    [Senate Hearing 109-509]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-509

                        TO REVIEW 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 NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 28, 2005

                                   __________

                           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

                       SAXBY CHAMBLISS, Georgia, Chairman

    RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
    THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
    MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
    PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
    JAMES M. TALENT, Missouri            BLANCHE L. LINCOLN, Arkansas
    CRAIG THOMAS, Wyoming                DEBBIE A. STABENOW, Michigan
    RICK SANTORUM, Pennsylvania          E. BENJAMIN NELSON, Nebraska
    NORM COLEMAN, Minnesota              MARK DAYTON, Minnesota
    MICHEAL D. CRAPO, Idaho              KEN SALAZAR, Colorado
    CHARLES E. GRASSLEY, Iowa

                Martha Scott Poindexter, Majority Staff Director

                    David L. Johnson, Majority Chief Counsel

                  Steven Meeks, Majority Legislative Director

                          Robert E. Sturm, Chief Clerk

                    Mark Halverson, Minority Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    To Review the Agricultural Risk Protection Act of 2000 and
      Related Crop Insurance Issues..................................    01

                                  ----------

                             Tuesday, June 28, 2005
                        STATEMENTS PRESENTED BY SENATORS

    Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman,
      Committee on Agriculture, Nutrition, and Forestry..............    24
    Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member,
      Committee on Agriculture, Nutrition, and Forestry..............    10
    Conrad, Hon. Kent, a U.S. Senator from North Dakota..............    18
    Crapo, Hon. Mike, a U.S. Senator from Idaho......................    01
    Grassley, Hon. Charles, a U.S. Senator from Iowa.................    13
    Lugar, Hon. Richard, a U.S. Senator from Indiana.................    07
    Nelson, Hon. Ben, a U.S. Senator from Nebraska...................    15
    Roberts, Hon. Pat, a U.S. Senator from Kansas....................    17
                                  ----------

                                   WITNESSES

    Babcock, A. Bruce, Director, Center for Agriculture and Rural
      Development, Iowa State University, Ames, Iowa.................    36
    Brichler, Ron, American Association of Crop Insurers, Cincinnati,
      Ohio...........................................................    25
    Buttars, Ray, Chairman, Domestic Policy Committee, National
      Association of Wheat Growers, Weston, Idaho....................    38
    Collins, Keith, Chief Economist, U.S. Department of Agriculture,
      Washington, DC.................................................    02
    Clemens, Mike, Wimbledon, North Dakota, on behalf of the American
      Soybean Association National Sunflower Association and U.S.
      Canola Association.............................................    37
    Davidson, Ross J. JR., Administrator, Risk Management Agency,
      U.S. Department of Agriculture, Washington, DC.................    04
    Little, Bert, Assistant Vice President for Research and Professor
      of Computer Science and Mathmatics, Tarleton State University,
      Stevenville, Texas.............................................    35
    Nielson, Norman A., On Behalf of the Independent Insurance Agents
      Brokers of America, Preston, Iowa..............................    27
    Rose, Billy, President and Chief Executive Officer Crop 1
      Insurance, Urbandale, Iowa.....................................    28
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Harkin, Hon. Tom.............................................    46
        Stabenow, Hon. Debbie........................................   179
        Babcock, A. Bruce............................................   166
        Brichler, Ron................................................    76
        Buttars, Ray.................................................   175
        Collins, Keith...............................................    48
        Clemens, Mike................................................   171
        Davidson, Ross J. Jr.........................................    57
        Little, Bert.................................................   161
        Nielson, Norman A............................................   107
        Rose, Billy..................................................   125
    Document(s) Submitted for the Record:
        Testimony of Leon Corzine, President of the National Corn
          Growers Association........................................   184
        Tetimony of the Insurance Research Bureau, Inc...............   187
        Testimony of the Natonal Grain Sorghun Producers.............   193
    Questions and Answers Submitted for the Record:
        Chambliss, Hon. Saxby........................................   196
        Baucus, Hon. Max.............................................   202
        Conrad, Hon. Kent............................................   210
        Grassley, Hon. Charles E.....................................   213
        Nelsen, Hon. Ben.............................................   218
        Roberts, Hon. Pat............................................   223

    TO REVIEW THE AGRICULTURAL RISK PROTECTION ACT OF 2000 AND RELATED CROP
                                INSURANCE ISSUES

                                  ----------

                             TUESDAY, JUNE 28, 2005

                                           U.S. Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 10:10 a.m., in
    room SR-328A, Russell Senate Office Building, Hon. Saxby
    Chambliss, [Chairman of the Committee], presiding.
        Present or submitting a statement: Senators Chambliss,
    Lugar, Roberts, Crapo, Grassley, Harkin, Conrad, and Nelson.

        STATEMENT OF HON. MIKE CRAPO, A U.S. SENATOR FROM IDAHO

        Senator Crapo [presiding]. The hearing will come to order.
    As you can see, I am not Senator Chambliss, but he will be here
    soon and we wanted to get this hearing started so that we can
    continue and keep on time. It is a very busy morning. I,
    myself, have three hearings at this exact time and I suspect
    that is about the way it is with every other Senator this
    morning, so you will probably see a number of people coming in
    and going throughout the morning. It is not to indicate a lack
    of importance of the topic, it is just to indicate how things
    are starting to hop around here.
        This hearing is to review the Agricultural Risk Protection
    Act of 2000, and I would like to welcome all of our witnesses
    who are here with us today. I especially want to welcome Ray
    Buttars, who traveled from Idaho to take part in this hearing.
    Ray, who is the father of four and is accompanied here by his
    wife, Melissa, grows wheat and barley and corn and alfalfa and
    beans while serving as the President of the Idaho Grain
    Producers Association and as the Chairman of the National
    Association of Wheat Growers Domestic Policy Committee. Ray, we
    thank you for being here with us to share your perspective on
    Federal crop insurance.
        All of the other witnesses here deserve a special
    introduction, too, but since you are not from Idaho, I don't
    have your biography, so I will just welcome you here and tell
    you that we do appreciate the attention you give to this
    important issue.
        Farmers and ranchers are at the mercy of Mother Nature, and
    plant and animal diseases, fluctuating markets, and rising
    production costs. With all the challenges of farm families that
    we are faced with, it is essential to ensure that producers
    have access to the risk management tools necessary to rebound
    quickly when disaster strikes.
        That is why I was proud to support the enactment of the
    Agricultural Risk Protection Act. This law has made significant
    enhancements to the Federal Crop Insurance Program and I
    commend the Department of Agriculture for the variety of
    different programs that have been developed and tailored to the
    particular needs of many diverse commodities.
        More producers are utilizing Crop Insurance Programs. Idaho
    is a great illustration of this. In 1994, Idaho producers
    signed up for a total of $97 million worth of liability
    coverage through Risk Management Agency programs. This year is
    expected to be a record high for coverage in Idaho, with more
    than $600 million in coverage. This is due in large part to
    substantial work and dedication of the RMA staff toward
    educating producers about the availability of products and
    working with the agriculture community to ensure that the
    products fit the needs of the farms.
        As farm risk management needs change, we must continue to
    review and adapt our Federal Crop Insurance Programs, and
    today's review of ARPA and the discussion will help us toward
    ensuring that farm families have the implements necessary to
    face whatever might come their way.
        Now, as other members of the committee arrive- and I will
    have to check with the chairman's staff- will they be allowed
    to make opening statements, or do we want to pass that and get
    right on with testimony?
        All right. We are going to go ahead with testimony and I
    will let the chairman decide what to do with the statements of
    other members when they arrive.
        So with that, we will start with our first panel. I don't
    know what Chairman Chambliss does on this, but we would like to
    restrict your testimony to 5 minutes. We do have three panels
    today and I know the Senators who are here are going to want to
    have an opportunity for dialog with you. My experience is that
    neither I nor anybody else can ever get everything that they
    want to say into 5 minutes. Your written testimony will be made
    a part of the record, but we do ask you to try to pay attention
    to the 5-minute clock, and then when it winds down, wrap up
    your testimony.
        With that, we will start with our first panel, which is Dr.
    Keith Collins, the Chief Economist of the U.S. Department of
    Agriculture, and Mr. Ross Davidson, who is the Administrator of
    the Risk Management Agency. Gentlemen, we will have you go in
    that order.
        Dr. Collins?

    STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF
                      AGRICULTURE, WASHINGTON, DC

        Mr. Collins. Thank you very much, Mr. Chairman. We thank
    you and Mr. Chambliss for inviting Mr. Davidson and me to
    participate in today's hearing on the performance of crop
    insurance under ARPA.
        I will briefly discuss the role under ARPA of the Board of
    Directors of the Federal Crop Insurance Corporation, of which I
    am the elected Chair. The Board has general management
    responsibility for FCIC. The primary activities of the Board
    under ARPA include approving new products, improving and
    expanding existing products, establishing priorities for the
    Federal Crop Insurance Corporation, evaluating the FCIC's
    products, improving Board operating processes, and dealing with
    a range of other issues, including premium reduction plans.
        The Federal Crop Insurance Program is growing. I think it
    is getting better every year, and I believe today it is serving
    the needs of the public well. Acreage in the program and
    insured liability reached record highs last year and farmers
    are increasingly turning to crop insurance as more products are
    being developed and approved for more crops in more regions of
    the country.
        In the 5 years under ARPA, the Board has met 46 times,
    compared with 28 times in the 5 years prior to enactment of
    ARPA. The increased activity reflects the submission of private
    products, as provided under Section 508(h), and the requirement
    that the Board use independent expert reviewers in its
    deliberations, as well as the need for the Board to take action
    with respect to numerous pilot programs and research products.
        Under ARPA, over 200 individual independent expert reviews
    have been conducted on over 40 submitted crop insurance
    products and program modifications. Examples of some of the
    products approved include the Livestock Risk Protection pilot
    plan of insurance for swine, fed cattle, and feeder cattle; the
    Livestock Gross Margin pilot program for hogs. After BSE and
    for other reasons, sales were suspended on these products, but
    changes approved by the Board made possible the reopening of
    sales last fall. We had a test of these new procedures with the
    second positive finding last week and the procedures appear to
    have worked well.
        Another Board action significantly expanded Adjusted Gross
    Income-Lite. First offered in 2003 in Pennsylvania, AGR-Lite
    has been expanded this year to 17 States. The Board believes
    AGR-Lite, which covers adjusted gross revenue for the whole
    farm, can potentially fill an important void by appealing to
    small- to medium-sized producers, particularly of livestock and
    specialty crops. Sales have been slow, and the Board is working
    with the submitter to consider potential changes to improve the
    product and increase sales.
        Some examples of other products approved by the Board
    during the past year include a silage sorghum pilot program,
    group risk income protection for grain sorghum, a new pilot
    group risk plan rangeland program, a new pilot program for
    sweet potatoes, and permanent programs for mustard, mint, wild
    rice, and cabbage.
        A major issue the Board and RMA continue to face is the
    provision for a Premium Reduction Plan for producers. Section
    508(e)(3) of the Federal Crop Insurance Act requires the FCIC
    to allow approved insurance providers to offer premium
    reduction plans if they meet the legal requirements. In 2002,
    one company, Crop 1, requested Board approval to offer a PRP.
    In December 2002, the Board established certain standards that
    such a PRP should meet and directed RMA to develop additional
    procedures under which Crop 1 and other companies could operate
    a PRP.
        After that, six additional approved insurance providers,
    representing over 80 percent of the crop insurance business,
    requested approval for a PRP. Because of the diversity of the
    plans and the implementation issues that were raised by their
    submissions, the Board decided that all stakeholders should
    have an opportunity to present their views on PRP, so the Board
    asked RMA to undertake notice and comment rulemaking to
    establish the framework under which PRPs will be evaluated,
    approved, regulated, and operated.
        The Board created an ad hoc committee that reviewed the
    proposed rule and has worked with RMA on the development of the
    final rule. After the final rule is issued, the Board plans to
    review with the manager of FCIC all the submissions for
    approval of a PRP.
        That concludes my remarks.
        Senator Crapo. Thank you very much, Dr. Collins.
        [The prepared statement of Mr. Collins can be found in the
    appendix on page 48.]
        Senator Crapo. Mr. Davidson?

        STATEMENT OF ROSS J. DAVIDSON, JR., ADMINISTRATOR, RISK
    MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON,
                                   DC

