SPEAKERS CONTENTS INSERTS
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57–123 CC
1999
1999
REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM
HEARING
BEFORE THE
SUBCOMMITTEE ON RISK MANAGEMENT,
RESEARCH, AND SPECIALTY CROPS
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
MAY 3, 1999, LEXINGTON, KY
Serial No. 106–3
Part III
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Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska
Vice Chairman
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
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KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
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
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
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
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on Risk Management, Research, and Specialty Crops
THOMAS W. EWING, Illinois, Chairman
BILL BARRETT, Nebraska
Vice Chairman
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
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RAY LaHOOD, Illinois
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
GARY A. CONDIT, California
Ranking Minority Member
GEORGE E. BROWN, Jr. California
CALVIN M. DOOLEY, California
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
SANFORD D. BISHOP, Jr., Georgia
JOHN ELIAS BALDACCI, Maine
VIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
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LEONARD L. BOSWELL, Iowa
KEN LUCAS, Kentucky
MIKE THOMPSON, California
(ii)
C O N T E N T S
Bishop, Hon. Sanford D., Jr., a Representative in Congress from the State of Georgia, opening statement
Ewing, Hon. Thomas W., a Representative in Congress from the State of Illinois, opening statement
Fletcher, Hon. Ernie, a Representative in Congress from the State of Kentucky, opening statement
Lucas, Hon. Ken, a Representative in Congress from the State of Kentucky, opening statement
Witnesses
Bullock, John, president, Burley Farmers' Advisory Council
Prepared statement
Coyle, Marshall, first vice-president, Kentucky Farm Bureau
Prepared statement
Hornback, Paul, president, Council for Burley Tobacco
Prepared statement
Snell, William M., associate professor of agricultural economics, University of Kentucky
Prepared statement
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West, Henry, vice-president, Burley Tobacco Growers Cooperative
Prepared statement
REVIEW OF THE FEDERAL CROP INSURANCE PROGRAM
MONDAY, MAY 3, 1999
House of Representatives,
Subcommittee on Risk Management,
Research, and Specialty Crops,
Committee on Agriculture,
Lexington, KY.
The subcommittee met, pursuant to call, at 9:05 a.m., in the Fayette County Cooperative Extension Office, Lexington, KY, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
Present: Representatives Fletcher, Bishop and Lucas of Kentucky.
Staff present: Ryan Weston, John Riley, Keith Rogers and Kevin Atkins.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. Ladies and gentlemen, if you will take a seat, we are going to get started.
I want to begin by thanking you for your hospitality since we have been here in Lexington. It is a pleasure to be here for this hearing this morning and I am pleased that you have come out to share your thoughts with us.
Before I move on to talk about why we are in Lexington, I would like to thank my colleague, Ernie Fletcher, for hosting this event, and Sanford Bishop from Georgia and Ken Lucas, also a Kentucky Congressman, for being here and attending.
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We are here today to listen to you about your views and thoughts on the Federal Crop Insurance Program, although I am sure that we will also hear a great deal about one of your major crops, tobacco, and that is fine also.
The subcommittee has worked over the last few years to successfully defeat appropriation amendments that would have limited or ended Federal crop insurance availability to tobacco farmers. I also realize that one of the major tobacco manufacturers recently had a meeting to get input on the future of your industry.
As a producer myself, not of tobacco but of corn and soybeans, I know that you have a lot more than crop insurance on your mind. But this is an issue of great importance to the subcommittee and to the entire Agriculture Committee. The budget that recently passed the House provided $6 billion over the next 5 years for Federal Crop Insurance Programs. We are interested in what you have to say about our program; what is working well, what is not working, what we can fix, what we should fix and how we can make this whole system serve you better.
The committee is on a two-track program in crop insurance. The first track is to determine what we can do in the short run—now, as soon as possible—to improve the program. Some of the short-term improvements include an increase in the farmer premium subsidy, and there has been a major increase this year, adjustment of rating policies, incentives to encourage private development of risk management products, equalizing administrative and operating percentage subsidies for all crop insurance products, allocating premium discounts to producers who demonstrate history of participation without incurring loss, and I cannot stress enough that we will be improving the enforcement of the rules of the program.
The second track is a long-term effort, leading up probably to the renewal of the farm bill in 2002. The ideas put forth by the chairman of the full committee, Mr. Combest, would establish an insurance type pooling structure that would pay out in bad years and build up reserves in good years. We are seeking to have your input on this concept idea as we take the information back to Washington to work on refining the chairman's idea.
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I would like to recognize somebody who probably does not need to be named in this group, because this is his hometown, but Ernie, we are pleased with all that you have done to set up this hearing and thank you very much.
We are also glad to have Ken Lucas from Kentucky, not from Lexington, but from northern Kentucky, which is closer to Illinois probably, is it not, Ken?
Mr. LUCAS. Yes.
Mr. EWING. I made a deal last night with the Farm Bureau here.
Mr. LUCAS. How is that?
Mr. EWING. We are not going to grow tobacco if you do not grow corn. [Laughter.]
Now that is not in writing, so if any of the press is here, you do not want to put that in the press.
Ken, thank you for coming.
Sanford Bishop, a member for a number of years of the Agriculture Committee from Georgia, my colleague to my right, and somebody that I have worked very closely with in other important programs that come under our subcommittee, particularly peanuts, and you have some tobacco in your area also in Georgia, so thank you for being with us.
I want to recognize John Riley of Mr. Stenholm's staff. John. John is on the professional staff of the ranking member of the committee, Mr. Stenholm.
And Representative Ron Lewis' staffer, Keith Rogers is here. Keith, thank you for joining us.
Kevin Atkins of Senator McConnell's staff, thank you for being here. And finally Ryan Weston of my staff. Ryan, thank you.
Our procedure today, because time is always limited, we will be here until noon, we have plane tickets back to Washington, we need to go back there this afternoon, though with this kind of weather, I may just cancel and see if I can stay around Kentucky a little longer.
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We are going to start with the panel which has taken their seats at the front of the room. They will give us their concise statements in about 5 minutes and then we will have some question and answer between those of us here at this table and the panel. Then we are going to go to the audience. And we do hope that you will be thinking of questions and comments that you would like to make for us to have as part of the record of this hearing, ideas about agriculture, about crop insurance, about the crops you grow here in Kentucky. And we will listen to you and have an exchange as to your ideas.
I would like to also introduce the RMA representative, Mitchell Cruther, he is with the regional branch office of the Crop Insurance Agency. And also we have Mr. Hampton here, who is the State Executive Director of the Farm Service Agency. Thank you.
Now I will turn to my fellow members on the panel if any would like to make an opening statement or comments. And we will start with you, Congressman Fletcher.
OPENING STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY
Mr. FLETCHER. Thank you, Chairman Ewing, and it is a pleasure, I want to thank you for holding the hearing and my other colleagues for participating in this, and each of you that have come to participate also, the witnesses and others. It is a beautiful day out there and I know a lot of you could have been doing some work that is much needed since they are predicting rain tomorrow, but we thank you for making that sacrifice and coming out this morning.
It is a pleasure for me to really have this hearing here because I think as we look at the last few years, we know how critically important it is that we focus on our farmers. Even the President in his State of the Union address talked about the family farmers. Most of our farms here are relatively small farms and it is very important, it depends upon the risk management, the tobacco program and other things that we will talk about this morning. And so it is a pleasure that we can come here and hear your concerns and make sure that we take them back to Washington.
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Sometimes as we look at members that may be from—not have quite the experience and understand how our policies impact you right here and us here in Kentucky and other states that grow tobacco and have the concerns that we have, I think it is very important that we certainly hear what you have to say and make sure that we respond. So it is a great pleasure to be here and, Mr. Chairman, thank you very much.
Mr. EWING. Thank you. Mr. Bishop.
OPENING STATEMENT OF HON. SANFORD D. BISHOP, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
Mr. BISHOP. Thank you very much, Mr. Chairman. Let me thank you for holding this hearing, let me thank Representative Fletcher for his wonderful hospitality and let me thank all of you for coming.
The Chairman has held a hearing similar to this—several, as a matter of fact—in Georgia, and I think all across farm country in America, farmers are really feeling the pinch. We have had, in many parts of the country, multiple disasters and as a result, there is a real farm crisis. If we are going to repair the safety net, an essential component of that will be reform of our Crop Insurance Program, which is why we are here to talk with and listen to the people, as they say, where the rubber meets the road. You are the people on a day-to-day basis that understand what the problems are and also what the solutions are.
So we are not—I know certainly I am not—one of those all-wise people from Washington who has all the answers, but I am all ears, I am a sponge, I am here as a part of this subcommittee hearing to gather information to take back so that when we do undertake a reform of our crop insurance system, it will help us to design a package that will adequately meet your needs and the needs of the farm community across this country in managing the risk, the severe risk, that you face.
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Thank you so much for coming; thank you, Mr. Chairman and my colleagues for being here and sharing in this, because I look forward to what you have to say and carrying that information back.
Mr. EWING. Thank you, Sanford, and now Congressman Ken Lucas.
OPENING STATEMENT OF HON. KEN LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KENTUCKY
Mr. LUCAS. Thank you, Mr. Chairman. It is, for me as well, a pleasure to be here, and Ernie, I appreciate you inviting me and for being the host of this.
I am a freshman Congressman at age 65, but I just do not feel that great wearing a beanie, it just does not seem like—for some reason, it just does not work.
But I think a lot of you folks who know me, I grew up on a tobacco farm in Green County, which is halfway, Mr. Chairman and Sanford, about halfway between here and Cincinnati, right off of I–75, and so I certainly was well aware of the crisis that we have in the tobacco community, but I have to confess that it was only as a member of the Agriculture Committee did I find out what crisis that the rest of our farm community is in across the Nation. It seemed just unreasonable to me that with the economy doing so well and the unemployment low, inflation low, but I had to go to Washington to find out what crisis our farm community is in all over this country.
So as an old guy, I do a lot of listening and so that is what I am planning on doing here today, as I have in all these hearings with the Agriculture Committee in Washington, is do a lot of listening.
So again, it is a pleasure for me to be here and I hope to learn from you folks here in Kentucky today. Thank you.
Mr. EWING. Thank you, Ken.
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I want to also thank the Fayette County Extension Office for allowing us to have our meeting here today. This is a beautiful facility and one that we are very proud to have the opportunity to use.
Also, Congressman Fletcher's staff, Daniel, who is his chief of staff, is here and he may have taken somebody to the airport; Brenda and Lorie from his staff. Thank you very much for all the work you have done in putting this together.
I am now going to introduce the first panel and we welcome you and we are just pleased that you took the time to come today. Mr. Marshall Coyle, First vice-president, Kentucky Farm Bureau; Dr. Will Snell, associate extension professor of agricultural economics, University of Kentucky; Mr. Johnny Bullock, president of the Burley Farmers Advisory Council; Mr. Paul Hornback, president, Council for Burley Tobacco and Mr. Henry West, vice-president of Burley Tobacco Growers Cooperative.
I welcome all of you and we look forward to your testimony. I would remind you all that your full testimony will be made a part of the record here today. Thank you. We will start with you, Mr. Coyle.
STATEMENT OF MARSHALL COYLE, FIRST VICE-PRESIDENT, KENTUCKY FARM BUREAU
Mr. COYLE. Thank you, Mr. Chairman.
Let me just begin by saying that I certainly appreciate, on behalf of all of us here in Kentucky, you and the members of your subcommittee taking the opportunity to come to Kentucky, we are certainly glad to have you here and look forward to the comments that are made here this morning.
I am Marshall Coyle and I am here this morning representing more than 79,000 farmer members of Kentucky Farm Bureau, all across the great Commonwealth of Kentucky. All of us involved in agriculture here, have a vital interest in the ongoing Congressional discussion regarding crop insurance reform.
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But Mr. Chairman, I also serve as chairman of the Kentucky Farm Bureau Tobacco Committee, and I would certainly be remiss in my duties I think if I did not mention briefly a little about tobacco, since your subcommittee does have jurisdiction over that program. We have over 44,000 farmers that produce tobacco in 118 of our 120 counties. The Tobacco Program is extremely important to us. I think we showed that in the last referendum that was held on the program when over 98 percent of our farmers voted in favor of keeping the Tobacco Program. Simply put, the Federal Tobacco Program keeps small farmers farming. Without it, tobacco farmers would be at the mercy of the manufacturers seeking much cheaper resource inputs.
The current challenges in the tobacco community are not unlike those challenges in other commodities of agriculture that are in a transition period. Managing risk will be crucial for farmers during this transition period. As most segments in agriculture seem to be relying more and more on contract production, one questions if contract agriculture will be the preferred risk management tool. Moreover, the underlying question becomes how will our farmers maintain their independence and what becomes of the small family farm under contract agriculture?
In addressing reforms to risk management, specifically crop insurance, Congress will begin the government's role in agriculture in securing the proper type safety net. As you know, the farm sector has been distressed by economic conditions, including declining exports, prices and natural disasters. These occurrences have almost every commodity interest looking for some type of relief that will maintain their very existence. Dairy producers are seeking more stable prices, grain farmers and those raising livestock are seeking adequate compensation and tobacco farmers are seeking to guard against future quota cuts and price reductions.
