr. Peterson.
Mr. PETERSON. My question, and maybe you may not know the answer, but maybe you do, but what would it cost the Federal Government to go to 40 percent on the 65 percent?
Mr. CYRE. I think the next panel would be able to provide that. However, in areas of low loss, there's a bid in process that goes, whereby the Government subsidy percentage may not be that high when there's not a loss, and I think in our situation, that if Mr. Edinger's comments were heeded, and buy-up coverage were subsidized at the same levels—you may consider referring to Mr. Thune's question. If I buy 75 percent coverage and my APH is going to—cannot be recorded less than 75 percent regardless of my actual production. That's again a reward for participation rather than a blanket.
And in addition to that, we have a serious problem pending for 1999 in the price selection policy. We are going to set price selection options based on this year's prices, and that's if you want to have the other side of risk management when we are managing dollars, and I think we are all here in favor of revenue assurance type programs, we better face immediately the fact that price selections are going to be adversely affected by current price structures and allow us less coverage for more premium, and that we want to avoid at all costs. So while we are at it, let's figure out a minimum price selection that we are going to consider when we face situations like we currently have where Russia, in dire straits, is actually receiving free food. When in a previous time frame that drove the price of wheat to where we stopped shipping.
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We are in a whole different world here, and that fact is going to cause us to have more hardships trying to select risk management because we won't have price selections that are accurate. So we have it not only with production purposes, but with actual price too, so it's a two-edged sword.
Mr. PETERSON. I agree, and I think since 1991, I have been trying to get away from using yields and histories to some kind of system where we can assure the risk that we have. I'm not sure how we get there. It seems like whenever they move that direction that we always go back to the same old system. And I guess the other question I have is, how much do you think that Congress is the problem in all of this? I think that this year again is a good example, and I think in the South, the reason they won't buy insurance is because Jamie Whitten took care of them for 50 years or 40 years, and they knew they didn't have to buy insurance because if anything happened, they would get a Government deal.
And this education issue, you say that they need to be educated. Well, how much of a problem is it the way we are educating people? Again, this year when price goes down, we roll out $6 billion. How much does that factor in the farmers' decisions that the insurance is very good. It costs all this money, something goes wrong, they figure that the Government will take care of it anyway especially in an election year. And isn't that part of the problem or am I way off base?
Mr. TSCHAKERT. I'd like to respond if I could, in the written testimony that we submitted was the simple fact that, yes, those of us that brought crop insurance this year paid a premium to get that crop insurance, and those individuals that did not participate are going to reap the same rewards. Now, we didn't have a loss, but yet, we are going to get some money from the Federal Government, but those that did not buy any insurance, you understand, are going to get the same dollar value from the insurance, and we still have to pay the premium.
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So, in essence, those of us who did participate are getting penalized because you came back out and said to people, well, we're still going to take care of you even if you make a bad business decision, we are still going to take care of you.
Mr. PETERSON. And we have done it before.
Mr. TSCHAKERT. There's a history of doing that.
Mr. PETERSON. I think that is part of the problem. I remember in 1996 when we passed the farm bill, everybody took this pledge that there would be no more disaster bills and no more of what we are doing here and what we just did, and you see how long that lasted so it's just what you're talking about doing is the right thing, and I don't know how we get there though because it seems like we move that in a direction, and we get going a little ways, and pretty soon we are going the other way, and I really think this money thing is going to come back and bite us, and they are going to say, you guys already spent the money. Why are you in here asking for more money because we gave it to you. So how we get over this hump and get to a point where we can have a system that works for people without us getting in there and mucking it up is the question, and how we get the South, that's had this history of not being insured, and how we get a product for California that makes sense for their citrus industry designed so they can buy coverage rather than now, as I understand, they can't.
Basically, until we can get the whole country into a system that makes sense, I don't know how we are going to get that done with a system that's just basically focussed on the Midwest or middle part of country which is basically what we have now. That's where the participation is. So I don't know, and that's the question, but it's a real problem, and you have got some people that have had these multiple year losses here in South Dakota, but I don't think you have had any kind of widespread thing that we have had. It points out what's wrong with the current legislation. I don't blame the 1996 farm bill, but something has got to be done here because there's no way that people can withstand the risk, the price risks, and even more, the world market risk is more than people can bare.
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Mr. MORAN. Mr. Peterson, thank you.
Would someone explain to me as a Kansan the unique features of the prairie pothole region and the suggestion that there be a board member from this region? I detected about the water and the concern that you never know when it's going to dry out and be able to be cultivated again. Is that the story?
Mr. CYRE. I think, Mr. Moran, our need for that comes from the fact that the prairie pothole region is one of three closed basins in the United States and in North America. The Great Salt Lake and Devil's Lake being the other two. We have an area of our State in northeast South Dakota that does not drain. It is a raised basin in gravel, and all the water that collects there is there until it evaporates. That causes a large part of our northeastern South Dakota that suffers tremendously under the conditions we have had for the last 6 years.
Second, I think that to deal with some of the disease and quality-related issues that were brought by Mr. Edinger and alluded to by Mr. Peterson, we need persons who can look at a policy and see its shortcomings as they relate to an area. That frankly, has been the driving force behind a great deal of this disaster package. I think we need to do all these things to shore up the crop insurance as a tool. Not as a last resort, but as a tool, and we would appreciate having representation from this part of the country specifically included in that process so that we can more easily review the policies.
Contiguous, as an example, I do not believe would have been an issue for an additional 12 months had someone been sitting there the day that that was presented because we were united in that in our area of country, and we were the only ones that really were understanding because we were the ones that needed it, and that's our call for that, but the prairie pothole region is a significantly different geographic area of the United States, and we need to have some representation. We manage risk here in a different manner.
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Mr. MORAN. Mr. Cyre, you in your testimony you talked about livestock coverage and extending coverage for including livestock. Does anybody else have thoughts about that? Is that something that livestock producers have expressed an interest in within their associations?
Mr. OLSEN. I guess they have not within the Farm Bureau. We are more concerned about getting the Crop Insurance Program fixed before we——
Mr. THUNE. You want to mess up another program?
Mr. OLSEN. You said it.
Mr. MORAN. Other comments about livestock? I apologize. Mr. Cyre, getting back to you. I don't understand in your conclusion, and you highlighted it for us about new pilot programs which would couple benefits to voluntary levels of conservation practices. Could you explain to me what it is you're suggesting?
Mr. CYRE. In 5 minutes I could not. However, I'll briefly tell you that it has to do with developing risk management that include options to buy up loan rate coverage in exchange for reducing planting, and in the prairie pothole region, where we are faced with multiple years of questionable production on lands, that particular policy or program would have tremendous benefit both in reducing exposure for subsidy to the Treasury and increasing options to producers.
Now, I have got that detailed fairly well, and I have been fortunate enough to be referred to a nationally recognized committee to review that, and once we have got that done, I'd be more than pleased to present it.
Mr. MORAN. Any other questions out there?
Mr. THUNE. One follow-up. Back to this question of, you know, the connection between the purchase of crop insurance and basic expectation that the Federal Government is going to come in, in an emergency. The thing that came out which Mr. Peterson referred to, and which I happen to agree is it's going to make it real difficult to get any additional funding for this because we have gone to the well in a big way just recently. In that bill there was about $2.375 billion for disaster that was provided for single and multiple year crop losses. Do you all support a proposal that those producers who carry insurance on their crops receive a higher, basically a percentage disaster versus those who did not?
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[Panel nods.]
Mr. THUNE. The record should show that every head seemed to be nodding, yes.
Mr. KOESTER. There ought to be an incentive of some kind for the individual that does take the insurance, does do a good job of farming, does do a good job of marketing, and is not standing with your hands out. The old saying, the Lord helps those who help themselves. I think that we have got to be that in agriculture. There's a lot of things that we have no control over, but we need to try to protect ourselves as much as we can.
Mr. MORAN. I have one final question in regard to this disaster money that's to be delivered. Are there any thoughts about whether RMA or FSA ought to be the delivery mechanism? Does it matter to you? Do you have any opinion as to one being better than the other?
Mr. CYRE. If we could include 1993 in the designated period of 5 years so that we don't have to wait for the 1998, we believe that, that would speed up the process which is an important aspect that we would like to see addressed. But as far as preference, we prefer whoever can get it done the cheapest, fastest, and most effective. We would like to see 1993 in the mix of years for disaster.
Mr. MORAN. When are you expecting deliverance?
Mr. CYRE. It would be easy to say not in this century, but I believe we will see it in this century.
Mr. MORAN. Thank you. Anything further? Panel, we appreciate your time. Thank you for joining us this morning. And I think it was very helpful, especially for someone who is not from South Dakota to hear about the specific issues that you all face.