        Mr. Davidson. Thank you, Mr. Chairman and members of the
    committee. I am pleased to appear before you today to report on
    the progress and challenges of the Federal Crop Insurance
    Program, particularly to provide an update with regard to the
    implementation, successes, and challenges of the Agricultural
    Risk Protection Act.
        In fulfillment of the mandates of ARPA and under the
    direction of the Federal Crop Insurance Board of Directors, the
    Risk Management Agency continues to promote an aggressive
    agenda to bring new and innovative insurance products to the
    agricultural community, to validate the utility of current
    insurance products, to ensure outreach to small and limited
    resource farmers, and to promote equity in risk sharing and to
    guard against waste, fraud, and abuse within the program.
        The program has experienced extraordinary growth in the
    last quarter-century, particularly after ARPA. Through the
    private sector delivery system in crop year 2004, RMA provided
    approximately $47 billion of risk protection to farmers on
    approximately 370 commodity types covering over 80 percent of
    planted acreage on about 221 million acres through 22 insurance
    plans. Attached to my testimony are several charts that I
    commend to your review that provide further background and
    highlight the growth of the Federal Crop Insurance Program
    under ARPA.
        In 2004, crop insurance provided approximately $3.1 billion
    in indemnity payments to farmers and ranchers, including
    approximately $218 million for the four hurricanes in the
    Southeast and approximately $337 million for a brief freeze in
    the upper Midwest. RMA continues to improve and update the
    terms and conditions of the existing crop insurance policies to
    improve coverage and the efficacy of those policies as well as
    to clarify and define insurance protection and the duties and
    responsibilities of the policy holders and insurance providers,
    to enhance understanding, use, and integrity of the program.
        The new standard reinsurance agreement is now in place and
    the financial terms of that agreement will be implemented in
    2005 and 2006. The regulatory terms are in place currently and
    we are in the process of implementing those through Manager's
    Bulletins and other means.
        We now have 16 approved insurance providers selling and
    servicing crop insurance, compared to 14 when the SRA was
    signed. Since the SRA was signed, three new insurance companies
    have been approved. We have also been contacted by another
    major organization, which has indicated it is in the process of
    preparing an application to join the program.
        The 2004 reinsurance year was exceptionally profitable for
    the companies and the commercial reinsurers, with an estimated
    $700 million in underwriting gain and a return on retained
    premium of approximately 22 percent. This compares to $380
    million and a return on premium of about 15 percent in 2003. Of
    course, 2002 was a loss year, with a loss of $46 million for
    the industry and a minus-two percent return on retained
    premium.
        The administrative and operating expense reimbursement has
    also risen, from $626 million in 2002 to $734 million in 2003,
    with an estimated $889 million in 2004. This represents a
    growth in administrative and operating reimbursement per policy
    of 45 percent over the past 3 years. At the beginning of ARPA,
    it was just a little bit over $400 per policy and slightly over
    $700 per policy for 2004.
        Now let me briefly highlight a couple of items. We are in
    the process of reviewing comments from the proposed rule for
    premium reduction plans under the Board's direction and are
    reviewing those with the Office of Management and Budget
    currently and intend to publish a rule in the near future. The
    comments have been very helpful and we very much appreciate
    those comments in guiding the agency to establish a rule that
    will address the concerns on discrimination and program
    integrity.
        Soybean rust continues to be a concern and we are working
    diligently to make sure that farmers understand their
    responsibilities under the program and that farmers will be
    covered, assuming that they do the right thing by their land.
        Multi-year disasters and declining yields have been a
    concern in this program. We are working now with a couple of
    potential contractors that we will hopefully award contracts to
    this week and next week to move along in trying to address
    declining yields in the program.
        With regard to program integrity, we have used a number of
    innovative tools, part of which were funded by ARPA,
    particularly data mining. We are very proud of that initiative,
    and you have a data mining topic on your agenda today. I won't
    spend more time on that. But we have saved millions of dollars
    in prevention of fraud, waste, and abuse. We do intend to issue
    a Manager's Bulletin briefly in the near future on conflict of
    interest supplementary guidance.
        The program is expanding dramatically, Mr. Chairman,
    including a number of areas, like pasture, forage and rangeland
    and the nursery program. We are excited about the things that
    are moving forward and appreciate the support of this
    committee.
        Senator Crapo. Thank you very much, gentlemen.
        [The prepared statement of Mr. Davidson can be found in the
    appendix on page 57.]
        Senator Crapo. I will begin the questioning and then we
    will go to Senator Lugar, who has joined us, and Senator, you
    will also be able to make an opening statement at that time if
    you would like to.
        Dr. Collins, my first question is for you, and let me say,
    I have appreciated the USDA's willingness to develop a wide
    variety of risk management products for producers with a wide
    variety of commodities. One of those that I am interested in is
    the sheep industry, the proposal for an LRP pilot project for
    the sheep industry. It is my understanding that there has been
    some concern about that proposal because of the lack of a
    commodities exchange upon which forecasts for sheep prices can
    be effectively evaluated.
        I am concerned about that, because I understand that a
    number of commodities have futures markets and that those
    markets can be utilized as the basis for insurance programs
    under the LRP pilot approach, but I don't think the fact that
    the sheep industry does not have a futures market or a price
    risk management tool should preclude them from being able to
    have access to these kinds of programs.
        So, first of all, I urge the USDA to work with the sheep
    industry to help them manage their proposal or modify it, if
    necessary, so that it can be implemented. But I would like your
    comments on this issue.
        Mr. Collins. Sure, Mr. Chairman. This is a difficult issue
    for the Board. We do have effectively functioning livestock
    price insurance products for swine, for fed cattle, and for
    feeder cattle. We have gone down this road, I think, fairly
    deliberately and have ramped up the coverage over a several-
    year period.
        Senator Crapo. Let me interrupt you. I have just been
    called away myself, and I am going to have to leave. My staff
    is here. You can finish your answer, but the committee is going
    to be taken over now by Senator Lugar.
        Mr. Collins. Just to quickly finish the response, Mr.
    Crapo, the Board of Directors of the Federal Crop Insurance
    Corporation sent a notice of its intent to disapprove an LRP
    proposal for sheep that we had received and considered and had
    sent out for expert review. The reason that we chose to do that
    was because the insurance guarantee in this product is based on
    projections. We do not have insurance guarantees in any FCIC
    product based on model projections. We use insurance guarantees
    based on projections in a marketplace where a number of buyers
    and sellers come together and establish a futures price.
        It would be quite a change, or quite a departure in our
    policy to adopt an insurance policy where the coverage is based
    on a projection from a model. It is on that basis that we
    issued our notice of intent to disapprove this product. The
    submitter of the product has indicated to us that they plan to
    come back with responses to our concerns by the end of calendar
    year 2005.
        So the LRP sheep product is not dead. It is still alive and
    we will wait and see what the submitter does to respond to the
    concerns of the Board of Directors.

      STATEMENT OF HON. RICHARD LUGAR, A U.S. SENATOR FROM INDIANA

        Senator Lugar [presiding]. Thank you very much. I will
    raise a couple of questions while we are waiting for our
    chairman to arrive.
        Mention was made by you, Mr. Davidson, of the data mining
    and this has helped to prevent fraud. Precisely how? When you
    talk about the data mining situation that you have employed so
    extensively and successfully, what does this amount to? How do
    you go about doing this?
        Mr. Davidson. Senator, RMA collects information on farming
    operations, as you know, as part of the insurance and the
    reinsurance activities of the agency. That information is rich
    with global information about the general trends in various
    areas of the country. Data mining is simply an analysis tool.
    As we analyze that information, we are able to identify
    anomalous activity, things that are outside the bounds of what
    would appear to be normal from the information that we have,
    such as a higher incidence of losses linked with agents, loss
    adjustors, and particular producers. Trends are identified as
    we do the analysis.
        In and of itself, those anomalous data do not represent
    that fraud is actually taking place, but they do guide our
    actions. We refer those anomalous activities over to the FSA
    State offices as well as to the county offices and there are in
    many instances, growing season spot checks that take place.
    That has been very helpful as we look at those trends and those
    anomalous activities. After those growing season spot checks
    and after other notifications to farmers that there seems to be
    something different about their results, we notice a regular
    decline in those anomalous activities.
        Senator Lugar. So this mining would pick out rapidly
    diverging trends, big payments and small losses----
        Mr. Davidson. Absolutely.
        Senator Lugar [continuing]. Or some agent that seems to be
    going haywire or whatever.
        Mr. Davidson. Yes, and we just use that to inform our
    investigation process and our oversight process and it has
    helped dramatically. We also use data mining actually to take
    to court and prosecute people who have actually defrauded the
    government, and that has been very helpful.
        Senator Lugar. I suspect during the hearing, the soybean
    rust problem will bob up in various directions, but you have
    touched upon it in your opening testimony. Just in a nutshell,
    what does a soybean farmer need to be thinking about who has
    not seen soybean rust in his or her State at this point but is
    apprehensive and wondering, will my crop insurance hold if and
    when it comes? What are the prudential steps, as simply as
    possible, so every farmer in America hearing this will know
    exactly what to do?
        Mr. Davidson. Well, in the first place, soybean rust is a
    devastating disease and can act very rapidly. That is different
    from most diseases that affect soybeans, and as a result of
    that, the management practices of farmers, of course, need to
    adjust to that very rapidly emerging disease.
        I want to say up front that our policies cover damage from
    disease. The farmer is obligated to do the right thing by their
    crop, to raise the crop in a way that is sufficient to produce
    the amount that is guaranteed under the policy. If natural
    causes or other things preclude the farmer from being able to
    do that--it has to be a natural risk--then the farmer is
    covered.
        So, basically, the farmer has to pursue good farming
    practices and document what they have done. We recommend that
    farmers use consultants, because this is a new and emerging
    disease, that they document advice that they have used to guide
    them in caring for their crop. If they do that, and assuming
    that they take the necessary actions, then they will be
    covered. But the documentation is a very important thing.
        Senator Lugar. Let me ask the question farmers ask me, and
    that is if there is a hint that soybean rust has come, must I
    apply chemicals immediately, in other words, take that
    prudential step, or at what point am I obligated to have
    applied the chemicals to have indicated the proper steps?
        Mr. Davidson. If a farmer knows that soybean rust is in his
    area and there are preventative steps that should be taken, we
    will look at whether or not he took those preventative steps.
        Senator Lugar. Now, who will notify the farmer? I raise
    this question carefully, because----
        Mr. Davidson. Of whether or not the disease is there?
        Senator Lugar. Yes. He says that FEMA is going to have a
    task force down there at USDA and they haven't had one for 3
    weeks on soybean rust, but he had one after we called him
    because this is very serious, this very step I am talking about
    now. Who informs the farmer? Is there a flash point in Indiana
    here people say, ``Soybean rust is here,'' so be on your guard
    because you have got to begin taking the steps?
        Mr. Davidson. I could answer that, but Dr. Collins can
    answer it better, if you don't mind.
        Mr. Collins. Mr. Lugar, the answer to that is that there
    has been a National Soybean Rust Working Group that has
    developed a system to track soybean rust in the United States.
    As of the most recent data on that system, soybean rust is
    present in five counties in Florida on kudzu and in one county,
    Seminole County in Georgia, on volunteer soybeans. Any farmer
    in the United States can automatically get e-mailed, an e-mail
    every time that information is updated by the National Soybean
    Tracking System. They can find that information on USDA's
    website or they can personally get an e-mail letting them know
    every time that information changes.
        So there is a system to track soybean rust. It comes from a
    total of 700 sentinel sites in the United States, 300 sites
    established by USDA and 400 sites established by the soybean
    industry through their checkoff program, and there are tens of
    thousands of people who have been trained to be able to detect
    soybean rust and report soybean rust. So there has been a
    tremendous effort going on to make producers aware of the
    possible progression of soybean rust.
        Senator Lugar. It may be, and I would just say off the top
    of my head, Senators even on this committee may want in their
    offices to be issuing these advisories, because the
    communications system here appears to me to be there, but maybe
    not apparent to every soybean farmer.
        The second thing is if we start applying this chemical, is
    it going to be like the flu shots last fall, and that is that,
    suddenly, there is a tremendous demand but there isn't any
    chemical? What is the situation as far as we can tell now?
        Mr. Collins. As far as we can tell now, the manufacturers
    of these chemicals tell us that they believe there are adequate
    provision of chemicals. We don't know the actual data. It is
    proprietary information. There are questions about where it is
    staged in the country. But when we talk to the chemical
    suppliers, they indicate to us that there are adequate
    chemicals. There are something on the order of nine active
    ingredients that have been under expedited procedures approved
    by EPA or already registered and a total of something like 19
    different products. In talking with the chemical companies,
    they believe that they have adequate supplies.
        Senator Lugar. One final question, and that is that this
    year, maybe not for the first time, but conspicuously,
    insurance companies have asked for the ability to discount
    policies to various policy holders. The House of
    Representatives took action in its legislation to stop that,
    prevent that from occurring. The Senate, I gather, hasn't acted
    yet. What are the policy implications? Is this good, bad, or
    indifferent, or what should we be thinking about discounts?
        Mr. Collins. That question has many answers, depending on
    the level at which you are asking it. If you are asking about
    the House action, that is one thing. If you are talking more
    generically about premium discount plans and whether they are a
    judicious policy or not, there are two----
        Senator Lugar. Try the generic side.
        Mr. Collins. Under the generic side, OK. I guess I would
    respond to that generally by saying that the crop insurance
    industry in the United States is highly regulated, as you know.
    The Department of Agriculture sets rates. In other lines of
    insurance, that doesn't happen the way we set rates. The
    Department of Agriculture pays a reimbursement to the companies
    to deliver the program. We pay their delivery expenses. There
    is little opportunity for price competition or cost competition
    in this industry.
        In 1994, legislation was enacted which provided an
    authority for a company to come to us and ask to be able to
    offer a discount to producers on their premium if they could
    show a gain in efficiency of delivering crop insurance that
    would reduce their expenses below the expense reimbursement we
    give them. This is not our program. This is not us asking
    companies to do this. This is companies that come to USDA and
    they can do this if they want to do this, if they can meet the
    requirements of the law.
        I think the good part about this is it could mean a lower
    premium for producers. It could mean an increase in
    participation in crop insurance. It could mean higher levels of
    buy-up coverage and, therefore, overall coverage for crop
    insurance. It could mean an increase in the efficiency of
    delivering crop insurance to producers, that is, squeeze out
    some cost efficiencies in the delivery system.
        On the down side of this, on the other side is that this
    could potentially be somewhat disruptive to the industry in
    that it could mean some change. People may do business
    differently as a result of this. This may cause some
    dislocations. There have also been issues raised about whether
    there might be some unfair discrimination, that is, that the
    small, the minority, the women, and the limited resource
    farmers might be neglected at the expense of large producers.
    There might be some shifting of sales away from high-risk areas
    to low-risk areas.
        These are things that we have been trying to deal with in
    the development of the final rule. We recognize these as
    potential adverse consequences of being able to provide a
    discount to producers and we are trying to mitigate those
    possible consequences.
        Senator Lugar. Thank you very much for that very thoughtful
    answer, both the up sides and the down sides. Obviously, in
    most parts of American life, people are looking for discounts,
    including farmers. But I appreciate this is controversial and
    you have weighed judiciously the pros and cons and I thank you.
        Senator Harkin?

    STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING
       MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

        Senator Harkin. Thank you very much, Mr. Chairman. I
    apologize for being a little bit late with that vote, and
    everything. I have a statement, but I will just ask that it be
    made a part of the record.
        Senator Lugar. We will include that in the record.
        Senator Harkin. I appreciate that very much.
        [The prepared statement of Senator Harkin can be found in
    the appendix on page 46.]
        Senator Harkin. I just note that we just passed the fifth
    anniversary of the enactment of the Agricultural Risk
    Protection Act last week. I just note again for the record,
    since 2000, crop insurance participation in terms of acres
    enrolled has increased by 7 percent and the total crop value
    covered has increased by more than 33 percent. So farmers are
    buying more and they are covering more acres, which is exactly
    what we intended to achieve.
        However, in some of these new conflict of interest rules
    that have come out, I have heard from many of our agents, Mr.
    Davidson, in Iowa about some of the problems in this in terms
    of the relationships between crop insurance agents and loss
    adjustors. I understand under the new conflict of interest
    rules, a loss adjustor can't even utilize the data and records
    that an agent has readily available. He instead has to go to an
    FSA office to obtain them, which in some rural areas in the
    country can mean a 100-mile trip, just to gather maps and
    records that are sitting in a file cabinet in the agent's
    office.
        I have heard a lot about this, and my question is, is this
    level of restriction really necessary to protect against
    conflicts of interest? Is this in the best interest of the
    farmer or anyone if it causes a great delay in adjusting and
    processing their claim? Do you understand what I am talking
    about?
        Mr. Davidson. I do understand the question, Senator, and I
    appreciate the question, as well. We, as we negotiated the
    standard reinsurance agreement, implemented a number of changes
    that were suggested by audits that had identified fraud, waste,
    and abuse in the program. Many of those instances of fraud,
    waste, and abuse included collusion among producers, agents,
    loss adjustors, and particularly the area of collusion between
    an agent and a loss adjustor was a great concern for the Office
    of the Inspector General and for others who had looked at these
    cases of fraud, waste, and abuse. A number of those cases have
    actually come to prosecution and have been widely publicized,
    as well.
        And so one of our mandates in negotiating the standard
    reinsurance agreement was to tighten up on the regulatory
    framework, to hopefully preclude some of this fraud, waste, and
    abuse, or at least create a framework in which that could be
    controlled and mitigated through internal controls.
        The agent's involvement in loss adjustment has long been
    precluded in the standard reinsurance agreement, not recently,
    but since a long time ago, for good reason. The provisions of
    the agreement actually say that agents should have no
    involvement in the loss adjustment process. The more recent
    guidance that we have provided has given further detail to that
    and has tightened up because we have found a continuing
    disregard in some agents' situations of that prohibition.
        That having been said, there is a business process that has
    to be pursued and information is necessary in order for a
    timely adjustment of the claims. The FSA offices are one source
    of that information. The farmer himself is a direct source of
    that information. Agents will often use the information from
    FSA to help fill out applications and many of them do have that
    information resident in their files.
        At the time of a loss, it is entirely possible, and happens
    frequently, that something has changed since the sale of the
    policy. It is the obligation of the loss adjustor, who
    represents the company, to make sure that he has the most
    current information, and in some instances we have found, in
    fact, that the information received from an agent hasn't kept
    up with that information that may be resident at the FSA
    office.
        That having been said, we have also had instances where
    agents have, in fact, altered those reports to obtain a more
    favorable loss adjustment for their producer clients. Those are
    troubling situations. They are not frequent, but they are
    troubling.
        And so our Compliance Office has felt that it is necessary
    to, No. 1, give notice to agents when we have said, don't be
    involved in the loss adjustment process, that that is something
    that they really do mean, and that the loss adjustor needs to
    be the one to provide those services and to get the most
    current information, either directly from the farmer, who has
    an obligation to maintain that, or from the FSA office.
        Senator Harkin. Mr. Davidson, I appreciate that. It just
    seems to me, though, that the loss adjustor is representing the
    company. I mean, why would they then give the report to the
    agent to modify and change before they send it in? That is true
    collusion----
        Mr. Davidson. Yes, it is----
        Senator Harkin. And I don't know how many cases of that you
    have, but that is quite adequately covered. I mean, it would
    seem to me that the loss adjustor, that anyone would do that,
    the company ought to fire them right away if they ever detect
    anything like that.
        Mr. Davidson. I would agree.
        Senator Harkin. So I think there has to be some internal
    market forces that would keep them from that kind of collusion.
    However, to have it so strict that an adjustor can't even call
    up an agent and say, where is this field? How do I get there to
    look at it? That they have to go to the FSA office someplace
    and get a map, and the agent knows exactly where it is, I mean,
    that is how tight these conflict of interest rules get and I
    just wonder if that is really in the best interest of anyone.
        You have a few cases. You have brought them to prosecution.
    But does that mean you have to have this wholesale change which
    really, as I have come to know, can be quite onerous in some
    cases. I would just leave that.
        Mr. Davidson. I appreciate those comments, and we have held
    up on the----
        Senator Harkin. Let me ask one thing. My time is running
    out. There have been a number of complaints about marketing
    practices used by one company, Crop 1----
        Mr. Davidson. Yes.
        Senator Harkin [continuing]. Authorized to sell our PRP
    policies. Your written testimony indicates that these
    complaints were investigated and changes were made when some
    complaints were validated. But to my knowledge, no public
    report of these investigations has ever been provided.
        In order to put some of these concerns to rest, I think you
    should consider releasing at least a summary of the results of
    those investigations and actions taken to remedy problems when
    they were detected. Have you contemplated doing anything like
    that?
        Mr. Davidson. We haven't, but I think that is a fair
    request and we would be willing to do that. I have a full list
    of those complaints, and we may have to be careful to not
    disclose confidential business information, but I think we
    could probably do that.
        Senator Harkin. OK. Thank you very much, Mr. Davidson.
        Just one last thing. The written testimony provided by Mr.
    Brichler and Mr. Nielsen, who will appear on the second panel,
    indicate that more than 90 percent of the comments submitted on
    the proposed rule on PRP were negative. Two questions. Is that
    fairly accurate, and second, if that is correct, doesn't that
    suggest to you that it would be appropriate to circulate the
    revised rule for review outside of RMA before finalizing it?
        Mr. Davidson. I very much appreciate that question, because
    that is an important one. Yes, we did receive a number of
    comments. In fact, we received letters from over 800 people,
    which represent 1,900 individual comments, or thereabouts, and
    the preponderance of those comments came in the form of a
    fairly standardized wording, repetitive, as you might guess,
    and so it may not be fair to necessarily count them one for
    one.
        But that having been said, there are a number of comments
    that just simply say, don't implement this rule. We have been
    advised by our counsel that we don't have the choice of whether
    or not to administer this law. We have to figure out how to
    administer it in an appropriate manner. If it can be
    administered in an appropriate manner without causing damage to
    the program, then we will do it. If it can't, then we will be
    the first ones to indicate that we cannot do that.
        We have taken into consideration all of the comments. They
    have been very helpful. Many of those comments have been laced
    with positives and negatives. Some have said, don't do this,
    but if you do it, do it this way. That has been very, very
    helpful. Some have suggested a different way of doing it, or as
    we had included in the preamble to the rule, some alternative
    approaches. Comments on those alternative approaches have been
    very helpful in guiding us.
        Some of the issues are that the proposed rule didn't allow
    variability from State to State, for example. That has become a
    very common theme throughout the comments. We have paid
    attention to that very carefully. Some have said, don't make
    this a discount up front where people have to guess whether or
    not they can provide--reach these efficiencies. Do it on the
    back end. That has been very helpful, as well. There are other
    comments that have been very helpful.
        I can't say that we have counted all of those helpful
    suggestions as negatives because they have been linked with
    negatives, but we have a substantial number of those helpful
    suggestions and we have paid a lot of attention to those.
        Senator Harkin. Thank you very much.
        Mr. Chairman, I may not be able to stay for all the
    hearing. I just want to thank you for making sure we have three
    people from Iowa here testifying today. I appreciate that.
        Senator Lugar. Thank you, Senator Harkin, for that
    observation.
        [Laughter.]
        Senator Lugar. Another person from Iowa, Senator Grassley,
    with the understanding of others, Senator Grassley needs to
    head off to chair another hearing, so I will recognize him at
    this point.

      STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR FROM IOWA

        Senator Grassley. Senator Hatch is filling in for me while
    I am gone, and I won't ask any questions. I will submit them
    for the record and I have some documents I want to submit for
    the record, as well.
        Senator Lugar. They will be placed in the record.
        Senator Grassley. I appreciate my colleagues' accommodation
    and I appreciate your irritation because I have been in the
    same position myself.
        I, first of all, thank you, Senator Lugar, but also Senator
    Chambliss for holding a timely hearing. When the Agricultural
    Risk Protection Act was signed into law on June 20, 2000, I was
    hopeful that by adopting the Agricultural Risk Protection Act,
    we would increase the affordability of crop insurance, make
    programs more flexible and responsible for farmers, and improve
    the public-private partnership that composes the programs'
    underlying basis.
        While the Agricultural Risk Protection Act has clearly
    improved affordability and flexibility for farmers, I believe
    that the public-private relationship that we had hoped to
    create has been undercut by the Risk Management Agency's
    Administrator. Administrator Davidson knows that I have been
    critical of many decisions made by RMA under his leadership.
    From the standard reinsurance agreement negotiation to an
    evolution of the Premium Reduction Program, from discovery of
    soybean rust to constituent services, I have raised numerous
    questions about the decisions made by the Administrator and his
    inability to work with or provide service for my constituents.
        So what I am going to ask now shouldn't come as any
    surprise, because I have suggested this in the past. It is for
    these above reasons that I am calling on Administrator Ross
    Davidson to resign. I do not believe that there is any way at
    this point in his tenure as Administrator to improve his image
    or standing with the companies, agents, and most importantly,
    farmers that are provided the essential service of mitigating
    their own risk through participation in the program.
        While I could point out specific examples of my
    dissatisfaction with many issues, in the interest of time, I
    want to limit my comments to the Premium Reduction Program's
    proposed rule. The proposed rule requires that the discount
    made available to farmers may not vary between State, crops,
    coverage levels, policies, and plans of insurance. Yet anyone
    involved in crop insurance knows it costs less to provide a
    crop insurance product in Iowa than it does in Texas because we
    have less risk. It is not possible, in my opinion, to have non-
    variable efficiencies in an environment full of variable costs.
        RMA's attempt to arbitrarily cap the Premium Reduction
    Program's benefit based on the State with the highest cost of
    delivery or risk works against the original intent of the
    program. Under the proposed rule, the only folks that lose are
    the ones that have the most to gain, those in low-risk areas
    like Iowa. If companies don't want to be subject to caps based
    on States with high risk, the companies must cut the high-risk
    States out of the program. That won't help us maintain our
    support in Congress for federally subsidized Crop Insurance
    Programs.
        There is no question that I support lower premiums for
    farmers when market and regulatory conditions warrant lower
    premiums. But due to comments made by RMA that I plan to submit
    for the record, and that is what I have asked to submit, I have
    no confidence RMA can recognize more major delivery
    efficiencies in the current marketplace.
        For that reason, Mr. Collins, I would call on the U.S.
    Department of Agriculture to reevaluate the timing of benefit
    delivery. If the premium reduction were to be delivered in a
    similar fashion to the USDA's Title I loan or LDPs, that is, if
    the benefit were delivered as a loan upon purchase of the
    policy or provided after the crop is harvested when the
    speculative calculations currently involved in benefit delivery
    could be eliminated, I would have much more confidence in the
    Premium Reduction Program.
        While I know that neither Mr. Collins nor Administrator
    Davidson can comment on the content of the final rule, these
    types of changes could give me confidence that this issue need
    not be addressed through appropriations or even reconciliation.
    Anything short of that type of change will most likely result
    in an amendment similar to Congressman Kingston's being offered
    on the Senate floor during agricultural appropriations.
        So, Mr. Chairman, I need to leave and chair the Medicaid
    hearing I talked about. I will submit questions. I am surely
    not leaving because of lack of interest or due to--but only due
    to time. So I will look forward to future hearings on this
    topic and I would suggest to the chairman that he might
    consider the possibility of holding another hearing in the near
    future following the release of the Premium Reduction Program
    final rule.
        I thank you.
        Senator Lugar. Thank you very much, Senator Grassley.
        [The questions and documents of Senator Grassley follow:]
        Senator Lugar. Do either of you have a comment on Senator
    Grassley's testimony?
        Mr. Davidson. I appreciate the Senator's perspective, and
    we have had a number of exchanges and we very much appreciate
    his suggestions on the rule. He made comment on the rule.
        As to my resignation, as we all know, I serve at the
    pleasure of this administration and when I am asked to resign,
    I will obviously agree to do that. Until that time, I serve at
    the pleasure.
        Senator Lugar. Thank you.
        I will recognize now the Senators in the order that they
    have come, and that would be Senator Nelson, Senator Roberts,
    and Senator Conrad. Senator Nelson?

       STATEMENT OF HON. BEN NELSON, A U.S. SENATOR FROM NEBRASKA

        Senator Nelson. Thank you, Mr. Chairman, Mr. Davidson, Dr.
    Collins.
        Mr. Chairman, you have raised the question of soy rust.
    That is an issue of considerable importance to the State of
    Nebraska and I appreciate the fact that you raised that. I
    react positively to your suggestions as to how we deal with
    this in an integrated fashion across the country so that
    farmers are aware of its existence and the locations of the
    existence as well as how to deal with mitigating against the
    damage that would otherwise be caused if they didn't take
    action.
        From time to time, we get comments from agents in Nebraska
    raising questions about the challenges they have in
    representing companies and providing coverage to the farmers. I
    think that there has been significant improvement over the
    years in the awareness of how you go about doing some of the
    things, but from time to time, there are still fairly
    substantial challenges that many of them face. I am going to
    have some of those examples put together and submit them to you
    to respond rather than take up the time of the committee this
    morning.
        But it does seem to me that coordination and communication
    can't be overstated when it comes to this area. It is only 5
    years old, so it is still evolving. But there are a lot of
    things that come to light that haven't been dealt with that I
    think can be dealt with and probably more anticipation of those
    problems.
        I am wondering if you have a working group of agents from
    around the country that come in and discuss with you on a
    timely basis the problems and challenges that they are
    experiencing out in the field, if you have a group that you
    meet with. It could be ad hoc or it could be formalized. Do you
    have one?
        Mr. Davidson. Yes, we have invited agents to come in and to
    describe to us the challenges that we have. Occasionally, we
    will meet with an agent group. I could name names, but you are
    familiar with the associations. We are willing to do that. I
    have also offered to come out to meet with individual agent
    offices. Frankly, we are trying to finish this proposed rule
    and that is the next thing on the agenda. We did receive a
    considerable amount of input from agents in the negotiation of
    the standard reinsurance agreement, as well. So yes, we are
    very open to interact with agents specifically and learn what
    their issues are and try to address those within the context of
    what our responsibilities in the statute require.
        Senator Nelson. The other thing, I am puzzled by excluding
    agents from having anything to do with the loss experience. I
    have had a little experience with the insurance business over
    the years and I know the concerns about collusion and the moral
    hazards that go along with that. But I would caution against
    taking a total ban against any kind of agent involvement.
    Rather, I would recommend you deal with instances when they
    arise and you deal with them swiftly and painfully for those
    that collude and take care of it that way rather than push the
    agency system completely out of the loss adjustment phase when
    there are losses.
        I think you are identifying problems, but the solution
    seems to be extraordinary unless you are going to tell us that
    the problems in terms of numbers or amounts are extraordinary.
    I just don't think the solution fits the problem you are trying
    to solve if it is total exclusion. I just think in some cases,
    if you have an agent you don't trust, you don't involve them.
    But I would hate to see a hard and fast rule that would extend
    or raise the cost of adjusting.
        Mr. Davidson. If I might respond----
        Senator Nelson. Yes.
        Mr. Davidson [continuing]. The guidance that we have been
    intending to release and, frankly, haven't released because we
    wanted to receive this kind of input, makes a number of
    exceptions to this general rule of agent involvement in loss
    adjustment.
        For example, we have a simplified claims process for small
    claims and for claims where there is minimal opportunity for
    collusion because we rely upon third party information for the
    claims adjustment. In those instances, the agent preclusion
    from the loss adjustment process is, in fact, exempted.
        We have also stated in this guidance that we understand
    that it is the agent's responsibility to keep the policy holder
    advised of their opportunities, their benefits, including loss
    adjustment, and so we would not preclude the agent from having
    a continuing conversation on that.
        When it gets to the exact claim itself and the actual
    adjustment of the claim, we feel that the loss adjustor is the
    person to do that and so we have limited the agents'
    involvement at the time, for example, riding along with the
    loss adjustor to go out and visit the farm as the claim is
    being adjusted, holding the tape as the bin is being measured,
    and things of that nature. We feel that that is--there is too
    much conflict there and we haven't allowed it.
        Senator Nelson. I just never heard of such a thing, to be
    quite candid. It seems to me you ought to identify the things
    that--where the problems are and permit them to be involved
    where the problems aren't. I can't imagine how holding the tape
    gets in the way or creates a conflict of interest. Perhaps
    deciding the level of damage or loss to a field, whether it is
    25 percent, 30 percent, whatever it may be that way, might be a
    conflict. But I am just puzzled by it. I just hope it doesn't
    add to the cost to exclude agents. Unless your problem is
    bigger than I understand it to be, I wouldn't understand why--
    --
        Mr. Davidson. We would be happy to spend some time with you
    and go over specific cases where----
        Senator Nelson. Maybe that is the best way. I don't want to
    take up the time of the----
        Mr. Davidson [continuing]. The results of the audits from
    the Office of Inspector General that have driven us to this.
        Senator Nelson. Maybe I just don't understand the nature of
    the problem. I appreciate very much.
        Mr. Davidson. We will set up a time to come see you.
        Senator Nelson. OK. Thank you. Thank you, Mr. Chairman.
        Senator Lugar. Thank you very much, Senator Nelson.
        Senator Roberts?

