[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]





          HEARING TO REVIEW THE FEDERAL CROP INSURANCE PROGRAM

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
              GENERAL FARM COMMODITIES AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 14, 2007

                               __________

                           Serial No. 110-22


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov
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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia,
    Vice Chairman                        Ranking Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                JO BONNER, Alabama
STEPHANIE HERSETH SANDLIN, South     MIKE ROGERS, Alabama
Dakota                               STEVE KING, Iowa
HENRY CUELLAR, Texas                 MARILYN N. MUSGRAVE, Colorado
JIM COSTA, California                RANDY NEUGEBAUER, Texas
JOHN T. SALAZAR, Colorado            CHARLES W. BOUSTANY, Jr., 
BRAD ELLSWORTH, Indiana              Louisiana
NANCY E. BOYDA, Kansas               JOHN R. ``RANDY'' KUHL, Jr., New 
ZACHARY T. SPACE, Ohio               York
TIMOTHY J. WALZ, Minnesota           VIRGINIA FOXX, North Carolina
KIRSTEN E. GILLIBRAND, New York      K. MICHAEL CONAWAY, Texas
STEVE KAGEN, Wisconsin               JEFF FORTENBERRY, Nebraska
EARL POMEROY, North Dakota           JEAN SCHMIDT, Ohio
LINCOLN DAVIS, Tennessee             ADRIAN SMITH, Nebraska
JOHN BARROW, Georgia                 KEVIN McCARTHY, California
NICK LAMPSON, Texas                  TIM WALBERG, Michigan
JOE DONNELLY, Indiana
TIM MAHONEY, Florida

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff
                     Andrew W. Baker, Chief Counsel
                 April Slayton, Communications Director
           William E. O'Conner, Jr., Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                BOB ETHERIDGE, North Carolina, Chairman

DAVID SCOTT, Georgia                 JERRY MORAN, Kansas, Ranking 
JIM MARSHALL, Georgia                Minority Member
JOHN T. SALAZAR, Colorado            TIMOTHY V. JOHNSON, Illinois
NANCY E. BOYDA, Kansas               SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South     CHARLES W. BOUSTANY, Jr., 
Dakota                               Louisiana
BRAD ELLSWORTH, Indiana              K. MICHAEL CONAWAY, Texas
ZACHARY T. SPACE, Ohio               FRANK D. LUCAS, Oklahoma
TIMOTHY J. WALZ, Minnesota           RANDY NEUGEBAUER, Texas
EARL POMEROY, North Dakota           KEVIN McCARTHY, California

               Clark Ogilvie, Subcommittee Staff Director

                                  (ii)










                             C O N T E N T S

                              ----------                              
                                                                   Page
Boustany, Jr., Hon. Charles W., a Representative in Congress from 
  Louisiana......................................................     2
    Prepared statement...........................................     3
Etheridge, Hon. Bob, a Representative in Congress from North 
  Carolina, opening statement....................................     1
    Prepared statement...........................................     2
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  prepared statement.............................................     5
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     4

                               Witnesses

Wilcox, Caren, Executive Director and CEO, Organic Trade 
  Association, Washington, D.C...................................     6
    Prepared statement...........................................     7
Segler, Hilton R., President, Georgia Pecan Growers Association, 
  Inc., Albany, GA...............................................     9
    Prepared statement...........................................    10
Marlow, W. Scott, Director, Farm Sustainability Program, Rural 
  Advancement Foundation International--USA, Chapel Hill, NC.....    11
    Prepared statement...........................................    13
Gillen, David, Farmer; Vice Chairman, Public Policy Action Team, 
  National Corn Growers Association; Chairman, Board of 
  Directors, South Dakota Corn Growers Association, White Lake, 
  SD.............................................................    18
    Prepared statement...........................................    20
Kubecka, William H. ``Bill'', Past President, National Sorghum 
  Producers, Palacios, TX........................................    32
    Prepared statement...........................................    33
Iverson, Gary W., Executive Director, Great Northern Growers 
  Cooperative, Sunburst, MT......................................    39
    Prepared statement...........................................    41
Chapman, Steven D., President, American Sesame Growers 
  Association, Lorenzo, TX.......................................    42
    Prepared statement...........................................    44
Watts, Tim J., President, Watts and Associates, Inc., Billings, 
  MT.............................................................    45
    Prepared statement...........................................    47

                           Submitted Material

Answers to submitted questions                                       61

 
          HEARING TO REVIEW THE FEDERAL CROP INSURANCE PROGRAM

                              ----------                              


                          MONDAY, MAY 14, 2007

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:31 p.m., in 
Room 1300, Longworth House Office Building, Hon. Bob Etheridge 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Etheridge, Marshall, Salazar, 
Herseth Sandlin, Pomeroy, Boustany, and Neugebauer.
    Staff Present: Tyler Jameson, Clark Ogilvie, John Riley, 
Sharon Rusnak, April Slayton, Debbie Smith, Kristin Sosanie, 
Bryan Dierlam, and Jamie Weyer.

 OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN 
                  CONGRESS FROM NORTH CAROLINA

    Mr. Etheridge. This hearing of the Subcommittee on General 
Farm Commodities and Risk Management to review the Federal Crop 
Insurance Program will come to order.
    I want to thank my colleagues and the witnesses for being 
here today. You know that if you have a hearing on a Monday 
afternoon, it puts a lot of extra pressure on witnesses as well 
as my colleagues who, if they went home, it would shorten their 
weekend. So I want to thank them for being here.
    At the previous crop insurance hearing, we heard from those 
that oversee, sell, adjust, manage and reinsure the policies 
that make up our crop insurance system. Today, we will hear on 
behalf of the producers who use the system as well as those who 
would like to be a part of that system.
    While traditionally the farm bill does not delve deeply 
into crop insurance matters, it does provide an opportunity to 
make some improvements to the system. The 2002 Farm Bill 
contained a subtitle which included several small provisions 
regarding crop insurance, and I strongly expect that at least 
some minor changes to the crop insurance system will find their 
way into this farm bill.
    The purpose of crop insurance is to help farmers better 
manage their risk. To the extent it does not accomplish this 
goal, it is our task to improve the system. I am a believer in 
crop insurance, and I want to ensure that farmers and taxpayers 
are getting the best product for their dollars invested. It is 
my hope that we will learn today ways we can improve the system 
so that more producers will be able to take advantage of this 
important risk management tool. I look forward to hearing 
today's testimony from our witnesses.
    [The prepared statement of Mr. Etheridge follows:]

