[Senate Hearing 108-114]
[From the U.S. Government Publishing Office]
S. Hrg. 108-114
USDA IMPLEMENTATION OF THE AGRICULTURAL RISK PROTECTION ACT OF 2000 AND
RELATED
CROP INSURANCE ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 12, 2003
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
Available via the World Wide Web: http://www.agriculture.senate.gov
______
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
THAD COCHRAN, Mississippi, Chairman
RICHARD G. LUGAR, Indiana TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky PATRICK J. LEAHY, Vermont
PAT ROBERTS, Kansas KENT CONRAD, North Dakota
PETER G. FITZGERALD, Illinois THOMAS A. DASCHLE, South Dakota
SAXBY CHAMBLISS, Georgia MAX BAUCUS, Montana
NORM COLEMAN, Minnesota BLANCHE L. LINCOLN, Arkansas
MICHEAL D. CRAPO, Idaho ZELL MILLER, Georgia
JAMES M. TALENT, Missouri DEBBIE A. STABENOW, Michigan
ELIZABETH DOLE, North Carolina E. BENJAMIN NELSON, Nebraska
CHARLES E. GRASSLEY, Iowa MARK DAYTON, Minnesota
Hunt Shipman, Majority Staff Director
David L. Johnson, Majority Chief Counsel
Lance Kotschwar, Majority General Counsel
Robert E. Sturm, Chief Clerk
Mark Halverson, Minority Staff Director
(ii)
C O N T E N T S
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Page
Hearing(s):
USDA Implementation of the Agricultural Risk Protection Act of
2000 and Related Crop Insurance Issues......................... 01
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Thursday, June 12, 2003
STATEMENTS PRESENTED BY SENATORS
Cochran, Hon. Thad, a U.S. Senator from Mississippi, Chairman,
Committee on Agriculture, Nutrition, and Forestry.............. 01
Leahy, Hon. Patrick, a U.S. Senator from Vermont................. 17
Roberts, Hon. Pat, a U.S. Senator from Kansas.................... 02
Stabenow, Hon. Debbie, a U.S. Senator from Michigan.............. 21
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WITNESSES
Collins, Keith, Chief Economist, U.S. Department of Agriculture,
Washington, DC................................................. 06
Davidson, Ross, Administrator, Risk Management Agency, U.S.
Department of Agriculture, Washington, DC...................... 08
Penn, J.B., Under Secretary for Farm and Foreign Agricultural
Services, U.S. Department of Agriculture, Washington, DC....... 03
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APPENDIX
Prepared Statements:
Harkin, Hon. Tom............................................. 30
Collins, Keith............................................... 44
Davidson, Ross............................................... 49
Leahy, Hon. Patrick.......................................... 32
Penn, J.B.................................................... 37
Stabenow, Hon. Debbie........................................ 34
Document(s) Submitted for the Record:
Baucus, Hon. Max............................................. 64
Background Commodity Insurance Information, Risk Management
Agency..................................................... 65
Written Statements (several companies)....................... 72
Questions and Answers:
Cochran, Hon. Thad........................................... 104
Harkin, Hon. Tom............................................. 110
Baucus, Hon. Max (no answers provided)....................... 126
Conrad, Hon. Kent............................................ 115
Crapo, Hon. Mike............................................. 123
Leahy, Hon. Patrick.......................................... 121
Lincoln, Hon. Blanche........................................ 109
USDA IMPLEMENTATION OF THE
AGRICULTURAL RISK PROTECTION ACT OF 2000 AND RELATED CROP INSURANCE
ISSUES
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THURSDAY, JUNE 12, 2003
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SR-328-A, Russell Senate Office Building, Hon. Thad
Cochran [Chairman of the Committee], presiding.
Present or submitting a statement: Senators Cochran,
Roberts, Chambliss, Harkin, Leahy, Stabenow and Nelson.
STATEMENT OF HON. THAD COCHRAN, A U.S. SENATOR FROM
MISSISSIPPI, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
The Chairman. The hearing will please come to order.
Three years ago this month the Congress passed and the
President signed into law the Agricultural Risk Protection Act
of 2000. This Act significantly increased premium subsidies for
Federal crop and revenue insurance policies. It also improved
insurance coverage for farmers affected by multiple years of
natural disasters, authorized pilot insurance programs for
livestock, and placed increased emphasis on the insurance needs
of specialty crops and underserved regions.
Farmers have significantly increased their purchases of
crop insurance since the enactment of this legislation. Insured
acreage reached 79 percent of eligible acreage in crop year
2001 with 63 percent insured at the higher levels of coverage.
Insured acreage increased again in 2002 and will likely be up
again this year.
For crop year 2002, risk-based crop insurance premiums
totaled $2.9 billion. The value of associated crop insurance
protection reached $37.3 billion, an increase of 34 percent
since 1998.
The law also shifted responsibility for the development of
new insurance products to the private sector and away from the
Agriculture Department's Risk Management Agency. It also
increased private sector representation on the Federal Crop
Insurance Corporation Board of Directors and gave the
restructured board authority to approve new insurance product
proposals.
Though it is largely out of the new product development
business, the Risk Management Agency continues to play a major
role in the administration of the Crop Insurance Program. In
this regard, it should be remembered that the agency was given
new tools to help reduce crop insurance fraud and abuse.
It is well-known that the crop insurance industry, which
delivers the insurance program to farmers and ranchers on the
Federal Government's behalf, has been dealing with significant
financial challenges in recent months. For these reasons, we
are conducting this hearing of the Agricultural Risk Protection
Act and to assess its effectiveness in meeting the risk
management needs of farmers and ranchers.
With us today are Dr. J.B. Penn, Under Secretary of
Agriculture for Farm and Foreign Agricultural Services; Mr.
Ross Davidson, Risk Management Agency Administrator; and Dr.
Keith Collins, Chief Economist of the U.S. Department of
Agriculture. We appreciate very much your attendance and your
assistance at this hearing.
Senator Roberts.
STATEMENT OF HON. PAT ROBERTS, A U.S. SENATOR FROM KANSAS
Senator Roberts. Thank you Mr. Chairman, and thank you so
much for your leadership in holding this hearing today on this
very important topic. Some of my statement will be redundant
with yours, but the points are well taken.
With the third anniversary of the signing of the
Agricultural Risk Protection Act just 10 days away, it is
important we hold this hearing to review the implementation of
what is very important legislation.
I want to thank, as the distinguished Chairman has, our
Under Secretary, Dr. J.B. Penn; our Administrator, Ross
Davidson; and our Chief Economist, the man who is the only
economist I know who does not say on the other hand, Keith
Collins, for joining us as of today.
I want to take them personally for their efforts and on
behalf of my farmers and ranchers in Kansas, because the
difference between this program and what we had before saved a
lot of farmers.
Mr. Chairman, I have more than just a little interest in
this topic. Former Senator Bob Kerrey of Nebraska, who was in
town just the other day--he said we ought to provide crop
insurance to Iraq, Mr. Chairman. I am not quite sure what he
meant by that.
We really worked for nearly 2 years to make this
legislation a reality. In Kansas, we call it the Roberts-Kerrey
bill. In Nebraska, it is the Kerrey-Roberts bill. If you do not
like it then it is the Kerrey bill.
Our intention behind pushing for these reforms was to
improve this important risk management tool for our producers.
It was a bipartisan effort and I am proud of the final product.
Our primary goals in the legislation were to make crop
insurance more affordable, increase participation, and expand
the program to the underserved areas. We are hopefully headed
in the right direction on all of these fronts.
The increase in subsidies greatly reduced the cost of the
purchasing policies for many of our farmers. As Mr. Davidson's
testimony does point out, what the Chairman has alluded to, the
increase in participation and the coverage levels have been
absolutely amazing.
In 1998, only 9 percent of the eligible acreage was insured
at the 70 percent or higher level. Last year more than 50
percent of the eligible acreage was insured at 70 percent or
higher. Quite frankly, the increased coverage levels and the
affordability of the revenue policies under ARPA literally, as
I said before, saved many of our Kansas producers during our
terrible drought of last year and the previous year.