Mr. Tom Kauer, vice-president of Spreckles Insurance is here also on behalf of the Independent Insurance Agents of the America. Mr. Kauer.
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STATEMENT OF TOM KAUER, VICE-PRESIDENT, SPRECKELS INSURANCE, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS OF AMERICA
Mr. KAUER. Good morning, members of the committee. A lot of the things that I'm going to say have been said already, but I will reiterate them again on behalf of the agent's point of view. I appreciate the opportunity to share agent's perspective on the issue of crop insurance, which is a very important thing for our farmers and livelihood for our farmers here in the state.
The Crop Insurance Program being delivered through independent agents has been designed to be a safety net for the farmers. Have all the farmers taken advantage of it? No. Not to the extent that they could, and a lot of that is it due to the pricing of the economy and the insurance. It's not because of the agents not being there. The agents are out there, ready and experienced, educated to provide the product to the customers if they should want to have it and can afford it at the same time. The one thing that we compete with repeatedly as addressed before is the ad hoc disaster acts. Why buy my product when you're going to get it free? Would you buy house insurance if Uncle Sam is going to come in and pay for your house every time it burns down? So it's hard to compete against that in trying to sell something.
USDA maybe needs to help out in trying to educate the fact of not having ad hoc disasters, but then it probably goes back to our bodies in Washington to follow through on that, too.
What can be done to increase involvement and encourage farmers to buy higher levels of crop insurance? Two things that I hear, is to increase the coverage amount, and make it more affordable. They would like to see more coverage at a lower cost, and ways of doing that I know we talked earlier we had spoken about the fact effect to raise the APH. One thought that comes to mind in a loss year when you have possibly a zero to 5 bushel yield, just replace that yield with a guarantee of that units APH so that in turn you're not putting in a lower yield, but yet not a higher yield either, sort of the middle of the road which would keep the APH relatively high, and not discount for having a bad year.
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The subsidies, I believe, need to be increased on the higher levels. This would present them better to the farmers, make it more affordable, and they in turn would have more coverage. Right now, as you know, the lower levels of coverage have the higher rates of subsidies and the opposite, the higher levels have the lower levels, so it's very counter intuitive to buy the higher level.
Also, insureds tell me they would like to see a simplified program of revenue coverage and be allowed to purchase a dollar amount of insurance. I'm not sure where to go with this one. I might leave it to the current part of the company level to develop different plans, but they would like a simple plan. If I need $125 worth of coverage to cover my corn, let me buy $125 worth of coverage. I know there are problems in there trying to develop ways of protecting the companies, so how do you figure what the cost is on something like that, but that is something they definitely do want to see to cover my cost, be it $125 or $150 or whatever it is.
Presently there are many rules and regulations pertaining to crop insurance which have good intent, but are not practical. For instance, in Congressman Thune's home county, corn is not insurable as a grain only as silage. So here you have a producer producing corn for grain laboring 70 to 100 bushels of corn and he can only insure that corn as a grain not a silage. So in turn, his coverage is probably $35 an acre versus his cost of having $80 to $90. He can't cover his costs. So we are promoting insurance as a coverage option, but we don't give him the option to actually use it. If anything, we are limiting their insurance coverage for that. For those insureds who have been good business managers and are using crop insurance as a means of financial protection, it important that these same individuals receive some benefits for that.
Farmers with crop insurance should receive a larger amount of Federal farm disaster relief money that is coming out here soon. Farmers need to know there's a very real benefit to carrying crop insurance, and this would be one way of projecting that to them. By having the crop insurance we are receiving extra benefits compared to those who did not have crop insurance.
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Further, to strengthen the Crop Insurance Program recent disaster relief aids, I believe, should be distributed through the private sector rather than through the FSA offices. If you deliver it through the FSA office, it's going to give the impression that it's just another ad hoc disaster. Whereas, if you deliver through the insurance companies, through the agents in force, then at least it will give us a chance to sell them again on crop insurance at the same time, and hopefully they will in turn be using crop insurance as their safety net provider rather than always going to FSA office to pick up their check as it is now.
The agents are out there. We are educating our—as I mentioned earlier, we educate the farmers. The agency force is there. All they need to do is come to us. We do everything possible to get them in, and hold meetings, and whatever else. The agency force is there ready and waiting to provide the insurance. Hopefully that helps some.
[The prepared statement of Mr. Kauer appears at the conclusion of the hearing.]
Mr. MORAN. Mr. Kauer, thank you very much.
Mr. Miller is a Kansan and graduated from the University of Kansas in my hometown of Hayes. Mr. Miller, nice to see you today.
STATEMENT OF MIKE MILLER, PRESIDENT, BLAKELY CROP HAIL, INC., VICE CHAIRMAN, AMERICAN ASSOCIATION OF CROP INSURERS
Mr. MILLER. Thank you, Mr. Chairman. It's my pleasure to appear before you to talk about the Federal Crop Insurance Program. As mentioned by the chairman, I'm Mike Miller, president of Blakely Crop Hail, Inc., and vice-chairman of the American Association of Crop Insurers or AACI. And I represent insurance companies and agents that currently write about 80 percent of the Multiple Peril Crop Insurance premiums written throughout the United States.
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It appears that our U.S. farm policy may be at a crossroads. The 1999 Appropriations bill, as we know, provides $6 billion in emergency relief and calls into question the existing farm policy. The appropriations bill provides ad hoc disaster assistance without an offset as required by the 1994 Crop Insurance Reform bill. It provides ad hoc disaster assistance to producers who signed a waiver with the Federal Government stating that they will waive their eligibility to receive any emergency assistance, also a requirement of 1994 farm bill, or to get your Freedom to Farm payments, and it provides additional market loss payments calling into the question the adequacy of the Freedom to Farm transition payments provided in the 1996 farm bill.
All of this assistance has been in the 1998 crops. If conditions that brought the 6 billion dollar farm relief package; multi-year disease problems in the upper Midwest, weather-related disasters, low commodity prices for feed, grains, wheat, soybeans, and significant reductions in agricultural exports are likely to persist again next year. The $6 billion in aid will be extremely helpful for farmers in 1998, but what about next year? America's farmers need no more short-term ad hoc emergency spending. They deserve reliable long-term solutions to this problem.
Mr. Chairman, we at AACI think the program needs to be improved, and we want to help address some of these problems. At this time I want to highlight two particular areas that are ripe for change. First, we want to strengthen the public/private partnership that characterizes the Crop Insurance Program. Private industry has much to offer, but we seem to be sort of partner of convenience rather than a full partner. There are nearly 20 private insurance companies and 14,000 agents nationwide selling and servicing crop insurance for the American farmer. Our experience and knowledge should be leveraged by the Federal Government in order to improve this program. Quite frankly, we are hamstrung today, not leveraged. Both the procedures and the incentives are designed to keep private industry primarily as a simple delivery system. We should be more than that. One has to only look at the success of those privately developed products that have made it through the Federal approval process to see how successful the program could be if we are called upon as full partners and treated as such. To this end we need to reevaluate the Federal Government's role in developing insurance projects.
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Second, particular attention should be focussed on the existing premium subsidy formula that's already been mentioned. Premium subsidies are currently capped. As farmers purchase higher coverages, the cost rises disproportionately. For example, current premium subsidy for 65 percent coverage is roughly 40 percent of the total cost. If the farmer purchased 75 percent coverage, the total premium roughly doubles, the subsidy falls to roughly 20 percent, and the out-of-pocket cost to the farmer nearly triples. As a result, over 70 percent of all acres covered by the buy-up program are insured for 65 percent coverage levels. Only 18 percent are at higher coverage levels, and the remainder is below the 65 percent coverage level. With the current subsidy formula, this should be no surprise. And remember this is the break-out of coverage for policies above the catastrophic insurance risk level which is 50 percent. And that covers roughly one-third of the acres insured.
What are the two most common complaints about crop insurance? The policy costs too much, and it doesn't provide enough protection. Is a 35 percent deductible adequate to avoid future ad hoc disaster bills? Past experience would suggest not. Virtually all of the perceived and real problems with crop insurance would be greatly minimized if growers had higher coverage at more affordable rates. Increasing premium subsidies for higher levels would likely result in the majority of farmers buying higher coverage because it would be more affordable. In fact, we should seriously search for ways to take this bold step quickly so the growers can benefit for the 1999 crop year. We would like to participate in policy discussion regarding the existing premium subsidy formula, both for the existing multiple peril insurance and revenue insurance. We would also like to help evaluate more comprehensive changes that could greatly reduce the likelihood of further costly disaster bills.