If Congress wants to acclimate agriculture to a more open market environment and individuals toward more responsible risk management planning, then it must become more selective in its approach toward alternatives.
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Today, subsidy levels for higher coverages of insurance are not enough to entice all farmers to purchase buy-up coverage, so many do not.
Congress is in a unique position to help farmers through a difficult adjustment period. Already, discussions have begun in the U.S. House and reports have been published on substantial changes to the Crop Insurance Program. We would like to offer our comments on some of the current discussion.
First, there have been suggestions to base price elections on the average prices received by producers for the previous five years, rather than the projected Chicago Board of Trade market. Farm Bureau policy calls for various insurance coverages and price elections that accurately reflect market prices and risk conditions.
Second, considering that catastrophic coverage may be the only viable option, if other policies do not become more economically feasible, Kentucky farmers are trying to trend more toward buy-up coverages. In 1998, 1,500 of our farmers selected buy-up coverage over catastrophe coverage. This year, that number has increased by about five times to 5,100. Farm Bureau does support a premium subsidy for buy-up coverage at a minimum level of 50 percent. This includes the amount of buy-up coverage above the current catastrophic coverage.
Third, while we realize there is controversy in the methodology and recommendations of the report to the Secretary on Federal Crop Insurance, it did highlight certain concerns that do need attention. According to the report, the government has lost millions of dollars in recent years due to inequitable risk sharing with reinsurance companies. The report also concluded that sound actuarial practices were not followed.
Fourth, recent multi-crop losses have contributed to the cause for last year's $6 billion assistance bill. This is due to the fact that the current crop insurance policies do not adequately cover producers who experience those significant losses. Farm Bureau believes this problem could be remedied by allowing farmers to drop one year of production records from the actual production history calculations.
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Fifth, while most of the major commodities are provided with risk management options, there are still numerous crops that are not covered by the program; specifically, coverage for livestock. Kentucky ranks 25th in livestock numbers. Livestock should be included as a defined crop under Federal Crop Insurance Corporation Act.
And finally, Farm Bureau believes that we should encourage educational programs that provide risk assessment and management, financial management and marketing information for farmers. One of the best ways to acclimate any farmer to innovative programs is through local community-based initiatives involving government officials, agricultural leaders and extension.
Mr. Chairman, as you and the members of the committee know, farming is a risky endeavor. We operate our farms at the mercy of mother nature. We certainly do appreciate and applaud your efforts and that of each member of your committee to address the much needed reforms on the Crop Insurance Program. And we certainly will look forward to working with you as we proceed on through this program and we hope that you will take to heart the comments that we have made and our suggestions on reforming crop insurance.
Again, I thank you for the opportunity to appear before you this morning and again appreciate you being here in Kentucky and holding this hearing.
[The prepared statement of Mr. Coyle appears at the conclusion of the hearing.]
Mr. EWING. Thank you very much. And now, Dr. Will Snell.
STATEMENT OF WILLIAM M. SNELL, ASSOCIATE EXTENSION PROFESSOR OF AGRICULTURAL ECONOMICS, UNIVERSITY OF KENTUCKY
Mr. SNELL. Thank you, Mr. Chairman and other members of the committee. It is certainly an honor for me to be able to testify before this committee. My name is Will Snell, I am an agricultural economist at the University of Kentucky, where I work closely with policymakers on a lot of the issues related to the Tobacco Program.
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I realize that this hearing is devoted to the Federal Crop Insurance Program and I certainly will address some of the issues regarding this program. However, I would also like to focus some of my testimony on the overall risks facing Kentucky agriculture, particularly tobacco farmers, which you cover in this committee. I will begin my testimony with some general remarks about the uniqueness of Kentucky agriculture.
Kentucky agriculture is comprised primarily of a large number of small family farms. According to the latest census, Kentucky possesses over 82,000 farms, which is the fourth largest in the Nation. The average farm is 162 acres, roughly one-third the national average.
These farms produce a wide range of agricultural enterprises ranging from traditional grain and livestock enterprises to some emerging exotic enterprises including freshwater shrimp and on-farm festivals. But the one thing that is common to most Kentucky farms is tobacco.
Despite a relatively large number of farms leasing out their tobacco quota, tobacco production still occurs in over 50 percent of Kentucky farms with the average tobacco production just being a little bit more than 5 acres per farm. Overall, as Mr. Coyle pointed out, tobacco is produced in 118 of our 120 counties, generating farm sales of some $800 to $900 million annually, which represents over one-third of the net cash return from agriculture sales in Kentucky.
Given the current agricultural environment, this committee is well aware of the attention being devoted in Washington, DC and around the Nation in the area of risk management. Tobacco farmers adopt a variety of means to manage risk, including enterprise diversification, participation in cooperatives and marketing alliances, off-farm employment and also crop insurance.
In recent years, approximately 40 percent of Kentucky tobacco acres have been insured under the Federal Crop Insurance Program with another 10 percent insured through private wind and hail policies. This compares to over 80 percent of the flue-cured acres being insured in the Carolinas, where larger capital investments in tobacco farming and the threat of hurricanes present a much greater risk to these farms.
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For those burley tobacco farmers electing to purchase Federal crop insurance, around 70 percent of these acres are insured with buy-up coverage. A final statistic is that while tobacco accounts for less than 10 percent of the total federally insured crop acres here in Kentucky, tobacco has accounted for 50 to 75 percent of the total indemnities for all Kentucky crops in recent years.
Undoubtedly, the Crop Insurance Program is a very important risk management tool for many of our farmers. But the program is criticized on several fronts, including its overall cost effectiveness and the abuse within the program. To obtain some specific thoughts on the Crop Insurance Program for tobacco, I solicited some responses from my fellow extension colleagues across the state. One county agent responded:
There are producers in my area who set their tobacco, don't fertilize, don't spray for insects or diseases or adopt any other management practices, in hopes of having a failure so that they can collect crop insurance. I have one greenhouse grower who told me this season that a producer asked him to call and let him know if he had any diseased plants so he could set them. This attitude is widely known about in the communities, they know the producers who do it and make money by doing so. It sure sets a bad example for most producers who are honest and try to do what is right.
Also citing abuse, another agent recommended that a farmer should be limited to the number of years that he or she can claim.
Another extension colleague stated:
The CAT policy does not act anywhere near a safety net. There needs to be increased subsidies on buy-up coverage in order to increase participation by low risk producers as a means to spread the risks across a larger population.
And finally, one extension specialist claimed:
I have been involved with several meetings this year in which the insurance rep has basically said to growers—do not worry about these disease management practices, just buy insurance.
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Despite its shortfalls, the Crop Insurance Program is vital to many farmers as a means not only to shield against yield and income risks, but also it is mandatory for many just to obtain credit, especially for those farmers who possess the greatest agricultural financial risk or those with limited off-farm income.
In addition to concerns at the farm level, I am sure you are well aware that the tobacco Crop Insurance Program has received a lot of attention in the U.S. Congress in recent years. As you know, tobacco producers and purchasers pay for the operational costs associated with the tobacco program, but like with all Federal programs, there are some Federal outlays for administrative costs associated with tobacco, including crop insurance.
In a normal growing season, the net Federal crop insurance outlays for tobacco are approximately $30 million to $40 million a year, which may swell to more than $75 million in years in which we experience significant yield losses. Historically tobacco—or total indemnities paid to burley tobacco producers have exceeded $210 million since 1980, compared to total premiums collected of $127 million, yielding a loss ratio of 1.65 over this 19-year period. Thus, the Federal Crop Insurance Program for tobacco remains vulnerable, which may prompt the private sector or perhaps the tobacco co-ops to even evaluate means to offer a viable Crop Insurance Program in the future.
While the future of the Crop Insurance Program remains uncertain, as Mr. Coyle stated, tobacco farmers are much more concerned with the greater political risk that they face from additional taxes, regulation and probably the major concern that they face, the potential loss of the Tobacco Price Support Program. Although there are numerous issues within the program that need to be addressed, such as quota volatility, non-competitive prices, high quota rental rates and marketing inefficiencies, the tobacco program can arguably be labeled as one of the most effective farm programs ever administered by the Department of Agriculture.
Unlike other Federal agriculture programs, the tobacco program over the years has accomplished many of the original goals set out for farm programs of providing price and income support for a large number of small family farms without incurring large government expenditures.
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The tobacco program provides farmers with a high degree of risk protection relative to other agriculture enterprises. Price variability for tobacco during the past 10 years has averaged less than 5 percent, compared to 10 to 20 percent for most other traditional enterprises produced in Kentucky and more than 20 percent for some of the vegetable enterprises, which are often cited as an alternative to tobacco production. Besides minimizing price risk, the program also provides for production risk protection by allowing producers to carry over non-marketed quota into the following growing season or disaster lease pounds within the current marketing season.
In reality, it really does not matter what happens in terms of crop insurance reform or with some of the risk management tools, many of our farms simply will not be able to survive without a tobacco program.
Unlike other crops, there are no future markets for tobacco to offset the enhanced price risk, which will certainly evolve without a tobacco program. Contracting is a marketing mechanism that will likely emerge in a free-market tobacco economy. Contracts do possess the potential to guarantee market access, to guarantee production levels and to minimize price and income instability for tobacco farmers.
But the question remains how many of Kentucky's 45,000 tobacco farms would be included in a private contracting system? If the average tobacco production per farm would increase just as little as 20 acres per farm under a contracting system, the net result would be the elimination of around 80 percent of the farms necessary to grow the production that we have grown in recent years.
Consequently, the only viable option for many of our farm families without a tobacco program will be to pursue off-farm employment. Unfortunately, the most vulnerable tobacco farms in this state under a deregulated tobacco marketing system are the ones that are located in some of our most tobacco-dependent regions which are characterized by relatively low education levels, high poverty rates and overall limited off-farm employment opportunities.
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Thus, in conclusion, Congressmen, Kentucky agriculture today is facing a lot of risks that are much different from the price and production risks that the rest of agriculture is facing today. Given the current political and economic trends for tobacco, our farmers are working very hard to diversify their income base. And some of these farmers are certainly achieving success in their diversification efforts. However, given the resource base that we have here in Kentucky, there is simply no other single agricultural enterprises that, for a large number of small family farms and for a sustained period of time, can generate the returns to management and labor comparable to tobacco.
Hopefully our leaders will have the insight to invest the tobacco settlement funds in a manner that will help sustain our farms and rural communities that are such an important part of Kentucky's heritage. But there is no doubt that our political and farm leaders have a real challenge before them in addressing the risks that our farms will face heading into the 21st century.
Thank you.
[The prepared statement of Mr. Snell appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Snell. Mr. Bullock.
STATEMENT OF JOHN BULLOCK, PRESIDENT, BURLEY FARMERS' ADVISORY COUNCIL
Mr. BULLOCK. Chairman Ewing, Congressman Fletcher, Congressman Lucas, Congressman Bishop and other distinguished representatives, I am John Bullock from Somerset, KY and president of Burley Farmers' Advisory Council and also a tobacco farmer for 40 years. I would like to thank you for taking the time to come to Kentucky and letting us in the agricultural community share our thoughts and concerns that we have pertaining to crop insurance and problems we have in agriculture today.
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I am sure you are all aware that this is not the best of times on the farm. Commodity prices are at record lows or falling toward record lows. The Federal Crop Insurance Program was established to protect farmers against such economic hardships or losses due to inclement weather that we face every year.
During these hard times, we begin to focus and analyze Federal assistance programs such as Federal crop insurance to ensure that they are indeed achieving their intended purposes. I think in recent months, since Congress has begun their analysis, we have all discovered that problems do exist throughout the entire system from the producer to the administrators.
For instance, if I elect to purchase buy-up coverage, my premium increases while the subsidy for that higher coverage decreases. Let me quote a Warren County, IA farmer, Craig Hill, who explains it well: ''When the Federal Government reduces the cost of insurance when you buy at a very low level, but increases the cost of insurance when you buy at a very high level, it tends to make farmers buy a very low level of coverage.''
The program needs to be modified to stimulate increased producer participation and provide better coverage levels and options across more crops, regions and production practices, including the needs of livestock producers. Improvements to the Federal Risk Management Program for crop, livestock and dairy producers can serve to reduce the pressure for future ad hoc disaster legislation and will prove to be a sound investment that should result in long-term savings to the government.
It is my understanding there is a bill in the Senate that is sponsored by Senators Pat Roberts, Tom Harkin and Bob Kerry that would make crop insurance more affordable for farmers and therefore encourage the farmers to buy more. Another benefits to the Roberts-Harkin-Kerry crop insurance bill is that for the first time livestock losses would be covered as a result of low livestock prices. This would benefit Kentucky immensely, since we are one of the largest cattle producing states east of the Mississippi. Also, it would have been extremely important to the pork producers in the past few months.
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Changes in the Federal Crop Insurance Program will also benefit the overwhelming majority of tobacco farmers throughout all counties in Kentucky. While the total number of burley tobacco farmers purchasing crop insurance declined from last year, additional 7 percent of those who continued to purchase crop insurance selected buy-up coverage.