Mr. Chairman, I realize that many people say that ARPA and
crop insurance do not work because we still have a disaster
bill again as of this year. My preference, and I think it is
shared by the Chairman and most of us who have the privilege of
serving on the Ag Committee, would be not to do another
disaster bill, that circumstances would be such that we would
not have to do that. We need to consider this fact: the total
cost of our disaster bill was $3.1 billion, $3.1 billion,
including livestock assistance and all of the other cats and
dogs--and I do not mean that as a pejorative. The total crop
insurance indemnities paid for 2002 crop losses are just over
$4 billion. Let me repeat that, total indemnities paid on 2002
losses are $4 billion.
Now Mr. Chairman, I am first to admit that there may be
areas where we should do and I hope will do some additional
tweaking in the program. For the critics, I have to say that if
$4 billion is a broken program, what more can we ask for?
Overall, we can term the first 3 years of ARPA a success.
Again, sir, I thank you for holding this hearing and I look
forward to our discussion with today's witnesses.
The Chairman. Thank you very much, Senator Roberts.
It is obvious that you are due a great deal of credit and
an expression of appreciation for the hard work you did
personally in developing this legislation 3 years ago and
helping guide it to passage. The facts speak for themselves
about the participation and the effectiveness of the newly
designed insurance program.
Dr. Penn, we appreciate your being here this morning. We
hope you will proceed with any statement you would like to
make. We have a copy of your prepared statement which we will
make a part of the record in full. You may proceed.
STATEMENT OF J.B. PENN, UNDER SECRETARY FOR FARM AND FOREIGN
AGRICULTURAL SERVICES, U.S. DEPARTMENT OF AGRICULTURE,
WASHINGTON, DC
Mr. Penn. Thank you, Mr. Chairman. I will be brief. Senator
Roberts.
I am very pleased to appear before you today at this
oversight hearing for the Federal Crop Insurance Program. You
have acknowledged Dr. Collins and Mr. Davidson, and I agree
with you that they are the two resident experts on the Crop
Insurance Program. That suggests to me that you should direct
most of your questions to them at the appropriate time.
The Federal Crop Insurance Program was first instituted in
1938. Crop insurance, as we have traditionally called it, and
now more recently other types of risk management tools, have
become an increasingly important part of the economic safety
net for American agriculture. They are an expanding component,
alongside the several other farm programs that include
marketing assistance loans, direct and countercyclical
payments, dairy price support payments, and other specialty
commodity programs.
As the world has become more technical and interconnected,
the risk faced by farm businesses also have increased and
become more complex. In addition to the always present natural
risk, market risks have expanded, new risks have emerged such
as liability related to consumer safety, and now we have the
threat of intentional sabotage of the food system.
The Federal Crop Insurance Program has grown rapidly in the
past few years in response to this changing risk environment.
Insurance not only protects farms from devastating loss in
times of extreme weather such as extensive drought or flood,
but it protects individual farming operations from adverse
impacts of more localized conditions as well.
More and more producers have recognized that it is good
business to have crop insurance and commercial lenders
increasingly require producers to have crop insurance as a
condition of obtaining a loan. Today, as you have noted, over
80 percent of the acres for the major program crops are covered
by crop insurance, and more than half of those acres have
coverage at the 70 percent level or high.
Since passage of ARPA in 2000, RMA has placed a high
priority on extending coverage to a wide array of products,
including specialty crops, forage, rangeland, livestock, and
even aquaculture.
However, Government risk management tools are fundamentally
different from traditional farm programs. They are unique in
several respects. The Congress recognized this with the passage
of ARPA in 2000. The vision at that time of some of the
architects of the ARPA was for risk management, at some point
in the future perhaps, to constitute the major component of the
safety net for the commercial farm sector, supplanting some of
the more traditional farm programs.
The ARPA provided the structure for the envisioned
expansion of risk management tools, both the development of new
innovative tools and their widespread use across more of the
farm sector.
Risk management also is unique in that it is actuarially
based. It is not another farm program with an often-negotiated
or bureaucratically determined set of rules for providing
benefits. Rather, it is a program providing individual producer
protection with cost and benefits based upon historical
experience and evaluations of specific risk.
Congress has required actuarial soundness, meaning that the
amount collected from premiums roughly equals the amount paid
out for claims over time. Producers pay for their insurance
coverage, which is provided through commercial contracts
between the producer and the private sector insurance company.
The insurance companies then in turn deliver the products, make
indemnity payments, and bear a proportion of the commercial
risk.
This component of the farm safety net also is unique in
that it involves this public/private partnership in masking
risk management services available to American producers. It
involves the participation of private companies--some dozen-
and-a-half or so today--in both the development and delivery of
the service to farmers. At the same time it involves the
participation of a major government agency, RMA.
ARPA placed the RMA in a unique position of being both a
regulator of the agricultural insurance industry and a
reinsurer of billions of dollars of incurred liability
annually. The partnership involves broad representation through
an oversight board, as Chairman Cochran mentioned, the Federal
Crop Insurance Corporation Board whose composition was
determined by the Congress with individual members selected by
the Administration.
We are concluding, as Chairman Roberts noted, the third
year since enactment of ARPA, and this hearing thus we believe
is very timely, presenting a very good opportunity to review
progress and performance since ARPA's passage and also to
assess any technical or structural changes that may appear
warranted.
The challenges ahead are enormous, however. U.S.
agriculture today counts some 2.1 billion places as farms and
together they produce about $200 billion worth of products
annually. All of this $200 billion comes from a highly
differentiated farm structure that encompasses a large number
of very small diversified farms, a small number of very large
special specialized farms, and a wide variety of all farm types
in between. It is to this very diverse group of farms that RMA
attempts to provide risk management tools for improved farm
management.
As been noted today, risk management still is largely crop
insurance and only about $38 billion of this $200 billion of
value generated each year is insured. The demand is growing for
tools that can provide a safety net for farms and products that
receive little or no benefits from the traditional farm
programs.
The challenge to the insurance industry and the challenge
to RMA is clear. More products are needed that address the
differing risk environments of the different farm types. More
products are needed for the rest of the crop sector and we have
only begun to develop appropriate products for the livestock
sector.
The other challenge, as Senator Roberts mentioned, is one
that confronts the Congress especially and that is in providing
risk protection to farmers and determining the relative roles
of ad hoc disaster assistance versus the risk management tools
of the program, especially crop insurance.
The presence of a federally administered insurance program
does not guarantee that a disaster program will never be
needed, but it can reduce the extent and frequency of disaster
over time.
As Senator Roberts also noted, the recent drought of 2002
demonstrates this point very vividly. Over $4 billion in claims
have been paid to date as he noted. Most of those were paid
within 30 days of the evaluation of the loss.
Congress also passed a substantial disaster package for
that same period, but the $4 billion paid in crop insurance
claims represents a substantial and growing portion of all
disaster payments. Furthermore, the premiums paid by producers
reduced total outlays of the Federal Government. As crop
insurance is used more extensively and as more risk commodities
and geographic areas are afforded coverage, the need for
disaster assistance should decline.
Finally, Mr. Chairman we are working very diligently to
implement the ARPA as Congress directed. We have gained
considerable experience in the past 3 years and we believe that
that will improve in invaluable as we move forward.
We welcome continued discussions with the insurance
industry, with farmers and ranchers, with the committees of the
Congress as we attempt to refine and improve this increasingly
important part of the farm safety net.
We look forward to working with you and the committee, and
thank you again for the opportunity to be here today.
[The prepared statement of Mr. Penn can be found in the
appendix on page 37.]
The Chairman. Thank you Dr. Penn. We appreciate your
statement very much and your participation at this hearing.
Dr. Collins, we have a copy of the statement you have
submitted and we will make that a part of the record but we
invite you to make any opening statement you would like to this
time.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF
AGRICULTURE, WASHINGTON, DC
Mr. Collins. Thank you very much, Mr. Chairman, Senator
Roberts. I appreciate the opportunity to join Under Secretary
Penn and Administrator Davidson here today.
I would never contradict Senator Roberts, but I must say on
the one hand I am the Chief Economist of the USDA, but on the
other hand I currently serve as the Chairman of the Board of
Directors of the Federal Crop Insurance Corporation. My
comments are going to focus on the activities of the board
since the passage of ARPA in the summer of 2000.