We recognize that changing the premium subsidy formula is not without cost to the taxpayer. However, if we are to avoid future emergency spending, we must look to increasing coverage levels and affordability to farmers. To this end, this will prove to be a more prudent investment of taxpayer funds than one-time emergency spending bills. Mr. Chairman, I would like thank you for holding this hearing, and we look forward to working with you in the future.
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[The prepared statement of Mr. Miller appears at the conclusion of the hearing.]
Mr. MORAN. Mr. Miller, thank you.
Mr. Jim White, president of Norwest Bank in Aberdeen.
STATEMENT OF JIM WHITE, PRESIDENT, NORWEST BANK
Mr. WHITE. Mr. Chairman and members of the subcommittee, I'm pleased to be here on behalf of Norwest Bank of South Dakota participating in the hearing of the Federal Crop Insurance Program. As stated, my name is James White. I am president of Norwest Bank in Aberdeen, SD. That is located in the north, north central part of South Dakota where we have had some adversity, and we are dealing with a lot of things that we are talking about. My bank is a $200 million bank. We have $150 million out in loans, of which about $60 million are to agriculture producers.
As members of the subcommittee know, bankers have a very important role in the financing of U.S. agriculture productions. With the changes in the farm support programs authorized by the 1996 farm bill, farmers have 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, today's stable and reliable Federal farm insurance program with its private sector delivery is a must. We 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 and some cases, challenging agricultural markets. Crop insurance also insured that the producers would be able to recover their input costs when damaged by unexpected circumstances, and thus be protected from financial disaster.
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Our bank encourages each of our producers to know what their cost of operation is on an annual basis. After that has been determined, we share with them the importance of maintaining both a risk management and a marketing program to meet that exposure. While the decision to purchase crop insurance and execute their marketing plan is entirely up to the producer, more and more of our customers are utilizing these tools to manage their risk.
One of our biggest challenges facing bankers today when dealing with farm and ranch customers is getting them to evaluate the risks in the business and to understand how a failure to adequately manage risk may impact their ability to obtain credit.
While crop insurance is an effective tool for customers to use to protect themselves from production risks, it is important to note that production risk is only a 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 the production or protect the minimum price is something of which all of us in the private and public sector should concentrate. Some of the new products being offered such as crop revenue coverage and income protection offer price as well as yield guarantees.
These products offer producers an opportunity to further insure themselves against production and market risks. We have seen the limited use of these products due to the cost per acre.
I believe further consideration should be given to the subsidy level of this product. Most producers would use it if their cash flow allowed it. If crop revenue coverage were made more affordable, it would give more credence to projected cash flows; therefore, more consistency to credit availability. At present, affordability becomes an issue for some producers necessitating their reliance on your enacting an emergency bailout bill to cover unprotected expenses.
As bankers, we have great faith in the ability of our farm customers to run their business, but more needs to be done. Much more needs to be done in a relatively short period of time.
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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 market place. Bankers play a key role in all of agriculture. We work with our customers to provide the best possible financial products and services for our farmers and ranchers to grow their business. We have committed ourselves to agriculture and share with our customers their optimism for the future of the industry. I also would like to thank you for the opportunity to testify today, and look forward to answering questions you may have at a later time.
[The prepared statement of Mr. White appears at the conclusion of the hearing.]
Mr. MORAN. Mr. White, thank you.
Mr. Dennis Christofferson, president of AGForce Insurance and on behalf of the Crop Insurance Research Bureau, Inc.
STATEMENT OF DENNIS CHRISTOFFERSON, PRESIDENT, AGFORCE INSURANCE, ON BEHALF OF THE CROP INSURANCE RESEARCH BUREAU, INC.
Mr. CHRISTOFFERSON. Good morning, my name is Dennis Christofferson, and as you said I am president of AGForce Insurance located in Fargo, ND. AGForce insurances crops throughout the Dakotas, Montana, Minnesota, and Iowa. Speaking on behalf of Crop Insurance Research Bureau, CIRB, and AGForce, I wish to thank the committee for calling this hearing as a first step toward insuring the integrity of the Crop Insurance Program as a strong and viable protection for agricultural producers against crop loss and disasters.
CIRB is a national trade organization of crop insurers whose members provide billions of dollars in crop insurance protection to American agricultural producers in nearly every State of the Union. CIRB'S membership covers all spectrums of the crop insurance industry as it includes large nationwide multi-line insurers, crop-hail providers, regional and local crop insurance providers, as well as major producer driven organizations. As Congress considers efforts to strengthen the Crop Insurance Program and addresses concerns of those suffering from crop insurance losses, we urge you to encourage and support participation in the Federal Crop Insurance Program at a coverage level which insures adequate protection against crop loss and dramatically simplifies burdensome program rules and regulations. If achieved, producers will have the tools necessary to protect themselves against weather-related losses, and the demand for ad hoc agricultural disaster assistance will be eliminated or at least muted.
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Today in places like the Dakotas, especially North Dakota, there is simply not enough coverage available—and in northern Minnesota, Mr. Peterson—to cover our costs of production when the prices are low. In an attempt to address these issues, CIRB would like to make the following recommendations.
First of all, program integrity must be sustained and sound insurance principles observed. One of my fears, AGForce, is that in our enthusiasm to help the producer protect their risks that we have to be very careful not to create a moral hazard out there. This is one thing that scares me a little bit coming from an insurance side of it, is that we do not develop a program where the crop is worth more in the field, in the swath, than it is in the elevator, and that's one thing I think we have to try to avoid.
In all program decisions, including those focussing on the long-term structure of the program, as well as those involving emergency agricultural assistance, we can not undermine the credibility and integrity of the Crop Insurance Program and agricultural risk management. If we deviate from these principles, producers will lose faith in the crop insurance system increasing the demand for more costly disaster assistance. Because of the very unique nature of this private-public partnership, we fully understand that there are circumstances which present themselves which challenge the very underpinnings of the program.
However, the way to deal with these sorts of circumstances is not to abandon in a wholesale the manner, the principles that have served the industry and the public for hundreds of years. We must return to the mandate Congress made in 1994 when it eliminated ad hoc and set us on the current course. It is extremely difficult to hold firm to what one believes when the types of problems agriculture has experienced in 1998 present themselves. CIRB clearly understands the type of pressures of you have been under to address the situation, and we look forward to Congress getting the program back on course. Since its enactment, crop insurance has saved roughly $2.4 billion over combined historical disaster payments.
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As we have seen this year, a return to ad hoc disaster payments is extremely costly. That is why it's critical that producers have the protection available through adequate coverage levels which have been addressed repeatedly today to securely cover them against crop losses. Essential to that end is, No. 1, affordability of coverage; two, producer participation; and three, regulatory reform.
Adequate affordable coverage. In many places today there's not enough coverage. For example, right now it costs $80 to $87 an acre in cost in the Red River Valley of North Dakota to produce an acre of wheat. Right now we are getting about $65 in coverage at the 65 percent level. This is just not adequate. CIRB has recommended that any fiscal investment made in the program serve to assist producers in the purchase of higher levels of crop insurance protection. That would be particularly effective in areas where producers need, but feel they can not afford, higher levels of protection, and those not adequately protected by the catastrophic coverage.
The affordability of higher levels of buy-up coverage is necessary, but this will require a substantial investment in the program. However, it would provide for the greater protection that is necessary and would diminish the need for disaster assistance in years to come. Higher subsidy levels may require program modifications such as, we night need to look more closely at enterprise units and even whole farm unit coverage. This would reduce some of the temptations for program shifting and eliminate costly spot losses. There are a number of other coverages such as private crop-hail insurance, which would provide for spot loss coverage. It should matter little to an insured whether or not they have $200,000 worth of production come off of 500 acres in one section and none off of the 500 acres in another so long as they received $200,000 that covers their operating costs. Affordability would allow farmers the flexibility to manage their risks more effectively.
Leveling of APH records, I think has already been touched on by the gentleman that preceded us. We need a leveling mechanism on disaster years. I would like to discuss that more if I had time, but I believe that the disaster declaration method by county is probably the best way to do that. Maybe we need a 2-year trigger rather than a 1-year year, but we need some kind of leveling with a county or an area that has been declared a disaster. In addition, I recommend fixed yields for disaster years in order to provide a yield floor so that necessary levels of insurance are not out of reach. It is important to stress that such solutions cause an increase in the price of the product. However, I believe the producers will accept that realty if it means access to affordable, adequate coverage.
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Producer participation is essential. To summarize this, we have gone from 220 million acres in 1996 to 180 million acres in 1997. This is of concern particularly in the catastrophic coverage, which dropped from over 700,000 policies to 400,000 policies today. At the same time there has been no increase in the buy-up coverage, but rather a decline. Following the delinkage, a drop off in participation occurred throughout most of the major farm States including many areas currently many experiencing high crop losses such as Oklahoma, Texas and the Dakotas. Although a new round of linkage is in the offering and with it, significant increase in participation. Such artificial induced participation produces only temporary relief from the concerns especially if it is based upon CAT coverage. If the pattern repeats itself, significant numbers of farmers will leave the program as soon as the linkage requirement is removed.