While the amount of tobacco farmers may raise has been severely decreased by recent quota cuts due to our Federal tobacco program, prices have not been reduced. Taking into considerations the estimates of an additional quota cut in 2000, reducing the amount of premiums farmers must pay for adequate crop insurance coverage will help maintain participation levels in the future. If maintaining or increasing the number of participants in the Crop Insurance Program is one of the goals of Congress, then continuation of the Federal tobacco program would assist in achieving that goal.
The tobacco farmers' program is the only protection we have against price cuts. The tobacco program has been the best and most successful commodity program in history. Also, the tobacco program has been the best and most successful at keeping the price of tobacco at profitable levels. In the past few years, there have been problems that need addressing in the tobacco program. Those of us in the tobacco growing industry have been hesitant to go before Congress to make these changes from time to time. The tobacco program has been very successful and I would like to ask you and your colleagues to continue to support our program.
Again, Congressman Ewing, Congressman Fletcher, Congressman Lucas, Congressman Bishop, distinguished members of the committee, thank you for coming here today and holding this hearing in Lexington.
[The prepared statement of Mr. Bullock appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Bullock, Mr. Hornback.
STATEMENT OF PAUL HORNBACK, PRESIDENT, COUNCIL FOR BURLEY TOBACCO
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Mr. HORNBACK. Thank you very much for allowing me to offer testimony on the Federal Crop Insurance Program and tobacco program today. I would like to thank you, Chairman Ewing, and Congressman Fletcher and your staffs and other members of this committee for holding this hearing to focus on issues and concerns that farmers are continually facing.
Let me first say, as a farmer—and I am a farmer from Shelbyville, KY, just about 60 miles west of here where I farm tobacco, grain crops, livestock and also some other specialty crops like sweet corn and vegetables—let me say that crop insurance is a tool. When we go out in the spring, it is a tool that we decide whether we are going to purchase or not, just like a planter. It is something to cover some of the risks that we have with the high investment in the crops, for risks that are out of our control. And I think that is the key point, there is nothing that farmers can do about these risks that we sometimes have to take. Farmers can be the best managers and things will happen completely out of their control where they may lose their investment for the entire year.
Crop insurance, or let me say, a risk management tool similar to crop insurance, is a must when a disaster hits. This is not to say that crop insurance does not have its problems. There is much abuse in this program, as with any program that does not have proper checks and balances. Too many people are able to plant crops and not maintain them during the growing season and then collect the insurance. All this gives Federal crop insurance a bad name from the farmers' standpoint. We see these farmers out here driving the best equipment and have poor crops consistently and we know what is going on.
We need a system that enforces the claims that are made, verifies that the areas did have a disaster, not just a specific farm, and that the problems are justified, and then pay according to those facts that are made. Just this past year, the so-called black list of farmers that had collected 3 out of 5 years on crop insurance was done away with. I think when you have people that are consistently having claims on crop insurance, they need to be looked into and made sure that those are justified claims.
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We have even got people in my home county that have been convicted of fraud against crop insurance and are still eligible to carry crop insurance on a continual basis year after year.
My hope would be to have a crop insurance-revenue assurance program that would allow American agriculture to remain strong, not only during weather-related disasters but the disasters we are now having with depressed world prices, a system that can cover justified losses and eliminate fraud. Abuse of the present system is costing us all.
Buy-up, like has been mentioned by many other people testifying here today, is a must. The low coverage that we have in the CAT policies will not even cover the input costs for the crops that we are planting.
And I think it is perfect that we have the subcommittee that deals with crop insurance also dealing with specialty crops. Specialty crops are a lot of times a much higher risk because the acres are smaller and generally the investment per acre is much higher. Chairman Ewing, the numbers may not be as large as they are for the grain farmers out West, but believe me, the small farmers we have here in Kentucky and all over the United States are at a much higher risk because of the small acres and the high investment they have per acre in these specialty crops. This leaves them a lot more vulnerable to the localized storms, localized drought that we a lot of times have in these areas.
Also, I would like to mention, being a tobacco farmer, and this being the Subcommittee on Specialty Crops, that I would be remiss if I did not mention the tobacco program and the importance it plays to the welfare of the agriculture economy here in Kentucky. The bright spot in the agriculture economy in Kentucky is probably the tobacco program. We have fared very well. Congressman Lucas and Congressman Fletcher, the agriculture economy here in Kentucky is probably doing better than it is nationwide and that is because of tobacco. Congressman Bishop, you realize this in Georgia too, that it is a bright spot and that is because of our tobacco program. It is the longest standing and least costly farm program we have had in American agriculture. It manages supply and demand, thus allowing farmers to produce a crop year after year for a fair income. But that is not to say that we do not have our problems too. But I think that with support, this subcommittee and the full Agriculture Committee and other committees like this, we in the tobacco producing states can still play an important segment in the agriculture economy of these states.
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Again, let me thank you for the opportunity to testify before your committee and I want to remind you that agriculture is what made this country strong, enabling us to feed and clothe the world. The continuation of these and other farm ventures are a must for our continued success in carrying American agriculture into the 21st century.
Thank you very much.
[The prepared statement of Mr. Hornback appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Hornback. And now finally, Mr. West.STATEMENT OF HENRY WEST, VICE-PRESIDENT, BURLEY TOBACCO GROWERS COOPERATIVE
Mr. WEST. Thank you, Chairman Ewing, other members of the committee. Thank you for your interest in our commodity and thank you for coming today.
I am Henry West, I am one of those farmers that makes up the statistics that Dr. Snell expressed to you earlier. I farm in south central Kentucky in Garrard County. I am a burley tobacco grower, a quota holder. I have been a sharecropper, a lessee and a lessor. I have had good crops and bad. Tobacco has fed and clothed my family and educated my children. In simple terms, tobacco pays my bills.
Tobacco is generally produced on family farms, as has been mentioned. Farms in Kentucky are small by national standards, 162 acres is the average in the 1997 agriculture census. Tobacco is a high-value per acre crop that is well suited for our small farms that have very limited tillable acreage.
The last two crop years have been very difficult in our area because of extreme weather. We have had later frost in the spring, earlier frost in the fall, too much rain in May and June, no rain in July and August. Crop failures have become more common. Many farmers have tried to get bigger to make up for past failures and there compounds the problem. For some growers, Federal crop insurance is a must to secure financing.
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As important as crop insurance is to protect us from the weather-related and production problems, the real threats to our existence are the attacks in Washington on our tobacco program and the huge reduction in quota the last two years. No amount of crop insurance can protect us from the lost quota or the loss of our program. The tobacco program for over half a century has provided stability for farmers and their communities. While other farm programs have failed, the tobacco program stands as an example of success while costing the Federal Government very little. Some in Washington would like to discard our price support quota system and get government out of tobacco. But without the program, many of us would cease to exist as a viable farming operation and our rural communities would dry up.
Federal crop insurance can be a savior for some farmers—the tobacco program is a savior for all tobacco farmers.
Federal crop insurance on tobacco without a program is like buying oats for a dead horse.
The almost 40 percent reduction in quota the last 2 years and the possibility of more cuts in the future places us in jeopardy. The increased use of imported tobacco, the uncertainty surrounding the many lawsuits against the tobacco companies, the cigarette price increases, whether they are tax increases or price increases by the company, all equate to lower use of our tobacco.
As a reasonable American, I understand the health risks involved with the use of tobacco products. Farmers support efforts to educate youth about the health risks of tobacco and we do not encourage any youth to use tobacco. However, tobacco is a legal product and many adults choose to use tobacco. American farmers grow the very best tobacco in the world. I would encourage you to help us maintain our very successful price support and quota program, so that we may continue to thrive on our farms.
Thank you very much, Mr. Chairman.
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[The prepared statement of Mr. West appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. West and thank you to all of you for your well thought out testimony here today.
It appears to me that there are several themes that run through the testimony here. No. 1, that your tobacco program is something that you feel very strongly about, that is very important to agriculture here in Kentucky and that you want to see that maintained, to maintain your farm structure that you have in this state. Also, that there are abuses to that program, the Crop Insurance Program. And that while you think it can be improved, you would also like to see enforcement of rules to try and weed out those who really are farming for crop insurance and not to raise a crop. Also, the third theme I think is how you feel that really your whole structure here of your farms in Kentucky rest upon what is happening nationally and what will happen here.
Specifically Mr. Coyle, in the area of fraud, do you think that this is a problem of the crop insurance agency or what enforcement do you see out there and what would you recommend?
Mr. COYLE. I think maybe one of the problems, Mr. Chairman, is we do not seem like we see any enforcement. It does not matter whether I am trying to grow a crop or whether I am just trying to collect the crop insurance, there does not seem to be a difference. There needs to be probably looking at maybe some difference in premium, if I have suffered losses for whatever reason over a period of time.
It is going to be something that is very difficult, because as we try to weed out those that are farming strictly for the crop insurance proceeds, it will be somewhat difficult to do that without hurting those of us who are actually trying to grow that crop and the crop insurance is there just as a backup guarantee against loans and some of our losses. So it is certainly not going to be real easy to deal with.
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Mr. EWING. Is there—not to dwell too much on that, but a question, if a person has allotments in more than one farm, is it possible that sometimes the production is reported under one farm and another farm is reported as having a very poor yield?
Mr. COYLE. Yes, sir, that is a possibility and I think it does happen in several cases.
Mr. EWING. You made a comment about contract production and how that may be something that we are going to see more of in the future. Your thoughts on that are that that may be detrimental to the structure currently in Kentucky agriculture?
Mr. COYLE. Yes. Most of us in fact on this panel just returned from a meeting almost 2 weeks ago now in Georgia with one of the tobacco manufacturers that was considering a pilot program for contracting for 1999. They have since canceled that program.
Our biggest concern is, No. 1, what would that do to the program; but what does that do to our small family farm that does not have the ability, they are not large enough, to get into contract agriculture, and we are just afraid it is simply going to really hurt them and in many cases put them out of business from farming.
Mr. EWING. Bring on consolidation.
Mr. COYLE. Absolutely. It will consolidate to much larger operations. I am from eastern Kentucky and we do not have that opportunity for large operations because we do not have a lot of tillable land, and we are going to be at an extreme disadvantage on contract farming and contract production.
Mr. EWING. Mr. Snell, I appreciate your testimony, it was very good. The question I wanted to ask you though, you talk about the quota system that works here for tobacco program. Has your university looked into that for other crops? Is that something that you are suggesting a supply management—has your university done any studies on that?
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Mr. SNELL. Well, there has been obviously a lot of research done on agriculture programs and the tobacco program is somewhat unique, it is more designed toward stabilizing supply and demand for small farmers if we get to the western part of Kentucky, we have larger operations which supply management programs may not be the ideal type of program for that type of agriculture. But again for the farms that Mr. Coyle was talking about, these particular farmers do not have the financial resources or perhaps the degree of risk necessary to expand their operations in the short term, with all the uncertainty regarding tobacco and the future of the industry. They have been reluctant in making long-term investments to expand the operations, and as a result, the tobacco program has worked well for sustaining small family farms. And that may not necessarily be the case for other types of enterprises.
Mr. EWING. I asked that question because often one of the things that is said to us about what we should do for low commodity prices is set-asides. That is what we call it in corn country where you set aside so many of your acres, and maybe you have a similar thing here in Kentucky.
But with 40 percent more or less of corn and soybean production having to be sold overseas, if we are going to cut back to what we use in this country, you can I think quickly see that set asides are going to be pretty drastic, if it is going to work and if we are going into that kind of a supply management type operation. Do you have any comment on that?
Mr. SNELL. Well, the major reforms in farm policy back with the legislation a few years ago in the FAIR Act, obviously we were anticipating continued strengthening of the world economy. And as we know, there has been a lot of financial distress in lots of parts of the world, which has dampened our demand possibilities in other markets. At the same time, we have had fairly large crops worldwide, so we have had kind of the worst of both worlds and really it has not enabled some of our grain producers to make the expansions in terms of demand that we anticipated back in the mid–1990's.
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Mr. EWING. To the three gentlemen here on the end, you all talked about the importance of the tobacco program. Reductions in quotas, reductions in quotas are really part of that program, are they not? Is that not the way you keep your supply in line with the demand?
Mr. HORNBACK. Yes. I mean that is the basis for our program, that it does do a good job of keeping supply in line with demand. But our quotas have been so drastic, and a lot of times we think it is because of not having the ability to market our tobacco like some of the other crops can worldwide and some of the blocks that are put in our way in Washington, working against tobacco, even though it is still a legal crop, and I think that is what it comes down to for us. We do not want to be treated different, we are a legal crop, whether it be the availability of crop insurance or the availability of some of this export enhancement, some things; we are dealing with a crop that is being discriminated against in Washington. And that, we think has caused part of the quota cuts that we have had.
Mr. WEST. Mr. Chairman, there is a formula in place in our quota structure that dictates what the quota will be each year, and the tobacco companies submit their intentions for the next year as a big part of that and stocks on supply are another factor in that. And then exports are the other factor.
Mr. EWING. Mr. Bullock.
Mr. BULLOCK. I might comment also that we have somewhat suffered on our markets from the worldwide conditions that Dr. Snell was alluding to also, has affected our export market to some extent. We are not quite as competitive when the world economy is weakened.
