[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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                            WASHINGTON : 2003
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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

                              ----------                              

                        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
                              ----------                              

                               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
                              ----------                              

                                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

                              ----------                              


                        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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