We know from the experience of 1998 that few farmers can afford to go without crop insurance. And we need to dramatically simplify the program. Overburdensome program rules and regulations, which contribute little to the program integrity are currently a deterrent to producer participation and program effectiveness. The system must be more user-friendly. Today's program is full of regulatory requirements that simply leave producers with a bad taste in their mouth. Many farmers cannot see the benefits of crop insurance protection because the program is so obscured by a host of complicated and sometimes oppressive rules and regulations. The program must be responsive to producer demands for improvement in this area. Meaningful and constructive regulatory simplification must take place or we stand to lose more program participations. An industry task force on simplifications is currently working once again on this problem. Excellent recommendations have been made. The final set of recommendations have been made.
It is absolutely imperative that the administration takes action sooner rather than later on these recommendations. This is the third major simplification effort in recent years. Little has come of the previous two. We no longer have the luxury of dragging on with this process. CIRB urges Congress to insist that simplification be put at the front of the parade of initiatives to improve the program. We also recommend an aggressive timetable for implementation of the simplification. CIRB has previously supplied House and Senate staff with this list.
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CAT. The CAT program was originally envisioned by Congress to be a very simple and basic form of protection against catastrophic losses, thereby encouraging farmers to protect their crops as they move away from ad hoc. However, today's CAT program is more complicated and time consuming than ever discouraging producer participation. Even though the cost is only $60 per crop per county, farmers may decline coverage because the regulatory requirements are just too burdensome. The reporting and servicing requirements are just as comprehensive and time-consuming for CAT as they are for the buy-up coverage adversely affecting both producers and deliverers.
In addition, beginning in 1998, company providers will not receive any compensation for administrative functions for servicing CAT policies eliminating needed incentives to agents who serve these policies.
APH. Again, I think the master yield concept with a 1-year lag in reporting should be considered. A default yield for CAT should be considered. Acreage tolerance for acreage reports would also be a burdensome requirement lifted. Claims procedures that more appropriately shifts of the burden of proof to the producer. Additionally, appropriate penalties for misreporting should be considered to protect program integrity.
Paper reduction. A common sense approach to regulatory paperwork is badly needed for all parties, producers, and company deliverers alike. If Government-required statements could be combined to just one form, sent out once a year, it would greatly reduce the use of paper and simplify the understanding and reading process for the insureds. At my company, we credit sell 10,414 policies. We could eliminate, if we went to a single form—put all Government statements on one form, we could eliminate 60,000 pieces of paper. Multiply that times the big insurers and it would be unbelievable. The simpleness the form would read, and also the cost would greatly be reduced.
CAT compensation. As we look at ways to correct vulnerabilities in the farm safety net, it is important to realize that companies will not receive compensation for serving nearly 40 percent of all crop insurance policies, those with CAT coverage. It will become problematic since companies and agents will have little or no incentive to service CAT policies at a time when crop protection is desperately needed. As mentioned the servicing requirements for CAT are as time and resource consuming as for buy-up coverage. Congress must address this problem now in order to fully ensure adequate risk management protection.
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The recently enacted farm relief measures places additional burdens on companies and agents by requiring them to service CAT policies of non participants required to purchase 2 years of CAT coverage in order for benefit for eligibility. This is another reason CAT compensation to providers should be reinstated. Restoring some incentive to this product will go a long way towards ensuring the strength of program.
In summary, we concur with Agriculture Secretary Glickman who emphasized during the USDA's Working Group on improving the safety net that crop insurance should provide the foundation for risk management, and the program should operate more like other traditional insurance products. This isn't just a good idea, it is absolutely necessary for the future of agriculture risk management in this country.
We look forward to working closely with the committee as you work to improve the program effectiveness, and I apologize for the time I took.
[The prepared statement of Mr. Christofferson appears at the conclusion of the hearing.]
Mr. MORAN. Thank you, Mr. Christofferson.
Ms. Gerdes. She is a producer as well as a crop insurance agent in the Auburn Agency.
STATEMENT OF RUTH GERDES, PRODUCER AND CROP INSURANCE AGENT, AUBURN AGENCY
Ms. GERDES. Good morning, Mr. Chairman and members of the subcommittee. I do live on a farm in Auburn, NE, where my family and I do have a diversified operation from grain to livestock. Besides being an active participant in our farm operation, I'm also a crop insurance agent. I currently work with over 1,200 producers in six States. Because I'm both a producer and provider of crop insurance, I do believe I have a somewhat unique view of our industry. I work very hard to see they have a product that meets their needs. Because I believe in what I do, it's hard to believe some of the things that have been happening lately. It's hard to come forward to improve the program when we are giving away free money. Crop insurance does work very well in my area. No, it is not a replacement for the price support system, and it certainly was never designed to be a solution for low commodity prices caused by dismal economic events both here and in other parts of the world, but when used appropriately as part of an overall risk management strategy, it works very well.
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Attached to my testimony are three different examples of how my clients used their CRC policy to make 1998 a very profitable year on their farms. In example 1, the farmer has had a net return of $3.52 per bushel on his corn. Example 2, shows a return of $3.40, and example 3, a return of $3.14. As one of the gentlemen told me when I talked to him yesterday, his banker is a very happy camper these days. These three are typical of my CRC policy holders and what they have done with their policies, and to address the question that was asked in the earlier panel, the concern about the CRC price selection being too low, the way that CRC is constructed, I don't believe the price selections will be too low. We took the February average of the decrease corn contract with the beginning price of CRC right now no decrease contract is trading about 255 to 256. I think we have got some things in by way of policy that will help these farmers take the responsibility for transferring risk and making themselves more profitable.
As we look to the future, I think it's important to recognize when progress has been made by RMA. When I testified before this same subcommittee a year ago, I brought up several concerns to your subcommittee. First on my mind was the issue of timeliness in getting rules, rates, and regulations out to the industry side. That has been a big problem in the past, but what a difference a year makes. To their credit this year, RMA got rules, rates, and even actuarial documents in the agent's hand by November 1. That is a huge step in the right direction. Particularly this year when I am working already with cash flows with my producers and their bankers, and I thank RMA for that.
Second, new prevented planting rules were announced and implemented for 1998. What an improvement. Yes, they need to be tweaked in some areas. It's hard to believe that one word like ''contiguous'' can cause so many problems, but they are a vast improvement on what we have had to deal with in the past.
And finally, this year is the last year of the NCS program, which had been a boondoggle from day one. RMA has done some things well in the past year, and I thank them for their efforts, but now we must focus on this program so it works for all farmers in all areas.
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Today I'm going to explain how the private sector is responding to create new solutions, and then I would like to leave you with five major principles that I would hope you would use in the foundation to build an improved crop insurance system. Included in my testimony today, is one specific new concept which has been hand delivered to Secretary Glickman for his consideration in the last 2 or 3 weeks and hopefully for his approval.
I became aware of a rather obscure pilot program that was authorized in the 1996 farm bill which allows USDA to encourage better marketing by farmers. It is called the pilot option program, and it is under Subtitle H - Miscellaneous Commodity Provisions. It is already authorized. I see a great opportunity to link this program, pilot program, with the crop revenue coverage policy. I took this idea and bounced it off of several members of American Agrisurance, the company that I place my business with. We then quickly brought together a group of agriculture industry leaders and boards of trade people, agents, and farmers. Within 1 day, we had a framework for this concept completed. In another 2 weeks, we fleshed out the details of the concept I'm putting on the table today.
The concept is simple. Any farmer who carries CRC can purchase a call, put, or minimum price contract up to his insured bushels. Rather than having the FSA reimburse farmers for his cost, as was done in the original pilot option program, the cost would be deducted from the farmer's CRC premium. This plan is far superior to the old pilot program for the following reasons: By combining CRC and a marketing tool, we teach the farmer how to put together a total risk management plan. This concept is very similar to how we approached things when I was in 4H. Learning by doing. It's the critical element that is missing today in our transition from a market to a market-oriented world. With the combination of CRC and marketing insured bushels, we always keep the farmer in a strictly hedged position, never a speculative one. It is why you can only do it with this plan, with the CRC policy, and not the multi peril policy. The critical element of this proposal is that it eliminates many of problems encountered with the original pilot option program.
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Fourth, I think this provides a tool of transition that we sorely need in the country side, and it enables the farmer to move to that more market-oriented world. We have included in our plan a detailed proposal of this concept and how it could be implemented as well as how to pay for it. I use this as an example of what we are doing to help producers improve their bottom line.