Prepared Statement of Hon. Bob Etheridge, a Representative in Congress 
                          From North Carolina
    I want to thank my colleagues and the witnesses for being here 
today.
    At the previous crop insurance hearing, we heard from those that 
oversee, sell, adjust, manage, and reinsure the policies that make up 
our crop insurance system. Today, we will hear on behalf of the 
producers who use the system as well as those who would like to be part 
of system.
    While traditionally, the farm bill does not delve deeply into crop 
insurance matters, it does provide an opportunity to make some 
improvements to the system. The 2002 Farm Bill contained a subtitle 
which included several small provisions regarding crop insurance. And I 
strongly expect that at least some minor changes to the crop insurance 
system will find their way into this farm bill.
    The purpose of crop insurance is to help farmers better manage 
their risk. To the extent it does not accomplish this goal, it is our 
task to improve in the system.
    I am a believer in crop insurance, and I want to ensure that 
farmers, and taxpayers, are getting the best product for their dollar. 
It is my hope that we will learn today ways we can improve the system 
so that more producers will be able to take advantage of this important 
risk management tool.
    I look forward to hearing today's testimony from our witnesses, and 
I now turn to the gentleman from Louisiana, Mr. Boustany, who is 
sitting in for the Ranking Member, Mr. Moran.

    Mr. Etheridge. I now turn to the gentleman from Louisiana, 
Mr. Boustany, who is sitting in for our Ranking Member, Mr. 
Moran, who is on his way back, for any comments he may have and 
his opening remarks.

     OPENING STATEMENT OF HON. CHARLES W. BOUSTANY, Jr., A 
           REPRESENTATIVE IN CONGRESS FROM LOUISIANA

    Mr. Boustany. Thank you, Mr. Chairman.
    I know Congressman Moran would like to be here, but he has 
got his difficulties back in his home State of Kansas that he 
is dealing with, and so I am pleased to sit in for him today.
    I want to thank you for calling this hearing. It is a very 
important hearing. We have heard from the USDA, from crop 
insurance companies, from crop insurance agents, from GAO and 
other parties; and I think it is wise to hear from these 
witnesses today who each have their own concerns about how the 
current crop insurance programs work.
    I continue to hear from producers in my district along the 
Gulf Coast about the need to improve crop insurance. Nearly 2 
years ago, my district was struck by Hurricane Rita. Hurricane 
Rita did substantial damage to many farms in my home state, and 
this was preceded by the damage caused by Hurricane Katrina 
just 1 month before. I believe we have to have a strong crop 
insurance program that can adequately address the inherent risk 
of a normal farming operation as well as provide relief to 
farmers in cases of severe disaster.
    Having reviewed the testimony, I observed that we have 
three different types of concerns to address today. The first 
deals with crop insurance for new and smaller crops. It seems 
that some of the witnesses, Sesame Growers Association, for 
example, would like to expand their production, but without 
crop insurance there is an unwillingness on the part of some 
lenders or landlords to finance or support these crops. I want 
to make sure that we can address these types of concerns, that 
we don't limit the options of producers because we don't have a 
crop insurance product available to them.
    That being said, I want to make sure that our crop 
insurance programs remain actuarially sound; and I am anxious 
to hear more about this issue in ways that we can address this 
problem.
    Additionally, I believe it will be important to review the 
impact that traditional ethanol and cellulosic ethanol 
production is having on the industry and how crop insurance 
could be hindering progress in this area as well. It is 
important how we address the importance of certain energy 
crops, while remaining grounded in the actuarial soundness of 
any new crop insurance program.
    Second, we have a recurring problem with declining yields 
that is addressed in the testimony of the sorghum producers. 
The sorghum producers have hit a common theme, and it is one 
that Ranking Member Moran and Mr. Neugebauer and others, 
including RMA, continue to address. I would like to hear the 
ideas on how we can deal with declining yields so we don't end 
up with a situation where producers have less protection but at 
a higher price. At the end of the day, I believe it is 
important that farmers and not bankers are making the decision 
of which crops to plant.
    Third, we have testimony dealing with potential changes to 
the 508(h) process, and I think the 508(h) process has worked 
well. Since the passage of ARPA, 70 proposals have been 
submitted to RMA; and 46 have been approved. This means that 
about 10 per year have been submitted to RMA since the passage 
of ARPA.
    I am interested to hear more about the proposals that we 
will hear about today. I want to make sure that any changes to 
the program would not simply result in more expenditures that 
would encourage the development of a cottage industry, whereby 
people submit ideas for development. While they may be a worthy 
concept, they may not be subject to approval; so we need to 
strike a careful balance with this.
    Again, I want to thank the Chairman for calling this 
hearing. I look forward to the testimonies of the witnesses, 
and I hope we can address these issues as we go forward. Thank 
you.
    [The prepared statement of Mr. Boustany follows:]

 Prepared Statement of Hon. Charles W. Boustany, Jr., a Representative 
                       in Congress From Louisiana
    Mr. Chairman,