       STATEMENT OF HON. PAT ROBERTS, A U.S. SENATOR FROM KANSAS

        Senator Roberts. Senator Nelson, I think you understand the
    problem very well. Mr. Chairman, welcome back.
        Senator Lugar. Thank you.
        [Laughter.]
        Senator Roberts. Temporarily. I realize we are supposed to
    be in the question and answer session, but I do want to make a
    quick statement in regard to today's hearing.
        First, I want to thank Senator Chambliss for taking the
    step of holding this oversight hearing. I think it is very
    important and very timely. We have got an important role to
    play in overseeing all the programs under our jurisdiction and
    I am pleased we have this opportunity.
        Second, I am pleased we are holding this hearing today
    because of the advancements we undertook back in 2000 to
    strengthen the Crop Insurance Program. Chairman Lugar, thank
    you for your help in this regard, and I also want to thank
    Senator Chambliss, then Congressman Chambliss, for his role in
    this, and more especially former Senator Bob Kerrey. We led a
    rather difficult uphill fight in the Senate and the House in
    trying to achieve the passage of that Act. It took us nearly 2
    years, but we finally got the job done.
        I must admit that in terms of producer participation in
    increased coverage levels, we have been successful beyond our
    wildest expectations. Crop insurance has become a viable risk
    management tool for a large number of our producers and I think
    it is due, at least in part, to our efforts and the good work
    of people on this committee in 2000.
        As most of you know, many parts of Kansas went through a
    severe drought in 2001 through 2004. I have had more than one
    producer tell me the only reason they are in business is
    because of our efforts in 2000. We should all be very proud of
    that fact.
        But Mr. Chairman, despite these successes, I am concerned
    with what I view as some of the overall management issues with
    the program. We have seen what I could only term as an
    adversarial relationship between the agency and the industry.
    That is not healthy. I understand the need to provide oversight
    and the proper use of taxpayer dollars, but I am concerned that
    actions over the last year and continued efforts to find
    additional savings in the program are the equivalent of trying
    to squeeze blood out of a turnip, and that turnip just isn't
    there. Mr. Chairman, this program will only continue the
    success of the last few years if industry participants have a
    financial incentive to continue in the program.
        Finally, I remain disappointed with the agency's continued
    blockage of expanded coverage to producers that want to
    diversify their operations by planting new crops in their
    rotations. I have a lengthy question in that regard. If we have
    a second round, I would like to get into that.
        And new research and technology is allowing crops to be
    viable in expanded growing areas, but the agency seems
    continuously locked in neutral on expanding coverage and it is
    harming our producers and their bottom lines.
        Mr. Chairman, I am not going to continue, as I intend to
    address many of these issues in my questions of Mr. Davidson.
    Again, I can say on the whole, we have been incredibly
    successful since 2000. I thank you and I thank Senator
    Chambliss and my colleagues for their continued leadership and
    oversight of the program.
        As to Senator Grassley's comment, Mr. Davidson, I associate
    myself with his remarks and more especially with the proposed
    rule. I intend to recommend to Secretary Johanns that we need
    what I would call new producer and crop insurance-friendly
    leadership at the USDA. In terms of riding that Crop Insurance
    Program into a box canyon that I think has been full of
    regulatory overkill mismanagement, I don't know if you can turn
    that horse around or not, but that is how I feel about it. So
    if you serve at the pleasure of the Secretary, it is my view
    that I am going to advise the Secretary that you resign, as
    well.
        I see that I have a minute and 15 left, but I will let that
    comment and the deafening silence that will occur, just let it
    lie there, and I have one more question if, in fact, there
    would be a second round.
        Senator Lugar. Thank you very much, Senator Roberts.
        Are there any comments from the panel?
        [No response.]
        Senator Lugar. Very well. I call now on Senator Conrad.

    STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA

        Senator Conrad. I thank the chairman and I thank Chairman
    Chambliss for holding this hearing, as well.
        I think this is a sobering hearing, and I know, Mr.
    Davidson, it must be tough for you to hear this, but I can tell
    you, dissatisfaction in your performance is widespread in my
    State, as well. I was just home. I have been home, I think,
    seven of the last 10 weekends and your agency is probably the
    most unpopular Federal agency in my State. There is a feeling
    that there is a rigidity there, that when problems are brought
    to the attention of the leadership, that nothing happens.
        I could go into a long litany. I just was with several farm
    group leaders this last trip home. They said they believe you
    ought to be replaced and they asked me to deliver that message
    at this hearing.
        To be very succinct about it, the No. 1 complaint that I
    hear is on quality loss adjustment. In fact, I have just now
    received a letter from the insurance agents back home, the
    Professional Insurance Agents Association of our State, and
    quality loss adjustment topped their list.
        I have raised this issue on numerous occasions. I mean, I
    don't know how many letters I have sent up there, and nothing
    happens. No progress has been made in better reflecting actual
    market discounts for quality losses in the Crop Insurance
    Program. Your own agency commissioned Milliman USA to produce
    an independent actuarial review of quality adjustment that was
    completed in 2002. Milliman found existing crop insurance
    discount schedules to be inadequate when compared to local or
    regional market discounts in terms of the quality factors
    considered and discount levels applied.
        Milliman recognized that quality issues generally occur on
    the local or regional level and therefore their impact on
    producer returns is also concentrated at those levels. This is
    a fact that RMA continues to ignore.
        RMA's response to their own study was to criticize the
    report's conclusions, fail to propose alternatives, and suggest
    that everyone in the industry supports the status quo. That is
    just an unacceptable outcome and has engendered deep resentment
    in my State.
        On the Premium Reduction Program, at least part of the
    complaint that I heard from Senator Grassley is mirrored in my
    State and just a serious skepticism about the performance of
    the agency and about a willingness to adjust.
        Finally, also grave dissatisfaction in my State on those
    who produce both spring wheat and durham wheat in calculating
    their yields. This, too--I mean, I don't know how many letters
    I have sent. I don't know how many sessions we have had, and
    nothing happens. It is just--it has just led to a breakdown of
    confidence, a breakdown of support, and a growing level of
    anger and frustration.
        I must say, in some ways, I say this with a heavy heart. I
    don't like to ask for people to leave. I don't like to
    recommend that they be replaced. I honestly don't. But I have
    to tell you, I am here representing my State and the people of
    my State, I mean, I hear this time after time after time, are
    utterly dissatisfied with the leadership of your agency.
        We have just suffered--I have 25 seconds left--we have just
    suffered another set of weather disasters in my State, a
    million acres affected, 385,000 acres prevented planting. I
    don't know what is going on in my State. This is not how things
    were when I grew up. But 16 inches of rain in 2 days. I just
    flew over 10 days ago, just unbelievable.
        And the way this is all set up, a lot of these people
    aren't going to get helped. It is perverse. Those with
    prevented planting are, 385,000 acres. But I have got a million
    acres affected and a lot of those people are not going to get
    helped and that is just not right.
        With that, Mr. Chairman, I am supposed to be at the same
    hearing that Senator Grassley has left for. I will submit a
    series of questions for the record.
        And I must say, really, I kind of leave here with a heavy
    heart. I wish it would never have come to this, but it has. We
    can either try to avoid unpleasantness or we can face up to
    things. Senator Grassley and Senator Roberts have faced up to
    it and I think I have got an obligation to do that, as well.
        So with that, I thank the chair.
        Senator Lugar. Thank you very much, Senator Conrad.
        [The questions of Senator Conrad follow:]
        Senator Lugar. This is not a time for levity or humor, but
    I would suggest the energy bill we have been discussing,
    climate change, for example, global warming, may be hitting
    your State. As a result, we may sort of couple our talents with
    energy and agriculture. But in any event, I appreciate your
    coming and you have a responsibility, as we all have.
        Senator Roberts has one more question, and he will be back
    in a moment. Do you have another question in this round,
    Senator Harkin? If not, this is a question from Chairman
    Chambliss.
        Mr. Davidson, the financial failure in late 2002 of
    American Growers, Incorporated, raised questions about the
    financial strengthens of the crop insurance industry. Can you
    describe for us the current and projected financial conditions
    of the crop insurance industry in light of the new standard
    reinsurance agreement and also the steps that RMA has taken to
    ensure that we do not have a repeat of the American Growers
    situation?
        Mr. Davidson. I would be pleased to answer that question.
    In the wake of the failure of American Growers, we spent a
    considerable amount of time evaluating what kind of financial
    standards existed within this agency's regulatory structure,
    what kind of reports we were asking from the companies, and how
    we collaborated with State insurance departments in the
    oversight of the financial condition of the companies.
        We worked with the Nebraska State Insurance Department in
    evaluating what took place and why it took place with American
    Growers. We required within the standard reinsurance agreement
    additional disclosures and placed upon the companies the
    obligation to advise us in advance if there were deteriorating
    circumstances.
        This year, we have made continuing strides in asking the
    companies for additional information with regard to how they
    view the risks that face them, what they plan to do about those
    risks if they should emerge. This contingency planning will
    require additional evolution over time to make it even more
    effective, linking with the States who are also addressing
    these issues. There is a Risk Assessment Working Group at the
    National Association of Insurance Commissioners, for example,
    that is revising the standards by which an insurance company's
    financial condition is reviewed to take into account future
    risks.
        I will say that this year, because we have had a very good
    year, that many of the companies' financial conditions is quite
    strong. We continue to be concerned about a few companies who
    have minimal amounts of surplus. Many of those companies
    participate in substantial amounts of insurance provision under
    this programing with the assistance of additional reinsurance
    support. We have a ranking system for each one of those
    companies in terms of their financial condition and we review
    those as we approve them for their annual plans of operation.
        I think the industry is relatively strong. A small number
    of companies are on very close watch, though.
        Senator Lugar. You say relatively strong, but reinsurance
    that undergirds this.
        Mr. Davidson. In a number of instances, if the reinsurance
    should go away, we would have grave concerns, yes.
        Senator Lugar. Thank you very much.
        Senator Roberts?
        Senator Roberts. Yes. Thank you again, Mr. Chairman.
        When we wrote the crop insurance reform bill in 2000, we
    took a large sum of funding that actually created a T-yield
    plug to help address the declining--the Acreage Production
    History--the acronym is APH--caused by multiple years of losses
    that this continues to be a problem, and your prepared
    testimony indicates that you are in the negotiating stage of
    letting a contract to look into the issue.
        What I would like to know is when you expect to get moving
    on this. This has been a priority for over a year. We had a
    meeting in Kansas City on the topic. I thank you for going to
    Kansas City. Yet we seem to be getting a lot more talk than
    action. Can we get a time line from you?
        Mr. Davidson. Senator, you are referring to the so-called
    declining yield?
        Senator Roberts. Yes, that is correct.
        Mr. Davidson. We anticipate awarding a contract at the end
    of this week and another one at the end of next week, two
    proposals that seem to have some promise. Both of those
    proposals, however, will ultimately end up in requiring
    additional legislative authority as well as funding to fully
    implement, as we have said in the past.
        Senator Roberts. We spent a large sum of funding that
    actually created the T-yield plug to help address the problem.
    I am not sure what it is in legislation that is needed, but we
    would sure like to get with you to work that out.
        When we wrote ARPA, i.e., the crop insurance reform, one of
    our priorities in addition to increasing the premium assistance
    for farmers was to expand coverage for the alternative crops
    and to make it easier for producers to increase their crop
    rotation opportunities under the flexibility of the 1996 bill
    and the 2002 farm bill. One example of this is expansion of
    sunflowers and canola in Kansas and also in other areas of the
    high plains, and Congress has pumped a lot of research dollars
    and investment into these crops.
        I have heard from just a lot of producers in Kansas and the
    Southern plains who would like to raise canola. It mirrors the
    growing season as winter wheat and thus it could fit well into
    a planting rotation. We also have seen a lot of data indicating
    it could provide significant opportunities for cattle grazing.
    But we have got a roadblock in halting the expansion of these
    crops and it is in the form of the Risk Management Agency.
        Earlier this year, I authored a letter signed by quite a
    few of my Senate colleagues regarding the proposed expansion of
    this coverage for these crops. In Kansas, we requested the
    expansion of crop insurance coverage for sunflowers in 25
    counties. We get the crop insurance in the counties out West
    where we don't have much rainfall. We asked for the counties
    east of that where we do get the rainfall. You expanded the
    coverage to one. Nationwide, you expanded it to 19 counties,
    half of those being for irrigated purposes only. I don't see
    the sense on that. In terms of canola, you did not expand
    coverage to a single county in the United States, not one.
        The letter you send in response to our request cited
    several factors for denying these requests, and specifically,
    you mentioned the lack of cropping histories and the lack of
    the crushing facilities. I have a news flash on that one. Most
    of these producers, or most of the lenders won't let them plant
    the crops without the insurance coverage, and without the crops
    being planted, we have been told that the crushing facilities
    will not be expanded into these areas even though the crushers
    have an interest in doing so. So it is a catch-22.
        Based on the criteria you have established, you are making
    it impossible for these crops to continue to grow, expand, and
    become part of the producers' normal cropping rotation. It is
    my understanding that in the past, written agreements could be
    provided to allow producers to begin to grow an alternative
    crop, but the RMA now requires at least 3 years of growing the
    crop in a county before a written agreement will be granted.
    Now, how are we supposed to get this history if we can't insure
    the crop through a written agreement in most of these counties?
        Additionally, I don't know why the rule was changed to
    require the new 3-year history. I just don't think this is
    acceptable myself. I know Senator Chambliss and others have
    really worked very hard in this regard, only to find that we
    have sort of run into a roadblock on this issue. This also
    involves many other members of the committee, and the House
    committee moved heaven and earth in 2000 to improve this
    program.
        But this decision on canola is just one more example to me
    of an agency that is saying no when they should be saying, let
    us work on it and see how we can work this out. I think, to a
    great extent, that is a lawyer decision and it has failed to
    serve our producers when it comes to expanding coverage to
    these alternative crops. We used to be known as the ``Wheat
    State.'' That is not true anymore because of the flexibility we
    had in the 1996 Act and the 2002 program and we would like to
    continue that progress.
        So if you are going to make guidelines that make no sense
    and which make it impossible to make the program work for
    producers, I just don't understand this position. So if you
    would like to respond to that, why, feel perfectly free.
        Mr. Davidson. I would be happy to. The challenge that we
    have in this program is that the one standard that we have to
    follow is that our programs are actuarially appropriate, that
    there is enough information to be able to provide insurance
    rates that are actuarially appropriate. Where there has been no
    production history, there is no information and that creates a
    conundrum for us. We have a very difficult time identifying
    data that can be used to determine actuarial appropriateness
    when there is no production.
        We strongly support the idea of innovation in the crop
    insurance, or in crops, and recognize that that is very
    important. We have found that the actuarial appropriate
    requirement is a barrier to expanding in many areas. I will say
    that we have added over 11,000 county crop programs since the
    beginning of this administration and have shown a willingness
    to expand as rapidly as can be done under the actuarial
    requirements of the program.
        We did respond in our letter that through the Noninsured
    Assistance Program, producers can receive coverage through FSA.
    In some instances, we did confirm that banks will accept that
    as collateral and that that is a way for farmers to begin to
    develop their experience. When an individual farmer has enough
    experience, and three points of data is a minimal amount of
    data to be able to say what any kind of a rate should be, then
    we can establish rates and provide a written agreement. Then
    when there is sufficient information in the county, when we can
    expand it beyond that.
        So there is kind of a continuation here that you provided
    in the statute. Where there has been no experience, NAP is
    available to farmers, and hopefully that is acceptable as
    collateral to bankers. With NAP, they can develop their
    experience and can progress to a written agreement, and we are
    willing to provide written agreements as well as we can within
    the bounds of statutory actuarial soundness requirements. Then
    beyond that, as there is adequate experience in a county, we
    are willing and have shown the willingness to expand to the
    county for the full program. So that is a continuation, or a
    continuous path that a farmer can follow to get coverage.
        Senator Roberts. It is the 3-year business that bothers me,
    because when we passed that law, we didn't have that in there,
    and then you changed that to the 3-year history.
        But here is what I am talking about. If you look at a map
    here on the 2006 expansion and existing sunflower counties in
    regards to my State, this is where you are covered. The green
    area is where we asked and the one county here is where the
    coverage has been expanded. The thing that doesn't make any
    sense to me is that here is--from about here on is where you
    have most of the moisture in terms of being actuarially sound,
    and I don't understand why it takes 3 years to wrestle with the
    paperwork to get that done. But at any rate, we will continue
    to work with the agency to see if we can't make some progress.
        I am way over time and I appreciate the patience of the
    chairman. Welcome back, Mr. Chairman.
        Mr. Davidson. Senator, if I might, it might be useful for
    us to have a further conversation about the kind of flexibility
    that we would need statutorily to give us the ability to both
    meet the actuarial sound standard as well as expand.
        Senator Roberts. Well, I am--it took us 2 years to pass
    that Act. We had to go uphill and downhill and around
    Grandmother's house and in about six different pastures to get
    it done, and many strong differences of opinion. Out in the
    West part of my State, we used to have five or 6 percent of
    people sign up for crop insurance, and as the former chairman
    can testify, they would indicate why on earth would you want to
    sign up for crop insurance when you get a disaster payment
    every year? So the whole design was to address the disaster
    payment situation.
        We tried to give a lot of flexibility in that Act, and now
    all I am hearing now is that we have to go back and do more
    legislation. If we do more legislation on crop insurance, you
    open up Pandora's box, and it wouldn't be Pandora's. If you
    need it, we will try to get it. Mr. Chairman, that would be
    called a technical correction as opposed to ``son of ARPA.''
    But as you can see, I am not very happy about this whole
    situation.
        Anyway, thank you very much for coming, and that is about
    it.

    STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM GEORGIA,
      CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

        The Chairman [presiding]. First of all, let me apologize to
    our witnesses for running behind here. We have had some other
    crisis we have been trying to address. To my colleagues, thank
    you all for pinch-hitting for me here.
        Without being here, though, Mr. Davidson, Dr. Collins, it
    is apparent to me just from talking to my colleagues over the
    last several months that there is a lot of frustration relative
    to what is going on in the Crop Insurance Program. We passed
    the bill that Senator Roberts referred to back in 2000 that we
    thought was going to solve a lot of problems, and apparently
    the more we get into it, the more problems we are observing. I
    hope we can resolve this and make this a smoother program
    without additional legislation. If we need to, we have got to.
        I just have a couple of questions. Dr. Collins, in November
    2004, the FCIC Board of Directors adopted a resolution
    directing FCIC to publish a proposed and final rule regarding
    Premium Reduction Plans of Insurance. What led the Board to
    adopt this resolution and why had the rulemaking process not
    been fully exercised prior to the initial availability of PRP?
        Mr. Collins. Mr. Chairman, the Board first considered PRP
    in the fall of 2002. At that time, the Board considered
    rulemaking, but only briefly. We spoke with the Department's
    General Counsel. At that time, the General Counsel advised us
    that PRP was provided for in the standard reinsurance agreement
    and that PRP could be implemented without rulemaking. It could
    be implemented under procedures--it could be implemented
    straightforward under the SRA, or it could be implemented with
    additional procedures developed by the Board or RMA.
        In December of 2002, the Board adopted a resolution that
    authorized the approval of PRP subject to, I think it was nine
    different conditions. There was one company that was approved
    under those conditions, and those conditions were later
    expanded by a Manager's Bulletin issued by Mr. Davidson. One
    company was approved under those procedures for two successive
    years.
        It, however, was in the late summer or early fall of 2004
    when we received six additional applications for PRP that we
    first became more troubled by the procedures that were in
    place. The six additional applications raised many new issues
    that hadn't been contemplated by the Board or by RMA. There was
    a diversity of approaches submitted by the six companies on how
    a PRP should be operated.
        So in October of 2004, the Board passed a resolution
    seeking an Advance Notice of Proposed Rulemaking, an ANPR, to
    find out what the public thought, find out what additional
    analysis we could get together to evaluate a PRP. We knew it
    was becoming controversial at that point. We were hearing from
    agents. We were hearing from companies. We were hearing from
    the public. We were hearing from producers. We felt that it
    would be important to get in a formalized way that input.
        So at that point, we were only contemplating receiving
    comments and revising our existing procedures. We also sent out
    PRP to five independent expert reviewers under contract to get
    their evaluation.
        Come November, the next month, the month that you started
    with, we had thought about it some more and thought, well, just
    going out and asking for public comment is probably not going
    to be enough. We ought to follow APA, the Administrative
    Procedures Act, and do a formalized approach to this because of
    the possible repercussions of this to the industry. So it was
    at that point that the Board of Directors adopted the
    resolution that you just mentioned and indicated that FCIC
    would proceed with notice and comment rulemaking, and that is
    the process we are in right now.
        The Chairman. Mr. Davidson, when do you expect that final
    rule on PRP to be published?
        Mr. Davidson. When the Board passed its resolution, it
    directed us to have something available so that companies could
    apply for the 2006 reinsurance year that begins July 1. We
    anticipate publishing a rule in the very near future.
        The Chairman. On the next panel we are going to hear in
    greater detail from the industry about PRP. Can Crop 1 operate
    in 2006 without premium discounts if it so chooses?
        Mr. Davidson. They haven't applied to us to do so.
        The Chairman. They haven't applied for what exactly?
        Mr. Davidson. They have applied to do business this next
    year under PRP. That is the mode of business that they have
    done. Any company that applies will have to adhere to the new
    rule as it comes out. That will probably require some
    adjustment on anybody's part, but particularly, I would say, on
    Crop 1's part.
        The Chairman. Senator Lugar, do you have any other
    questions?
        Senator Lugar. No, Mr. Chairman.
        The Chairman. All right, gentlemen. There will be some
    additional questions that will be submitted to you in writing
    and we would ask that you respond to those as quickly as
    possible, if you will, please.
        The Chairman. We will move now to our next panel. We have
    Ron Brichler, the Chairman of the American Association of Crop
    Insurers; Mr. Norm Nielsen, Independent Insurance Agents and
    Brokers of America, and Mr. Billy Rose, CEO of Crop 1.
        Gentlemen, welcome. Thank you. I have been advised by staff
    that we will certainly take any statement you want to submit
    for the record, but if you will please limit your opening
    comments to 3 minutes, it will just allow us to move a little
    bit quicker.
        Mr. Brichler, we will start with you.

        STATEMENT OF RON BRICHLER, AMERICAN ASSOCIATION OF CROP
                       INSURERS, CINCINNATI, OHIO

        Mr. Brichler. Thank you, Mr. Chairman. Members of the
    committee, in spite of all the progress that we have made in
    recent years, and despite the tremendous boost the program was
    given by the passage of ARPA in 2000, the Crop Insurance
    Program is now at great risk. Three initiatives taken by RMA
    could destroy in a few years the progress we have made over the
    last 25.
        These RMA initiatives are as follows: Pursuing a premium
    reduction plan that will discriminate against small and limited
    resource farmers and create chaos in the marketplace; two,
    promulgating regulations that make the Crop Insurance Program
    more costly and nearly impossible for the traditional companies
    and agencies to deliver; three, misusing data of a taxpayer-
    funded industry analysis to force cuts in the delivery system
    that will, if allowed to continue, adversely impact the
    delivery system that took 25 years to build.
        On the first threat, RMA asserts that the law requires they
    implement a PRP rule this year. We disagree. If they cannot
    devise a rule that prevents discrimination against small
    farmers that meets all of RMA's other requirements,
    limitations, and procedures, RMA should not issue a final rule.
    Strangely, RMA has chosen to ignore the mandatory provisions of
    the 2000 ARPA law and instead are forcing implementation of the
    outdated provisions of the 1994 law, which is not mandatory.
        RMA verbally stated that they are going forward with a PRP
    program even prior to closure of the comment period. They are
    choosing to ignore 93 percent of the 805 comments which are
    opposed to the PRP rule and program. We have supplied our own
    analysis of these comments as our Appendix A.
        We predict the following outcomes will be the inevitable
    result of a PRP program authorized by RMA's proposed rule.
    Companies and agents will be forced to neglect the small family
    farmers and concentrate on competing for the largest and most
    profitable accounts. Companies will be forced to withdraw from
    States because it will not be profitable to compete in those
    States. Service to farmers, both through risk management
    counseling and claims adjusting, will rapidly decline.
        RMA continues to increase the regulatory burden of the
    program in an attempt to limit fraud. No one in the crop
    insurance industry condones fraud, and fraud identification and
    control is improving. However, currently, the greatest threat
    to the integrity of the program is the attempt of RMA to force
    down reimbursements to companies and their agency force to a
    level that makes it impossible to properly service the
    business.
        By its very nature and purpose, the Federal Crop Insurance
    Program is complex. The photograph before you represents
    roughly about half of the pages of notices and guidelines and
    regulations that companies and agents must understand and
    adhere to. Doing the job right requires true public-private
    partnership and one that is not resource-starved.
        The third threat concerns RMA's deceptive and misuse of
    certain data. In an unsigned briefing paper delivered by the
    RMA to the House Appropriations Committee on May 13, RMA
    stated, quote, ``The allegation that PRP is being offered only
    to large farmers and not small farmers is untrue. In 2004,
    approximately two-thirds of the policies sold by Crop 1 were
    for 250 acres or less,'' close quote. This is a deceptive use
    of statistics.
        RMA's definition of a crop policy is one crop in one
    county. With this definition, very few farmers would have only
    one policy. A farmer frequently has multiple county crop
    policies for the same crop, and most farmers have more than one
    crop. In any event, our research shows that other companies
    report that, on average, the size of policies being transferred
    from their companies to the premium discounter company is twice
    as large as their average policy.
        Another instance of misuse of data involves a study
    produced under contract with RMA by Milliman USA. Although the
    study is a highly technical analysis of rates of return
    involving several scenarios and economic assumptions about the
    crop insurance industry, RMA has publicly referenced certain
    statements in the study without making the complete study
    available for independent review. RMA skewed the study by
    picking a period in which crop insurance had a loss in only one
    of 13 years rather than a more representative period of 1988 to
    2002, when crop insurance experienced a loss in three of 15
    years. Both the private industry and Congress have tried
    unsuccessfully to obtain the complete study.
        I am sorry for going over, Mr. Chairman. There is a lot to
    say in 5 minutes. Thank you for your time.
        The Chairman. Thank you.
        [The prepared statement of Mr. Brichler can be found in the
    appendix on page 76.]
        The Chairman. Mr. Nielsen?