Dr. Barnaby put this paper together for our working group, and it is attached to my testimony. The paper has a detailed proposal for you concerning this concept, and I hope you will take the time to delve into those details. As I started to begin with, I believe the authority rests with the Secretary that he could implement that plan right away. Your support of this concept with the Secretary could go a long way into turning into reality, and it could be a reality for the 1999 crop year on spring crops.
Now, as we turn to other issues and the five basic concepts as you look to improving the Crop Insurance Program, I would like to leave you with these foundation points: First, we need to address the problems with crop insurance subsidies. You have heard that all day to ad nauseam, but how do you do it? It needs to be done effectively. We need to make the higher level of coverage affordable but equally important, it needs to be flexible, and it needs to be portable. If you only make the higher subsidy available for multi peril and CRC, and revenue insurances is our future, it has to be portable to those products as well. We currently have a significant problem with the CRC being under subsidized compared with the multi peril, and I don't think that's been brought out today.
Second, we should resolve the issue of RMA contacting as a regulator and competitor. No agency can serve these two functions without conflict. When elephants fight, it's the grass that suffers. With the regulatory agency and industry constantly in conflict, who is suffering? Our farmers.
Third, we need to provide fair treatment for those investing in new ideas and products. If a scientist or research firm came up with a cure for AIDS, their innovation would be rewarded a thousand times over, but in our industry innovation receives no compensation. Products developed by private companies are reappropriated and given to competing companies outright. Proprietary products are free to be copied as regulators look the other way with a wink and a nod. This is creating a tremendous bottleneck, which is literally killing any new ideas from coming to the marketplace, products or ideas or concepts of companies. They have no incentive to bring new ideas because their investment is not going to be rewarded.
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We need to also recognize our social responsibility in supporting the agriculture industry. We spend less than ever before on more abundant food supplies, but farming unlike like any other industry is totally dependent upon the weather. Because our clients are that dependent on the weather, we will always have a portion of this program that's social in nature. If private industry had been able to do this, they would have done it a long time ago.
And fifth, we have a responsibility for supporting our farmers and you recognized that commitment in providing almost $7 billion in this emergency relief in 1998 alone, but I am concerned about the long-term ramifications of this disaster legislation. It may end up undermining the Crop Insurance Program. Farmers are walking into my office every day and asking why they should invest in crop insurance when those who did not are going to be receiving payments and sometimes more payments than those who took crop insurance. We must all face the realty of this disaster and work together to pick up the pieces and provide a long-term and very viable agricultural program for agriculture. I want to leave you with this warning. If you think you have an economic crisis in agriculture today in the countryside, dismantle the Crop Insurance Program and this year will be nothing compared to what you will see in the future. I very much appreciate the opportunity to be before you today. I am submitting several documents with my testimony, and I would be happy to answer any questions.
[The prepared statement of Ms. Gerdes appears at the conclusion of the hearing.]
Mr. MORAN. Dennis Larson.
STATEMENT OF DENNIS LARSON, REGION 4 NATIONAL DIRECTOR, CROP INSURANCE AGENTS OF AMERICA, L & S AGENCY
Mr. LARSON. I'm from Groton, SD, where Mr. Thune spent a day in the snow. I'm a farmer and I own a crop insurance agency, and I'm representing Crop Insurance Agents of America as a regional director. There's been some very good testimony here today, and I'm going to just probably reiterate a lot of points that have been made.
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One of the points that I don't think has been addressed very much at this time is when Congress decided crop insurance would be the agricultural safety net, the previously mandated ratio of 1.07 was not adjusted to compensate for the expansion and the changes that were needed in the program. And I think that's one of the problems that we have really had with making changes in the last few years is because every time we come up with a new program, it doesn't work because the premiums have to be too high to meet that standard. Just as an example, the new 85 percent coverage that is being proposed for 1999. In Kittson County, MN where Mr. Peterson, I am sure, is aware of the example of a 38 bushel APH would give the farmer $106.59 worth of coverage and would cost him $31.81 per acre. Now, that's ridiculous. You know, we just wasted all our time and effort to come up with a program when we come up with a price like that.
So how do we solve that problem? In 1989, there was a big hearing for crop insurance in Fargo, ND, and I testified at that hearing, and a while back I was going through my file, and I found the file where I had written testimony, and in this testimony, I said one of the things that crop insurance needs is coverage levels up to 85 percent, but the subsidy for those products must be at least 50 percent.
Now, I don't know what that's going to cost, but I truly believe that that's where we need to be. We have had other people talk about 40 percent or whatever, but I think, that we need to look at least 50 percent and I want to reiterate what Mrs. Gerdes said that we also need into include all the revenue coverage policies in that. The revenue, crop revenue coverage, has been a very good product for our farmers. We feel that we have done a good job of selling it. We haven't done as good a job as Mrs. Gerdes has done with getting our producers to forward contract because they have had that, and that's a goal of ours, but this project is very good and—but it's not affordable to a lot of farmers without an increased subsidy. And the other thing is, the reimbursement to the companies is less for CRC, and I think that needs to be changed too.
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A couple of the other things on the production history thing, there's been a lot of good ideas come out today, I like the idea of the disaster interest thing. I question that a little bit. I have had producers that have had, out of—2 out of 4 years they have got completely hailed out, and so they ended up with zeros on their APH, and now they have to live with those zeros for 10 years, and that's been a problem. So somehow, I think I like the idea that no matter what, that we don't maybe decrease those yields less than 75 percent of the average APH or something.
Another thing that was brought up, I think by Mr. Christofferson, how to simplify the program. Master-yield. We have been talking about that with our regional office in Montana for a year or so now, and they have done a lot of work on that, and I understand for some reason some of the companies don't like it. I think it would be a tremendous program and maybe we need to give the farmers a choice. We can do one or the other, but I'd say in our area that most farmers would be very interested in that. Prevent plant has been a big problem in our area. We are just right on the edge of the pothole region, and also I actually own land in that area, and it's become a very big problem.
I want to give Tim Hoffmann, who's here today some credit on the word, ''contiguous.'' I think he remembers I told him last year that that would never work, and he now agrees with me, and he's been very responsive to it. He made a trip out to our area last summer and I think was convinced that that needed to be changed and has worked very hard to get it changed. But one of the problems evidently that's happening is the bureaucracy. He's been working on that since June, and as of November 2, it wasn't approved yet. And that's the thing that needs to be changed. Why should these people have to spend months and months to get something done that they are pretty sure is going to get done, but there's something going on in the system that doesn't let them get it done. So that's one of the things that hopefully we can get changed. And as far as the distributor of the disaster money, I firmly believe that it should be delivered through the crop insurance companies, and somehow we need to reward the people that have been spending money for crop insurance. The biggest criticism I have had from my farmers since this disaster thing has been proposed is that, boy, we sure don't want any farmers that gave up their right, they signed a waiver and said that they weren't going to accept any disaster payments and now—and didn't even buy CAT insurance and now they are going to get a payment, and that really bothers a lot of our producers, and I don't know how we solve that problem, but hopefully it will never happen again.
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We thank for your time, and I'm confident that if we would subsidize all levels of crop insurance at least 50 percent for 1999, that we are on the road to making this the safety net that farmers need. Thank you.
[The prepared statement of Mr. Larson appears at the conclusion of the hearing.]
Mr. MORAN. Mr. Larson, thank you very much.
Mr. Zirschky is the Associate Administer of the Risk Management Agency, also a former Kansan. Mr. Zirschky, we will have an opportunity to visit with you in Washington. I've tried to be very moderate in my time allowed to the folks from this region of the country, but if you could summarize your remarks. We will have another shot at you another day.
STATEMENT OF JOHN ZIRSCHKY, ASSOCIATE ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. ZIRSCHKY. Thank you, Mr. Chairman and members of the subcommittee for holding this hearing and for the opportunity to testify. As was alluded in this panel and the first panel, we have addressed a number of concerns. In fact, just your calling this hearing helped us recall a number of issues. I'd like to briefly introduce my colleagues. Doug Hagel is director of the regional service office that services this area. Tim Hoffmann is our director of new product development, and for the members of Congress, Barbara Leach is our chief of staff who will be working being very closely with you all in legislative reforms next Congress.
Others have mentioned the Freedom to Farm bill, and it does have some new opportunities, but with new opportunities come new risks, and I enjoyed the comments about the political difficulty in helping agriculture.