As we have talked about here, ARPA has made substantial
changes in the functions and responsibilities of the Federal
Crop Insurance Corporation. For example, they changed the
composition of the board. As you noted, Mr. Chairman, the
private sector representation has gone from four members of the
board to six members of the board. Now, out of a total of nine
voting members of the board, six represent the private sector.
That change, of course, symbolizes the emphasis that is
placed on the private sector not only for guidance and
management to the corporation, but also for the research and
development of new products.
The board has met 31 times since the enactment of ARPA, and
our work has cut across a wide range of management issues. To
help deal with those, for the first time ever, we have
established a governance committee and a financial and audit
committee. Most of our activities over this period have focused
on the decision of whether to approve new products that have
been submitted by the private sector for sale to producers.
We have to make decisions on those submissions under a very
tight timeline. We must issue a notice of intent to disapprove
a product within 90 days after the receipt of a complete
submission, and then either approve or disapprove within 120
days after the submission. The board must also contract with
independent actuarial and underwriting reviewers to get
independent reviews on each of these products. Then we are
required by law to take those reviews into consideration to
determine the approval or disapproval.
Since the enactment of ARPA, we have had over 150
independent expert reviews on about two dozen products that
have been submitted, new products or program modifications. The
board currently has about 40 expert reviewers under contract to
do that work.
The board has approved several new risk management products
over the past few years, including four livestock products,
whole farm insurance policies such as AGR-Lite, Adjusted Gross
Revenue, expansions of existing products such as revenue
assurance into new areas, new specialty crop insurance programs
such as one for forage seed, and the expansion of certain pilot
programs such as the Pecan Insurance Pilot Program.
Another board effort has been to review the rating
structure of APH, revenue assurance, and crop revenue coverage
plans of insurance. That may lead to substantial change in
rates as we move ahead into the future.
The board also reviewed Crop1's premium discount plan and
we recommended its approval subject to certain conditions being
determined by the Risk Management Agency. As we look to the
future, the board is committed to working closely with the Risk
Management Agency. Our goal is, like theirs, improve risk
management capacity of farmers and ranchers.
In order to ensure the resources of the Federal Crop
Insurance Corporation are being used in the best possible way,
at the end of last year we authorized two studies to look at
FCI's current and future products. One study is looking at
inconsistencies or overlaps between the statutes, the plans of
insurance themselves, and all of the materials, directives,
handbooks and so on that RMA puts out. The other study is
looking at the whole portfolio of products that RMA offers,
existing products as well as the need for new products, and
trying to identify gaps in coverage or overlaps in coverage.
Work will help RMA and the board deal with the large number
of pilot projects and feasibility studies that are in the
pipeline and that we are going to have to make a decision on
either to put into place or to terminate at some point in the
future.
In conclusion, the FCIC board is committed to strengthening
the Nation's crop insurance and other risk management programs,
as well as the regulatory functions of the Risk Management
Agency. I can speak on behalf of all of the board members. They
are very pleased to have the opportunity to serve American
agriculture and they are all working very diligently and very
responsibly to make this a continued and indispensable part of
the farm safety net.
Thank you.
[The prepared statement of Mr. Collins found in the
appendix on page 44.]
The Chairman. Thank you, Dr. Collins.
Mr. Ross Davidson is Administrator of the Risk Management
Agency. We have a copy of the statement you have prepared for
our hearing. It will be printed in the record in full, but we
encourage you to make an opening statement.
STATEMENT OF ROSS DAVIDSON, ADMINISTRATOR, RISK
MANAGEMENT AGENCY, U.S. DEPARTMENT OF
AGRICULTURE, WASHINGTON, DC
Mr. Davidson. Thank you very much, and let me just give you
some highlights. I appreciate the opportunity to be with you
today.
The primary mission of the Risk Management Agency is to
promote, support and regulate the delivery of sound risk
management solutions to preserve and strengthen the economic
stability of America's agricultural producers.
RMA is also, as you know, responsible for implementing
Congressional directives and the decisions made by the Federal
Crop Insurance Board of Directors.
Let me just highlight a little bit about ARPA and its
implementation. In response to subsidies provided by ARPA,
farmers have increased their levels of coverage in crop
insurance. As noted by Senator Roberts, in 2002 over 50 percent
of the insurable acreage was insured at 70 percent coverage or
higher, compared to only 9 percent in 1998.
This high participation rate and the higher levels of
coverage have enabled the ability of crop insurance to become
the main risk management tool for American producers.
However, the traditionally underserved States and some
commodities still lag in participation and coverage. RMA is
working to promote and facilitate the development of revenue
and specialty crop insurance to address availability questions
and affordability concerns in the underserved areas especially.
In February, the Department announced an effort to better
serve the 15 traditionally underserved States by providing up
to $18 million of additional subsidy for higher levels of
coverage through the Targeted States Financial Assistance
Program. This program, which is designed to help producers
manage production price and revenue risk has been very
successful.
This additional financial assistance has encouraged many
producers to purchase crop insurance for the first time and has
allowed many producers to purchase the maximum coverage level
available.
RMA has received many positive letters from producers,
producer groups, and insurance agents in many States on this
program and we expect to have more definitive participation
data later in the summer after acreage reporting dates have
passed, and we will be pleased to share that information with
you.
With regard to products and coverage, RMA is undergoing an
extensive product review, conducting listening sessions with
producers across the U.S., and identifying crop insurance
priorities of local and national producer groups, lender
organizations, and State Departments of Agriculture to improve
and fine-tune its products.
Under guidance from Secretary Veneman and the board, RMA
continues to support and regulate the development of new risk
management tools, update and adapt existing tools to meet
emerging market needs, technologies and risks, and expand
availability of risk management tools for all producers.
RMA's work with the apple industry recently to improve
apple insurance coverage is a good example of how producers,
insurers, and the agencies can work together to adapt the
program to address market changes, new risks, and local
conditions. We plan to do everything within our authority to
expedite the appropriate changes to the apple policy, and RMA
regularly works with producers to address such emerging needs
as these.
RMA recently announced a Livestock Risk Protection Pilot
Program for fed and feeder cattle which the board approved.
Both plans protect producers from declining cattle prices.
Additionally, RMA is entering into its second year of insuring
slaughter hogs in Iowa under two different pilot insurance
plans. Several other livestock initiatives are currently
underway, including a feasibility study for various livestock-
related insurance plans and for insuring against catastrophic
livestock diseases. RMA is also testing a number of pasture and
forage products.
With regard to adjusted gross revenue, in accordance with
the 2002 Farm bill, RMA expanded the areas for the AGR program
to additional counties in Pennsylvania and California. AGR is
nearing the completion of its pilot phase and will undergo
final evaluation, after which the Board of Directors will
consider nationwide expansion.
RMA has received interest from many States in an adaptation
of AGR called AGR-Lite which was submitted by the Pennsylvania
Department of Agriculture and approved by the board for use in
Pennsylvania. Recently the Pennsylvania Department submitted
certain changes and requested the expansion of AGR-Lite. On May
7th, 2003 the board sent the submission out for review by
external reviewers.
Cost of production is a new and untested insurance concept
and approach. Many issues, including program design, rating,
delivery, and administration still must be addressed. RMA and
the contractor on this product are currently addressing the
issues raised during the board's consideration process. We
expect to revisit these issues by midsummer, when the product
is resubmitted for the board's additional consideration.
Pending resolution of these issues to the board's
satisfaction, a policy for cotton may be available for spring
crop year 2004. Any decision to expand to other crops would be
decided by the board, taking into consideration the experience
on this initial pilot program.
As we all know, excessive drought has plagued and continues
to affect many producers in the U.S. and RMA recognizes this
challenge and has several programs that address the needs of
drought stricken producers. RMA has demonstrated its continued
service to producers during the drought stricken years by
paying, for crop year 2002, over $4 billion in indemnities
compared to $3 billion in 2001.
Prevented planning provisions cover producers in times of
excessive multi-year drought. Recently, RMA provided
supplementary information explaining prevented planting
policies to producers and most producers have found that they
are better covered than they originally thought.
Additionally, RMA is holding a series of prevented planting
forums to improve RMA's prevented planting coverage for the
future.
We are also evaluating the possibility of requesting
revisions to the yield substitutions that are in the APH
structure to address long-term production decline such as those
induced by extended drought.