Mr. EWING. Well, gentlemen, I would agree that tobacco has been abused in Washington and our subcommittee has kind of been the group with the thumb in the dike. I get more abuse in my campaign in Illinois every year over tobacco than anything else I do. So I know that it is something everybody likes to beat on.
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I would tell you though that in the proposed agreement with China, there are some very good things in there that would allow reduction in tariffs with that country for sale of your tobacco and I know that is very important.
You have to have a quota before you can grow tobacco, right?
Mr. BULLOCK. That is right.
Mr. EWING. I kind of think I got taken by the Farm Bureau here. They made that agreement with me and they did not tell me I had to have a quota to grow tobacco, and now they have got the best of both worlds.
Thank you all for your testimony. Ernie, do you have some questions?
Mr. FLETCHER. Thank you, Mr. Chairman. And again, I appreciate very much the witnesses and what you all have presented.
As we have heard what you said, obviously when we look at risk management and crop insurance in general probably the best crop insurance we have heard and risk management is the tobacco program, which has worked to stabilize the price of tobacco and helped really secure the future of the small farmers.
Also I think some of the things that we can do obviously from what you have said is to make sure that we fight to make sure that that tax increase does not occur, fight to prevent the Department of Justice from the lawsuit that is going to impact us here tremendously. So I think it is important that we do that, but not only that, I think it is important to make sure that we keep all that tobacco settlement money here in Kentucky, we can use that for communities, for farmers and for education of our youth, to make sure that it is really directed by the state.
And so I think what I am hearing is the fact that probably the best insurance is to keep the program in place and make sure that we allow and try to improve the markets that we have for the product and make sure that we do work in some of the other areas you have mentioned also.
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Dr. Snell, as you said, probably the tobacco program is our best risk management program. What do you think would happen in Kentucky if we did eliminate the program?
Mr. SNELL. I still feel confident that tobacco will play a major role in the agriculture economy in Kentucky, even without a program, but the issue that a lot of the farm group leaders and other political leaders have tried to maintain is the structure of agriculture and I think we would be in store for tremendous structural change very similar to the rest of agriculture out there, where we have had tremendous concentration.
I have heard some comments from some of the tobacco companies that they would be looking at contracting in the neighborhood of 20, 30, 40 acres per farm. And you quickly do the math and you certainly realize that you do not need 45,000 farms, given that acreage size, to produce the set amount of tobacco, it could easily be 5,000 or 10,000 farms. Then the issue becomes what happens to those 30,000 farms that are not able to maintain a production base. And obviously some of them right now are depending more and more upon off-farm income and I think it is very important that we not only strengthen our agricultural economy but also our rural economy as these individuals would be forced probably into off-farm employment to sustain their families. The farms may not go away, but certainly their dependence on agriculture would.
Mr. FLETCHER. Thank you, Dr. Snell.
Let me ask maybe the panel in general briefly to talk about what are some of the other alternatives that can help stabilize farm income in general as far as alternatives to tobacco, or supplemental crops that you all see that can help stabilize it. Are there any really that can replace tobacco at this time?
Mr. COYLE. Mr. Chairman, Congressman Fletcher, as I have mentioned, I am from eastern Kentucky and we do not have a lot of tillable land and we certainly have not found any legal crop that will substitute for the production of tobacco. [Laughter.]
Mr. EWING. You have researched that?
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Mr. COYLE. Only the legal parts.
Mr. HORNBACK. And Congressman Fletcher, let me say I am from central Kentucky and I am not the average size farm because I am not up to the 162 acres. But I do rent and sharecrop a lot of land which probably gets me a little bit over the average, but with the decreasing quota over the past several years and even being a businessman in farming and looking at other alternatives or other ways to help subsidize my income out on the farm. I have looked at vegetable crops, I have raised a lot of ornamental crops, we do landscaping and I have found nothing at all that would even come close to taking the place of tobacco, tobacco still makes up better than 60 percent of my income off the farm and there is not anything out there. It takes a wide variety of a large number of crops to even offset 10 percent, or the 30 percent cut in quota we had this year in tobacco.
Mr. WEST. Congressman, I would just have to agree with what Paul has just said. We have looked for supplemental crops all my life to supplement tobacco. We have tried various vegetable crops, strawberries and sweet corn and cucumbers and peppers and all those things. And while a few farmers can supplement their income with those things, there just is no substitute for tobacco.
Mr. BULLOCK. Congressman, I would just like to second what Paul and Henry have said here, there is no substitute for tobacco in Kentucky, I do not think. There are some crops that a few farmers can get into, but there is no one crop or no combination of alternate crops that will take the place of tobacco.
Mr. FLETCHER. Mr. West, you mentioned about if you eliminate the program, buying crop insurance is like buying oats for a dead horse. Let me ask you, catastrophic coverage does not adequately cover farmers from disasters, would it be better to reform or eliminate the CAT coverage or catastrophic coverage and use that money to help subsidize buy-up coverage? And I might get comments from some of the others after you, Mr. West.
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Mr. WEST. I am just not well enough acquainted with insurance to adequately address that question, but Dr. Snell might be able to better address that than I.
Mr. SNELL. Well again, I am probably not the expert on crop insurance. I know that a lot of people that I have talked to have made that suggestion and some of the other committee hearings that you have held certainly have made that claim. I assume that a large percentage of the Federal dollars that are used to subsidize crop insurance are put forward to the catastrophic coverage and again, we are hearing from our farmers that the CAT policy just does not provide that safety net. So perhaps if the buy-up coverage does provide a lot more of a safety net then those dollars should be re-allocated to that particular level of coverage.
Mr. COYLE. As I stated, Farm Bureau's position is that coverage ought to have the minimum of 50 percent subsidy at any level of buy-up to encourage our farmers to get above the CAT coverage. As has been mentioned, many of our farmers have to have that insurance coverage to secure operating loans and that CAT coverage is just not going to help him pay off that loan in the event that he has a disaster. And we need to encourage them on those buy-up coverages.
Mr. FLETCHER. Mr. Chairman, I might ask one more question.
Mr. Hornback, I think you mentioned something about the abuses, as several of you did, in the Crop Insurance Program. You mentioned the need for checks and balances. Specifically I know you mentioned elimination of the black list. What are other things specifically that we might look at so that it might reduce the abuse and reduce the costs thereby of crop insurance?
Mr. HORNBACK. Well, I think when you farm out through the agents the crop insurance, that they not only look at individual farms and they have had a yield loss because of drought, Mr. Coyle mentioned that one farm may have a real high yield and a farm there next to it may have a smaller yield. And I think those things need to be taken into consideration that we have adjusters that go out on the farm when the crop is growing to make sure that that crop is being maintained and being managed in order to try to produce the crop and is not being raised just for the insurance.
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I do not know that it saves you a lot of money in the long run because you are going to have to spend it on administrative costs and it is going to be costlier for those independent agents to go out there and do these things, but I think it does put a lot of credibility back into the system, because right now, at least in my area and farmers I talk to, they do not see that credibility in the system, so they are hesitant about buying the insurance.
Mr. FLETCHER. Thank you. Mr. Chairman, I yield back.
Mr. EWING. Congressman Bishop.
Mr. BISHOP. Thank you very much.
I want to just share with you the fact that I have listened to—like I say, I have participated in about half a dozen hearings on this subject matter in Georgia and elsewhere, and I want you to know that we have heard the issues repeatedly that you have raised today, and many of the proposed solutions. So you are not alone in what you are suggesting.
There are some differences of opinion on what approach we should take on some of the specifics. I would just like to get from each of the panelists, for example, as we reform the crop insurance in Washington and this committee in developing our hopefully better risk management practice, tell us, from each of the panelists, which you would prefer or which the people you represent would prefer, the FSA administered program or leave it entirely in the hands of the private sector. Could I just get your response to that?
Mr. COYLE. Mr. Bishop, I am not sure that we have a big position. We are a firm believer in the private enterprise system, but this one sometimes has been very difficult for the private enterprise system to pick up, particularly the additional crop coverages that we need. So I think there certainly will probably be a role for FSA in trying to work to cover the additional crops and livestock coverage that we need.
Mr. BISHOP. Mr. Snell.
Mr. SNELL. The only comment I would have is the issue of whether the private sector can basically put out a package that is cost-effective, that is quotable for our producers. The Federal subsidy is obviously a very controversial issue but I think what you are hearing from this panel and you have heard from other meetings throughout the country that without that subsidy, we are not for sure we would have a high enough level of coverage or participation to sustain a program in the private sector.
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Mr. BISHOP. Mr. Bullock.
Mr. BULLOCK. I agree with these two gentlemen, and also something that might be taken into consideration, I think a farmer that has had good experience, giving him a cut, and those bad actors that financially—see that they have to pay a little bit more for the insurance.
Mr. HORNBACK. Congressman Bishop, I have always been under the opinion that the private sector is generally more cost-effective in doing some of these type things, whether it be the insurance, although FSA is going to have to be a vital part in it. FSA has got the figures on planted acres, they have got the figures that show what yields are, the records that show what yields are for the county and for different areas, and so I think the two are going to have to work hand-in-hand and I think we have to realize too that whichever way it goes, the subsidies that are going to displace disaster payments, as I understand is the intention of this, the subsidies are still going to have to be there and they are going to have to be at a level that is high enough to encourage farmers to participate.
Mr. BISHOP. Mr. West.
Mr. WEST. I think there has to be some combination between the FSA and the private sector.
Mr. BISHOP. Thank you. Let me just ask, one of the themes that has recurred over the hearings was the loss computation process, the loss/yield ratio and whether to do it over a number of years, whether to drop some years, whether or not we should take into account the yield that is—the potential yield that our universities can pretty much provide for per acre of the particular crop or commodity. Do you have any comments about that, whether we should drop a loss year? Because many times in the computation, what I am hearing from farmers is that they had a disaster loss due to weather, through no fault of their own, but if there are multiple disasters over 2, 3, 4 growing seasons and then they take the ratio, or they average out what the yield is and add in those loss years, that it drastically reduces the amount that they are able to recover, which actually has no relationship to what that land would yield. And so when they get a claim paid, the insurance that they bought actually does not compensate them for their cost of production of their actual losses, and it certainly does not provide them sufficient funds to service the loans. What is your comment on that?
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Mr. COYLE. Mr. Bishop, we certainly feel that the individuals should be able to drop at least that one year's real bad history in that computation.
Mr. HORNBACK. Yes, sir, I think Marshall is right, I would like to see them drop one year and I would also like to see us use established yields for those farms, the yields that have been established over the past years, so that those farmers that have better production practices and established higher yields on their farms can use those yields rather than the county average.
Mr. BISHOP. I am told that the Farm Service Agency and USDA does not have accurate records and that the yield history that USDA maintains is not always up to date and certainly does not reflect the new technology where we have got, for example, Bt corn, Bt cotton, and we have got a much higher yield today because of the new technology, per acre, than the history has revealed. Should we take all of that into account? I mean the research that is ongoing in our universities?
Mr. HORNBACK. That is why, getting back to the the farmers that have used these new practices and have heightened their yield potential on their individual farms, that is the reason to use their individual farm yields rather than using county averages, because they are not up to date.
Mr. BISHOP. But they are just beginning to use these new technologies over the last 2 or 3 years.
Mr. HORNBACK. Maybe we could take a 5-year average and gradually your yield would go up on those farms, your average yield would go up on those farms.
Mr. BISHOP. Anybody else?
Mr. COYLE. We would certainly concur with what Paul is saying. Those that are using the new technologies and expanding their production, should not be penalized by the lower county yields.
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Mr. BISHOP. My final question, and I know I need to share the question time with others, has to do with how much emphasis we should place in our reform effort here on rewarding those farmers who exercise due diligence. For example, in the part of the country where I come from, dry land farming versus irrigated farming, should there be a difference in premium rates, for example, for those farmers who take all of the necessary due diligence efforts such as irrigation, and should they be allowed to recover when there are disasters for the extra effort that they put in to reduce or to mitigate their losses. For example, by the extra diesel costs for running their generators to irrigate. Do you have any thoughts about that? I know you may not do a lot of irrigation up here, but we do a lot of it and there are some other parts of the country that do. Do you have some thoughts about that?
Mr. WEST. Mr. Bishop, I would certainly think that would be something we would want to take into account. If I drive recklessly, then my insurance premiums reflect that. So I think the same thing applies here.
Mr. COYLE. And I think we would agree with that, Mr. Bishop. I think the key to this program is to get it designed as best we can to include as many people within the program so that you continually spread that risk.
Mr. BISHOP. So then would you advocate providing a broader coverage so that more commodity groups can participate in some form of crop insurance and thereby widening the pool so that you have a bigger base? Is that what you are suggesting?
Mr. COYLE. Absolutely.
Mr. HORNBACK. Congressman Bishop, in just my own personal experience with crop insurance—and I have never had the multi-peril crop insurance, because I have invested in water supplies, whether it be lakes or whatever, I have invested in irrigation equipment like you spoke about, and so my risks are down considerably from what they are for my neighbor that does not have any of that. You would have to broaden it some way to even encourage me to try to get into it and make my premium much less than my neighbor's that does not have those. I have insured myself through these management decisions that I have made and that is the reason a lot of people are not interested in crop insurance.