My wife and I farm in Maryland about 30 miles or 40 miles outside of the Capitol. It seems like more and more farm land is used to grow houses rather than crops. It's becoming increasingly difficult where we live. The people all want to look at our farm, but none of them want the tractors on the road and none of them want the herbicides used, and we even have people calling complaining we aren't mowing our wheat. It doesn't look good. So there are all kinds of challenges in farming. Each year we put several hundred thousand dollars worth of money in the ground and hope it rains. We use crop insurance in case it doesn't, so crop insurance does work for us. It also allows us, as Ms. Gerdes mentioned, to use the markets to hedge more of our crops. So it works for us, but it can be improved and we'll need your help to do so.
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Mr. Larson mentioned some of the difficulties we have in getting things done. Our program falls under the Administrative Procedures Act and Federal Advisory Committee Act. These are good laws that were put in place to make sure that the Government doesn't do bad things to people, and there's plenty of time for public comment. Unfortunately, we have to bring the policy improvements through the same process and it is a 12 to 18 month process to get these regulation through, and our policy changes are viewed as regulations. So it makes it very difficult for us to have a short turn around time. The Federal Advisory Committee Act also makes it difficult for to us meet privately to meet with the people we reinsure at the FCIC.
We hope in the next Congress to submit a floor package, and we will be working hard within the administration. I can't go into a lot of detail now because we are talking with the Office of Management and Budget, and I have learned if you leak stuff, they get mad and you don't get the stuff even they think it's good, but I thank you for your support, and I'll answer any questions.
[The prepared statement of Mr. Zirschky appears at the conclusion of the hearing.]
Mr. MORAN. Mr. Zirschky, thank you very much. I appreciate you being here.
Mr. Thune.
Mr. THUNE. Thank you for some excellent ideas and a lot of good testimony. By the way, Dennis, tell the good folks in Groton hello for me. I think they were fearsome I might take up residency there for as long as I was spending. I was observing here on the sheet that was distributed here by Mr. Christofferson, a number of State by State break down of those who were purchasing CAT coverage and those at the buy-up level, and noticing—I'm pleased with what I'm seeing at least in terms of the buy up. It seems most people in South Dakota, those that are using the insurance, are using it at that level, but the CAT coverage is down 54 percent over 2 years ago, and I'm wondering if there is a way to better and more effectively educate producers about the insurance products that are available. Do you all in your dealings with them have any suggestions you see that might be helpful there?
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Ms. GERDES. Education happens one on one and you have to be a very good agent to know the grounds, and the agent has to work with a producer. I have been a critic of their risk management agency education program in the past and I continue to be. I think you really need to work at the public/private partnership in this regard, and it can't be done from Washington and the top down. It's got to be down at the grassroots level. There's some responsibility that agents need to step up to the plate and do more. In my agency, we provide risk management seminars every year. They are day-long seminars. We have got Dr. Barnaby from Kansas State firmly convinced that we are part of Kansas State for the purpose of those regulations. Those seminars are critical to getting the farmers using the program adequately. If your agent isn't willing to do this, then the farmer needs to finds one who is.
Mr. CHRISTOFFERSON. We are doing something the same as Ruth is talking about. We will provide to our agent or any agent who wants to put on a farm seminar, our company will do that free of charge. We are doing it at the grassroots, and they put on a dinner or something and we try to educate them on the different opportunities out there. The CRC product is an excellent product to work with the marketing and so on. The problem with CRC is, Ruth has got corn and beans, corn and bean, corn and beans, and our rotation up there, we do not have corn and beans. We have dry beans and a big part of ours is sunflowers and canola, and we don't have that product to offer on those types of crops, and that's one of the— I'm a great supporter of CRC, but we need it expanded to other crops if we can, but they're on the boards of trade, so it becomes very difficult.
Mr. THUNE. Do you recommend the participation of the program to be mandatory again? It was decoupled from the farm program in the 1996 farm bill. Do you see any value in that?
Mr. LARSON. I think that certainly if we are going to give them a payment when we have a disaster, then maybe we need to make it mandatory.
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Ms. GERDES. I don't think it is nearly as critical as dealing with the disaster legislation. The disaster legislation is going to create havoc for us and for you all. It's going to be extremely difficult to go back to the well to ask for $2 billion to improve the insurance program when we have sent about $7 billion out there. That is the issue. I don't think that linkage is nearly the issue that that is.
Mr. THUNE. It just seems like if you had greater participation, you'd spread the exposure of the risk, which would result ultimately and hopefully in lower premiums and greater coverage, and if you had more participation——
Ms. GERDES. You're absolutely right. In the Midwest, in North Dakota and South Dakota enjoy some of the highest participation anywhere in the country. Participation is down in the areas of the South, and we have just reinforced why they don't buy crop insurance.
Mr. CHRISTOFFERSON. Excellent point.
Mr. THUNE. One more question. Most of you would agree, I think the producers agree that one of the things that is necessary is an infusion of more Federal dollars into the program, and I guess I just have one question in terms of, if we were to do that, how would you see that those dollars were spent most efficiently? Would you do it in the form of additional premium subsidies, increased coverage levels, new products, reimbursement to agents? [Laughter]
How would you go about seeing that those dollars are spent most efficiently as possible?
Mr. ZIRSCHKY. We are looking at both options, not only to increase the subsidy, but also increase the levels of protection people can buy. So we are trying to balance both of those options, and we are discussing that with be Administration.
Mr. THUNE. Then that will be part of that embargo of information you discussed that you can tell right now. You can tell us, but you would have to kill us. All right, with that I yield back, Mr. Chairman.
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Ms. GERDES. I would like to add to that. The subsidy issue is the critical issue, and unless you reform on both of those issues, the five principles I laid out, I'm not sure you're going to solve the long-term problem.
Mr. MORAN. I'm already working on my argument with my colleagues on why you have to increase the subsidies for crop insurance. We can never do what we did this year again, spend $2 billion to save $6. Perhaps it's the best argument I can come up with listening to Mr. Peterson's concerns as well as what you have all raised.
Mr. Boswell.
Mr. BOSWELL. Thank you, Mr. Chairman. I agree with some of the discussions that we could be on the threshold of some hard sells with some of our colleagues to represent the farm community. Because of this, I am concerned about that. Just to throw it out there so we are talking about it some, the reimbursement. I heard quite a bit about that several months ago, but nothing about it today. Is that a concern?
Ms. GERDES. No. I think if we got permanent funding—we have all had to live with the terms of it. We are trying to be more efficient. Certainly, it would be much more feasible if we could deal with some of the paper work. Simplification needs to happen for us to be profitable.
Mr. BOSWELL. Thank you.
Mr. CHRISTOFFERSON. I would like to address that too. The CAT part of the formula, I think needs to be addressed. We are handling CATs for nothing. I think that issue—I agree with what she's saying on the expenses of reimbursement, but nothing with the CAT fees. We are getting nothing to handle that product, and that doesn't give the agent much incentive to promote the CAT. That's all I would like to say about that.
Ms. GERDES. I would qualify that by saying that the CRC and the revenue products needs to be made equal. That's where the real problem is. The CRC takes hours and hours of education, and we get less reimbursement for doing revenue products than for a multi peril product.
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Mr. BOSWELL. OK. You have qualified some. You know, I have got a large district, so I see a lot of different agents. I'd be very confident for a producer from any of you to get the right kind of guidance, but there's a lot of different agents out there, some just pushing the high premium stuff and so on and so on and so on. This is something we have all got to deal with, and back to you, John, I don't know what I'd do, but this is something we need to deal with and probably rely on you folks more than anybody else that I can think of at the moment. So this is something that I am concerned about. Another good panel. Mr. Chairman, you did a good job. Did you put this together yourself?
Mr. MORAN. I have to defer to staff as usual.
Mr. BOSWELL. This has been a good experience for me. Thank you.
Mr. MORAN. Mr. Peterson.
Mr. PETERSON. The issue of increasing the reimbursement—Mr. Zirschky, you probably don't have this information, but could you make it available to us how much going to 50 percent subsidy on the whole system would cost?
Mr. ZIRSCHKY. In what kind of scenario would you like us to examine it?
Mr. PETERSON. Say you took last year and applied 50 percent across the board. What would that cost? If you could make it available to me and the other members of the committee, I think that would be helpful to give us some idea of what we are talking about here.
Mr. Larson, you made the comment about the disaster that you think RMA should administer that. And I'm not sure what I think, but you know, when this was originally put forward in the Senate, the discussion was that this was supposed to be a supplemental crop insurance, that it was—I don't know if this was uniform, but what I heard was they were recognizing that our people up when we had the disasters a number of years in a row could not buy crop insurance coverage for what they should because the yields went down and so forth. So we were going to give people that had multi-year disasters—at that time they were talking 3 years out of the 5—25 percent of whatever their crop insurance losses were over that period of time. And originally, I think it was targeted in the legislation Minnesota and South Dakota, and as always happens, when this thing got written in the back room, five or six people that were in the room and the 4,000 pages that were put into this deal, they dropped out the specific naming our of states, and it was pretty wide open.