With regard to education and outreach, we have an extensive
program. In 2002, RMA established 13 cooperative agreements to
deliver crop insurance education and information to producers
in the 15 underserved States and awarded 72 partnership
agreements to conduct producer training and risk management
with a priority to producers of specialty crops throughout the
Nation.
In addition, our Civil Rights and Community Outreach
Division entered into 46 outreach partnerships covering
approximately 34 States serving women, Asians, African-
Americans, Native Americans, and Hispanic farmers and ranchers.
RMA has also participated in the 14 public educational
briefings that USDA conducted across the country on the 2002
Farm bill and to explain USDA programs and services.
We all have concerns about fraud, waste and abuse and
managing that. As directed by ARPA, RMA instituted new
provisions strengthening program integrity and compliance and
these have shown positive results. To combat fraudulent claims,
RMA provided crop insurance oversight training to 2,500 FSA
personnel. This helps RMA and insurance providers monitor crop
conditions and producer behavior during the growing season
through onsite farm service agency personnel inspections.
USDA's 2001 compliance report to Congress noted that RMA
has reduced program costs an estimated $94 million by
preventing payments on potential fraudulent claims. In addition
to that, our traditional investigation, criminal, civil, and
administrative processes have generated recoveries of
approximately $35 million in overpaid indemnities in the last
year.
ARPA also requested the use of data mining and data
warehousing to administer and enforce crop insurance. An
additional spot checklist is extracted from RMA's data mining
warehouse to identify producers who should have growing season
inspections performed by FSA personnel. The indemnities of
producers on the spot checklist were reduced from over $210
million to just over $100 million dollars in 2002, representing
approximately $110 million in cost avoidance.
In addition, RMA is upgrading its Geographical Information
System, or GIS, using current mapping and imagery technology
and infrared data to assist in making compliance
determinations, and is integrating imagery technology into its
data mining effort. These combined efforts provide additional
help in preventing, deterring, and prosecuting crop insurance
fraud.
Recently, we have had to deal with the failure of a large
insurance company that is a major portion of our delivery
system. We continue to work with the Nebraska Department of
Insurance, the rehabilitator of American Growers, in assuring
the timely service and payment of claims. Currently, fewer than
200 open claims remain of the nearly 29,000 processed for 2002.
A few new claims are added each week.
All 2003 policies have now been transferred to other
insurance companies.
Although most of American Growers' employees have been
separated from employment at this time, a number of them were
retained to help work these claims and we acknowledge that
without their assistance and dedication this effort would not
have been as successful as it was.
We believe that this has been a very good example, also, of
cooperation between Federal and State regulatory officials. We
appreciate the insurance industry for picking up the additional
policies and absorbing that business volume.
Secretary Veneman recently charged RMA to examine its own
authorities and processes to ensure effective oversight of the
insurance industry. RMA is considering several changes in its
authorities and organizational structure to increase oversight
of the companies participating in the Federal Crop Insurance
Program.
RMA recently published procedures by which any reinsured
company may apply to offer a premium reduction plan under
strict standards for approval and operation. RMA has and will
continue to exert careful regulatory oversight of these types
of programs to ensure compliance with Federal law, particularly
with respect to the proper use of licensed agents, producer
service, and illegal rebating and tying prohibitions.
With regard to changes in our basic provisions, RMA has
incorporated the final requirements as mandated by ARPA into
its common crop insurance policy for basic provisions. We
recognize that there are a number of questions surrounding
these proposed changes and hope to publish the basic provisions
in the near future.
The standard reinsurance agreement is the method by which
we reinsure and provide subsidy to insurance companies that are
helping us with the delivery of crop insurance. The current
standard reinsurance agreement has been in effect since 1998.
ARPA authorizes the Department to renegotiate the SRA once
before 2005, and we plan to begin working with the insurance
companies to begin renegotiation of that in the near future.
As demonstrated, Mr. Chairman, by my testimony today, RMA
is proactively striving to fulfill Congress' and Secretary
Veneman's continued commitment to better serve our Nation's
producers.
I appreciate the opportunity to visit with you at this time
and we will be happy to respond to any questions.
[The prepared statement of Mr. Davidson can be found in the
appendix on page 49.]
The Chairman. Thank you very much for your statements. I
have a few questions to ask but I will yield first to my good
friend from Kansas for any questions that he might have of this
panel. Senator Roberts?
Senator Roberts. Thank you, Mr. Chairman. Some of this may
be repetitive to the testimony given by our three expert
witnesses.
Last fall Senator Harkin and I, Mr. Davidson, wrote you
regarding several of our concerns in your proposed rule for
changes to the basic provisions. I know you receive many
comments and are now in the process of completing the final
rule.
As you know, June 30 is the deadline for making policy
changes for the 2004 winter crops. Winter wheat is the top crop
in our State and in the Great Plains. If the final rule comes
out after June 30, but is still applied to the 2004 spring
crops, it will create enormous confusion in the Great Plains
and in Kansas. We would face a situation where our producers
would be operating under one set of rules on their 2004 winter
wheat and another set on their 2004 spring planted crops. This
could cause some real problems especially in the area of
prevented planting and double insurance.
My question to you is if you cannot issue the regulation by
June 30, would you delay the implementation until 2005 to avoid
this confusion in the countryside?
Mr. Davidson. There is virtually no chance that it will not
implemented before June 30th. We will have it published and
ready to go.
Senator Roberts. That is the kind of answer we like to
have. That is great.
Your proposed rule also included significant changes to the
rules regarding written agreements. As you know, these
agreements are often used for producers that are moving to new
crops but do not have a significant cropping history or where
standard policies are simply not available in the county.
We do not have many cropping options in the high plains but
in recent years we have seen our producers switching or
rotating to crops including canola and cotton. Mike, how many
acres do we have in cotton now, 60,000?
It has been predicted 120,000 acres of cotton. I do not
think that the distinguished Senator from Mississippi realized
that when Stephen Foster wrote the song old cotton fields back
home, he was talking about Kansas.
I do have some concerns with your proposal on the written
agreements. One of the primary purposes of ARPA was to expand
the coverage to the additional crops and regions. I know that
we have to work to prevent fraud. We do not want a 60 Minutes
program or anything like that. At the same time, we must work
to ensure that we do not really discourage our producers from
trying to get new crops and we must ensure that new beginning
producers can get insured.
Have you addressed these issues in the revised rule?
Mr. Davidson. I believe we have and we have a continuing
effort to evaluate the written agreement procedures. In fact,
our Board of Directors has asked us to do that to ensure that
it is balanced with responsiveness as well as with
responsibility.
Senator Roberts. Thank you, sir.
In the Farm bill, a provision was included to equalize the
loan rates for sorghum and corn. There was also a provision in
the Cochran-Roberts proposal that the Chairman and I put
forward at the time. The provision was included to try to keep
producers from deciding to plant corn simply because of the
higher loan rates.
Sorghum is also a less water intensive crop, which is very
important in the high plains. I have heard from many producers
concerned with lower crop insurance price elections for sorghum
than corn. Could you please take a look at this issue and let
us know where you stand on it?
Mr. Davidson. Yes, I am aware of that issue and we are
looking at it. We would be happy to come back to you on that.
Senator Roberts. A big-time issue, if I might, Mr.
Chairman, the industry has seen some drastic structural changes
in the last 8 months. American Growers has gone out of
business. Firemen's Fund Insurance has been merged into RCIS.
Thus, we have lost two of our largest crop insurance providers
in the past 8 months.
My question is are you taking steps to ensure the financial
integrity of the industry? Are there any other upcoming
financial problems we should be aware of? Or do you think the
situation has begun to stabilize?
Mr. Davidson. We have increased our scrutiny of all of the
companies as a result of the American Growers failure. I cannot
tell you at this time that we are not concerned about other
companies because we do have a couple that we are watching very
carefully.
We believe that those companies, if they have a problem,
will be able to preempt that rather than to have an abject
failure to deal with. I do have some concerns about a couple of
smaller companies.
Senator Roberts. We have come through a very difficult
time, especially out in the high plains, Montana, Wyoming, so
on and so forth, with the drought and forest fires, et cetera,
et cetera. That is part of the reason, we hope that Mother
Nature is a little kinder to us as we go into these next few
years.