    Thank you for calling this hearing to hear from a number of 
individuals who have an interest in crop insurance. We have heard from 
USDA, from crop insurance companies, from crop insurance agents, from 
GAO and other parties. I think it is wise to hear from these witnesses 
who each have concerns with how the current crop insurance programs 
work.
    I continue to hear from producers in my district along the Gulf 
Coast about the need to improve crop insurance. Nearly 2 years ago, my 
district was struck by Hurricane Rita. Hurricane Rita did substantial 
damage to many farms in my home state, and this was preceded by the 
damage cause by Hurricane Katrina just 1 month before. I believe we 
have to have a strong crop insurance program that can adequately 
address the inherent risks associated with a normal farming operation, 
as well as provide relief to farmers in cases of severe disaster.
    Having reviewed the testimony, I observe that we have three 
different types of concerns to address today.
    The first deals with crop insurance for new or smaller crops. It 
seems that some of the witnesses, sesame for example would like to 
expand their production, but without crop insurance, there is an 
unwillingness on the part of some lenders or landlords to finance or 
support these crops. I want to make sure that we can address these 
types of concerns so that we don't limit the options of producers 
because we don't have crop insurance. With that being said, I want to 
make sure that our crop insurance programs remain actuarially sound. I 
am anxious to hear more about this issue and ways to address to 
problem.
    Additionally, I believe it will be important to review the impact 
that traditional ethanol and cellulosic ethanol production is having on 
the industry and how crop insurance could be hindering progress. It is 
important that we address the importance of certain ``energy crops,'' 
while remaining grounded in the actuarial soundness of any new crop 
insurance program.
    Second, we have a recurring problem with declining yields that is 
addressed in the testimony of the sorghum producers. The sorghum 
producers have hit on a common theme and it is one that the Ranking 
Member Mr. Moran, Mr. Neugebauer and others including RMA continue to 
address. I would like to hear ideas on how we can deal with declining 
yields so we don't end up with a situation where producers have less 
protection but at a higher price.
    At the end of the day, I believe it is important that farmers, not 
bankers, are making the decision of which crops to plant.
    Third, we have testimony dealing with changes to the 508(h) 
process. I think the 508(h) process has worked well. Since the passage 
of ARPA, 70 proposals have been submitted to RMA and 46 have been 
approved. That means that about 10 per year have been submitted to RMA 
since the passage of ARPA. I am interested to hear more about this 
proposal. Nevertheless, I want to make sure the any changes to the 
program would not simply result in more expenditures that would 
encourage the development of a cottage industry whereby people submit 
ideas for development, while they may be a worthy ``concept'', that 
won't be subject to approval.
    Again, I want thank the Chairman for calling this hearing. I look 
forward to the testimony of the witnesses and I hope you address these 
issues in your testimony, or in the Q&A period.

    Mr. Etheridge. Thank you very much.
    Let me also recognize the Chairman of the full Committee, 
Mr. Peterson. Thank you for joining us and for any comments you 
may have.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. I thank the Chairman and Ranking Member for 
their leadership and for calling this hearing. I also thank the 
witnesses for being with us today.
    As has been said, Federal crop insurance is an important 
part of our safety net. You know, most Americans don't live in 
a farm or on the farm or in farming communities, have no clue 
about what a risky business you guys are in and how much money 
it takes to farm nowadays. So we, as has been said, want to 
make sure that we maintain that safety net and make sure that 
we have got the ability for people to continue to farm.
    Historically, as has been said by the Chairman, crop 
insurance has not been a major part of farm bills. However, 
that does not mean that we cannot consider some changes to 
improve this program. As was mentioned about the declining 
yields, we have been trying to deal with that issue for over 10 
years. Frankly, I have come to the conclusion that this cannot 
be dealt with in crop insurance in any meaningful way. So we 
are looking at some way to deal with the safety net that we 
have and the issues that we have been unable to solve. I am 
determined to somehow or other figure out how to do this, and 
that will entail us looking into crop insurance to make sure 
that it all fits together.
    Today, we will be hearing from a number of groups that 
would like to see some changes in the crop insurance system. I 
think their testimony will help us move forward and make the 
right kind of decisions as we mark up the farm bill starting 
next week.
    Again, Mr. Chairman, I want to thank you for your 
leadership in holding this hearing, and we look forward to 
hearing the testimony.
    Mr. Etheridge. Thank you, Mr. Chairman.
    The Chair would request that other Members submit their 
opening statements for the record so the witnesses can begin 
their testimony and ensure that we have ample time for each 
Member to ask questions.

 Prepared Statement of Hon. Jerry Moran, a Representative in Congress 
                              From Kansas
    Thank you, Mr. Chairman. As I have stated before, the Federal Crop 
Insurance Program represents a key component of the farm safety net for 
agricultural producers. It is essential to shielding agricultural 
producers from localized crop losses. In addition to providing 
liquidity to producers who have lost a crop, the federal crop insurance 
also provides assurance to lenders and retailers that extend needed 
credit to farmers and ranchers during the growing season.
    Two weeks ago this Subcommittee heard from U.S. Department of 
Agriculture officials and a number of crop insurance industry 
representatives regarding the condition of the crop insurance industry. 
The witnesses stated that the Federal Crop Insurance Program has grown 
tremendously over the years and many witnesses expected the industry 
would continue to experience positive growth. However, many of the 
witnesses remarked that some issues remain, such as crops that continue 
to be uncovered by crop insurance policies and the failure of the 
system to develop a program to deal with multi-year droughts that cause 
declining yields and reduce the effectiveness of the traditional crop 
insurance policy.
    The suggestions of the USDA officials and the crop insurance 
providers were useful. This Subcommittee, however, is also interested 
in obtaining the producer perspective on the Federal Crop Insurance 
Program. After all, it is for the producer that the crop insurance 
program was created. The program should be designed to address the 
challenges faced by producers, while maintaining actuarial and 
programmatic integrity.
    I am pleased today to be presented with the suggestions of farmers 
and ranchers across the nation and from diverse production backgrounds 
on how to improve the current system. Should Congress consider 
addressing the crop insurance industry in the near future, the advice 
provided today will be a useful resource for this Committee.
    I look forward to all the witnesses' testimony and hope that our 
discussion today can yield useful information for this Committee to 
utilize in the coming months.
    Thank you, Mr. Chairman.

    Mr. Etheridge. With that, let us go to our first panel. We 
would like to welcome our first panel to the table: Ms. Caren 
Wilcox, Executive Director and CEO of the Organic Trade 
Association here in Washington; Mr. Hilton R. Segler, President 
of the Georgia Pecan Growers Association; Mr. Scott Marlow, 
Director of the Farm Sustainability Program, the Rural 
Advancement Foundation International of the United States in 
Pittsboro, North Carolina; Mr. David Gillen, farmer, on behalf 
of the National Corn Growers Association from South Dakota.
    Ms. Wilcox--let me also remind each of you, if you would, 
your full statement will be included in the record; and if you 
will endeavor to summarize as close to 5 minutes as you 
possibly can, that would allow each one of us to have adequate 
time.
    Thank you, and you may begin.

STATEMENT OF CAREN WILCOX, EXECUTIVE DIRECTOR AND CEO, ORGANIC 
              TRADE ASSOCIATION, WASHINGTON, D.C.