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So, I don't know if I'm speaking out of school or not, but we got a couple of weeks ago or week and half ago some kind of intelligence from someplace that OMB had put out some numbers how the $875 million was going to go, and the numbers that I heard were Minnesota was going to get $43 million North Dakota $114 million, and South Dakota was going to get $74 million, and Texas was going to get $24 million. There was not the $1 1/2 billion that everybody understood it was going to be at the time and Georgia—this was the money that was supposed to go to us. Nobody would tell us where that came from or anything about it and still won't tell us to this day, but my sense is in looking and thinking about this is what probably happened is this, they probably took this formula and ran it through the system, and that's how it came out, and of course, needless to say, North Dakota and South Dakota raised hell and we raised hell. So now they are looking at something else.
The long and short of it is that because of the way this is developed and because we don't know if we are going to put 1993 or not, which was our big loss year, if we run this through RMA, I'm not sure we are going to get the right results because a lot of our people didn't buy insurance. It doesn't make economic sense or the coverage was down so they had a loss, and they didn't get reimbursed because the system doesn't work. If you base this on what people got paid, it's not going to work. And I don't know, so I guess my question after all of this long dissertation is can RMA—or if we use the RMA system, can we come up with a way to figure that out—how it was screwed up, and adjust for it? So I would ask you that, and Mr. Zirschky, who is shaking his head over there.
Mr. ZIRSCHKY. Mr. Larson can probably answer better than I do, and I understand the problem. One thing that hasn't been mentioned here today, and I never got an answer from anybody about is prevent plant, a part of that formula, in our area, since 1995 we have paid out literally millions of dollars in prevent plant payments, and if we don't include those, we are not going to be——
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Mr. PETERSON. I don't think you have to worry about that. I think the other issue is more critical than this.
Mr. LARSON. The same point is true. We have got customers that weren't customers of ours 2 years ago that had a loss out there for prevent plant, but because their agent didn't know what he was doing, they didn't get paid. So we have got people in that same situation, and I don't know the answer to that question.
Mr. PETERSON. Maybe Mr. Zirschky, I don't know if you can answer this or not.
Mr. ZIRSCHKY. We are still discussing some of the issues with the USDA, but yes, we have the capability to deliver checks very quickly to people for those who had insurance, but we also carry payments for anyone who has an insurable crop, and we can go back to 1993. We can also, at the committee's request, run various scenarios. If the committee would like to request the information——
Mr. PETERSON. I will request that then to follow-up on that. Can you go in there and figure out what people's insurance payments would have been if their yield would not have been used under the system, you know what I mean? In other words, you know, we up in Kittson County, we have people who have a bushel history down to 20. A lot of them dropped off coverage and went to CAT coverage because they couldn't afford it. In fact, CAT coverage at those levels—unless you have complete crop failure, you don't get anything. So can you adjust this, back up and say if the system would not have had this effect that if that person would have had a 50 bushel yield through this whole time, what his payments would have been if he would have bought this. Because that's basically what you're going to have do if you're going to be fair about this.
Mr. ZIRSCHKY. Yes. We could apply some adjustment factors. If you could layout, preferably in a letter to me, what scenarios you would like us to run, and I can provide technical support to the committee.
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Mr. PETERSON. Because I don't know what exactly is going on there. Do you know where these numbers came from? These 43 million? Did you hear those numbers?
Mr. ZIRSCHKY. We have probably 20 different scenarios that we have looked at.
Mr. PETERSON. Apparently—here it is. The multi-year loss that's showing 24 to Texas, 74 to South Dakota, 43 to Minnesota, and North Dakota is 114, which I mean, I think all of us that were working on this expected that most of the $875 million was going to go to these three States.
Mr. ZIRSCHKY. Under this scenario or——
Ms. GERDES. I would suggest to you that the appropriate place for this is RMA simply because RMA is the only one who has anything to do with the production records and have got a history.
Mr. PETERSON. The FSA office has that.
Ms. GERDES. A 10-year history of production?
Mr. ZIRSCHKY. They are an average for an individual.
Mr. PETERSON. I'm suggesting might work better for us than the crop insurance. That's my concern. See, I think that this thing is being skewed because of the effect of what happened with this notwithstanding classification and all this other foolishness that was in here and what that did to people in terms of what they got paid, and if they bought insurance, and what level. How can anybody really know what the effect of all of that was? What I'm concerned about is when people find out what happens, they are going to go ballistic, and you'll have a revolt. I know this little area that wants to go to Canada, maybe the whole part of my district.
Mr. ZIRSCHKY. USDA is currently looking at a number of scenarios. If you compare both FSA and RMA, I believe they could deliver the payments. The decision that Secretary Glickman will have to make is how those payments could be distributed in a fair and equitable manner. I can't argue on that because it's my boss's boss's boss that has to make the decision on that, but we do have the capability.
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Mr. PETERSON. How soon are they going to make the decision?
Mr. ZIRSCHKY. Secretary Glickman is currently headed to Asia to help open up some markets there, and it's more important to the Department to make sure we have done it right rather than fast.
Mr. PETERSON. Just not going to do it this week or something?
Mr. ZIRSCHKY. Yes, sir. I would prefer you would wait for RMA.
Mr. PETERSON. I have no problem with that. My only concern is we figure out a way to get this to the right people. That's what I'm concerned about.
Mr. ZIRSCHKY. On the market loss payments, I believe the rationale was because the price fell so much, every producer was impacted and lost.
Mr. PETERSON. I don't agree with that. I mean the corn people and the 1997 crop—if they would have marketed, if they would have been on the ball, they shouldn't have lost any money at all. I had a corn producer tell me he didn't sell his crop, and he thought that we should pay him because we didn't tell him to sell in last December.
Mr. ZIRSCHKY. We sold our corn for $3 a bushel last year, and we got $5,100 electronically transferred to us. That was the FSA way of distributing the money. So, quite frankly, we did all right personally.
Mr. PETERSON. That's my point. Here's what I'm getting at, and again I apologize, but during this period of time when we went through this transition, we didn't have anything to sell. When prices were good, our people didn't have anything to sell, and see, that's what's not being given any credit in this, and what I'm concerned about are the people that had crops to sell that didn't sell when they should have because they were too greedy or lazy or whatever it was. Why should we bail them out? Why shouldn't we give money to the right people that have never had payments. And their transition payments are five times what ours are, and that's the thing that I'm concerned about is the $6 billion out here.
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Mr. MORAN. Before we run out of time, I think this debate has occurred and been resolved in a particular fashion that we are going to live with the consequences of——
Mr. ZIRSCHKY. Would the committee like a rationale for the record on how those payments were distributed?
Mr. MORAN. I think we would all be interested in that. Timely disaster payments—can you give us an estimate of when that's going to occur?
Mr. ZIRSCHKY. No, not in the next 10 days, but I don't know after that.
Mr. MORAN. Can you give us a perimeter of when that's likely to occur? By the end of the year?
Mr. ZIRSCHKY. That decision is way above my pay grade. [Laughter]
Mr. MORAN. I think I heard today that the priority would be on insurance and fixing the system. The priority is more on crop loss than on revenue protection. Is that accurate? Do you want tell me that I didn't hear that correctly. Maybe I heard that more from the producers?
Ms. GERDES. I didn't hear that from the producers. What I heard was the subsidy issue all across the board.
Mr. MORAN. All across?
Ms. GERDES. All across. Then again there's a lot of people that aren't into the revenue coverage because of the cost.
Mr. MORAN. I assume there's still a way, Mr. Zirschky and others, that we could structure the ad hoc disaster relief that was passed by Congress a month ago in a way that does not discourage these—at least does not significantly discourage the use of crop insurance, and I assume that's the direction we're trying to head. We have, in fact, instructed the Secretary to do that.
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Mr. ZIRSCHKY. That is the statute, and that's the position that RMA has taken within USDA.
Mr. MORAN. In particular, of the pothole region, I'd like to have a list of who the board members are, and what we they represent. I'm sure that's someplace in something I've seen before, but I'd like to know who they are.
Mr. LARSON. To my knowledge, there's two farmers. I think one from Iowa and one from Kansas.
Mr. ZIRSCHKY. There was a gentleman from Kansas who is an insurance agent. I believe he's from Plainville, and a gentleman from Iowa, and California. We are also in the process of trying to establish a Risk Management Advisory Board under the Federal Advisory Committee Act to bring in additional input into the program.
Mr. MORAN. Which I assume you could do without Congressional authorization?
Mr. ZIRSCHKY. Yes.