In recent weeks we have heard many comments regarding a new
company called Crop1 and their premium discount policy. The
acronym for that is PDP.
I understand the concerns some have expressed in regard to
the use of the Internet to provide this policy. At the same
time, I was a strong supporter, and others were as well, during
the ARPA debate, of developing new policies and reduced cost to
our producers.
We also had a very lively debate during the ARPA
discussions on something called rebating. I recall from those
discussions insurance rebating is prohibited by 48 State
insurance laws, the exceptions being California and Florida.
Except for these two States, I thought Congress was very
clear, we did not want rebating taking place in the Federal
Crop Insurance Program. Can you assure me that rebating is not
taking place under this new policy?
Mr. Davidson. Yes, I can. We have evaluated it very
carefully. We have actually put out additional communication to
all parties with regard to rebating. There are certain aspects
of being able to reduce the cost of insurance to farmers that
Congress has allowed in legislation. Those are the types of
reductions that are allowed through this PDP program. If an
insurance company can reduce its cost of delivery or there is
another section that indicates that if you can reduce the risk
of the product itself, that those savings can be passed along
to farmers. That is what PDP does. It is an allowed reduction
to benefit the farmer.
Senator Roberts. I see.
A related question, and my final question, Mr. Chairman,
and then I have other questions I will submit for the record
because I know time is valuable.
I know that the company is using input suppliers, I am
talking about the implement dealers, the seed dealers, the
grain elevators, to promote their policy. That is fine. Do I
have your assurance that these organizations are not operating
as unlicensed agents, and that not servicing the policies and
assisting producers in making their crop insurance decisions?
Mr. Davidson. It is against State law for them to do so. It
is against our rules and regulations for them to do so. If they
do it, they will have to be eliminated from the program.
Senator Roberts. Thank you for answering these questions in
such a precise manner, and thank you for the job that you are
doing.
I would like to submit some additional questions for the
record, Mr. Chairman.
The Chairman. Thank you very much, Senator Roberts.
In connection with the question about the failure of
American Growers and the questions that were raised about the
financial strength of some of the companies that are selling
and providing crop insurance, do you have enough tools
available to you, Mr. Davidson, to help assure those who are
relying on the solvency of these companies to continue to
participate in the program?
I know there is a reinsurance agreement vehicle that is
used. Do you need any additional legal authorities to obtain
financial documents or other information that would enable you
to help ensure that we do not have failures among the companies
that sell and service federal crop insurance policies?
Mr. Davidson. We are evaluating all of the authorities that
we have. It has been an interesting experience to deal with
this American Growers failure because we have determined that
we really do not have the authority to, for example, take over
a company, supervise as a State insurance regular would, and
rehabilitate that company. We have had to rely on the
authorities that exist in the State of Nebraska to do that had
to collaborate with them.
That has worked well with regard to American Growers
because basically we have provided the funding and the guidance
and the insurance commissioner has provided the regulation. In
another instance where a company did not have nearly 100
percent of Federal crop insurance, it might be difficult to
sort out the relative roles of the Federal Government and a
State insurance commissioner. We are working with the National
Association of Insurance Commissioners to sort that out. Likely
we will need additional authority for some things.
The Chairman. I have a few more questions, but I intend to
yield now to my friend from Iowa, Senator Harkin, for any
statement or questions he might have. Senator Harkin?
Senator Harkin. Thank you very much, Mr. Chairman and I
will just ask that my opening statement be made a part of the
record.
The Chairman. Without objection, it is so ordered.
[The prepared statement of Senator Harkin can be found in
the appendix on page 30.]
Senator Harkin. Thank you, and I just have a couple
questions here. The bulk of my questions were basically dealing
with the letter that Senator Roberts and I had sent last year,
and you have already answered those. I appreciate that.
I had a couple of more that I wanted to ask. The one thing
that was in the letter that Senator Roberts did not ask about
and that was one of your proposed changes was introduced was to
eliminate the arbitration of crop insurance claims. I am sure
you have heard from a number of groups, as I have, about this,
and we put that in our letter to you.
Do so still intend to eliminate arbitration? If so, do you
have a proposal for an alternative dispute resolution process?
Mr. Davidson. That was in the proposed provisions because
we did intend to replace it with something that is more
responsive to producers. One of my concerns, as I first came
here, many of the letters that I received in the first few
months had to do with a producer doing something in good faith
based upon the representation of an agent or an insurance
company or a loss adjuster, and then at the end losing their
farm because it was not really something that they could rely
upon, and having very little ability to come back and to deal
with that.
We still are searching for a better way for producers to be
able to deal with small and large complaints. The arbitration
provision currently, as it stands, is not as responsive as I
would like to see it. However, we are probably not going to
have that arbitration provision taken out yet because we have
not found the Holy Grail that would replace it.
Senator Harkin. You are going to come out with these rules
before June 30th.
Mr. Davidson. The arbitration provision will not be taken
away.
Senator Harkin. It will not be in there. Then the present--
--
Mr. Davidson. No, the arbitration will not be taken away.
Senator Harkin. It will still be there?
Mr. Davidson. Yes.
Senator Harkin. We did not address this, so I hope that you
will consult with us as we go along, because we did not address
that in the legislation at all.
Mr. Davidson. Sure.
Senator Harkin. I sense what you are saying.
Mr. Davidson. We are just looking for something more
responsive.
Senator Harkin. If you find it, let me know.
Mr. Davidson. We have a group working on it right now, and
we will.
Senator Harkin. I have two questions. Senator Daschle, who
could not be here, wanted me to ask this question and I will
just ask on his behalf. Last Friday USDA was to begin sign up
for the crop disaster program that Congress passed several
months ago. Producers have been waiting for this assistance,
many of them barely hanging on.
I am told that many States are not prepared to accept
applications and are being turned away and told to come back in
2 weeks. This week I am told that some offices are taking
manual applications.
It was USDA who announced when the sign up would occur. It
is one thing for producers to have to wait so long, but another
for them to adjusted their schedule during a busy time of year
and go to an FSA office only to be told that they will have to
come back later.
I am told that this is a National office delay and that the
software was not ready. I understand that the Department is
busy but why do not field offices have everything in place to
take the applications when the sign up date is announced?
I would like to explain to the committee why there is a
delay? Additionally, when is the deadline for producers to
apply? Dr. Penn?
Mr. Penn. Senator Harkin, let me try to respond to that.
The information that you have just cited is not exactly
consistent with the information that I have.
This is a massive undertaking, as you know. New software
had to be developed. The software was delivered to the county
offices and sign up did begin last Friday, June 6th, as we
said.
As with all undertakings of this scope and magnitude there
were some glitches. There were some county offices where the
software was not received or there were some places where it
did not work as intended. These have been relatively minor and
relatively few.
As far as I am aware, the sign up is going as intended and
we intend for the checks to start flowing within a few days
after the producer signs up.
I acknowledge there have been some few glitches but these
were relatively minor and relatively few and the sign up
progresses pretty much as we had intended.
Senator Harkin. Again, on behalf of Senator Daschle, would
you check on South Dakota and see how it is moving along?
Mr. Penn. I will do that.
Senator Harkin. Thank you, Dr. Penn.
One less question. Mr. Davidson, many farmers in my home
State and others have made a lot of fixed investments in
ethanol production facilities. As you know, these add value to
corn, they reduce our dependence on foreign energy. We just
about a vote on that in the Senate, as you know.
However, as you may know, the profitability of these
facilities depends on a lot of forces outside their control,
market price for example. When corn prices are high or when
energy prices are low, ethanol producers are put in a squeeze.
These are risks associated with these potential losses. They
have reduced some of the capital availability of the plants and
their farmer-owners.
My question basically is would your agency be willing to
look at insurance coverage, some kind of risk management tools,
to farmer-owners that have co-ops of ethanol facilities in a
manner that is similar to your recent efforts to guarantee the
gross margins of hog producers, for example, on the livestock
end?
Mr. Davidson. That is an interesting concept. I guess, yes,
we are willing to look at anything. It may require additional
authority to do something in that area, I would guess. We would
be happy to take a look at any proposal.