    Ms. Wilcox. Thank you, Mr. Chairman, and good afternoon. 
Good afternoon, also, Representative Boustany and Members of 
the Subcommittee.
    My name is Caren Wilcox; and I am Executive Director of the 
Organic Trade Association located in Greenfield, Massachusetts. 
It is my honor to have the opportunity to testify today. My 
comprehensive testimony regarding the entire organic community 
is on record with the Subcommittee on Horticulture and Organic 
Agriculture. Thank you for paying attention to this fast-
growing segment of agriculture.
    As you will hear today, the organic community has not been 
able to rely on USDA for the information it needs to understand 
its markets or the information to create a wide range of 
insurance products. So OTA does studies for the industry by 
itself.
    Last week, we released preliminary results of our latest 
market survey and announced that the organic food and beverage 
market reached 3 percent of the retail sector in the United 
States in 2006. Of course, the organic community is pleased by 
this growth. However, there is emerging evidence that consumer 
desire for organic products is outpacing domestic production. 
OTA is seeking to reduce these hurdles to farmers entering 
organic production.
    While organic farmers are pleased that they are no longer 
considered entirely ineligible for some forms of crop 
insurance, they continue to be penalized by the current system; 
and OTA seeks to create fairness for them. Currently, organic 
farmers are charged a 5 percent premium over the cost a 
conventional farmer pays. Adding to the inequity, when organic 
farmers must collect on their insurance policies they are 
compensated at the price of the conventional crop, not the 
higher organic price.
    An inability to seek crop insurance similar to what would 
be expected in conventional agriculture is one of the 
impediments to more farmers seeking to convert land to organic 
production. In order to remedy the situation for current and 
future organic farmers, we have developed legislative language 
that would amend the Federal Crop Insurance Act by adding a new 
subsection entitled Contracts for Organic Production Coverage 
Improvements.
    We acknowledge that the national organic standard only came 
into effect in late 2002 and that USDA did not originally 
collect localized, separate data for organic crops versus the 
same crops grown conventionally. Fortunately, the USDA is now 
beginning to gather more price and data for organic agriculture 
products. It should be possible for the Federal Crop Insurance 
Corporation to prepare appropriate studies of risk and loss 
experience.
    We believe that if the Congress will ensure that the data 
continues to be gathered across all segments and that there are 
appropriate studies mandated as part of the ongoing reviews 
conducted by the Corporation, then crop insurance products can 
be created that will be actuarially sound and will be available 
on an expanding basis to organic farmers. Such studies should 
lead the Department to be able to eliminate arbitrary price 
disparities.
    As data collection continues to be more comprehensive, the 
Department should review incoming data at least annually 
beginning in the 2008 crop year so the FCIC can make 
determinations and eliminate the surcharges; and farmers can be 
paid on actual losses in a timely manner. However, the proposed 
new system is very dependent on Congress and USDA creating and 
supporting comprehensive data collection.
    We have been very pleased by the RMA AMS interagency 
agreement on price collection and support FCIC continuing and 
expanding it to facilitate collection and dissemination of 
segregated retail and wholesale price information for organic 
production.
    In addition, OTA has called for the development of an 
insurance product with coverage that would protect the producer 
of an organic crop against the risk of a crop becoming 
contaminated through no fault of the producer and in a manner 
that would cause that crop to lose its access to organic 
markets and prices.
    Finally, OTA's legislative proposal would require that the 
FCIC report annually to the House and Senate committees on its 
progress in developing and improving Federal crop insurance for 
crops grown in compliance with USDA's national organic standard 
and program. Our proposal is deliberately formulated not to 
create a budget score, because it requires these reviews and 
studies to fit within the Corporation's existing program of 
research and contracts currently funded at about $25 million.
    Thank you for this opportunity to speak with you today. We 
look forward to working with the Subcommittee as you decide on 
crop insurance authorizations in the farm bill.
    [The prepared statement of Ms. Wilcox follows:]

Prepared Statement of Caren Wilcox, Executive Director and CEO, Organic 
                  Trade Association, Washington, D.C.
    Mr. Chairman, Ranking Member, and Members of the Subcommittee, I am 
Caren Wilcox, Executive Director of the Organic Trade Association 
(OTA), the membership-based business association for organic 
agriculture and products in North America. I am here today speaking on 
behalf of the Organic Trade Association (OTA).
    OTA is the voice for the organic business community, and has had 
this role for over twenty years, since its founding in 1985. Since that 
time, OTA membership has grown more than eight-fold, and now 
encompasses approximately 1,600 members across all parts of the organic 
farming, processing, distribution, and retailing supply chain for food, 
organic textiles, and personal care products.
    Organic agriculture forms the basis of a fast growing part of the 
agricultural economy, and offers hope to farms and shoppers alike, 
while contributing to the improvement of our land, air, and water 
resources. Many farm businesses involved with organic production have 
started with a vision of changing agriculture for the better, and have 
grown over the years to become well-known products.
    On April 18, 2007, before the Horticulture and Organic Agriculture 
Subcommittee, I provided extensive testimony on the state of the 
industry and the exciting growth taking place in the organic 
marketplace. I also outlined the laws, regulations, and practices that 
underlie that success. OTA provides private monitoring of the 
industry's growth, and has been involved with passage of the laws and 
regulations governing the industry. Also, during that testimony, I 
outlined OTA's 2007 Farm Bill agenda--its potential remedies to the 
various impediments faced by organic farmers. In particular, in the 
case of crop insurance there is a lack of data collection by USDA that 
for other segments of agriculture is collected. Today I would like to 
focus on one particular impediment--the lack of adequate crop 
insurance.
    One of the major impediments to converting more farm land to 
certified organic status has been the type of crop insurance available. 
Originally, organic farmers were not considered eligible for federal 
crop insurance. The Agricultural Risk Protection Act of 2002 (ARPA) 
provides that organic farming practices be recognized as good farming 
practices. Prior to this ruling, crop insurance policies may not have 
covered production losses when organic insect, disease, and/or weed 
control measures were used and such measures were not effective.
    However, the newly available federal crop insurance was presented 
at a disadvantageous rate. Organic farms pay a 5% additional premium 
and in the event of a crop loss they only receive compensation at a 
conventional price level for their organic crop. This is attributed by 
crop insurers and RMA to the fact that actuarial data is not available 
to insurers. While this is changing, it is important for RMA to use 
collected data to enable an insurance product to be developed promptly 
to help organic farmers. Some price and loss data is finally being 
collected by USDA, and this should be helpful in creating valid 
insurance products.
    In order to address the inadequacy of available crop insurance, OTA 
has developed legislative language that would amend the Federal Crop 
Insurance Act by adding a new subsection entitled ``Contracts for 
organic production coverage improvements.''
    If this legislation were to be enacted, within 6 months the 
Corporation would be instructed to enter into one or more contracts for 
the development of improvements in federal crop insurance policies 
covering crops grown in compliance with USDA's own national organic 
standards. This development research would include:

    1. A review of the underwriting, risk, and loss experience of 
        organic crops covered by the Corporation, as compared with the 
        same crops grown in the same counties and during the same crop 
        years using non-organic methods. The review should be designed 
        to allow the Corporation to determine whether significant, 
        consistent, or systemic variations in loss history exist 
        between organic and non-organic production, and shall include 
        the widest available range of data, including but not limited 
        to loss history under existing crop insurance policies, 
        collected by the National Agricultural Statistics Service, and 
        other sources of information determined to be reliable and 
        relevant.

    Unless this review documents the existence of such significant, 
        consistent, and systemic variations in loss history between 
        organic and conventional crops, either collectively or on 
        individual crops, the Corporation shall eliminate the 5% 
        premium surcharge that it currently charges for coverage for 
        organic crops on such crops. The review shall be conducted on 
        an ongoing basis, at least annually, beginning with the 2008 
        crop year and for each crop year thereafter as annual data is 
        accumulated by the Corporation, so that the Corporation may 
        make the determinations and eliminate the surcharge in a timely 
        manner as the review deems appropriate.

    2. The development of a procedure, including any associated changes 
        in policy terms or materials required for its implementation, 
        to offer producers of organic crops (including dairy and 
        livestock) an additional price election that would reflect the 
        actual retail or wholesale prices, as appropriate, received by 
        organic producers for their crops, as established using data 
        collected and maintained by the Agricultural Marketing Service 
        or other sources. The development of this procedure shall be 
        completed in time to allow the Corporation to begin offering 
        the additional price election for organic crops with sufficient 
        data for the 2009 crop years, and to expand it thereafter as 
        the AMS expands its data collection and availability for 
        organic crop prices.

    3. The development of an insurance coverage that would protect the 
        producer of an organic crop against the risk of that crop 
        (including dairy and livestock) becoming contaminated, through 
        no fault of the producer, in a manner that would cause that 
        crop to lose its access to organic markets and prices.

    The OTA legislative proposal also would require that the 
Corporation continue and expand its interagency agreement with AMS to 
facilitate the collection and dissemination of segregated retail and 
wholesale price information for organic production at relevant shopping 
points, points of entry, wholesale markets, and retail markets, 
including the funding of all phases of the pilot and implementation 
stages of this project until the resulting price collection facility 
has been established on a nationwide basis.
    Finally, OTA's legislative proposal would require that the 
Corporation report annually to the House Committee on Agriculture and 
to the Senate Committee on Agriculture, Nutrition, and Forestry on its 
progress in developing and improving federal crop insurance for crops 
grown in compliance with standards issued by the Department of 
Agriculture providing for the certification of such crops under the 
National Organic Program, including the numbers and varieties of 
organic crops insured, the development of new crop insurance 
approaches, and the progress of the initiatives mandated under this 
proposal. The annual report will also include the Corporation's 
recommendations on how it can continue to improve this insurance 
coverage.
    OTA's most recent market survey has preliminary results that 
indicate that organic agriculture and production have managed to 
provide almost 3% of the U.S. retail food and beverage supply in 2006. 
The organic community has accomplished this largely by its own efforts 
to develop voluntary standards, support state and then a federal 
standard for organic agriculture and producers. The community also has 
developed methods, academic knowledge, and technologies that have built 
the success of organic. This has been accomplished with very little 
help from the federal government, certainly none similar in quantity 
and quality to that provided to other parts of agriculture.
    The crop insurance proposal we put before you today is drafted to 
avoid generating a budget score. Instead, the organic projects will 
share in the $25 million fund authorized each year for spending on 
contracts and partnerships by RMA under section 522(e) of the Act. We 
would suggest backing up this approach with Committee Report language 
that urges RMA to ensure that organic projects receive their fair share 
of the fund, particularly during the early years of the new farm bill 
when they will be the most expensive.
    We believe that this proposal, if enacted, would go a long way 
toward reducing the impediments faced by current certified organic 
farmers, and will act as an encouragement to farmers who wish to 
transition all or part of their farms to organic production.
    Mr. Chairman, OTA thanks you for this opportunity to testify on 
behalf of the organic community on this important topic and looks 
forward to working with you on solutions.

    Mr. Etheridge. Thank you.
    Mr. Segler?