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Mr. EWING. Thank you, Congressman Bishop. Congressman Lucas.
Mr. LUCAS. Thank you.
This has been very enlightening to me, this risk program that is peculiar to tobacco. In particular, I was not aware—it sounds like the fraud and abuse is a little more widespread than I was aware and I guess there are always some bad apples that cause that. It makes it bad for everyone.
The other thing that I heard is that you want to broaden the coverage to risk management for livestock. That is one of the points that I heard. And of course, without question, we want to keep this support program, and I think we want to educate others about the minimum amount of money that the Federal Government puts in there for administrative costs. And so we have got to get folks like the Chairman and Sanford well educated to that so they can help us protect that program. Right, Sanford?
But maybe we should look at peanuts, bringing some peanuts in up here and see how we do with those. [Laughter.]
There is probably a reason that we do not grow peanuts and that is a lot of the tillable land that you have, Sanford.
Like Ernie, I think we will really fight about this increase and we would hope that we could get other members of Congress, particularly from the agricultural community, who might have some more empathy for us than those people from the urban areas in the east that may not have the empathy for the farmer that we do, so hopefully we can build a coalition of folks who will help us fight this tobacco tax and we can be successful there.
And again, about the Justice Department, talking about the suit. We think that is double jeopardy and that should not happen, and then again of course I think all the folks from Kentucky are working to keep all the settlement money in the state and let the feds keep their hands off of that.
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One of the thoughts I had was foreign tobacco of course is cheaper, and I guess I would throw this out for discussion, being maybe the least knowledgeable as to how this works. But even though the tobacco is considerably cheaper, the foreign tobacco, is my understanding, is around a dollar a pound, and I do not know where I got that number, but that is the number that sticks in my head. But still, the amount of tobacco that goes into a pack of cigarettes is so minuscule that it is only a few cents per pack and I would like to hear what others might think about what we might do to protect our farmers and use more domestic tobacco in cigarettes. I would like to hear that discussed at some point.
And then the other thing I heard is that as far as the insurance goes, that we really need the FSA and private folks to work cooperatively together there, that it should not be exclusive with either one of those agencies, as far as covering the risk goes.
I guess—could we have a little discussion about what we might do to use more domestic tobacco instead of foreign? Would anyone like to suggest how we might make that come about? Anybody have any thoughts?
Mr. COYLE. I wish I had the answer to that, Congressman Lucas. We have gone through many hours of discussion, and you are exactly right, when you look at the price of a pack of cigarettes, the cost of that tobacco that goes in there is small compared to the total cost of that manufacture of that cigarette. When you look at the difference between the cost of the domestic tobacco and the imported tobacco, it is even much, much smaller than that.
But we have gone through the domestic content which was ruled GATT-illegal. Other things that we have tried simply have not been real successful and I do not have the answer other than we do continually discuss with the manufacturers, from a growers' standpoint, our concern about the increasing use of imported tobacco. We will continue to work on it, but I certainly do not have all the answers.
Mr. LUCAS. Does anybody have any suggestions as to how we could give them a deal they couldn't refuse? [Laughter.]
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Mr. SNELL. I will make a couple of comments on that issue. To be truthful about it, it is going to be very difficult for us to compete on a price standpoint. There has been a lot of discussions about the price competitiveness of U.S. tobacco and when you are competing with a crop that is very labor-intensive, with your competitors paying just literally cents or dollars per day for labor, it is very difficult for us to compete on price. And as a result, I think farm leadership has made a dedicated effort to compete more on quality. There is no doubt that the manufacturers will claim that our tobacco, while the quality premium is not as large as it once used to be, I think there is still a demand, a core demand out there in the world market for quality burley tobacco.
Obviously the manufacturers have gone throughout the world in trying to find a product similar in quality and obviously lower in price, and they have been able to substitute a lot of our tobacco for that type of tobacco. But we have got to compete on quality, that is our only way to salvage the tobacco industry here in the United States. And not only do we need to work with the producers on quality, but I think some of the discussions a couple of weeks ago with one of the major manufacturers has dealt with marketing, that we have got to make some revisions in our marketing system so that we can get this product to our customers at a lower cost and also in a better quality packaged form so that we can enhance our quality on the worldwide market.
Mr. BULLOCK. I would agree with Dr. Snell and Mr. Coyle as mentioned. I would also encourage you Congressmen that anything you can do to make sure that world markets are not restricted to American tobacco would be a big help, any trade restrictions, have a free and open market for our tobacco. And we do need to push quality because I think that is where we do compete at is with quality. But maybe not necessarily on price.
Mr. LUCAS. Mr. West.
Mr. WEST. I would agree that quality is the one thing we have going for us. The curing process is very important to the quality of burley tobacco and there are few areas in the world that have the high humidity at night and the sunshine and the lower humidity during the days in the fall, and that is a process that is unique, that is very necessary in curing burley tobacco. And that is something we have and we just need to work very diligently at maintaining our quality that we have.
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Mr. HORNBACK. I think the quality aspect is what we are going to have to look at. I think what we would really like to have would be export enhancement back for tobacco, which may not be do-able, but we do not want to be penalized because we are tobacco when we try to negotiate trade with these other countries. And I think that is probably—just opening up those markets or allowing some of the government officials to help us in opening up markets, is kind of out of touch for them right now.
Mr. LUCAS. Well, again, it has been very enlightening for me and I am sure there will be other questions. Thank you.
Mr. EWING. Gentlemen, thank you. A couple of follow-ups though.
The agriculture economy here in Kentucky generally, it is tied very directly, of course, to tobacco, but besides that, the other crops that you grow, do you have an assessment of some of the problems that you are facing here right now and any suggestions or comments outside of the tobacco program and the tobacco crop?
Mr. HORNBACK. I grow a lot of grain crops, a few specialty crops—alfalfa hay for the horse industry around in this area—but when you are talking about livestock and grain crops, it is a terrible situation we are in right now. I am planting corn and soybeans that I am hoping to break even on, and that is in an average type yield. I have even had farmers there that have offered to pay the rent on their ground and let me put the crops out for this year because they do not know if they can make any money off of it.
It is the world economy. We are so dependent on having cheap food here in the United States and also exporting a major portion of what we produce to other countries. And when the Asian economies, some of the other economies, have a down-turn, it is hard on American agriculture, but it is one of those things that we will have to get through, we will have to survive, and will probably make us stronger in the outcome.
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Mr. WEST. Paul has more options than I, he has more tillable land. I am pretty well limited because of the amount of tillable acreage that I have. We have beef cattle, and tobacco is our primary crop. We do have some folks that try some specialty crops but to a small degree. So the beef prices have not been good the last couple of years and we are really struggling, but we are trying to make our beef operations more efficient, feed more cattle, and tobacco. Those are our two commodities and that is the case for a lot of eastern and southeastern Kentucky.
Mr. COYLE. I would certainly second what Henry said, being one of those that does not have a lot of tillable land. I think what we would look for, as much as anything in agriculture, would be some regulatory reform and help in increasing our export markets as well.
We are geared in agriculture, to produce for export and those markets have been very rough. And as we went through Freedom to Farm, that was geared toward exports and it was also toward regulatory reform. And now we need the regulatory reform part, as best as you can provide it.
Mr. SNELL. If you look at Kentucky agriculture, tobacco and horses make up $1 out of every $2 of cash receipts. And while a lot of people in this room have tobacco, there are not too many of us that are fortunate enough to have a horse running the first Saturday in May. So those dollars do not get distributed very much throughout the agriculture economy.
But I think as Henry pointed out, as we are looking down the road in terms of the traditional farmer in Kentucky, specifically central Kentucky, it is basically tobacco and beef cattle. And we feel like we have a lot of ability, given our forage base, to expand our beef cattle sector here. And with a lot of our agriculture enterprises, to be truthful for you, given all the management that we have devoted to tobacco over the years, that we have slacked up in terms of management in other areas.
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So we have got a lot of opportunity we feel like to improve some of our management practices of our producers. But as I said in my closing comments, it is going to be a real challenge to be able to keep those people on the farm without that dependable source of tobacco income. And that is I am sure what you are hearing today.
Mr. EWING. Mr. Bullock.
Mr. BULLOCK. Mr. Chairman, I might also comment. What really concerns me is the young farmers in tough financial times. It seems like we lose a lot of young farmers and that really concerns me because they are not quite as established maybe sometimes and do not have the financial base that some of the older ones do.
And another thing that really concerns me, especially in our area, down in the Somerset area, we are in a development area down there and you see a lot more houses go up on farms. And that concerns me quite a bit also in Kentucky. And if the tobacco program went out, I think we would see quite a bit more, that you would see farms subdivided.
Mr. FLETCHER. Let me just followup, Mr. Chairman, with one question directed toward Dr. Snell. I read an article here recently about more research of a safer or healthier tobacco—at least decreasing of the carcinogens in it. There used to be a lot more discussion of that and research at the University of Kentucky. What is the latest on that? If you could just update us on that, please.
Mr. SNELL. There has been some dialog with a couple of the tobacco companies in looking at the curing of tobacco to see if perhaps some changes on the curing could reduce potentially the health effects of tobacco. I have not been involved in that research project and I think it is somewhat in its infancy, but the dialog is going on, the research is being conducted and hopefully it will be fruitful.
As you are also aware of, at the university there is a health institute, tobacco research and health institute that is looking at genetic engineering of tobacco for alternative uses, primarily pharmaceuticals, protein supplements. There is a whole host of particular products that can be generated genetically by utilizing the tobacco plant. And we are hopeful down the road that that will prove fruitful for our tobacco producers.
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Mr. FLETCHER. Thank you very much.
Mr. EWING. Ken?
Mr. LUCAS. Well, again, thank you very much. This has been very informative for me and I appreciate all your input. Thank you.
Mr. EWING. Gentlemen, we are going to excuse you. Just one parting comment, for your organizations and you as individual farmers, the redoing of the farm bill is a multi-year program. It is starting now and your comments and your suggestions and your organizations' research and input into ways that we can improve the legislation which will be coming up in the next Congress is very much appreciated. And it is not too early to start with innovative ideas, hopefully from our universities and from our farm organizations and from individuals, we will be hearing more from you. And we thank you all for being here. We hope that you will stick around for the second part of our meeting here today and maybe have input or answer questions and comments that are made.
We are going to take a 5-minute break and then we will be back to hear from you in the audience. Thank you.
[Recess.]
Mr. EWING. Ladies and gentlemen, if you will take your seats. The 5-minute break has become 15 or 20, but a good opportunity for you to visit among yourselves.
Alice Bassler is here today, she is principal assistant to Kentucky Department of Agriculture.
Ladies and gentlemen, now it is your chance to talk to us. The first person that asks a question gets a prize, because that is always the icebreaker, that is the hardest. I am not going to tell you what the—no prizes today, but here is the first question right here.
Mr. SIMPSON. I want to thank Congressman Fletcher for bringing this committee to Lexington and thank Mr. Lucas who is also part of our delegation in Congress.
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I am Laurance Simpson, I farm in Bourbon and Fayette Counties.
I have seen some of the fraud in crop insurance and that is unfortunate. In this area, I do not think that it has been a large factor. I do take crop insurance and we did collect some last year. So I appreciate the Crop Insurance Program.
My major concern is the dismal outlook for tobacco. So far as we are concerned, without tobacco, cattle would be the only game in town and we saw what happened to the hog people here last year and that is frightening. With the concentration in beef processing business, we might have the same sort of situation that we had some years ago with tobacco, they would have an auction and all the tobacco companies would bid the same price and the auctioneer in the warehouse would just allot it out. This was even with the program, the program put a support price and the tobacco companies would all bid $1 above the support price and then it would just be allotted to them. I do not think that was competition.
I think that is the reason that we can justify spending some of the money that the tobacco companies have on buying out the allotments. Senator Lugar and the administration both seem to favor that $8 a pound. If we had that money, we could do something else with it and not raise tobacco.
There had been a thought that a higher tax on tobacco would be disadvantageous to the tobacco growers. It was pointed out here what a small portion of the price of cigarettes goes to farmers. If there were only a very small increase in taxes, that might cover a buyout of all the allotment holders and those that are left then could try to compete with China.
China apparently raises more of almost every kind of tobacco than anybody else and I do not believe that the people here can compete with a labor-intensive crop with China where they do not have to pay a person much more than enough to buy rice to keep them alive that day.
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I know that some of our friends here and I appreciate very much the help that the farm leadership people have given and are giving here today. Some of them favor a buyout of the quota program and some do not, and that is perfectly all right, I am not saying they may not be right.
Personally, $8 for the allotment we had a year or two ago would be better than $8 for the allotment we have left today and the allotment that we will have left a year or two from now, the $8 might even be smaller, but a few cents tax on tobacco would pay that.
That is all I have to say. And thank you very much.
Mr. EWING. Thank you for your comment. Over here. Please state your name.
Mr. FOLLETT. Yeah, I am pretty well aware of that.
Barry Follett, Montgomery County. I get up here a lot.
I have already talked to John Tibbs about my problem with the insurance and I do not think I need to mention it any more because he is well aware of it and he even agrees with me. But when a landowner has several tenants and one tenant has a loss, the landowner gets nothing, while the tenant goes to the bank with his insurance proceeds. That is my problem.
