[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
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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
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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
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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
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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
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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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