STATEMENT OF HILTON R. SEGLER, PRESIDENT, GEORGIA PECAN GROWERS 
                    ASSOCIATION, ALBANY, GA

    Mr. Segler. Good afternoon, Chairman Etheridge and Members 
of this Committee. I am Hilton Segler, a retired pecan grower 
and President of the Georgia Pecan Growers Association.
    Pecans grow in 20 states. Most of our improved varieties 
are grown along the Gulf Coast from New Mexico to North 
Carolina. Georgia has the most production, followed by Texas. 
Pecans are the only major crop that is native to the United 
States. All other major crops were imported to America from 
other countries.
    I chaired the first Committee back in 1980 to get Congress 
to pass the bill that would enable the RMA to provide Federal 
crop insurance for our pecan growers. In 2003, we were able to 
add 79 counties in Georgia and in 2004 two counties in Alabama, 
Baldwin and Mobile. Only in 2005 was a national program 
approved 25 years after we started.
    Crops such as peaches, peanuts, blueberries, cotton, and 
corn have a provision that in the event of a crop failure 
insurance coverage cannot be adjusted down more than 10 percent 
of the individual farm's APH average. This is referred to by 
RMA as a 10 percent cup. Long-range weather forecasters predict 
that the Gulf Coast region will continue to have the same 
weather for the next 15 to 20 years. If this is true, our crop 
insurance will be worthless in a few years without this 10 
percent cup.
    For crop years 2004 and 2005 hurricanes were devastating to 
the pecan industry in the Southeast. Until that time, the loss 
experience for this crop did not even approach the premiums 
paid by growers and the need for yield protection was not even 
an issue. Since that time, the opposite has been true. Alabama 
and Georgia have suffered crop and tree loss unprecedented in 
this region due to nature's wrath, the loss not only from the 
income but tree loss population and the significant reduction 
in insurance guarantee from pecan growers since the program 
does not enjoy the luxury of this 10 percent cup.
    The Valdosta regional Office of RMA submitted a request to 
the Kansas City national office for a 10 percent cup for the 
crop years 2004 and 2005 with no success. The reasoning from 
Kansas City was that the pecan program is a revenue program 
unlike APH and not production-based.
    Gentlemen, this simply is not true. Production is half of 
the equation that determines the pecan growers' guarantee, the 
other half being price received on a 2 to a 10 year average.
    As with the CRC corn and cotton insurance program, pecans 
also use a combination of yield and price to establish the 
revenue guarantee. The disaster incurred by peach producers in 
1996 when growers in the Southeast averaged near five bushels 
an acre overall prompted the administrative office of RMA here 
in Washington to implement a 10 percent cup for the crop year 
1997. This set a precedent that was parallel with the 
catastrophic weather events that have befallen our pecan 
growers not only in the State of Georgia but Alabama, Florida, 
Mississippi and Louisiana in the crop years 2004 and 2005.
    With the billions of dollars being thrown at the disaster 
in the Gulf, we can't afford not to recognize the disaster that 
has befallen our pecan industry in the Southeast and provide 
them the same yield protection so sorely needed. To correct 
this, we need to implement the 10 percent cup, have RMA go back 
to the 2004, and readjust the pecan growers APH average up to 
this time. It should be understood that no claims will be 
accepted or no additional premiums paid, only a readjustment of 
the APH average.
    In conclusion, another change would permit the pecan grower 
to insure his pecans by farm number. By practice, growers now 
have to average every acre that they have in the county. Many 
of our growers have farms located several miles apart and you 
can have things happen on one farm that don't happen on 
another. This would be very similar to you owning three pieces 
of property, three houses and have one be burned by fire and 
the insurance company asks you to take an estimated value of 
the other two because they have increased in value and subtract 
what you have and pay you the difference. They are not paying 
you what you have got insured on that particular farm.
    I appreciate the concerns that this Committee has, and we 
certainly appreciate the opportunity for the Georgia Pecan 
Frowers to be here today to address these issues, and we hope 
that you consider our issues in the 2007 Farm Bill.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Segler follows:]

   Prepared Statement of Hilton R. Segler, President, Georgia Pecan 
                 Growers Association, Inc., Albany, GA
    Good Afternoon Chairman Etheridge and Members of the Committee. My 
name is Hilton Segler. I am a retired pecan grower and President of the 
Georgia Pecan Growers Association, Inc.
Pecan History
    Pecans grow in 20 states. Most of our improved varieties are grown 
along the Gulf Coast from New Mexico to North Carolina. Georgia has the 
most production followed by Texas. Pecans are the only major crop that 
is native to the United States. All other major crops were imported to 
America from other countries.
    George Washington planted several young pecan seedlings at Mount 
Vernon in 1774. Thomas Jefferson started growing pecan trees at 
Monticello in 1779. Union soldiers returning north in 1865 after the 
civil war brought pecans with them and helped to increase the nuts 
popularity. It took about 4 centuries for the pecan to become an 
important crop in the United States; it reached a commercial scale in 
1920 and has increased steadily ever since.
    Most edible tree nuts are essentially one state crops; Almonds, 
Pistachios, and Walnuts are produced in California; Filberts in Oregon 
and Macadamia nuts in Hawaii. The pecan on the other hand, is a multi-
state crop, stretching across the country from the Southeast to the 
Southwest throughout some twenty states.
    Pecans are one of our National Treasures; over 40% of both houses 
of Congress, regardless of party affiliation have pecans growing in 
their state. I just wanted you to understand the importance of pecans 
to our nation.
Federal Crop Insurance
    I chaired the Committee, which began in 1980, to get Congress to 
pass a bill that would enable the RMA to provide federal crop insurance 
for our pecan growers. Not until 1998 did RMA allow us to have three 
pilot counties (Dougherty, Lee and Mitchell) in Georgia. In 2003, we 
were able to add seventy-nine additional counties in Georgia and in 
2004 added two additional counties in Alabama (Baldwin and Mobile). 
Only in 2005 was a national program approved 25 years after we started.
    It was the sense of Congress on the expansion of crop insurance 
that enabled us to move forward in the last 5 years. There are some 
small changes but important provisions that need to be made to the 
current policy to bring it in line with other crops. Crops such as 
Peaches, Peanuts, Blueberries, Cotton, Corn, etc. have a provision that 
in the event of a crop failure insurance coverage cannot be adjusted 
down more than 10% of the individual farms APH (yield average); this is 
referred to by RMA as a 10% percent cup. Long range weather forecasters 
predict that the Gulf Coast region weather patterns will continue for 
the next fifteen to twenty years. If this is true, our crop insurance 
would be worthless in a few years without this 10% cup
    Pecan growers' insurance has decreased $300.00 per acre and 
premiums have increased as much as $10.00 per acre sense the 
devastating hurricanes of 2004. We experienced a severe drought in the 
late summer/fall of 2005, which began in August, just as the flowers 
for the following year's (2006) crop were being induced. Any stress, 
especially drought, occurring at this time, will limit the return crop 
as it puts additional stress on the tree to bring its current crop to 
maturity. To correct this with our growers, RMA would need to go back 
to the 2004 crop and re-adjust the growers APH as if the 10% cup was in 
effect at that time. RMA should not accept any additional claims or 
premiums for this time period.
    Another change in the policy would be to permit a grower to insure 
his pecans by farm number. At the present time a grower can insure by 
practice (irrigated or non-irrigated) but has to average all his pecan 
groves by county. Many of our growers have farms located several miles 
apart. There could be a hail storm on one farm but not on another. It 
makes no sense not to let each farm be insured by farm number. This is 
why most all other crops have this safety protection and we don't 
understand why pecans are different. A good example would be like 
having three houses all insured and one was destroyed by fire and your 
insurer asked you to average the appraised value of the other two, and 
only paid you the difference, regardless of the insurance on the one 
that you lost.
    I want to thank the Committee for giving our organization an 
opportunity to testify today. We sincerely hope the 2007 Farm Bill will 
address these issues of concern to our Pecan Producers and reflect the 
value of their production to the U.S. Economy, as well as the dietary 
needs of all Americans. Thank You.