Senator Harkin. Mr. Chairman, I will just submit to you
some proposals that have come to me in that regard and have you
take a look at them and see how they might fit into that and
whether or not we need additional authority to do something
like that.
Mr. Davidson. Sure.
Senator Harkin. Thank you, Mr. Davidson. Thank you, Mr.
Chairman.
The Chairman. Thank you, Senator Harkin. Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT
Senator Leahy. Thank you, Mr. Chairman.
I have a whole statement that I might put in the record,
but I would like to mention a couple of things.
We made changes in ARPA in the 2002 Farm bill and was
actually beginning to help farmers in the Northeast enroll in
crop insurance, help them manage risk in other innovative ways
such as using conservation practices which, in our part of the
country, can help very much to manage risk. Better financial
management, farm diversification.
The Department deserves credit for developing new crop
insurance products to cover the crops in the Northeast, such as
whole farm insurance policies. I just now would like to see
them become available. There is only about 1 percent or so of
our farmers can even use the programs that all of us worked to
put in the Farm bill.
There is a perfect storm of events occurring this year to
stop past progress in helping these underserved States. I
mention this because all 50 States contributed with their
taxes, both to the salaries of the people at USDA, and I notice
that there is a humongous number of people from USDA here, but
also for the programs in the Farm bill. A great deal of those
taxes come from the Northeast. I am not sure this is realized.
The Department decided to make a 180 degree change in the
AMA program. Second, the Department did not implement the
regional equity language, guaranteeing the Northeast
conservation funding, even though a bipartisan majority of the
House and Senate wanted that.
Third, and this is most inexplicable, the Department
decided to cut the conservation programs that we know worked
very well in the Northeast, to fund technical assistance for
other programs that do not work.
This leaves a lot of the farmers in my part of the world,
especially in Vermont, feeling that they have been left behind
again by farm policy. That is the same feeling I hear
throughout a number of the far more populated States of the
Northeast.
Let us solve at least one of these problems. The
Agriculture Management Assistance Program was flexible, it was
locally driven, it was directly responding to risk management
needs in each of the participating States. Those needs changed.
it was not one size fits all.
It was so successful that in the Farm bill we--and by we I
mean all the Republicans and the Democrats in the Senate, all
the Republicans and Democrats in the House--expanded its
mandate and we doubled the funding.
USDA does not seem to see the benefits it provided farmers
and given them a variety of risk management choices.
Earlier this year the Department transferred the vast
majority of funds for the Agricultural Management Assistance,
the AMA, from the Natural Resources Conservation Service to the
Risk Management Agency. RMA has just used these funds for
traditional crop insurance subsidies.
If we had wanted to put more money in these traditional
crop subsidies, we would have done it. Instead we were trying
to point out another area. The funding would not have been put
in there at all, had it not been for the fact that we assumed
USDA would actually follow the law and the funding as we in the
Congress wrote it.
We can sometimes be a stumbling block to USDA doing
whatever they want to do, but after all the money does come
from up here.
These new subsidies would make crop insurance more
affordable for those who are eligible to purchase it. I
understand that. By diverting the funds you in the Department
killed an innovative program which had funded conservation,
market development, farm viability efforts. That is why 24 of
the senators from these AMA States, Republicans and Democrats,
wrote to the Secretary to urge you to restore the AMA program
to its original purpose. A number of these senators, I would
note, are on the Appropriations Committees.
AMA had offered farmers in my State a new way to diversify
into other markets and help improve their bottom line. It was
working and it is almost--I see so much money going into
programs that have not worked for decades and they just keep
getting added two.
Now we have one that is working, so it is almost like if it
is working it is going to get punished.
We went through all of this debate when ARPA was
authorized. We decided we did not want to put all of our eggs
in one basket. Risk management is more than just crop
insurance. I hope the Department will recognize that.
What I want to know is why did the Department invested AMA
funds in traditional risk management programs instead of
building upon past successes? What did the Department ignore
the broader authorization of AMA, and instead use the AMA funds
to only pursue one risk management tool, crop insurance, a tool
that is really not available to any meaningful fashion to us,
throughout much of the Northeast?
Anyone of all the USDA folks here want to take a try at
that?
[The prepared statement of Senator Leahy can be found in
the appendix on page 32.]
Mr. Davidson. Let me take a stab at it.
Senator Leahy. I know you came up here, Mr. Davidson, and
met with the staff yesterday.
Mr. Davidson. Yes, and it was very informative and very
helpful.
Senator Leahy. They have probably given you a little bit of
a heads up that I am somewhat concerned.
Mr. Davidson. I understand that you have some feelings
about this.
Senator Leahy. I have been here 29 years. I have been very
supportive of the Department in a lot of things. I am just so
frustrated I am about to lose what little bit of hair I have
left. That frustration, I have to tell you, is going to carry
over into my senior position on the Appropriations Committee.
Mr. Davidson. Let me first say that personally, and as an
agency, we support development of broad risk management tools.
We have a commitment to that. We also support the idea that
there are many other things that can be done other than
insurance, in fact, many other things that should be done other
than insurance to deal with risks on the farm.
We do have a commitment to that, and we demonstrated that
commitment last year by providing over $8 million in funding
for development of other risk management tools. Again this
year, tomorrow, in the Federal Register, will appear another
request for applications to development risk management tools
for producers that are not insurance related.
We have been given the mandate to try to increase----
Senator Leahy. Looking for more things, I mean there is
outstanding AMA contracts with Vermont farmers that are
probably not going to be met because of the Department's
program change. Before you go out looking for even more, why do
you change and cut these people out?
Mr. Davidson. We are actually hoping to receive several
applications from Vermont producers for those.
Senator Leahy. You have some in there already that, because
of your change, are not being met. I am told the State and
local officials were not even consulted or informed about a lot
of these changes. You have a Republican Governor up there, a
Republican Commissioner of agriculture. If you do not want to
talk to me, at least talk to them.
Mr. Davidson. We actually, in implementing this program,
did talk to the State Departments of Agriculture. They assisted
us in communicating the program to all farmers in every State.
Senator Leahy. They do not believe that up in Vermont. They
are uncomfortable with this. Go ahead, answer the question.
Mr. Davidson. I just wanted to respond to you. We have a
commitment to that, and it is our understanding that NRCS has a
commitment to continued funding of all the conservation
measures. I know there has been issues with regard to
implementation in that. We have had----
Senator Leahy. Even though we increased substantially the
money for conservation in this bill, something I supported,
also at the request of a lot of you in the Department of
Agriculture, I supported that increase in funding. I am told
now actually that even though we increased it, the money
available for conservation programs in my State is actually
going down.
Mr. Collins. Mr. Leahy, can I respond to this conversation?
I do not want to comment too much on the funding that has been
directed toward increasing the subsidization on insurance in
the Northeast. That was well motivated by the very low
participation and low coverage rates in the Northeast.
The question that you are getting at is the tradeoff
between the conservation aspect of it and the risk management
or the crop insurance aspect of it.
When this decision was made, as this process unfolded, we
looked at exactly what you pointed out. There was about an 80
percent increase in conservation spending. We had every reason
to believe that there was going to be an increase in
conservation spending in 2003. NRCS, in fact, indicated that to
us, as well. That was part of the reason we went to this
decision.
Well then, as it turned out, the appropriation for the
conservation programs, because of the debate over technical
assistance funding, was not made until after April 1st and NRCS
did not--I do not know what they told you in the briefings on
the Hill this week--but they did not implement the regional
equity provisions in 2003. Your concerns on that are well
justified and well motivated.
One of the things think NRCS has done, however, is they
have held back a certain amount of funds in reserve for the
conservation programs for 2003. I can tell you, in discussions
I have had with Under Secretary Ray and Chief Knight, that they
have every intention of making a priority in allocating those
unallocated funds over the rest of this year, making the
Northeastern States a priority for the distribution of those
remaining funds.
Now that is not going to solve all of the issues that you
have raised, but we recognize what has happened here. We did
not get the conservation increase that we expected to get when
we made these AMA decisions, and hopefully we can try and
address it, maybe not fully, but try and address it in some way
over the course of this year.
Senator Leahy. As I said, I am not trying to point fingers
of blame. I am trying to fix what is a real problem. It appears
to me, as a related thing, that the vast majority of
agriculture income that is generated in Vermont, because it
comes from dairy and livestock farms, is not even going to have
a chance of being protected under the changes that have been
made to AMA.