     STATEMENT OF NORMAN A. NIELSEN, ON BEHALF OF THE INDEPENDENT
         INSURANCE AGENTS AND BROKERS OF AMERICA, PRESTON, IOWA

        Mr. Nielsen. Good morning and thank you, Mr. Chairman, for
    holding this important hearing. My name is Norm Nielsen from
    Eastern Iowa. In the interest of time, I am going to let the
    record stand as for my formal introduction.
        I have been a Main Street agent for 20-plus years, through
    the good years and bad while RMA has slowly evolved through
    seven administrations. However, I have never seen it in the
    state it is in now. I am particularly bothered by the
    persistent undermining of the agent's role, which adds value to
    this program.
        Recently, through an unfair and arbitrarily drafted
    conflict of interest provision, RMA designed rules severely
    reducing the agent's involvement in loss adjustment. It is
    unrealistic to expect the agent to remain silent while their
    client faces a loss. There are always questions that only the
    agent can answer, but RMA's policy levies a $10,000 fine
    against us.
        Not as Senators, but as policy holders, I ask you, does
    this really make sense? Agents have built this program into the
    successful story it is today, and to be treated like second-
    class citizens is unconscionable.
        The Big I opposes PRPs. This does not mean that we are
    against competition. In fact, we embrace competition as an
    important check and balance to the industry. Competition drives
    the agent network. We compete against each other, which makes
    us strive to offer better service. However, PRPs actually
    undermine the competitive playing field by putting cost of
    service over quality of service.
        Speaking of competition, RMA's decision to allow one
    company to continue to offer PRPs after the FCIC Board
    suspended the program pending rulemaking created a government-
    sponsored monopoly for the 2005 year. This is RMA's idea of
    promoting competition in the industry?
        The Big I believes that PRPs have no role in the industry
    that relies so heavily on agents. We believe that PRPs promote
    discrimination against limited resource and high-risk farmers,
    contrary to the Federal Crop Insurance Act. In order to
    understand why PRPs are bad for the program, we need to
    understand what the agent does.
        Unlike property-casualty, a crop agent has to gather data,
    compute APH, determine optional units, review plans of
    insurance, quote 247 options, do risk management, enter data
    into the company's computer, and most of this done by March 15.
    I charge RMA to show me a delivery system that reduces the
    agent's role without reducing the quality of service to our
    farmers.
        PRPs require the provider to demonstrate that a true
    efficiency will be achieved, not merely cost savings. Mr.
    Chairman, agents are the efficiencies. RMA can admonish all
    forms of discrimination, but condemning it and actually
    preventing it are mutually exclusive. RMA can neither enforce--
    does not have an enforcement mechanism to prevent such abuse
    nor the resources to create one.
        There are also forms of covert discrimination. For example,
    an agent's book of business full of lucrative accounts, they
    will want you. If it is full of small and high-risk accounts,
    they will pass over you. There is a term that we call this and
    that is called cherry-picking. If only the profitable customers
    are skimmed off the top, who will service the small farmers?
        Mr. Chairman, companies have realized significant
    reductions in the Federal reimbursement over the last 11 years
    and the quality of service to the nation's agriculture
    producers has remained static. Unfortunately, that will not be
    the case under PRPs.
        In conclusion, Mr. Chairman, there are too many unanswered
    questions to allow the program to go forward. The most
    pragmatic solution is to suspend PRPs until a third party,
    preferably the GAO, can conduct a comprehensive oversight
    investigation. I implore the Congress to have the USDA suspend
    this program and initiate one immediately.
        Thank you for the opportunity to testify and I would be
    pleased to entertain any questions you may have.
        The Chairman. Thank you, Mr. Nielsen.
        [The prepared statement of Mr. Nielsen can be found in the
    appendix on page 107.]
        The Chairman. Mr. Rose?

    STATEMENT OF BILLY ROSE, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
                   CROP 1 INSURANCE, URBANDALE, IOWA

        Mr. Rose. Chairman Chambliss, Senator Lugar, and members of
    the committee, my name is Billy Rose. I am the President of
    Crop 1 Insurance out of Des Moines, Iowa. We are the first
    company approved by USDA's Risk Management Agency to offer
    farmers a savings of up to 10 percent of their Federal Crop
    Insurance premiums.
        Since I only have a few minutes, let us cut to the chase.
    The issue comes down to priorities for you and for the crop
    insurance industry. Is it more important to offer farmers a
    price break on crop insurance and help them control their
    costs, or is it more important to maintain the status quo of an
    industry undermining its own stability through bidding wars
    over agent commissions?
        Here is how a PRP works. If an insurance company meets
    certain operating expense criteria, a premium savings can be
    passed on to the farmer. But some companies and agents want to
    kill PRP. This is bad Federal policy and very bad for the
    American farmer. To kill PRP sends a simple message: Insurance
    company profits and agent commission checks are more important
    than helping farmers save money.
        Occidental Fire and Casualty Insurance of North Carolina
    and its managing general agent, Crop 1, in order to make PRP
    broadly available, have appointed over 400 independent agents
    in 15 States and we have written over 16,000 crop policies.
    Since the inception and approval of our program, we have saved
    the American farmer out of our pocket over $4 million, no cost
    to the American taxpayer.
        Farmers embrace PRP. They want to save money. They want to
    reduce risk by purchasing higher levels of coverage. Our book
    of business shows just the opposite of these allegations. Our
    farmers are taking the savings and buying higher levels of
    coverage, and we service all farmers.
        Attacks on PRP and its provider are really about
    competition amongst crop insurance companies. If PRP
    disappears, reduced competition allows large insurance
    companies and agents to retain the higher profits and market
    share.
        This industry is controlled by two insurance companies that
    have over 50 percent market share. Don't forget, crop insurance
    companies don't set the premium price. They recruit other
    firms' agents by offering higher commissions, leading to the
    loss of companies that can't afford the bidding war. This is
    one of the factors that led to the collapse of American
    Growers, a $40 million bill to the American taxpayer.
        Crop 1 now has evidence that other companies today are
    offering our agents in excess of 20 percent commission if they
    will move their farmers away from Crop 1. To date, our agents
    have resisted this predatory attempt to undermine the PRP agent
    delivery force.
        We feel it is time to stop talking to the insurance
    companies and agents and begin talking to farmers, the
    beneficiaries of reduced premium crop insurance. Occidental,
    Crop 1, and our agents are eager to support any legitimate
    effort to make PRP, with the obvious farmer benefits, a better
    program.
        I would like to, Mr. Chairman, set the record straight on
    some of the distortion and attacks that I have heard here today
    against Crop 1. First, it is a government-sponsored monopoly.
    The fact is, Crop 1 is simply the first company to sell PRP as
    approved by RMA. Six other companies have applied and weren't
    approved.
        Fact--or, excuse me, myth is that we are cherry-picking and
    we only operate in the most profitable States and we only
    service large farmers. As I mentioned before, we are in 15
    States. Our plan of operations for 2006 goes to 21 States. We
    include States like Texas, North Dakota, South Dakota, some of
    the highest-risk States.
        In fact, when you break down our book of business and you
    look at the facts, not the rumors, 60 percent of our policy
    holders are comprised of 500 acres or less. In fact, one of
    those Iowa farmers is with us today, Christine Ferguson. She
    comes from a century farm in Iowa, a couple hundred acres. Any
    farmer that wants a savings who can contact us through our
    agent or through our direct 800 number, we make sure that we
    get them hooked up with a local agent and they get the savings.
        Another myth is that farmers' service will suffer with PRP.
    Approximately 94 percent of PRP policy holders renewed their
    policy last year. Over 95 percent of PRP policy holders who had
    a claim renewed their policy. I contend you go to a good
    restaurant, you have a good meal, you go back and you tell your
    friends. If you have a bad meal, you don't go back and you tell
    your friends that, too. Well, our service record shows that the
    farmers want to go back. They want the savings and they are
    telling their friends about it.
        One of the last myths is that Crop 1 is operating without
    proper RMA oversight. USDA's Chief Economist that was here
    today, Dr. Keith Collins, calls Crop 1 the most scrutinized
    crop insurance company in his memory. Crop 1 has been audited,
    reviewed, reaudited throughout its 3 years of operation. I ask,
    could other firms selling crop insurance at government-set
    rates withstand the same scrutiny?
        Thank you, Mr. Chairman. I look forward to your questions.
        The Chairman. Thank you, Mr. Rose.
        [The prepared statement of Mr. Rose can be found in the
    appendix on page 125.]
        The Chairman. Mr. Rose, I do disagree with your written
    statement and testimony that says, and I quote, ``to accept
    such an amendment regarding PRP in the appropriations process
    tells farmers Congress cares more about insurance company
    profits and agent commission checks than about helping farmers
    save money,'' close quote.
        Just like everybody on this committee, I am a staunch
    supporter of the American farmer and I worked with others in
    the industry to modify the appropriations amendment so that
    producers' outstanding PRP policies will be honored and your
    company will be able to continue servicing these policies. I
    have been very clear that my position on this PRP amendment is
    not anti-Crop 1, and I will be clear today that my position is
    not anti-farmer. It is my firm belief that based on the
    proposed rule, USDA needs to thoroughly and carefully consider
    all issues as it moves forward in drafting the final rule.
        Mr. Brichler and Mr. Nielsen, some may view your pursuit of
    the moratorium on the PRP rule in the appropriations process as
    an attempt to put Crop 1 out of business. Is that what you seek
    to achieve?
        Mr. Nielsen. Mr. Chairman, that is furthest from the truth.
    All we are asking for is an independent GAO audit. Let us get
    all the facts on the table.
        Mr. Rose was in the Insurance Department in Iowa 2 years
    ago with a marketing plan that stated, I am going after the
    $5,000 account. Let us just get it to the public. RMA has not
    given this to us.
        Mr. Brichler. Mr. Chairman, we are not trying to put Crop 1
    out of business. They can continue to provide crop insurance
    without a premium discount program. All they have to do is file
    under that method. So what Mr. Davidson refused to answer
    before is they may file under a PRP, but they aren't required
    to file PRP, so they can remain in business if they like.
        Second, many of the insurance companies have always asked
    for just an even playing field in administrating the PRP rules.
    Many of us met with Mr. Davidson in his office and asked
    questions relating to what type of expenses qualify under the
    PRP rules, what happens to startup costs. All these types of
    questions were asked and we didn't get any action from the
    administration on making sure that the playing field remained
    even.
        There are different business models from different
    companies. Some companies rely on underwriting gain. Some rely
    only on the administrative and operating expense reimbursement.
    I don't think the elimination of PRP eliminates either one of
    those two business models.
        The Chairman. Mr. Rose, I understand your company is
    currently approved to sell PRP policies only. If a moratorium
    in the appropriations process is achieved or PRP policies are
    not approved to be sold in the 2006 reinsurance year, will your
    company request approval to sell non-PRP policies?
        Mr. Rose. We have already filed our 2006 plan that includes
    PRP. The 2006 crop year starts in a matter of days. Texas, the
    Southern crops, will be kicking off, and then we roll right up
    into Kansas and the winter wheat crops.
        To change midstream would create havoc, confusion, and
    great expense. We spent over $3 million creating an IT system
    of which we are able to analyze the farmers' options and we
    provide it to our agents so they can do it quicker, say within
    an hour, which used to take us 10 hours to do a complete
    analysis. All our systems would have to be overhauled. It would
    be a serious setback, sir.
        The Chairman. So I am not sure what your answer is, though.
        Mr. Rose. We feel this is a good program and the program
    should continue forward. We want the facts to come out. We
    support any further investigations. We are very proud. We play
    by the rules. We think it would just be a tragedy if this
    program were to be overturned and we could no longer offer it.
    We have not gone to that stage of saying, we can't offer the
    program anymore, so I don't have a concise answer for you, sir.
        The Chairman. OK. Mr. Brichler, Mr. Nielsen, if Crop 1
    sought approval to sell non-PRP policies, would you support
    having competition on a level playing field in the industry?
        Mr. Nielsen. We always support. I represent 22 companies in
    my shop and I have two Crop companies, so I can't say anything
    but support it.
        The Chairman. OK. Mr. Nielsen, your written statement
    directs pretty harsh criticism at RMA. Do you have any
    recommendations for improvement?
        Mr. Nielsen. Well, I kind of think Senator Grassley said it
    all early on. But I think what we really need is
    communications. When the SRA was being negotiated, we were not
    there. We weren't asked. We were never given any kind of input
    into what will the agents and the farmers really buy? We need
    to be at that table to give the input because we are on the
    first line of communicating with the producer and that
    information needs to be fed back up to the RMA.
        The Chairman. Senator Lugar?
        Senator Lugar. Thank you, Mr. Chairman.
        The issues this morning are extremely complex and it is
    difficult in this short hearing, and you have done a yeoman's
    job in short statements to sort of make it concise. But let me
    just ask this question from the standpoint--I suppose perhaps
    Senator Grassley and I may be the only two customers for crop
    insurance on this committee. So in terms of conflict of
    interest, we have indicated earlier on, and certainly I am. I
    buy crop insurance every year.
        We have 604 acres, just 200 acres in soybeans, 200-and-some
    acres in corn, so we would qualify in one of the
    classifications of either the small people under 250 or 500 or
    whatever this involved. We are in Indiana.
        One of the questions that Senator Grassley raised this
    morning, if I heard him correctly, was that Iowa is a low-risk
    State. He suggested there were other States that have higher
    risk, without categorizing all of them. There are some farming
    situations even within Iowa, I suppose, or in Indiana that are
    lower-risk than others.
        So philosophically, there is a problem here. I suppose,
    depending on how you sort of look at economics generally, if,
    in fact, the purpose of the Risk Management Agency, the crop
    insurance, is to try to take a look at every State, every
    farmer with the thought that the most efficient situations in
    the lowest-cost States get a better deal and those that are
    higher-risk get much worse terms, this might fit the normal
    circumstances, or at least one set of circumstances.
        On the other hand, the argument that I think is being made
    inferentially is that if we get down that road, essentially,
    before long, the higher-risk States will be forgotten or their
    situations will be less cared for. Ditto for the smaller
    farmers in the higher-risk States almost beyond the pale at
    this point. Therefore, perhaps in a democracy, you say you
    can't cherry-pick. You can't pick and choose among these
    people. Essentially, if you are going to have one crop
    insurance system, it is one crop insurance system, and
    therefore you cover everybody, same premiums, and you are
    mandated if you are a company to cover a State and every one of
    these situations unless somebody is in fraud and abuse.
        I suppose there have been arguments this may state too
    broadly the parameters, the question, but along these
    arguments, not only in crop insurance and agriculture but in
    other kinds of social policy insurance or other general
    situations, nondiscriminatory. So it is an interesting issue.
        If, for example, to take the Lugar farm, and we have just,
    say, 200 acres in soybeans for the sake of an argument this
    morning, and we appear to be a pretty low-risk State in
    Indiana. I don't know where we rank along with Iowa and so
    forth in terms of low-risk situations. We are probably not
    among the most risky. Senator Conrad has mentioned this morning
    his State, and I have heard Senator Conrad, I think for the
    last 15 years describe weather disasters that hit almost every
    month, not just every year. So it is a tough situation, we
    understand.
        But what I am trying to fathom is, and I would ask you, Mr.
    Brichler, to begin with, as the industry takes a look at this,
    as you are reading this, what is all of this to be about? If we
    are philosophically trying to design a crop insurance program
    for America, should it deal with the efficient and the
    inefficient the same, States likewise, or what is the marketing
    aspect as you look at it?
        Mr. Brichler. Well, I think, Senator, that maybe this body
    actually addresses the type of concern that you are posing to
    me better than most in that you build coalitions every day in
    order to get one common piece of legislation passed.
        If you look at corn in Iowa, for instance, and its
    likeliness of loss versus that same corn plant in North Dakota
    or cotton in the Southeast, each one of those particular crops
    are going to have a different set of loss factors, some better,
    some worse. What we are trying to do is build a program that
    brings all crops, all people that want insurance into the
    process. In some cases, we are going to have to insure crops
    that don't make an APH each year on an actuarially sound basis
    in order to maintain 50 State support for this program, which I
    think is important. I don't think our lending institutions
    would provide operating loans to our farmers without the Crop
    Insurance Program as a backstop.
        Senator Lugar. Well, that is an honest answer. Coalition
    building does happen all the time. It is an interesting
    insurance concept as well as a political one, I suspect. But
    what is your take on this, Mr. Nielsen?
        Mr. Nielsen. Coming from Iowa, we can say that we have some
    of the best loss ratios historically over a number of years.
    But coming from where I live along the Mississippi corridor, we
    have claims when nobody else has. When the Mississippi comes
    out of its banks, we have claims. We need a program that is
    there always for all farmers. Our Southern Iowa farmers get
    droughted out at times. We need it to be available.
        So to say that we have a program out here that fits
    everyone's needs, yes, we do presently. Everybody can get
    insurance. That is all we are asking. Provide the protection
    for the producer.
        You start cherry-picking this and then companies--I mean,
    it is not a dirty word. They are supposed to make money, OK.
    With that, they are going to have to make some tough decisions
    of where they are going to be involved in the marketplace. We
    just cannot have that for the producers.
        Senator Lugar. Let me just mention parenthetically, and the
    chairman has already testified or others have, ideally, crop
    insurance would then cover 50 States and all the marginal
    situations. But as some of us could point out, almost each
    year, there are hues and cries for additional disaster
    insurance. We had the program, but folks come then and say,
    well, the weather was especially bad here, or in five States,
    we just simply were blown out of the water, crop insurance or
    not, and if you pressed them, they would say, well, not all of
    our farmers can buy crop insurance at this point. They haven't
    discovered it yet. They found it too expensive.
        It was less expensive to come to the Federal Government and
    coalition build for another $4 or $5, $10 billion of disaster
    insurance on top of the crop insurance. Now, that is not your
    fault, the insurance situation. It is our fault, I suppose in
    whatever the political rallies may be in here. But this is just
    my observation, sort of year after year of this.
        There is another second cut for those that somehow or other
    felt that they either didn't want to buy the crop insurance and
    the Lord will provide, namely the Congress if you didn't have
    it.
        What is your answer to all of this, Mr. Rose? You are
    obviously offering differentials, 10 percent discount. You
    mentioned some farmers in Iowa for this type of thing. What is
    your take on the philosophy?
        Mr. Rose. Very good questions. I think it is important that
    we are aware that the current industry is operating anywhere
    from five to 15 percent above their expense reimbursement,
    looking at it from the insurance company. So we are speculating
    on an underwriting game. So Indiana is a very good State. If I
    am going to be eight points underwater as an insurance company,
    I want to operate in the highly profitable States.
        The beauty about PRP is you must operate within the expense
    reimbursement, the 22 percent, which has allowed us to be in
    North Dakota since day one, to go down to Texas and write 4,000
    policies, because in a worst-case situation, when farmers need
    the savings and they have drought, you know, now they can get
    the benefit of the savings, good for the farmer, now is it good
    for the American taxpayer? We are operating within the budget,
    so if we have a complete wipe-out in one State or all States,
    and our plans are to go nationwide, that we would--we are at
    break even. That just makes practical business sense.
        And that is why I look at the PRP model and I go, sure, it
    can be refined. There is no perfect program. But this is good
    for the farmer, it is good for the taxpayer, and it is good for
    the program.
        Senator Lugar. Thank you. Thank you, Mr. Chairman.
        The Chairman. Gentlemen, thank you very much for being here
    today. We appreciate your testimony and response to our
    questions.
        The Chairman. Our last panel today is composed of Dr. Bert
    Little, Associate Vice President for Research, Tarleton State
    University in Stevenville, Texas; Dr. Bruce Babcock, Director,
    Center for Agricultural and Rural Development, Iowa State
    University in Ames, Iowa; Mr. Mike Clemens, Wimbledon, North
    Dakota, on behalf of the American Soybean Association, the
    National Sunflower Association, and U.S. Canola Association;
    and Mr. Ray Buttars, National Association of Wheat Growers,
    Weston, Idaho.
        Gentlemen, thank you for being here today. Thank you for
    your patience. Dr. Little, we will start with you and we will
    come right down the row. Again, we will take your full
    statement for the record. If you could limit your opening
    comments to 3 minutes, it would be very much appreciated.
        Dr. Little?