    Mr. Etheridge. Thank you, sir. Mr. Marlow.

          STATEMENT OF W. SCOTT MARLOW, DIRECTOR, FARM
           SUSTAINABILITY PROGRAM, RURAL ADVANCEMENT
         FOUNDATION INTERNATIONAL--USA, CHAPEL HILL, NC

    Mr. Marlow. Chairman Etheridge, Representative Boustany, 
Members of this Subcommittee, thank you for this opportunity to 
address you today about how crop insurance affects the ability 
of farmers to adjust to recent shifts in our agricultural 
economy.
    Between Hurricane Floyd in 1999 and Hurricane Katrina in 
2005, the percentage of eligible acreage in my home State of 
North Carolina participating in crop insurance increased from 
56 percent to almost 78 percent, but an estimate of the 
percentage of North Carolina farm receipts covered by crop 
insurance fell from 19 percent in 1999 to around 13 percent in 
2005. It is not that crop insurance changed but that crop 
insurance did not change to keep up with North Carolina's farm 
economy.
    We are moving rapidly from crops with extensive risk 
management and disaster programs to enterprises with 
ineffective or no risk management. Today I would like to focus 
on three issues associated with this transition. My testimony 
is based on our experience in North Carolina, but we are 
addressing these issues with farmers from across the South and 
the rest of the Nation.
    First, there is no effective risk management for farms with 
production contracts where the farmer does not own the product. 
According to the 2002 Census of Agriculture, 69 percent of hogs 
and essentially 100 percent of broilers raised in the our state 
were raised under production contracts, and we are seeing 
anecdotal evidence of production contracts being adopted in 
non-livestock crops.
    Livestock producers are also increasingly concerned about 
the risks of the disease outbreaks, quarantine and depopulation 
by either state or Federal officials which are not insurable 
causes of loss in existing programs.
    We recommend that the Risk Management Agency develop or 
adapt crop insurance programs to ensure against the risks 
associated with production contracts and their unique ownership 
structure. Livestock programs should also include the peril of 
quarantine, depopulation by Federal or state government and 
bioterrorism as insurable causes of loss.
    Second, there is a lack of risk management for value-added 
products critical to mid-scale agriculture.
    Nationally, we are quickly losing mid-scale farms that are 
too large to access growing direct markets but are too small to 
compete in commodities markets, the agriculture of the middle 
that makes up the backbone of our agricultural economy and land 
stewardship. But we are also seeing a rapid rise in demand for 
high-quality, specially raised products like organic produce, 
heirloom vegetables and specialty meats.
    These emerging markets have grown beyond the ability of the 
small farmers who pioneered them to fill. The greatest hope for 
agriculture of the middle is the transition to production of 
high-value, specialized crops and livestock brought to niche 
markets in ways that bring a greater percentage of the food 
dollar back to the farm.
    In our experience, there is currently no crop insurance 
that provides effective risk management for value above the 
commodity price. This gap in the reduction in access to credit 
and Federal disaster programs that accompanies it creates a 
financial disincentives for farmers to make the transition and 
increases the risk and vulnerability of those that do.
    In recent years, RMA has been piloting the Adjusted Gross 
Revenue and Adjusted Gross Revenue-Lite crop insurance 
programs. AGR and AGR-Lite provide income insurance based on 
the 5 year average of gross farm revenue as established on 
Schedule F of the farmer's taxes, which addresses added value 
and crop diversity. Since 2005, North Carolina has been 
fortunate enough to be one of the pilot states for AGR-Lite.
    While AGR-Lite is simple in concept, it has proven to be 
extremely complicated in implementation, requiring 
documentation not only of gross income but of all the crops and 
enterprises that make up that income. Specifics in the 
requirements of the program have made it difficult to determine 
eligibility of income and coverage of losses. Because of the 
complexity of both application and claims adjustment, crop 
insurance agents are reluctant to promote it and farmers are 
reluctant to trust it.
    These difficulties have been borne out in declining 
enrollment numbers, despite significant outreach efforts. As 
the only programs that address value-added markets, it is 
critical that we get AGR and AGR-Lite right.
    We recommend that the AGR and AGR-Lite programs be extended 
in this farm bill but reformed to be more accessible before 
expansion to national availability. Reform should emphasize 
streamlining the application and claims adjustment processes 
and shifting the program structure to reward diversification 
and innovative marketing.
    Third, crop insurance for organic producers is inadequate 
due to the increased premiums and benefits that do not 
recognize the price for organic products. Crop insurance 
guidelines recognize organic farming as good farming practices, 
and the actual production history of the crop insurance 
policies are based on and reflects the individual producer's 
management.
    So we recommend that the 2007 Farm Bill eliminate the 
current 5 percent surcharge on premiums for organic producers. 
We also suggest that this farm bill establish a deadline for 
providing payments that reflect organic market prices.
    In closing, access to effective crop insurance programs is 
essential for farmers' transition to the emerging markets that 
are key to the health and vibrancy of our family farms. Thank 
you for this opportunity to testify today, and I welcome any 
questions and look forward to working with you in the future.
    [The prepared statement of Mr. Marlow follows:]