That is one thing. You couple that with decrease in
conservation funds, we kind--we are in a situation like--and
this is not dissimilar to a lot of the other Northeastern
States--we have been sawed-off and let float out to sea, as far
as the Farm bill is concerned. We are paying one heck of a lot
of the bill for that farm bill.
It took a lot of Northeastern Senator's votes to pass the
Farm bill. I would hate like heck to be on the floor trying to
get those votes this year. I just could not do it.
Is that not true, that with these changes, the vast
majority of agricultural income generated in Vermont would not
have the chance of being protected under AMA?
Mr. Davidson. I do have to say that the program has been
very successful in the way it was directed this year. We have
had significant increase in participation.
Senator Leahy. In the Northeast?
Mr. Davidson. In the Northeast, in crop insurance. Nearly
100 percent increase in buy-up coverage in those areas, based
on policy count.
Senator Leahy. Let me ask you this. 100 percent increase.
What percentage of that reflects the actual income being
produced up there? For example, in my State they might have had
100 percent increase in sign up, but you are talking about 1
percent, or less than 2 percent certainly, under the way this
program is designed of the farm income producing areas.
You can say 100 percent increase, but if it is not really
covering much, it is like saying here if we have one person in
this room has health insurance and we say two more have signed
up, we have a 300 percent increase but we have an awful lot of
people not covered with health insurance.
Mr. Davidson. It is true that a large increase off of a
small base is still a small result. We have seen a significant
amount of increase in various States. It has ranged--the main
thing that we are concerned about is making sure that we have
tools that Vermont and other farmers can use. I am really
encouraged by the development of Adjusted Gross Revenue and
Adjusted Gross Revenue Lite to meet the dairy farmer interest
in Vermont. That program hopefully will be available in Vermont
in the near future.
I tend to agree with you that we need to do more with
regard to the tools available to farmers, not just insurance
but also all risk management tools.
Senator Leahy. Thank you, Mr. Chairman. As you can imagine,
my staff and I will probably do some followup on this. Thank
you.
The Chairman. Thank you, Senator. Senator Stabenow.
STATEMENT OF HON. DEBBIE A. STABENOW, A U.S. SENATOR FROM
MICHIGAN
Senator Stabenow. Thank you, Mr. Chairman, Senator Harkin,
for convening this very important meeting. I do have a full
statement and some questions to enter into the record, but I
would like to address a couple of those concerns today, as well
as talk about some things that are positive that are happening
in Michigan.
I was a member of the House when we debated and signed the
bill to increase crop insurance and to broaden the scope as a
risk management tool. I was especially pleased of provisions
that we were able to add at that time to expand opportunities
for specialty crops to begin to focus on options for specialty
crops. I appreciate the fact that we have begun to do that and
that it is challenging to do that, I know. Practically in a
State like Michigan, with great diversity in terms of fruits
and vegetables.
My concern continues to be that when we pass disaster
packages, and Michigan has needed emergency assistance because
of our crop losses in the last couple of years, very severe
losses. For many of our growers right now that is the only risk
management tool that they have, is a disaster relief package.
We want very much to be able to provide them greater options,
affordable options under crop insurance.
We have seen some improvements in Michigan since 1999,
processed cucumbers and sweet cherries and cabbage has been
added to pilots. I would encourage you to add additional crops
and additional pilots and expand them to more counties. One of
the biggest concerns that I hear is that the pilots operate in
only a few counties, and that more growers want to be able to
use them.
The other concern that I here, and probably the greatest
complaint, is that coverage is still too expensive and that
most producers can only afford catastrophic coverage. Even
though we added dollars, we took major steps toward addressing
this in ARPA, to increase the Federal subsidy, but some growers
still find the highest level of coverage out of their reach,
and complain about variations from county to county that still
need to be addressed.
There are specific issues, and I will not go through them
in detail, I would like a followup with information I have
received in talking to growers, but I would say first of all
that I know that there was a comprehensive review of crop
insurance for sugar beets. I know that was just completed in
March and that there is a meeting this coming Monday with
growers to address issues that they have raised. I hope that a
copy of the report is going to be available soon for us to be
able to look at that in detail, and I am anxious to see that
the growers are able to work with you to resolve a number of
outstanding issues as it relates to sugar beets.
The response to the sweet cherry crop in Michigan has been
very positive. In fact, it is only available in two counties
but there has been an 80 percent sign up rate. That is
positive.
The concern is that with tart cherries that we do not have
right now a pilot for them. In the beginning there was some
question of whether it would be for tart cherries or sweet
cherries. We need it for both, and I would like to know when
that tart cherry crop insurance will be available, even on a
pilot project in Michigan. If any of you are aware of what is
happening, I would like to know, from your perspective. There
is a great concern about having this happen as soon as
possible.
[The prepared statement of Senator Stabenow can be found in
the appendix on page 34.]
Mr. Davidson. I understand that a number of years ago we
had a tart cherry pilot that did not work very well, and so it
was pulled. When the decision was made as to which variety to
go with on a pilot, it was decided this time to start with
sweet cherries and then see how that went and then look at tart
part cherries later, not only from Michigan but from other
states. I have also had the request to have a tart cherry
program looked at carefully, and we will start doing that.
Senator Stabenow. As I mentioned, even though it is limited
in Michigan, the sweet cherry pilot has gone very well. It has
been very successful.
Mr. Davidson. It seems to be very successful. Successful in
terms of participation. It remains to be seen how well it will
meet the needs of producers.
Senator Stabenow. The message, I guess, that I would leave
you with is that there is great need and great interest. We
continue to have fluctuations in weather that has caused great
damage in Michigan. We do not want our growers to be in a
situation where the only option they have is for us to come
back again and talk about another disaster relief package. They
are very anxious to figure out a way to be able to make sure
that there is affordable crop insurance for them.
The other issue, and I will not go into it in detail, but
apple crop insurance has been available in the State for some
time. There are a number of issues right now that relate to
that that I would appreciate your attention to. I will followup
in writing, and would like to work with you and encourage you
to look at those issues so that we can resolve them.
Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator. Senator Nelson?
Senator Nelson. Thank you very much, Mr. Chairman.
Before I arrived, I understand that Senator Roberts raised
a question which we have raised with Mr. Davidson earlier. It
is our concern about the crop insurance rates for the planting
of water conserving crops.
We remain interested, very much interested in that because
of the necessity for conserving water in general, but in
particular because of the drought conditions that Nebraska has
experienced over the last several years. It only makes good
sense.
We appreciate very much your interest in that. We would
like to continue to follow through and make sure that that is
administered in a way that will get the greatest amount of
impact for the program, not only in Nebraska but elsewhere, but
particularly in our State.
It is also good to see you again after a few years and we
appreciate the work that you are doing to make this essential
risk management program work for our Nation's farmers.
One of the questions that has been raised to us, and we
corresponded back and forth, and we are getting ready to
respond to your recent letter, is the development of the
premium discount plan. The agents, the independent agents who
have been working with this program and implementing it with
their accounts have raised a number of questions about how it
was developed.
There are always reasons to do things at times on an
actuarial basis and there are times to do it on an non-
actuarial basis. If you do it on an actuarial basis, you will
have people raise questions about the actuarial assumptions. If
do not do it on an actuarial basis, of course, the question is
why did you not.
We need to continue to work through this to get the
producers satisfied that the discount is appropriate under all
of the circumstances, and that it does not have to be done a
single way to be appropriate.
I appreciate the fact that you have responded back and we
will try not to become pen pals on this, but I do think it is
important to get some satisfaction out there and perhaps a
better understanding and acceptance, if possible, of the basis
for determining this discount.
Mr. Davidson. We would be happy to work with you on that.
Senator Nelson. You have been, and we appreciate that, and
we will continue to have some dialog and correspondence back
and forth. If we can be of any help in this area or any other
area of the risk management program, as you know, it is an area
that I have more than a passing interest in. I may not be good
at it, but I have had some experience with it. We like to be a
party to any kind of development of rates and/or other programs
that you might be working on.
Mr. Davidson. Thank you.