        STATEMENT OF BERT LITTLE, ASSOCIATE VICE PRESIDENT FOR
     RESEARCH, AND PROFESSOR OF COMPUTER SCIENCE AND MATHEMATICS,
             TARLETON STATE UNIVERSITY, STEVENVILLE, TEXAS

        Mr. Little. Thank you, Senator Chambliss. My name is Bert
    Little. I am Associate Vice President for Research at Tarleton
    State University, which is a member of the Texas A&M University
    System. I am a professor of computer science and of
    mathematics. I have been doing research for over 27 years on
    the Federal dime and the Fed has always been happy with my
    research, which I am glad to report.
        I am here to bring to you the results of another program of
    research that w conducted at the Center for Agribusiness
    Excellence. It was sponsored under Subtitle B, Section 515(j)
    of ARPA, basically to establish an information management
    system under which we could do data mining which would improve
    the integrity of the crop insurance system and effect savings
    and reduce fraud, waste, and abuse.
        I am bringing to you three messages today. The first
    message is that this program has been a success. The second one
    is, if this program goes away, the savings that we have been
    able to achieve will ultimately go away. Then third, I would
    like to raise a yellow flag, and that yellow flag is that the
    House gave us money to continue on for one more year and the
    Senate Appropriations Committee did not put money in there.
        Basically, what we have been able to do under my point one
    is to be able to effect savings that are on the average of $100
    million a year. Over the past 4 years, we have effected savings
    in excess of $350 million.
        No. 2, if the program does not continue, such savings will
    disappear and anything that we have been able to do to increase
    the integrity of the program will go away.
        No. 3, we do have 1 year of funding on the House side, not
    on the Senate side, and the interesting quagmire that the Risk
    Management Agency finds itself in is that although the
    authorization for the funding ends this year, the requirement
    for this kind of research to reduce fraud, waste, and abuse
    does not disappear.
        I have tried to keep my statement brief and I will yield my
    57 seconds.
        The Chairman. It is well received, I assure you, Dr.
    Little----
        [Laughter.]
        The Chairman [continuing]. The appropriations process is
    not over, so that will be duly noted, that you yielded back a
    minute as we move into that process.
        [Laughter.]
        The Chairman. I also note that you have as your Washington
    representative Mr. Ken Ackerman, who is former RMA
    administrator under the previous administration, a gentleman
    that I had the privilege of working with on many, many
    difficult issues, and Ken, it is good to see you.
        [The prepared statement of Mr. Little can be found in the
    appendix on page 161.]
        The Chairman. Dr. Babcock?

          STATEMENT OF BRUCE A. BABCOCK, DIRECTOR, CENTER FOR
      AGRICULTURAL AND RURAL DEVELOPMENT, IOWA STATE UNIVERSITY,
                               AMES, IOWA

        Mr. Babcock. Thank you, Mr. Chairman, for the opportunity
    to participate in today's hearing and to review ARPA's
    livestock insurance provisions. ARPA authorized the RMA to
    insure livestock and it set up a mechanism to induce the
    private sector to create new insurance products.
        My view of the rationale for expanded Federal involvement
    in the livestock sector is to increase the economic viability
    of independent livestock producers by providing them with
    efficient risk management tools that allow them to manage their
    risk independently of packers.
        Producers of hogs, fed cattle, and feeder cattle in 19
    States can now insure against unexpected declines in the price
    of their production with Livestock Risk Protection, or LRP. Hog
    producers in Iowa can insure against unexpected declines in the
    average margin over feed costs with LGM, or Livestock Gross
    Margin.
        Now, the extent to which small to medium-sized livestock
    producers will actually use these new insurance products
    remains to be seen, however. This year, no State has more than
    3 percent of its livestock insured under either product.
        There are a number of reasons for this low participation.
    History has shown that it takes time for farmers, their agents,
    and the companies to become knowledgeable about and comfortable
    with new products. In addition, both LGM and LRP were pulled
    from the market in December of 2003 following discovery of BSE
    in the U.S. Following substantial program modifications, sales
    of both resumed in October of 2004. This withdrawal hurt sales
    momentum for both products, but this type of learning by doing
    is what pilot insurance programs are really all about.
        Market research showed that livestock producers list risk
    management as a top concern. However, recent experience with
    crop insurance shows that most crop farmers will not buy high
    levels of insurance without large premium subsidies. But
    extending these large premium subsidies to the livestock sector
    to encourage participation would be counterproductive because
    livestock supplies are much more responsive to subsidies than
    are crop supplies. Large premium subsidies would lead to supply
    expansion and a resulting drop in market prices, exactly the
    event that the insurance products are designed to protect
    against.
        Over the next three to 5 years, we should learn whether
    independent livestock producers find that Federal livestock
    products are important to their operations. By then a large
    proportion of the nation's producers will have access to
    Federal insurance and agents and companies will have had time
    to learn how to sell the products and manage their risk.
        If it turns out that a significant number of producers want
    to purchase this kind of insurance, Congress will need to
    revisit the $20 million limitation on annual expenditures that
    is included in ARPA.
        In summary, ARPA is a success with regards to livestock
    insurance. It set up a successful mechanism to encourage the
    private sector to develop innovative products and it gave RMA
    authority and the financial means to offer reinsurance and
    support for the products.
        As an aside, I must say that in my experience, RMA has done
    a very good job working with the private companies in making,
    implementing this part of ARPA.
        So that is it.
        The Chairman. It is noted you didn't yield back any time--
    --
        [Laughter.]
        Mr. Babcock. But I was only 9 seconds over.
        The Chairman. We won't charge you for that, I promise you.
        [The prepared statement of Mr. Babcock can be found in the
    appendix on page 166.]
        The Chairman. Mr. Clemens?

     STATEMENT OF MIKE CLEMENS, WIMBLEDON, NORTH DAKOTA, ON BEHALF
        OF THE AMERICAN SOYBEAN ASSOCIATION, NATIONAL SUNFLOWER
                ASSOCIATION, AND U.S. CANOLA ASSOCIATION

        Mr. Clemens. Mr. Chairman and members of the committee, I
    am a producer from Wimbledon, North Dakota. I am Mike Clemens.
    I grow wheat, corn, sunflowers, and soybeans, and I am also
    Chairman of the National Sunflower Association.
        While the immediate concern for each oilseed and
    association varies, as farmers, we support a strong National
    Crop Insurance Program that ensures all producers can obtain
    affordable coverage. I will briefly discuss the major issues
    for each oilseed commodity that I represent here today.
        First, under soybeans, finding effective policies to
    address soybean rust is a top priority for the American Soybean
    Association. Soybean producers are significant customers of the
    Crop Insurance Program. Last year, 77 percent of the total
    soybean acres were insured, or 58 million acres out of the 75
    million acres. However, while participation numbers for
    soybeans are impressive, there are a wide range and regional
    variations in the type of policies farmers buy toward this
    program.
        For example, consider the different position of a soybean
    farmer from Iowa and a soybean farmer from Arkansas is likely
    to find himself in if both suffer a 40 percent yield loss from
    soybean rust. In Iowa, the State with the most soybean acres,
    94 percent of the acres in 2004 were covered with buy-up
    policies at the level of 75 percent. In Arkansas, the Southern
    State with the most soybean acres, only 46 percent of the acres
    were covered with a buy-up policy. In fact, only about two-
    thirds of Arkansas growers bought crop insurance at all, and of
    these, more than half bought CAT policies. For those growers, a
    40 percent yield loss would not even be covered if soybean rust
    were to happen.
        In Georgia, soybean farmers are in a similar situation.
    Only 71 percent of the soybean acres are insured at all, and
    fully 38 percent of all policies are at the CAT level.
        Soybean farmers have real concerns that despite our best
    efforts to protect ourselves through the Crop Insurance
    Program, losses due to soybean rust will not be adequately
    covered and disaster assistance will be necessary. The criteria
    for paying indemnities due to soybean rust seem terribly
    subjective to farmers. There is no certainty as to when to
    spray, how many times to spray, whether it is too early, too
    late, and the list just constantly goes on with the producer to
    identify that.
        The Soybean Growers Association strongly believes losses
    due to soybean rust should be covered through the Crop
    Insurance Program.
        And moving quickly into sunflowers and canola, the major
    concern is the inability to expand crop insurance coverage
    availability in a timely manner. Historically, farmers have
    used written agreements designed to offer coverage in a county
    where the crop insurance is not in place for a certain crop to
    help make the transition into growing a new crop. This also
    helped RMA compile enough experience to extend crop insurance
    policies into that county.
        However, under current RMA rules, 3 years of production
    history are now required before a producer can get a written
    agreement. In most cases, this prohibits producers from even
    trying an alternative crop, since lenders routinely require
    their borrowers to buy insurance every year, and to let a
    producer go along without crop insurance for 3 years can be
    devastating.
        We understand the need for actuarial soundness. However, we
    believe the cropping history of a producer's similar insurable
    crops could gauge his or her ability to grow these new crops.
    Therefore, we ask the committee to consider amending the crop
    insurance statute to allow the use of similar commodities to
    establish cropping history for written agreements.
        For instance, FDA's mandated trans fat labeling becomes
    effective January 1 of 2006 and consumers are searching for
    this healthy oil that is not available to the market at the
    levels we would like to see now. Producers need the flexibility
    to plant for these markets to capitalize on markets that are in
    front of us right now.
        Everybody likes baseball, but just think of confection
    sunflower seeds. You won't be able to eat the seeds at the
    ballgame because the producers in Kansas can't grow enough
    sunflowers.
        Thank you.
        The Chairman. Thank you, Mr. Clemens.
        [The prepared statement of Mr. Clemens can be found in the
    appendix on page 171.]
        The Chairman. Mr. Buttars?