I just wonder, Mr. Bishop said he has heard a lot about this. Have you heard that we sold last year's 1998 tobacco crop for virtually the same price as we received in 1982?
Mr. BISHOP. [Nods head.]
Mr. FOLLETT. You have already heard that. So you already know what the cost of production was in 1982 compared to last year, I do not have to expound on that.
But I would like to ask how many people are still drawing the same wages and salaries that they drew——
Mr. BISHOP. In 1982.
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Mr. FOLLETT. You know that too. And you also know that farmers are a happy bunch of people and they just roll right on and take the 1982 price and go right on.
We have more problems than just government in tobacco. I think that labor could put us out of business. I think that lack of fertilizer some day can put us out of business. Last year, 10 percent short, what is next year? The companies could go under, and if they have to pay $210 billion, that may put them under. That could cause us a problem. Increased prices can cause a lot of shortage on consumption.
I thought we had a law in place that said that 40 percent of the tobacco has to be locally grown. And that may be still done, I do not know. But this business of cutting us and so on in our quota is catastrophic. Those of us that have to lease back and are allowed to lease 30,000 pounds of tobacco are going to pay at least $12,000 for it, that is right off the top of our price. But we are lucky to get it and we smile and go right on.
Thank you.
Mr. BISHOP. Can I respond, Mr. Chairman.
Mr. EWING. Yes, Mr. Bishop.
Mr. BISHOP. Let me just say to the gentleman that hearing your comments, I feel just like I am at home in Georgia. I have participated in about half a dozen hearings just like this in the State of Georgia, a couple of which the Chairman had the committee there. And the very same concerns that you are raising are the concerns that the farmers in Georgia have, and they raise them probably not as politely as you do. [Laughter.]
Mr. EWING. OK. Over here, this young lady.
Ms. SIMON. Hello. I would like to thank you all for being here and for allowing me the opportunity to speak to you today.
I am Marion Simon, small farm extension specialist with Kentucky State University.
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I would like, first of all, to re-voice what your panel said earlier, the importance of the tobacco program to farmers here in Kentucky, the importance of crop insurance and particularly the importance of the tobacco program to the survival of small family farms in remote areas where there are not other opportunities and the impacts that this could have, both in the rural communities and the welfare listings within that community.
I particularly would like to point out that the tobacco program is very much a part of the African-American farmer here in Kentucky and without that program, it would be totally devastating to most of the African-American farmers here in Kentucky.
I have two or three questions I would first of all like to address, concerning risk management. If we are working with farmers who are trying to diversify—and I am talking about progressive farmers who are raising a rare crop in Kentucky or a new crop in Kentucky, often they are not covered by crop insurance because they are the only one in their county, the region or probably the state, that is attempting to diversify into a rare commodity that may be expensive and may indeed be risky. But there is no cropping history. If this is a tobacco farmer who is trying to diversify, I feel like they need the opportunity for full risk coverage, not just the catastrophic coverage for rare crops.
The second thing that I would like to request is the Crop Insurance Program—there seems to have been problems in reaching many of the small farmers and the African-American farmers with the CAT program. It looks like we are now working hard to make changes in that. I think at times, I think that the work with FSA is great, but I also think there needs to be a private investment to reach these farmers, because they sometimes are more reluctant to participate in government programs.
And thank you very much for the opportunity.
Mr. EWING. Thank you for your comments. And both will be part of the record and I think are very cogent comments about doing a better job of getting the information out to small farmers about the Crop Insurance Program.
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Generally, I think that the individual agents do a pretty good job of that, at least in our part of the world, when they are dealing with the producer on his other insurance, whether it be on his equipment or his home or his barn, they will bring up the crop insurance thing.
We would hope they would do that here. I think your suggestion regarding some type of coverage for new and innovative crops is one that we should look at very closely and see if we can improve that coverage.
Sanford, did you have a comment about another program?
Mr. BISHOP. I also wanted to commend your attention to the Small and Disadvantaged Farm Program that USDA is in the process of implementing to try to address some of the concerns that you have raised. We have a ways yet to go and you also might want to be aware that the average age of farmers now is about 57-point something years. We have very few youngsters that are going into farming, which means that fewer and fewer family farms and farmers will be in existence, unless we develop some policies and programs to do that. And of course, you have identified some of the problems and we as policymakers who work with rural communities in agriculture are having to really focus on that, and I appreciate your comments.
Mr. EWING. Over here. Yes, sir?
Mr. GILKISON. Eddie Gilkison from Clark County. We raise about 40 acres of tobacco and I work as a consultant throughout the State. I wanted to address some of the questions that you all asked the panel during the session here earlier.
Certainly I would endorse the private sector. I think the private sector can certainly handle crop insurance and sell it and administer it a lot more effectively than using the old type system we did in the old days and with the help of the Farm Service Agency, but I do not think—that should be their goal, to get out of the crop insurance, as they have.
I think in the 24 years that I have had crop insurance, I have had two losses, one year was a total loss because of hail, the other loss was in 1983 and we collected enough to get our premium. So we think we are pretty decent tobacco growers mainly and we grow some corn and beans.
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But I think I should be given credit for the years that I did not have a loss. That happened in the old days where we got credit for non-losses and that is one of the ways to avoid some of the risk, less risk in the system, to get these guys that are probably better risks, to continue with their coverage.
If we use the APH system that we have now correctly, there is nothing wrong with it where a guy has to use his actual production history. We tried to eliminate the disaster program, I assume we have except when you need a little money, somebody wants another disaster program. But an effectively run Crop Insurance Program can certainly make way for no disaster program.
One of the problems we have is when you average your yields on production history, a guy that has had the misfortune of hail, too much water, too little water, whatever, that all goes in his average of his production history. Some of those natural losses need to be eliminated so he could get better coverage without that disaster that he really did have.
Most of the fellows here are interested in tobacco and tobacco is not on production history. And I think that might be a good thing to do, is to put tobacco on production history instead of on a number that is out there. A lot of our farms in western Kentucky have very low yields on tobacco, whereas you are in tobacco country, the yields are pretty good as far as crop insurance is concerned.
But we really do need better education. There is certainly a lot of uneducated people, farmers, out here on crop insurance. As I said earlier, tobacco is not the only crop in Kentucky, we have 1.3 million of corn, probably about that many beans. And one of the things that I think creates a hardship on farmers starting out, young farmers or a farmer that has never had crop insurance before, is he has to use that county T-yield. He should be given a little bit of advantage on that T-yield. A lot of times the county T-yield is certainly not the yield you are going to target if you are an effective farmer. So there needs to be some adjustment on that T-yield, particularly on a new farmer. A lot of these farmers just do not have records, they are penalized for not having records. So there ought to be a different system for lack of records.
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And last, I think maybe we should eliminate the CAT program, subsidize the buy-up insurance a little bit more.
Mr. EWING. Thank you.
One of the things that we hear about everywhere we have been has been the rating of the policies and that is exactly what you are talking about there. And I think that we can do that, so that there is a benefit to those who do not have claims. The one comment I would make is that we shoot to have policies that are actuarially sound. Now the Federal Government pays part of the cost of that. They are subsidized policies. But as we all know, we pay on fire insurance on our barn or insurance on our equipment if we never collect on it, we hope we never collect on it. So the policy costs can never be totally eliminated for those that have even the best histories, but there are ways that we can recognize that, I believe, and make it more affordable, maybe make it less affordable. Sometimes I think when we have a little auto policy claim, we think, do we want to turn this in and have our premium go up or do we want to just pay this and avoid that type of increase in cost. And the same thing could work in crop insurance.
Next person.
Mr. BARTON. Thank you. My name is Bob Barton, I am a tobacco producer here in Fayette County. I am wearing two hats today. Congressman Lucas, as you emphasized you were a freshman, I too am a freshman, I was selected to a Farm Services Credit Board here this past fall.
Farm Services Credit is the leading lender in agriculture and certainly mid-America, which I represent, of the four states, Kentucky, Indiana, Ohio and Tennessee, we have a very diversified agricultural base.
An interesting chart I looked at last week kind of brought home the problems that we face. It is amazing that our economy is so good and yet agriculture is so down. This chart that I am referring to basically looked at all the major commodities in our four states and which of those commodities were lending to the most problems in our loan portfolio. The problems being maybe that the operating loans were not paid down or that a missed payment was made, basically the loans that are being reclassified.
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Certainly having Indiana in our area, you would think hogs would be No. 1, because they certainly have—$10 hogs do not pay a lot of bills. Or maybe corn and soybeans where we have suffered $2 corn and $4.50 beans. The number one commodity, as the panel up here suggested earlier, that we are having problems with in Farm Credit Services is tobacco, even though it only represents 5 percent of the total loan portfolio, which is $4.5 billion, tobacco losses right now are the greatest.
So my comment here would just be to suggest to you that it affects our whole four-State area and certainly the changes to the insurance program must take in the tobacco situation.
The second comment, as a producer, I would like to say that I am encouraged, Mr. Chairman, by your opening comments that the better producers, the ones with the least losses, will be benefitted by lower premiums or some such mechanism. And I certainly would encourage the board to realistically look at that approach.
Thank you.
Mr. EWING. Thank you. Before you sit down, you are saying that you have more tobacco farmers that have a problem in total number or percentage of farmers, than any of the others?
Mr. BARTON. Again, it is a percentage. Corn and soybeans represent 31 percent of the total portfolio of the area, tobacco is only 5 percent. But of the total number of tobacco producers, more are in trouble, as a percentage of the total, than any other commodity.
Mr. EWING. Do you have a reason for that? I know prices have not gone up and quotas have gone down. Is that the reason, just total income?
Mr. BARTON. I think probably the 40 percent reduction in our quotas has helped, and also the fact that we have very small producers. Usually the producers have only one commodity that is a paying commodity. We have very few off-farm jobs unfortunately in tobacco, which I think we are going to have to build up on.
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I do not want to say that we are getting ready to foreclose on these people because it is really still a small percentage. One of the tremendous things that is going on is the low interest rates that we now have in our agricultural loans and also the fact that our land prices are so high. As the gentleman from Somerset stated earlier, if you get in trouble, you just sell the farm. Now in North Dakota, they cannot do that. But certainly in our four-state area, they can. But that is certainly a bad thing to have to go to.
Mr. EWING. I would just share with you that I convened a meeting of agriculture bankers in my Congressional district and this is all corn and soybean area, and they said that of the people borrowing money, 30 percent were carrying over operating loans this year, and that is a very high amount, and that if corn and soybean prices stayed at the record lows that they are right now, that they would lose many of those farmers in one more year, that they just could not be carried over. So that percentage is quite high and quite alarming.
Mr. FLETCHER. Thank you, Mr. Chairman.
And Bob, I certainly appreciate that. I have also talked with some bankers here. I do not know if you could give us an idea of the percentage, you said a small percentage, but from what his indication was, there was a number of farmers that were not going to be able to get new loans this year because of the outlying loans that they had, in order to start producing and cover the cost of beginning for next year. What percentage are you seeing?
Mr. BARTON. Well, again, in the tobacco area, about 2.5 percent of those that have loans, whose major crop is tobacco, have been reclassified. So that is pretty small, but now hogs are less than 2 percent, it is about 1.75 percent if my memory serves me correct. As a hog producer says, times are pretty good now, I am getting 3 times as much as I got Christmastime, but I am still losing $10 a hundred.
I think one other comment maybe is the fact that some of these loans have been stretched out a little bit, they have gone to a longer period, which has helped. Certainly last fall, 7 percent loans were available for a 15-year period. Luckily, a lot of the producers went to that type of arrangement. We are still seeing figures close to the same area; however, if you get yourself into such a classification that you are not eligible for such a loan, then you increase your chances of failure.
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Mr. FLETCHER. Does that include—and help me out with this, you are with the Farm Credit Services, but what about those individuals that are with private banks and going on themselves? That percentage does not include those, does it?
Mr. BARTON. No. Now this is just with our loan portfolio.
Mr. FLETCHER. Well, from what I am hearing, in addition to that, there are a number of people that have loans as you mentioned, Mr. Chairman, that are really coming up with some difficult times right now because they need to obviously make the investment for next year's crop and they are having a tremendous problem. We have a supplemental bill right now that is in conference, should be out soon, providing $152 million for emergency supplementation for loans and I think it is important that we get that, because this is a very I think critical problem and again, the bankers I have talked to have said they have got some folks that even though they would like to, they know them, it is going to be very difficult and they cannot actually extend some of those loans next year. So I think you have raised a very important issue, and thank you.
Mr. BARTON. And also, as an after-the-fact thought, lots of times the fixes in agriculture come after the problem exists. Somehow we are going to have to fix the problem before we get into the crop year.
Mr. FLETCHER. I agree with you. I think that is the reason for this committee coming down here on risk management, is seeing what we can do proactively and take some of the suggestions we have gotten here in order to look at long-term so we are not coming with an emergency supplemental every year, trying to rather fix things on the front end.
Mr. BARTON. The commodities, I would just like to add, that are in the best shape are the ones that sometimes take a little bit of heat from the media, but especially in Kentucky, our poultry industry is now our best loans, our dairy industry is second, again because of the good prices they have had. But really the number one is horses, but it is really small.
