[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

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                                                                   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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