Senator Nelson. I appreciate it, and I thank the other
gentlemen for being here. It is good to see you both again.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Nelson. Senator Chambliss.
Senator Chambliss. Thank you, Mr. Chairman. Gentlemen, it
is good to see all of you here this morning.
Mr. Davidson, I just have a couple of quick questions that
I want to make sure that we get on the record. I know that my
staff has talked to you about expansion of the Blueberry Pilot
Program. We are pretty anxious to make sure that we get it
expanded for the 2004 crop season, particularly in Georgia.
I understand that is underway but I wanted to make sure
that we have your comments on the record relative to that.
Mr. Davidson. We are also anxious. We would like to get it
expanded to as many areas as possible. In some areas, the
challenge is just not enough information to be able to
establish appropriate premium rates, and we are working to try
to obtain that information. It is our goal to get it
established as broadly as possible.
Senator Chambliss. Is that information that has not been
forthcoming from the farmer level, or is it just you are not
able to get the information that you are looking for?
Mr. Davidson. Both.
Senator Chambliss. We will certainly push our folks and
encourage them to get that to you.
The other thing I would just comment on, the Pecan Program
is working well. Our farmers are really excited about that.
That is one pilot program that I know was very difficult to get
initiated, but it really has worked well. It is an area where I
am glad to see us expand the Crop Insurance Program into. I
commend you, your staff, and everybody else at USDA that got
this off the ground and got us moving and has made it work. I
commend you on that.
Mr. Davidson. Thank you. Georgia is the envy of all other
States that want to see that expanded as rapidly as possible.
Senator Chambliss. Let us use all the money we have right
now, and then we will talk about that.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Chambliss.
Let me ask each of you about some specific suggestions that
we have heard from farmers. There are a good many Southern
farmers that think crop insurance is too expensive, that there
is room for improvement in the program. There may be too much
opportunity for fraud. Some producers feel like they are left
out.
The Alabama Farmers Federation specifically has come up
with a suggestion called an individual risk management account.
Under this proposal, a producer would put money that he would
normally pay for crop insurance into a tax-deferred interest-
bearing account. USDA would add to the account the same amount
of funding that would usually go to subsidize the producer's
crop insurance premium. Then the farmer could make withdrawals
when his income from farming fell below a certain level.
I do not know whether you have had an opportunity to look
at this or whether you have heard about it, but my purpose is
to ask you to look at it and let us know what your thoughts
are.
I guess the board would have to approve something like that
and maybe there is no authority to approve a scheme like that.
What do you think, Dr. Collins?
Mr. Collins. Mr. Chairman, this type of concept has had
some history, as you know. I have supported them in the past.
There was similar proposals in the 2002 Farm bill debate for
individual risk management accounts, not ones that would
substitute for crop insurance premium subsidies but ones in
which producers would put money into an account, matched or not
matched by the Federal Government, with an interest rate paid,
subsidized or not subsidized by the Federal Government. Then
the funds could be pulled out if there is a drop in income or a
disaster.
I would say that the Risk Management Agency has a contract
right now, I believe with the Economic Research Service, to
look at these kinds of tools. We are looking at that. I cannot
say that this specific version is part of the mix that they are
looking at, but we will take that information and pass that on
to the research staff at RMA and to ERS and see if that could
be incorporated into it.
As a general statement about these programs, the Department
was very supportive of these during the run up to 2002 Farm
bill. We view those programs not as a substitute for crop
insurance, I would be worried about this being a substitute for
crop insurance, but as something that would work in parallel
with crop insurance, perhaps as a way to remedy some of the
shortfalls that crop insurance has in certain parts of the
country.
You mentioned some of the views that people have in the
South, for example, about crop insurance. We think crop
insurance is working.
Even so there are concerns that people have about having a
deductibility, for example, in crop insurance. There are
concerns raised by the existence of disaster assistance
programs which are premised on the fact that maybe crop
insurance is not working for everyone.
Well, this kind of a program, running alongside crop
insurance, a risk management account running alongside crop
insurance, might in fact, lessen the need for a disaster
assistance program, might deal with this question of the
deductibility or the low APH or whatever problems that
producers face across the country with crop insurance.
In concept, the idea sounds good. In practice, the problems
are trying to get it workable and trying to pay for it.
The Chairman. A similar suggestion that we have heard is
that cotton farmers thought that premiums for crop revenue
coverage were too high. I wonder whether or not there has been
an opportunity to review crop revenue coverage rates to see
whether or not they are too high?
Mr. Collins. We will give you a two-part answer on this.
Let me start, and then maybe Mr. Davidson would like to add to
this.
When I became Chairman of the Board of FCIS in 2001, it was
shortly thereafter that I started getting calls from around the
country from farmers, as well as from crop insurance companies,
presidents of companies, raising questions about CRS rates,
rates for revenue products, crop revenue coverage and revenue
insurance.
As a result of that, we did contract for a study to look at
the rates of revenue products. We contracted with four of the
most preeminent analysts in the world. They came back to us
with some concerns about the CRS rates, also some concerns
about the RA rates.
For the 2003 year, we were able to work with the companies,
make some rate changes. We did not go far down that road.
One of the reasons is this is very complicated. These
rating methods are very difficult. They are very different for
these different insurance products. We wanted to make sure that
what we were doing is sound.
We took this study that these four preeminent expert did
and we put it out for extra review, including we had the
insurance industry represented in the expert review team.
We have those results back. We got those back in December
or so. We are satisfied that there are some things that we can
continue to do that would result in rate changes across the
board, not just for the revenue products but for the underlying
multiple peril products as well.
The Board of Directors has accepted that study and has
recommended to the Risk Management Agency that they proceed to
begin prudently, slowly implementing those rate changes.
With that, I will turn it to Mr. Davidson to followup for
more details.
Mr. Davidson. You have done a wonderful job.
The Chairman. Senator Chambliss has a question.
Senator Chambliss. I just had one question to Dr. Penn. It
is not directly related to crop insurance, but I am already
starting to get calls from our farmers about the disaster
program. I know our sign up started on June 6th. I wonder if
you could tell us what your projected timeline is on that,
please?
Mr. Penn. This question was raised by Senator Harkin a
little earlier.
As you know, the sign up started last Friday, and the
software was delivered to the county offices. We understand
that the sign up is well under way. We expect that to run for
several weeks. Having the software available, we can issue the
checks to producers within a few days after they sign up.
There is a termination date, but I do not know the exact
date for this sign up. This should be done within the next few
weeks.
Senator Chambliss. Thank you.
The Chairman. There is some question about whether or not
it has been appropriate for Congress to make available disaster
payments to farmers for weather-related disasters at a time
when we have this Crop Insurance Program in place. It is
apparently working much better than a lot of the critics said
it would.
What do you say to those who complain that we may have gone
overboard in providing too much relief to farmers?
Mr. Penn. Let me just say a couple things, Senator. I noted
in my statement that there is a constant tension there between
operating a Crop Insurance Program and providing ad hoc
disaster assistance.
If the producer community begins to think that this ad hoc
disaster assistance is going to be available every time there
is a disaster of any consequence, then that tends to undermine
the Crop Insurance Program. It tends to reduce the incentive
for people to purchase crop insurance.
On the other hand, as we have noted here this morning
several times, most of the protection is available only to the
producers of certain crops. There is very little protection
available to the livestock sector, for example. That was one of
the big concerns in the past 2 years, is as we have had this
extended drought, more and more livestock producers who depend
on forage have been adversely affected and they have not had an
opportunity for crop insurance.
It seems to be that there is an ongoing tension here in
trying to not undermine the program for crops where we have
insurance available. At the same time we need to be operating
as quickly as we can. As Mr. Davidson has noted, that is what
we are trying to do, to develop new products and to expand
those products, especially in the livestock sector.
The Chairman. I appreciate very much your response and I
thank you all for your attendance at the hearing and
cooperation with our committee.
We may have additional questions to submit to you in
writing and we hope you will be able to respond to those within
a reasonable time.
The hearing is adjourned.
[Whereupon, at 11:29 a.m., the Committee was adjourned.]
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A P P E N D I X
June 12, 2003
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DOCUMENTS SUBMITTED FOR THE RECORD
June 12, 2003
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QUESTIONS AND ANSWERS
June 12, 2003
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