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Mr. EWING. The gentleman in the back.
Mr. RANKIN. I am Bobby Rankin from Georgetown, we produce tobacco, cattle, and hay.
I am here to plead with you people in Washington to help us with a legal commodity that is already in the making. Why should we have to look for alternative crops when we have a commodity that is going to be consumed worldwide and already have a market for.
Another statement I would like to make is I have carried Federal crop insurance since 1956 and even in the years of 1983 and 1987 of the drought, I have never collected a penny, do not want to have to collect a penny. I would like to know it is there when the farm payment needs to be made.
Thank you, gentlemen for coming out.
Mr. EWING. Thank you.
Mr. FLETCHER. Mr. Chairman, do you mind if I respond?
Mr. EWING. Go right ahead.
Mr. FLETCHER. Just to respond, one thing that I think is important, Mr. Rankin, as you have mentioned, it is a worldwide market and I think it is important that we look at some of our trade policies, including fast track, so that we can hopefully get these agreements that are needed in order to open up some of the markets. And we have not had that yet and I think it is important that we work towards that.
Mr. EWING. Others? Anyone else?
[No response.]
Mr. EWING. Well, we will ask members here at the front table if they have any closing comments and then we will adjourn the meeting.
Mr. Lucas.
Mr. LUCAS. Again, this has been a real learning experience for me and I appreciate all you folks sharing your comments and concerns with us, it has been very beneficial to me. Thank you so much for participating.
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Mr. BISHOP. I would like to echo that. I certainly want to let you know that I will go back and let my farmers in Georgia know that I know first hand that they are not the only ones who have the concerns, that I did come to Kentucky and I heard from the Kentucky Farm Bureau and the farmers in Kentucky, that they have the same problems, the same concerns that we have in Georgia, and that we are going to do our dead level best to bring some resolution to it in this session of Congress.
Thank you.
Mr. EWING. Congressman Fletcher, again my thanks to you for hosting this and your comments.
Mr. FLETCHER. Thank you, Mr. Chairman. Again, I want to thank you, it is a great honor to have you come down here and hold this hearing and Mr. Bishop, Mr. Lucas, I also thank you for participating. We have had a bipartisan panel here and I think it has actually been a very good day, very informative. I continue to learn more as I go through here. I have got a lot of family members back in Montgomery County still farm, some here today, and good to see them. So it is important that we do take this information, that we listen, that we go back and see if we can do some things proactively.
Crop insurance has been a major issue and I think it is important that we go back and make some of the changes or look at making some of the policy changes to make it fairer and to make it cover the concerns that you have better.
The tobacco program, obviously I think and as we have heard here today, is probably the best risk management program we have and so I thank you all again for the information that you have given us. The panelists did a marvelous job. I will tell you, it made me proud to be from Kentucky and we have I think had an excellent hearing for you, Mr. Chairman, thank you again.
Mr. EWING. Thank you.
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Ladies and gentlemen, I appreciate your being here, I appreciate your comments and I appreciate your concerns. It is a pleasure to be here and we look forward to working with you and continuing to hear from you in the months ahead as we seek to find answers for agriculture's problems.
Thank you. This meeting is adjourned.
[Whereupon, at 11:35 a.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of John Bullock
Chairman Ewing, Congressman Fletcher, Congressman Lucas and other distinguished Representatives, I'm John Bullock, from Somerset, KY, President of Burley Farmer's Advisory Committee and also a tobacco farmer for 40 years. I would like to thank you for taking the time to come to Kentucky and letting us in the agriculture community share our thoughts and concerns that we have pertaining to crop insurance and problems we have in agriculture today.
I'm sure you are all aware that this is not the best of times on the farm. Commodity prices are at record lows or falling toward record lows. The Federal Crop Insurance program was established to protect farmers against such economic hardships or losses due to inclement weather that we face every year.
During these hard times we begin to focus and analyze Federal assistance programs such as Federal Crop Insurance to ensure that they are indeed achieving their intended purpose. I think in recent months since Congress has begun their analysis, we have all discovered that problems do exist throughout the entire system, from the producer to the administrators.
For instance, if I elect to purchase buy-up coverage, my premium increases while the subsidy for that higher coverage decreases. Let me quote a Warren County, Iowa farmer, Craig Hill who explained it well: ''When the Federal Government reduces the cost of insurance when you buy at a very low level but increases the cost of insurance when you buy at a very high level, it tends to make farmers buy a low level of coverage.''
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The program needs to be modified to stimulate increased producer participation and provide better coverage levels and options across more crops, regions and production practices, including the needs of livestock producers. Improvements to the Federal Risk Management Program for crop, livestock and dairy producers can serve to reduce the pressure for future ad hoc disaster legislation and will prove to be a sound investment that should result in long-term savings to the government.
It is my understanding there is a bill in the Senate that is sponsored by Senators Pat Roberts, Tom Harkin, and Bob Kerry that would make crop insurance more affordable for farmers and, therefore, encourage the farmer to buy more. Another benefit of the Roberts-Kerry Crop Insurance Bill is that, for the first time, livestock losses would be covered as a result of low livestock prices. This would benefit Kentucky immensely since we are one of the largest cattle producing states east of the Mississippi. Also, it would have been extremely important to the pork producer in the past few months.
Changes in the Federal Crop Insurance Program will also benefit the overwhelming majority of tobacco farmers throughout all counties in Kentucky. While the total number of burley tobacco farmers purchasing crop insurance declined from last year, an additional 7 percent of those who continued to purchase crop insurance selected buy-up coverages.
While the amount of tobacco farmers may raise has been severely decreased by recent quota cuts, due to our Federal tobacco program, prices have not been reduced. Taking into consideration the estimates of an additional quota cut in 2000, reducing the amount of premiums farmers must pay for adequate crop insurance coverage may help maintain participation levels in the future. If maintaining, or increasing the number of participants in the crop insurance program is one of the goals of Congress, then continuation of the Federal tobacco program would assist in achieving that goal.
The tobacco farmers program is the only protection we have against price cuts. The tobacco program has been the best and most successful commodity program in history. Also, the tobacco program has been very successful at keeping the price of tobacco at a profitable levels. In the past few years there have been problems that need addressing in the tobacco program. Those of us in the tobacco growing industry have been hesitant to go before Congress to make these changes from time to time. The tobacco program has been very successful and I would like to ask you and your colleagues to continue to support our program.
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Again, Chairman Ewing, Congressman Fletcher, Congressman Lucas, distinguished members of the subcommittee, thank you for coming here today and holding this hearing in Lexington, KY, to review the Federal Crop Insurance Program.
Statement of Marshall Coyle
Chairman Ewing, Congressman Fletcher, Congressman Lucas, and other distinguished Representatives, my name is Marshall Coyle and I am here today representing over 79,000 farmer members from across the Commonwealth of Kentucky who have a vital interest in the ongoing congressional discussions regarding reforms to crop insurance.
Because this committee has jurisdiction over the Federal tobacco program, and since over 44,000 farmers in 119 of our 120 counties produce tobacco, I would be remiss if I did not express to each of you the importance of the program which is operated at no cost to U.S. taxpayers. In fact, the popularity of the Federal tobacco program was clearly expressed during last year's referendum in which 98 percent of tobacco farmers voting cast favorable votes. Simply put, the Federal tobacco program keeps small farmers farming. Without it, tobacco farmers would be at the mercy of tobacco manufacturers seeking cheaper leaf tobacco.
The timeliness of this hearing is quite unique, in that a majority of those testifying today have recently returned from a meeting in Georgia with a major tobacco manufacturer who is considering a pilot program to partner with tobacco farmers under production contracts. While they have decided against a pilot contracting program for this marketing season, given the current and future trends toward consolidation in agriculture, globalization of the marketplace, policy directives toward a more market-oriented agriculture, an enhanced litigious society against the tobacco community, continuing legislative attacks on the tobacco industry, certain inefficiencies in the tobacco program, production technology enhancements and comparative and competitive advantages, uncertainties continue to mount in the tobacco farm community with regard to the future vitality of the Federal tobacco program.
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The current challenges in the tobacco community are not unlike those challenges in other commodities as agriculture is in transition. Managing risk will be crucial for farmers during this transition period. As most segments in agriculture seem to be relying more and more on contract production, one questions if contract-agriculture will become the preferred risk management tool? Moreover, the underlying question becomes how will farmers maintain their independence and what becomes of the small family farm?
In addressing reforms to risk management, specifically crop insurance, Congress will begin to define government's future role in securing the proper type of safety net for agriculture. As you know, the farm sector has been distressed by economic conditions including, declining exports, falling prices and natural disasters. These occurrences have almost every commodity interest looking for some type of relief that will, in some cases, maintain their very existence. Dairy producers are seeking more stable prices, grain farmers and those raising livestock are seeking adequate compensation and tobacco farmers are seeking to guard against future quota cuts and price reductions.
As we seek to find solutions and a new defining role for government in agriculture, we must remember that this Congress, as did the 105th Congress, provided substantial relief in the forms of disaster assistance packages totaling more than $6 billion. Furthermore, over the three year implementation of the 1996 FAIR Act, over $17 billion in direct payments has been paid to farmers and $1.4 billion spent each year on the crop insurance program including, premium subsidies, insurance company reimbursement and underwriting losses.
If Congress wants to acclimate agriculture to a more open market environment and individuals toward more responsible risk management planning, then it must become more selective in it's approach toward alternatives. Due to societal and demographic changes in the United States, we must realize the fact that in the future, constraints on Federal dollars will result in a decrease in the amount of assistance available. Much like the issue of Social Security reform, Americans must prepare themselves for a time where their own retirement, health coverage or their risk management plan will be of their own design and planning.
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Today, subsidy levels for higher coverage are not enough to entice all farmers to purchase buy-up coverage. So in many cases they do not buy it. Compounding this decision is the simple idea that if disaster occurs, the Federal Government will offer assistance. While crop insurance reform efforts seem to focus on encouraging farmers to establish a responsible and diverse risk management plan through the private sector, disaster assistance continues to foster a dependence- mentality which creates a disincentives to purchase crop insurance.
Last year, 27,500 policies were sold in Kentucky covering 12 crops including burley tobacco, dark tobacco, corn, barley, soybeans, wheat, apples, popcorn and nursery crops. Total premiums were $15.8 million, subsidized at $8.7 million for nearly $275 million in liabilities. Of this, $25 million in indemnities were paid to farmers creating a loss ratio of 1.58. Current data for this year indicates nearly 25,000 policies are in effect.
Congress is in a unique position to help farmers through a difficult adjustment period. Already discussions have begun in the U.S. House and reports have been published from the General Accounting Office and the U.S. Department of Agriculture, Office of the Inspector General, on substantial changes to the crop insurance program. We would like to offer our comments on some of the current discussions.
First, there have been suggestions to base price elections on the average prices received by producers for the previous 5 years, rather than the projected Chicago Board of Trade market price. Farm Bureau policy calls for various insurance coverages and price elections that accurately reflect market prices and risk considerations.
Second, recognizing that catastrophic coverage may be the only viable option if other policies do not become more economically feasible, Kentucky farmers are trending more toward purchases of buy-up coverages. Consider that in 1998 over 1500 farmers selected to purchase buy-up coverage. This year, the number of farmers selecting buy-up coverage has risen to over 5100. Given this trend, additional financial assistance should be targeted toward buy-up coverages. Farm Bureau supports a premium subsidy for buy-up coverages at a minimum level of 50 percent. This includes any amount of buy-up coverages above current catastrophic coverage.
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Third, while we realize there is controversy regarding the methodology and recommendations of the report to the Secretary on Federal Crop Insurance generated by the USDA Office of Inspector General, it did highlight certain concerns that do need attention. According to the report, the government has lost millions of dollars in recent years due to inequitable risk sharing with reinsurance companies. USDA's Risk Management Agency inadequately assigned risk exposure on crop losses giving reinsurance companies an incentive to increase sales and retain insureds through favorable loss adjustments.
The report also concluded that sound actuarial practices were not followed. Some examples included, sales agents, loss adjustors and other were involved with conflicts of interest, loss adjustors rubber-stamped policyholders' claims, and quality control reviews were superficial.
Moreover, the United States General Accounting Office report on March 17, indicated that continued oversight of the reasonableness of the program's administrative reimbursement is necessary. This, even after passage of the Agriculture Research, Extension and Education Reform Act of 1998 revised the reimbursement rates downward to 24.5 percent of premiums for most crop insurance. Congress and the Risk Management Agency need to examine the Standard Reinsurance Agreement to make adjustments which guarantee proper oversight, compliance and long-term credibility of the crop insurance program.
Fourth, recent multiple crop losses have contributed to last year's $6 billion disaster assistance bill. This is due to the fact that current crop insurance policies do not adequately cover producers who experience these significant losses. Farm Bureau believes this problem could be remedied by allowing farmers to drop one year of production records from the actual production history calculations.
Fifth, while most of the major commodities are provided with risk management options, there are still numerous crops that are not covered by the program. Specifically, coverage for livestock. Kentucky ranks in the top 25 states in livestock numbers including beef cows, milk cows, hogs and chickens. Livestock should be included as a defined crop under the Federal Crop Insurance Corporation Act.