Mr. MORAN. But if we expanded the size or nature of the board, that would take Congressional activities.
Mr. ZIRSCHKY. Yes, I believe it would.
Mr. MORAN. Have you heard any comments about livestock, protection of livestock producers? Did any of you pick that up in your business? Is there something there we ought to be aware of?
Ms. GERDES. I think if you would get rid of the bottleneck in getting new products to the farm——
Mr. MORAN. You would see that as a product. Ms. Gerdes. You would see that as a product. There have been numerous times particularly in South Dakota—I come from a cattle ranch and there are many ways you can do it very efficiently.
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Mr. MORAN. Mrs. Gerdes, you have probably told me the most enlightening thing, certainly one that I've written down, when elephants fight, it's the grass that suffers, I like that, and it may be very timely as we refer to Washington next week.
Ms. GERDES. In regard to crop insurance, I'm sure.
Mr. MORAN. And a few other things. I do appreciate this panel's participation very much, and what I would like to do, we have just have a few minutes left. I'd like to know if there's anyone else in the audience who would like to address the subcommittee just briefly with any thoughts or comments that you might have. It's not unfortunately every day a Congressional committee comes to the Midwest and the Farm Belt.
Mr. INGER. I'm Dave Inger. I'm a crop insurance agent. This is a little bit confusing, but I'm a crop insurance agent/commodity broker and am involved in cash grain as well as input financing. All of the discussions that I hear about crop insurance deal with either a cold crop or whole crop loss. The most significant problem that a farmer has today, and I think you would agree with this in northern Minnesota, this 50 percent crop loss, 40 percent crop loss is the area where the farmers retention of 35 percent on a 65 percent coverage just doesn't get any dollars out of crop insurance, and consequently, obviously less dollars out of cash grain. There is not enough revenue coming from all sources to pay for the production expenses. My client base, and I think many of the farmers out here feel that they're entitled to at least get their inputs back, that being; the fertilizers, seed chemicals, petroleum, crop insurance premiums, and land costs.
They are not asking for the living expenses and probably not the machinery and equipment expenses, the principle and interest, but they have got to live. They have to live. Today the farmer that is suffering a 40 percent crop loss on wheat, is probably short on just production expenses alone $40 to $50 an acre, on corn, short $70, on soybeans, short 50 to 60. And this is, I think, the area that really needs to be fixed. There's a hole out here that really needs to be plugged, and I would propose that we look at some type of an enhanced program where a farmer could buy a 35 percent coverage level above the 65 percent coverage level with a 10 percent reduction or retention, which would be a separate policy which would plug that hole that we have in here today and probably eliminate the need for the ad hoc disaster thing that we have and that we are constantly plaguing you people with in Washington. Thank you. Any questions?
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Mr. MORAN. Thank you very much. Any questions?
Mr. PETERSON. Has that ever been proposed?
Mr. ZIRSCHKY. Something like that's being talked about. On cost of production insurance?
Mr. PETERSON. On additional policies over and above that cost of production. I know they're talking with Mr. Ackerman about that.
Mr. ZIRSCHKY. I don't know.
Mr. HOFFMANN. I believe there's actually available today in some form from the private sector a disappearing deductible time policy that's filling a gap in that insurance.
Mr. INGER. They're paying on a bushel per loss basis.
Mr. PETERSON. What I'm talking about is using a companion program type repayment structure where you could buy $60 to $70 worth of coverage on corn, for example.
Mr. HOFFMANN. I have some graphics on it.
Mr. ZIRSCHKY. There's a more recent proposal within RMA different scenarios similarly. I'd be more than happy to take those back. We are working on something now on how we could file that as an endorsement or rider.
Mr. MORAN. Is there any other Member——
Ms. GERDES. The company I place my business with has been working with this, John Scherle, for a little more detail.
Mr. SCHERLE. We actually have introduced in, I believe, North Dakota, a cost production policy which is—we developed and we did not take it to RMA because frankly, we wanted to get it on the market. It uses the extension service's actual cost of production published for each county, and the producer can go and get up to 125 percent coverage on that figure. So that does address things like living expenses and land payments, and things like that, but it actually is cost reduction up to 125 percent based on the actual cost as determined by the extension service.
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Mr. PETERSON. What is the cost per acre?
Mr. SCHERLE. It is very expensive right now because there is no subsidy, and that's where you get into the problem of——
Mr. PETERSON. For wheat, for example?
Mr. SCHERLE. I couldn't even tell you where it's priced right now, but it's been filed for two reasons; one to protect, again it's a private company developed product that we don't want to get—we will lose control of it if we don't file it, and that's one of the issues of ownership that's bottling some of these ideas up, and the other is the approval process because it is so lengthy, and it just—it is available to be purchased up there, and it is one of those new products.
Mr. PETERSON. Only in North Dakota?
Mr. SCHERLE. It was done in to response to, I think it was Senator Conrad that had an interest in that, and we did that in response to a question that he had to develop something like that.
Ms. GERDES. You can be assured because of the subsidy issue, that it's going to be 40 to 50 percent higher than it would need to be if that subsidy was portable, and that's what went to your question earlier and why I shook my head, no because we need to figure out what that subsidy is going to be and make that subsidy portable whether its cost production, revenue insurance, or simply a bushel guarantee that the farmer can get.
Mr. MORAN. I think my question goes to the priority. If we are going to have of X number of dollars to put into crop insurance, are we going to create the subsidy in one area to the exclusion of another, or treat everybody the same? I think that's a significant policy issue for all of us to try to figure out. Would you state your name for the court reporter?
Mr. SCHERLE. John Scherle. S-c-h-e-r-l-e with American.
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Mr. MORAN. Yes, sir. This will be our last opportunity for input.
Mr. COIL. Thank you. Larry Coil. I'm an agent from Pierre, SD. I've been an agricultural lender for 13 years, as well as being in crop insurance for 20. I sit on the advisory board for an insurance company, and one of the things we try to do in coming up with a product, increase the coverage, and enhance it is—one of things that we felt we needed to do was use MPCI product or crop revenue as an underlying coverage, and then possibly go to a whole farm unit or enterprise unit because as you combine units, you lower overall risk, and maybe look at an umbrella policy, something like what you do with the Medicare and Medicare Supplement. You have a supplemental policy that may be offered by the private industry.
One of the things we run into when we talk about this at our meetings, and everybody agrees this is something we need, what we run into is, it says RMA—one of the rules is, you cannot shift risk to the Government. So by having this policy in the private sector, if you're using the underlying MPCI policy as your bottom coverage and then having this as a supplement, and the if you're paying some of this loss on the bottom side of the MPCI policy, they're saying that you're effectively shifting risk to the Government, and you're not paying on your umbrella policy because you're using the money from the Government that to pay the underlying loss. I think that's one of the problems we need no solve.
Mr. MORAN. Thank you very much.
Mr. ZIRSCHKY. Before you adjourn the hearing, to make sure we provide you with what the committee has asked for, can I quickly go over this list? OK.
Information at 50 percent subsidy on all products of cost. How it's then allocated to the marketing loss payments, who the Board members are, and would you like any information we have on the types of costs of production or other insurance?
Mr. MORAN. I think that's the list I heard, although there may be others. My suggestion would be that you also do the 42 percent while you do the 50.
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Mr. LARSON. How about 60 too? [Laughter]
Mr. ZIRSCHKY. I mentioned in my statement, it's tough to explain to suburbanites, the economics of farming, and I'm sure many of your colleagues' agriculture staffs have never been to a farm, so if you would like to invite your colleagues' agriculture staff to see a real farm, we would be delighted to open ours up.
Mr. MORAN. Thank you very much.
Mr. THUNE. Do you have pheasant hunting?
Mr. ZIRSCHKY. We have plenty of deer hunting.
Mr. MORAN. I appreciate your attention. I particularly appreciate the folks from this region of the country joining us here today. There are staff members here from Mr. Minge's office as well as Senator Johnson's office, and I assume they can make themselves available for any comments you all have for them.
Mr. Thune, we appreciate you inviting us to South Dakota and your staff has been very helpful to our staff. Robert Fouberg and Ryan Weston, thank you very much for allowing us to appear like we know something about what we are doing, and committee members, particularly you, Mr. Peterson and Mr. Boswell, I know how difficult it is to get away from home. We all have our own responsibilities and families, and I appreciate you taking your time out of your day before we reconvene in Washington to be in South Dakota, and it's very kind of you to come and help us get an education, and again, I thank Minnehaha County for hosting us in their facilities here. It's a great meeting room.
The record will remain open for 10 days if people have additional items they wish to submit for the record. We are adjourned.
[Whereupon, at 12:45 p.m. the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
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Offset All Folios Here