    STATEMENT OF RAY BUTTARS, CHAIRMAN, DOMESTIC POLICY COMMITTEE,
          NATIONAL ASSOCIATION OF WHEAT GROWERS, WESTON, IDAHO

        Mr. Buttars. Thank you, Mr. Chairman, Senator Lugar, and in
    absentia, the rest of the members of the committee. My name is
    Ray Buttars and I grow wheat in the great State of Idaho. I am
    pleased to be here on behalf of the National Association of
    Wheat Growers and offer our thoughts on the Federal Crop
    Insurance Program.
        Crop insurance is a critical risk management tool, and like
    any other important tool on the farm, it needs periodic
    maintenance and sharpening. The sharpening we recommend is
    identified in the following four improvements.
        First, coverage levels. The higher levels of coverage
    currently available are not affordable. Even with the existing
    premium support, most farmers can afford only 65 or 70 percent
    coverage. With fuel and fertilizer costs being double of just a
    crop or two ago, it is easy to understand that production costs
    usually exceed 90 percent of the average crop value. At 70
    percent coverage, a farmer loses 3 years of potential profit
    before any claim is paid.
        Higher coverage is critical. However, it must also be
    affordable. NAWG has requested that group risk plans be made
    available to wheat growers. These policies are more affordable,
    but will work only for a portion of farmers because counties in
    the wheat belt tend to be large and have multiple climates.
    Greater premium support for 75 to 85 percent levels appear to
    be the only real solution for making these higher levels
    affordable.
        Second, risk management accounts. We have developed a
    concept we call risk management accounts. These accounts would
    provide a mechanism for Federal and private partnership to
    address the most glaring hole in the Crop Insurance Program,
    which is the uninsurable portion of a farmer's crop. Presently,
    this initial deductible is far greater than the slim margins we
    work with. Recent ad hoc programs have tried to address this.
    We believe the time is right for a proactive solution.
        These accounts would be available to farmers who buy crop
    insurance policies and would be linked to the value of the
    crops insured. Further details are attached to my testimony.
        Third, APH, or Actual Production History. The nation's
    wheat growers know all too well the effects of prolonged
    drought. Over the last several years, much of the nation's
    wheat belt has suffered from extensive drought and, therefore,
    loss of crop. Each year of crop failure reduces a farmer's APH,
    eroding the safety net provided by crop insurance. In my
    written testimony, you will find two suggestions to offset this
    erosion.
        Finally, minimum harvestable value. Many times, the
    residual value of a damaged crop is less than the cost of
    gathering or harvesting the remaining crop. Determining the
    point at which a crop is not worth harvesting and the actuarial
    cost of this option should be very simple. We suggest that
    farmers be allowed to purchase optional coverage to insure the
    unharvestable residual and recommend that this option be
    assignable to a custom harvester.
        Mr. Chairman, members of the committee, Senator Lugar, we
    sincerely thank you for this opportunity. I would be glad to
    respond to any questions you have and the NAWG leaders, staff,
    and I look forward to working with you to sharpen the risk
    management tools available to the American farmer. Thank you.
        The Chairman. Thank you very much.
        [The prepared statement of Mr. Buttars can be found in the
    appendix on page 175.]
        The Chairman. Dr. Little, you answered part of this, but I
    want to go a little bit further. As you know, mandatory funding
    for data mining expires after fiscal year 2005, as you stated.
    Also in your testimony, you state that your data is currently
    protected by an RMA firewall. What happens to this data if
    funding expires and is unavailable after October 1, 2005?
        Mr. Little. The hardware and software are property of USDA
    and we would pack it up and take it to Kansas City.
        The Chairman. Mr. Clemens, your testimony highlights
    regional differences in levels of insurance coverage. Do you
    have any thoughts about how to encourage producers to purchase
    higher levels of insurance coverage?
        Mr. Clemens. It seems in where I am from, North Dakota,
    that the agents do an excellent job of providing information to
    the growers to outline all the options that are to them out
    there as far as different levels of coverage and what policy
    they have. Just more of an educational thing, possibly, could
    be more in place.
        And also, there are certain areas that don't think that
    they ever have a crop less. Well, they may never have a crop
    less--North Dakota, it seems like you have heard in the room
    here several times today that North Dakota has a crop loss
    every minute of the day, it seems like, and these other States,
    with soybean rust coming in now, it might not be as often, but
    it is going to be as huge loss to the producers. So maybe they
    just get complacent to think that they never have a loss and
    that is why they buy that lower coverage.
        The Chairman. Are we far enough into the season yet to know
    what percentage of our soybean growers are going to experience
    a problem with rust?
        Mr. Clemens. Earlier testimony, I believe there was only
    one county in Florida that is identified. It is really pretty
    early in the season. You know, a spray will only last 2 weeks
    and it costs $15 per application, so a farmer could go broke
    just blindly applying a fungicide to his crop every 2 weeks to
    prevent the rust, and when you see it, it is going to be too
    late. Really, we are just starting to get into the timeframe
    when it is really getting crucial.
        The Chairman. Mr. Clemens, Mr. Buttars, do you as producer
    organizations have any views to share on the data mining?
        Mr. Clemens. We just support whatever RMA has already put
    in place, the firewalls that are in there to see what is going
    on in local communities. Other than that, really none.
        Mr. Buttars. Mr. Chairman, the Association of Wheat Growers
    has not taken a formal position on this. We support the
    absolute need for the preservation of the integrity of the Crop
    Insurance Program, as one of you has expressed. We also,
    though, nonetheless would want to assure that availability was
    always maintained and that profiling was not a pursuit of the
    program.
        The Chairman. Mr. Buttars, I appreciate your thinking about
    ways to improve the Crop Insurance Program, but as you probably
    know, statutory improvements to the Crop Insurance Program cost
    money. Do you have any cost estimates on the proposals that you
    have mentioned in your testimony?
        Mr. Buttars. We have simple estimates, but they are only
    simple. We would look forward to the opportunity to working
    with your committee, with FAPRI or whoever else we need to. The
    staff at NAWG and the rest of our group are eager to get an
    actuarially sound and FAPRI or OMB-supported estimate of these
    suggestions.
        The Chairman. Mr. Babcock, your written testimony suggests,
    on the one hand, that there may be a public policy rationale
    for Federal livestock insurance, but on the other hand warns
    that large premium subsidies could lead to a significant
    expansion in livestock supply and a resulting drop in market
    prices for livestock. Could you explain or elaborate a little
    bit on this, please, sir?
        Mr. Babcock. Sure. The public policy rationale, in my view,
    is that small to medium livestock producers can't really go to
    the Chicago Board of Trade and Chicago Mercantile Exchange and
    efficiently buy futures and options because the contract sizes
    are so large that they do not, what should I say, aren't
    customizable to an individual producer's operation and that the
    LRP and LGM insurance plans basically take those futures and
    options and customize them to make them work for small to
    medium livestock producers.
        The large producers can go to the commodity exchanges and
    use those for their price insurance. The only alternative for
    small to medium producers is to go to--and they have done it
    over the last 10 years--is go to the packing houses and the
    packers and processors in the big companies that will offer
    them different risk management tools like window contracts or
    forward contracts on their production, but then that raises a
    question about how independent those producers are relative to
    the packers, and so that the LRP and LGM give them an
    alternative to packers for their risk management purposes.
        So that, to me, is a public policy reason why maybe the
    Federal Government should support the insurance products. But
    on the other hand, that support needs to be a bit limited
    because the livestock sector, especially hogs and poultry and
    things that have a shorter biological cycle can take a price
    subsidy or a subsidy for their insurance and what that will do
    is encourage them to expand, because if you pay for the risk
    reduction, they will take more risk and they will expand their
    markets. Our experience with the livestock commodity groups is
    that they don't want that kind of intervention because they are
    afraid of what it will do to market price.
        So on the one hand, there is a reason for being involved,
    but on the other hand, I think we need to make sure we limit
    the large premium subsidies on--be careful that we don't take
    all the risk out of producing livestock.
        The Chairman. Senator Lugar?
        Senator Lugar. Thank you, Mr. Chairman.
        Mr. Clemens, I was interested in your analysis of the
    soybean situation in these ways. I think you mentioned that
    there could be a very great difference in what happens with
    soybean rust in the South, and you cited Arkansas, which is
    pretty Southern as opposed to Iowa or Indiana, where the spores
    might take a while longer to get there, but a very different
    set of circumstances under the crop insurance coverage.
        That is, as I understand you are saying in Arkansas, maybe
    40-some percent had greater coverage of 75 percent to 85
    percent levels, whereas maybe in Iowa, it was 77 percent or
    thereabouts. So this is totally disproportionate in this
    particular crisis to what is likely to be the problem.
        As I understand, the spores thrive in the South, could even
    exist in the South even if they die in the North during winter
    and so forth, and yet we sort of know as this situation is
    being set up there is a real problem here because the losses
    may not be to the point where you even get any coverage at all
    and you sort of miss out altogether.
        So then there will clearly be a hue and cry in the event
    that the rust problem really is a big one this year that the
    program didn't work, that the coverage is inadequate. In
    essence, you can almost see it coming just by definition unless
    we have no problem at all, in which case, why, this was a false
    alarm.
        I raised questions with the first panel to start out with
    this morning because I am alarmed about this. I have a feeling
    that this could be a very bad surprise. I am assured, for
    example, in my State that there are 20 plots somewhere that are
    going to detect the first spore that gets there. In other
    words, this will be an alert. I hope that is right. I am not
    sure I know where the 20 plots are and who will report what
    happens on those 20 plots.
        And as you have pointed out, if you apply the chemicals
    then at that point, the efficacy of the chemicals may have a
    duration of a week, two, three, how many times you do this to
    qualify for the crop insurance payments at the end of the
    trail, which I am still trying to pin down with those over at
    USDA to give us more definition. I am not satisfied that we
    sort of know if in a conventional way you plant the crop and
    nature moves on, you are OK.
        You are representing the soybean people. Let me just ask,
    have you encouraged soybean farmers generally because of this
    rust to go for the 85 percent coverage? In other words, this
    would appear to be the most prudent thing they could do. Or do
    you take Mr. Buttars' testimony on wheat? He has said so many
    wheat farmers have such a small margin with regard to the total
    expenses and with other things rising that although they might
    like to have the 85, the best they can do is the minimum
    situation, but then they may misfire altogether. So he is
    calling for a new program that offers some possibility to
    people moving up into this.
        What is your overall comment, given all of these sort of
    nondescript points that I have made?
        Mr. Clemens. First off, the data I supplied to you was 2004
    and it was the history----
        Senator Lugar. Two-thousand-and-four, OK.
        Mr. Clemens. Two-thousand-and-four data. We don't have the
    data for 2005.
        Senator Lugar. OK.
        Mr. Clemens. There hasn't been any effort by the Soybean
    Association to really get growers involved and know what could
    be coming down the road. I am not really sure, because I
    represent the National Sunflower Association, I am not on the
    American Soybean Board, but as a producer, I grow soybeans on
    my farm and I have had notices sent to me, not necessarily
    about buying up coverage, but how to look for the rust. A nice
    pamphlet was sent out to me. Unfortunately, everything in that
    pamphlet once I read it, it was already too late for me to
    spray my crop.
        There is going to be a real problem as far as if this rust
    does show up and we say one of these 20 fields shows it. There
    isn't enough airplanes, sprayers, and chemical in the country
    probably to treat all these acres and it is going to be just a
    panic.
        I think back to back in the 1980's when they had wheat
    midge predicted in North Dakota coming in. There were traps set
    out and everything to monitor it and the big scare was put in.
    A lot of producers couldn't forward-price their crops because
    they didn't know if they were going to have a crop and it never
    materialized.
        So this rust is really going to--it is a new thing, new kid
    on the block, so we are going to have to see how it is going to
    work out for us. We know the history in South America is very
    devastating.
        Senator Lugar. Well, I appreciate what you are saying. I am
    concerned about it because, as I have already pointed out, I
    have a parochial interest, 200 acres of beans out there. I am
    watching them. But I don't have any confidence at all in what
    is occurring as I watch either USDA's crop insurance or what
    have you on this. There is almost a wistful hope that somehow,
    we are going to miss what happened. But as you are suggesting,
    if we don't, then there will really be hell to pay. Everybody
    will be flying in every direction as to why there was no
    foresight, no vision, and so forth.
        At least, Mr. Chairman, on this committee, there was
    vision. We kept raising the alarm every time we had a hearing,
    hoping somebody understands that. I appreciate all the thoughts
    about clear signals and communications and what have you, but,
    you know, I am in a position to hear all these things and I
    don't hear very much of it. So I am worried about the average
    farmer in Indiana who isn't sitting in a Senate office, going
    to hearings, talking to USDA, visiting with my friend, Chuck
    Connor. You know, where do you gain some confidence in all
    this?
        Let me just ask a question of you, Mr. Buttars. Even if a
    wheat farmers pressed in terms of margin, wouldn't your advice
    still be to go to the 85 percent? In other words, I can't
    imagine--our margin is not that great in Indiana on corn or
    beans, for that matter, but I can't imagine starting off a crop
    year without the highest amount of insurance anybody is going
    to provide, and particularly given the fact there is a large
    Federal support to it. This is not the actuarial cost of all of
    this.
        Mr. Buttars. You ask a very good question and that
    question, while I don't know the answer for soybeans, I do know
    from personal experience that as I pursue the higher levels of
    coverage, the premium cost is just about dollar for dollar for
    the insured benefit. In explaining crop insurance to an intern
    that works for our Association yesterday, we discussed the
    concept, well, now if her car payment is $300 a year, or,
    excuse me, a month, and her insurance were $300 a month, she
    said, why not just buy a second car, because she doesn't need
    the coverage because she can bear that risk already. If the
    cost of that additional coverage is equal to the premium, or to
    the benefit, why buy the coverage?
        Senator Lugar. So here, I would guess that maybe our
    calculations are different. At least, my own calculation is why
    I buy this, actually pay the premiums, or theoretically
    discussing it this morning is that there is real value in doing
    that. One year, why, White River came up in September and came
    across 150 acres of bottom land. There was no predictability
    about that situation whatsoever, but I was awfully glad we had
    the insurance and it saved our situation, even granted a 5-year
    average. It doesn't precisely cover that crop.
        But in any event, this is why the value of people like Dr.
    Little and Dr. Babcock are very important, some economists in
    here to advise some of the rest of us as to whether there is
    value or not. Now, if there isn't, why, we need to hear that,
    likewise, from the academic community who are non-imbibers,
    non-soybean farmers, insurance premium payers.
        I think there is substance in what you are advocating, Mr.
    Buttars. What I am trying to get at is, before we get into
    that, to try to gauge the value of what additional
    appropriations might be involved and what benefits come from
    that, which I hope the adequate research will support before we
    bite into that.
        Thank you, Mr. Chairman.
        The Chairman. Gentlemen, thank you all very much for your
    participation. This has been a very informative hearing with
    testimony and the answering of questions by all of our
    panelists.
        The record will remain open for 5 days, if anyone has any
    additional comments or statements to insert.
        Thank you, and this hearing is concluded.
        [Whereupon, at 12:36 p.m., the committee was adjourned.]

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                                A P P E N D I X

                                 June 28, 2005

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                       DOCUMENTS SUBMITTED FOR THE RECORD

                                 June 28, 2005

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                             QUESTIONS AND ANSWERS

                                 June 28, 2005

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