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Finally, Farm Bureau believes we should encourage educational programs on risk assessment and management, financial management and marketing information for farmers. One of the best ways to acclimate any farmer to new innovative programs is through local community-based initiatives involving government officials, agricultural leaders and extension.
Mr. Chairman, as you well know, farming is a risky endeavor. We operate our farms at the mercy of mother nature. We appreciate your efforts and that of each committee member to address much needed reforms to the crop insurance program. As you and your colleagues work together to strengthen this program and define the farm safety net for agriculture we ask that you favorably consider our comments here today.
Statement of William M. Snell
Thank you Mr. Chairman. It's certainly a honor to testify before this committee. My name is Will Snell. I'm an agricultural economist at the University of Kentucky where I work closely with policy makers and farm organizations on tobacco policy-related issues.
I realize that this hearing is devoted to the Federal crop insurance program. And I certainly will address some of the issues related to this program. However, I would also like to focus some of my testimony on the overall risk facing Kentucky agriculture, particularly tobacco farmers which you cover in this subcommittee. I will begin my testimony with some general remarks about the uniqueness of Kentucky agriculture.
Kentucky agriculture is comprised primarily of a large number of small family farms. According to the latest Census of Agriculture, Kentucky possesses over 82,000 farms—the fourth largest in the Nation. The average farm size is 162 acres, roughly one-third the national average.
These farms produce a wide range of agricultural enterprises ranging from traditional grain and livestock enterprises to some exotic, emerging non-traditional enterprises, such as freshwater shrimp, wineries, and on-farm festivals. But one thing that is common to most Kentucky farms is tobacco.
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Despite a relatively large number of farms leasing out their tobacco quota, tobacco production still occurs on over 50 percent of Kentucky farms with the average tobacco production being just over 5 acres. Overall, tobacco is produced in 118 out of Kentucky's 120 counties, generating farm sales of $800–$900 million annually, which represents over one-third of the net cash return from ag sales in Kentucky.
Given the current agricultural environment, this committee is well aware of the attention being devoted in Washington DC and around the Nation in the area of risk management. Tobacco farmers adopt a variety of means to manage risk, including diversification into other agricultural enterprises, off-farm employment, participation in cooperatives and marketing alliances, and also crop insurance.
In recent years, approximately 40 percent of Kentucky tobacco acres have been insured under the Federal crop insurance program with another 10 percent insured through private wind and hail policies. This compares to over 80 percent of the flue-cured acres being insured in the Carolinas, where larger capital investments in tobacco farming and the threat of hurricanes presents a much greater risk.
For those burley tobacco farmers electing to purchase Federal crop insurance, around 70 percent of the acres are insured with buy-up coverage. A final statistic is that while tobacco accounts for less than 10 percent of the total federally insured crop acres in Kentucky, tobacco has accounted for 50 to 75 percent of the total indemnities for all Kentucky crops in recent years.
Undoubtedly the crop insurance program is an important risk management tool for many of our farmers. But the program is criticized on several fronts including its overall cost effectiveness and the abuse within the program. To obtain some specific thoughts on the crop insurance program for tobacco, I solicited responses from my fellow extension colleagues across the state. One county agent responded:
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''There are producers in my area who set their tobacco and don't fertilize, spray for insects/diseases, or adopt any other management practices in hopes of having a failure so they can collect insurance. I have one greenhouse grower who told me this season that a producer asked him to call and let him know if he had any diseased plants so he could set them. This attitude is widely know about in the communities. They know the producers who do it and make money by doing so! It sure sets a bad example for those producers who are honest and try to do what is right!''
Another agent echoed similar thoughts:
''Crop insurance is abused! A farmer should be limited to the number of years he can claim. We have people that farm for crop insurance!''
An extension colleague stated:
''The CAT policy does not act anywhere near a safety net. There needs to be increased subsidies on buy-up coverage in order to increase participation by low risk producers as a means to spread the risk across a larger population''.
And finally one state extension specialist claimed:
''I have been involved with several meetings this year in which the insurance representative has basically said to growers—do not worry about these disease control steps, just buy insurance.''
Despite its shortfalls, the crop insurance program is vital to many farmers not only in shielding risk, but also as means to obtain credit, especially for those farmers who possess the greatest agricultural financial risk or those with limited off-farm income.
In addition to concerns at the farm-level, I'm sure you are well aware that the tobacco crop insurance program has received a lot of attention in the U.S. Congress in recent years. As you know tobacco producers and purchasers pay for the operation costs associated with the tobacco program. Like with all Federal programs, there are some Federal outlays for administrative costs associated with the tobacco, including crop insurance.
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Total Federal expenditures on the tobacco program in a normal year are generally around $60 million. FSA administrative costs associated with the tobacco program have consistently totaled around $15 to $16 million in recent years. The total cost of the Federal tobacco program varies from year to year, depending on the weather-influenced crop insurance outlays.
In a normal growing season the net Federal crop insurance outlays for tobacco are approximately $30 to $40 million. But events such as hurricanes, droughts or diseases can easily escalate the Federal cost for administering and subsidizing the Federal tobacco crop insurance program to more than $75 million annually.
Historically, according to data from USDA's Risk Management Agency, total indemnities paid to burley tobacco producers have exceeded $210 million since 1980 compared to total premiums collected of $127 million, yielding a loss ratio of 1.65. (The loss ratio is 1.44 if the severe drought-stricken 1983 crop is not included). Thus, the Federal crop insurance program for tobacco remains vulnerable which may prompt the private sector or even perhaps the tobacco cooperatives to evaluate means to offer a viable crop insurance program.
While the existence of the Federal crop insurance program remains uncertain, tobacco farmers are more concerned with much greater political risks they face from additional taxes, regulation and probably the major concern—the potential loss of the Federal price support program for tobacco. Although there are numerous issues within the program that need to be addressed such as quota volatility, non-competitive prices, high quota rental rates, and marketing inefficiencies, the tobacco program can arguably be labeled as one of the most effective farm programs ever administered by the Department of Agriculture.
Unlike other Federal agriculture programs, the tobacco program over the years has accomplished many of the original goals of farm programs of providing price and income support for a large number of small family farms without incurring large government expenditures.
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The tobacco program provides farmers with a high degree of risk protection relative to other agricultural enterprises. Price variability for tobacco during the past ten years has averaged less than 5 percent, compared to 10 to 20 percent for most other traditional enterprises produced in Kentucky and more than 20 percent for some of the vegetable enterprises—often cited as an alternative to tobacco production. Besides minimizing price risk, the program also provides for production risk protection by allowing producers to carryover non-marketed quota into the following growing season or disaster lease quota within the current marketing season.
Consequently, farmers have shown their support of the program via referendums (held every three years) which have consistently tallied over 90 percent approval of maintaining the program. However we all know that the future existence of the tobacco program remains in jeopardy.
Given this risk, farmers have been reluctant to make long-term investments in their agricultural operations, including purchasing additional tobacco base, land, barns and equipment, and even to adopt new enterprise mixes that may offer more promising long-term income opportunities, but are less profitable in the short-run.
However, the increasing uncertainties facing the tobacco industry and the tobacco program have forced many Kentucky farmers to more closely evaluate various alternatives in recent years. And some of these farmers are certainly achieving success in their diversification efforts. However, given the resource base in Kentucky, there are simply no other agricultural enterprises that for a large number of farms and for a sustained period of time can generate the returns to management and labor comparable to tobacco. Thus, unlike many other farm programs of the past, the price stabilizing/production control measures of the tobacco program have certainly contributed greatly to sustaining thousands of small family farms in Kentucky and other burley tobacco-producing States.
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In reality, it does not matter what is done with crop insurance reform or other risk management tools, many of these farms simply will not survive without a tobacco program.
Unlike other crops, there are no futures markets for tobacco to offset the enhanced price risk which would certainly evolve without a tobacco program. Contracting is the marketing mechanism that will likely emerge in a free market tobacco economy. Contracts possess the potential to guarantee market access, production levels, and minimize price and income instability for tobacco farmers.
But the question remains how many of Kentucky's 45,000 tobacco farms would be included in a private contracting system? If the average tobacco production per farm would increase to just as little as 20 acres under a contracting system, the net result would be an elimination of around 80 percent of the farms necessary to grow a crop similar in size to recent production levels.
Consequently, the only viable option for many of these farm families without a tobacco program is to pursue off-farm employment. Unfortunately, the most vulnerable tobacco farms in this state under a deregulated tobacco marketing system are located in the most tobacco dependent regions—many of which are characterized with low education levels, high poverty rates, and overall limited off-farm employment opportunities.
Thus, Kentucky agriculture is facing a lot of risks these days that is different from the price and production risks confronting the rest of agriculture today. Given the current political and economic trends for tobacco, our farmers are working hard to diversify their income base. Hopefully our leaders will have the insight to invest the tobacco settlement funds in a manner that will help sustain our farms and rural communities that are such an important part of Kentucky's heritage. But there is no doubt that our political and farm leaders have a real challenge before them in addressing the risks that our farms will face heading into the 21st century!
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Statement of Henry West
Chairman Ewing, members of this committee, thank you for interest in our commodity and thank you for coming here.
I am Henry West. I farm in south central Kentucky in Garrard County. I am a burley tobacco grower and quota holder. I have been a share cropper, lessee and lessor. I have had good crops and bad crops. Tobacco has fed and clothed my family and educated my children. In simple terms, tobacco pays my bills. Tobacco is generally produced on family farms—farms in Kentucky are small by national standards—162 acres is the average in the 1997 ag census. Tobacco is a high value per acre crop that is well suited for our farms which have limited tillable acreages.
The last two crop years have been very difficult in our area because of extreme weather. We have had later frost in the spring, earlier frost in the fall, too much rain in May and June, no rain in July and August. Crop failures have become more common. Many farmers have tried to get bigger to make up for past failures and there compounds the problem. For some growers, Federal crop insurance has become a must to secure financing.
As important as crop insurance is to protect us from weather-related and production problems, the real threats to our very existence are: (1) the attacks in Washington on our tobacco program and (2) the huge reduction in quota the last two years. No amount of crop insurance can protect us from lost quota or the loss of the program. The tobacco program for over half a century has provided stability for farmers and their communities. While other farm programs have failed, the tobacco program stands as an example of success while costing the Federal Government very little. Some in Washington would like to discard our price support and quota system and get government out of tobacco. But without the program many of us would cease to exist as a viable farming operation and our rural communities would dry up.
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Federal crop insurance can be a savior for some farmers—the tobacco program is the savior of all tobacco farmers.
Federal crop insurance on tobacco without a program is like buying oats for a dead horse.
The almost 40 percent reduction in quota the last two years and the possibility of more cuts in the future place us in jeopardy. The increased use of imported tobacco, the uncertainly surrounding the many law suits against tobacco companies, and cigarette price increases all equate to lower use of our tobacco.
As any reasonable American, I understand the health risks involved with the use of tobacco products. Farmers support efforts to educate youth about the health risks of tobacco and we do not encourage any youth to use tobacco. However, tobacco is a legal product and many adults choose to use tobacco products. American farmers grow the very best tobacco in the world. I would encourage you to help us maintain our very successful price support and quota program so that we may continue to thrive on our farms.
Statement of Paul Hornback
Thank you very much for allowing me to offer testimony on the Federal Crop Insurance Program and tobacco program today. I would like to commend Congressman Ewing, Congressman Fletcher and the other members of this committee and their staff for holding this hearing to focus on issues and concerns that farmers are continually facing.
Let me first say that crop insurance is a tool used by many farmers to cover investment in crops for circumstances that are out of their control. In farming we can be the best managers, but due to things will happen completely out of their control, lose our investment for the entire year. Crop insurance, or let me say, a risk management tool is a must when disaster hits.
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This is not to say that crop insurance does not have its problems. There is much abuse in this program that as with any program that does not have proper checks and balances. Too many people are able to plant crops and not maintain them during growing season and then collect insurance. We need a system that enforces the claim, verifies the area did have weather problems that justify the loss, and then pays according to those facts. Just this past year the so-called blacklist of farmers who consistently made claims was done away with, thus allowing them to continually falsify claims.
My hope would be to have a crop insurance-revenue insurance program that would allow American agriculture to remain strong not only during weather related disasters but during a time of depressed world prices like we now have. A system that can cover justified losses and eliminate fraud. Abuse of the present system is costing us all in the end.
Specialty crops, including tobacco, are at a great risk because acres are generally smaller and investment per acre higher. This leaves them vulnerable to a small storm or localized drought that could cost them their entire crop.
Being a tobacco farmer and this being the Subcommittee on Specialty Crops, I would be remiss if I did not mention the Tobacco Program. This is the longest standing and least costly farm program we have in American agriculture. It manages supply and demand, thus allowing farmers to produce a crop year after year for a fair income—that is not to say we don't have our problems—but with your support tobacco will continue to be a major segment of the agricultural economy in tobacco producing States.
Again, let me thank you for the opportunity to testify before your subcommittee and I want to remind you that agriculture is what has made this country strong, enabling us to feed an clothe the world. The continuation of these and other farm support ventures area must for our continued success in carrying American agriculture into the 21st century.
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