  Prepared Statement of W. Scott Marlow, Director, Farm Sustainability
Program, Rural Advancement Foundation International--USA, Chapel Hill, 
                                   NC
    Chairman Etheridge and Ranking Member Moran, Members of the 
Subcommittee, thank you very much for this opportunity to address the 
Subcommittee about crop insurance, and specifically about how crop 
insurance affects the ability of farmers to adjust to recent shifts in 
our agricultural economy.
    My name is Scott Marlow, and I am the Director of Farm 
Sustainability for the Rural Advancement Foundation International--USA. 
RAFI-USA is a non-profit organization based in Pittsboro, NC that 
addresses issues of equity, sustainability and diversity in agriculture 
and rural communities. I am also here on behalf of the thousands of 
farmers in North Carolina and across the country that we have worked 
with over the last 15 years to help access new markets, seek equity in 
production contracts, get reward in the marketplace for the 
environmental stewardship that they do or help find ways to keep going 
in the face of disasters of weather or price. My testimony is based on 
the specifics of our experience in North Carolina, but we are also 
addressing these issues with farmers from across the southeastern 
United States, and the rest of the country.
    While crop insurance has a long history of providing effective risk 
management for the traditional crops of North Carolina agriculture, 
recent changes in our farm economy mean that the Risk Management Agency 
faces a series of challenges in providing effective risk management for 
a significant percentage of North Carolina farm income, and we expect 
these challenges to increase in the years to come.
    Between Hurricane Floyd in 1999 and Hurricane Katrina in 2005, the 
percentage of eligible North Carolina acreage participating in crop 
insurance increased from 56% to almost 78%, but the percentage of North 
Carolina farm receipts covered by crop insurance, based on North 
Carolina Department of Agriculture and Consumer Services and Risk 
Management Agency data, fell from 19% in 1999 to around 13% in 2005, 
and the percentage of farm income eligible for crop insurance fell from 
approximately 38% to 28%.\1\ It is not that crop insurance changed, but 
that crop insurance did not change to keep up with changes in North 
Carolina's farm economy.
    The segments of the farm economy with extensive crop insurance, 
commodities such as tobacco, cotton and corn, while vitally important 
to many farmers in our state, have dropped in their percentage of North 
Carolina farm receipts. The fastest growing segments of North 
Carolina's farm economy--livestock produced under production contracts, 
specialty crops like greenhouse, nursery and Christmas trees, and 
emerging value-added markets such as organic and specialty livestock--
are all underserved, if served at all, by current crop insurance 
programs. We are moving rapidly from crops with extensive risk 
management and disaster programs to enterprises with ineffective or no 
risk management. Today I would like to focus on three issues associated 
with this transition.
Issue 1. Lack of Risk Management for Operations With Production 
        Contracts
    The greatest percentage of North Carolina farm income, almost 60%, 
now comes from broilers, turkeys and hogs. The structure of these 
livestock industries has significant effect on the outlook for risk 
management programs. According to the 2002 Census of Agriculture, 69% 
of hogs and essentially 100% of broilers raised in our state were 
raised under production contracts where, according to USDA definitions, 
the producer never owns the animal.\2\ We are also seeing anecdotal 
evidence of production contracts being adopted in specialty crops and 
other non-livestock areas.
    In the past, the Risk Management Agency has acknowledged the gap in 
risk management for livestock producers,\3\ and in hearings before this 
Subcommittee last week, Dr. Keith Collins outlined two current pilot 
programs for livestock. It is important to note, however, that animal 
ownership is essential for eligibility in both of these programs and 
neither will provide risk management for livestock produced under 
production contracts. Livestock producers are also increasingly 
concerned about the risks of disease outbreaks, quarantine or 
preventative depopulation by either state or federal officials as they 
are currently not insurable causes of loss.
    There is precedence for benefits to producers of livestock under 
production contracts in ad hoc disaster programs. The 2000 Supplemental 
Appropriations Act passed on Nov. 29, 1999 targeted $10 million for 
contract growers \4\ under the Livestock Indemnity Program. Following 
Hurricane Katrina and the other Gulf Coast hurricanes of 2005, Congress 
made some assistance available to contract growers in the form of 
Livestock Indemnity Payments and Emergency Conservation Program cost 
share assistance for cleaning up debris from poultry barns and/or costs 
to reconstruct or repair barns if there were uninsured losses.\5\ 
However, ad hoc programs that Congress may or may not pass after a 
specific disaster are no substitute for risk management that contract 
growers may incorporate into their farm business planning on an ongoing 
basis.
Recommendation
    Crop insurance programs must be developed that insure against the 
risks associated with production contracts and the unique ownership 
structure that they bring, either by developing crop insurance programs 
specific to production contract income, or by including production 
contracts in currently existing programs that insure income rather than 
products. Livestock programs must also include the peril of quarantine, 
depopulation by federal or state government and bio-terrorism as 
insurable causes of loss.
Issue 2: Lack of Risk Management for Value-Added Products Critical to 
        Mid-Scale Agriculture
    Nationally, we are losing the mid-scale farms that have made up the 
backbone of our agricultural economy and land stewardship. The most 
rapid loss is among those farms that are too large to access the 
growing direct market economy, but too small to compete in the 
undifferentiated commodities market--the agriculture of the middle.\6\ 
Last year, North Carolina led the nation in the loss of farms.\7\
    But we are also seeing a rapid rise in demand for high-quality, 
specially-raised products like organic produce, heirloom vegetables and 
specialty meats, what we call ``food with a taste, a place and a 
face,'' driven by consumer demand and an increase in spending on away-
from-home food.\8\ According to Rick Schnieders, the CEO of the Sysco 
Corporation, the defining aspect of retail food is price, whereas the 
defining aspect of restaurants and food service is differentiation. As 
consumers shift more of their food dollar to food consumed outside the 
home, there will be greater demand for the type of differentiation of 
products that only mid-scale farmers can provide.\9\
    These emerging markets for natural, organic and specialty foods 
have grown beyond the ability for the small farmers who pioneered them 
to fill, and require the capacity and the management capability of the 
mid-scale farmers that we are currently losing. The greatest hope for 
mid-scale farmers is the transition to production of high-value, 
specialized crops and livestock brought to niche markets in ways that 
bring a greater percentage of the food dollar back to the farm, and our 
greatest challenge is assisting mid-scale farmers in connecting to 
these markets before they go away.\10\
    Crop insurance plays an important role in encouraging or 
discouraging that transition, both in providing risk management, and 
because crop insurance determines access to credit and access to 
additional disaster program benefits. In a 2004 survey of tobacco 
farmers, RAFI-USA found that 67% identified access to capital as a key 
barrier to diversifying their farm. In a yearlong study with 
agricultural lenders in North Carolina, we found that lenders based the 
expected value of crops for both collateral and budgets on assured 
income as determined by either conventional commodities markets or crop 
insurance. Because the added value of specially marketed crops like 
organic is uninsured, it is frequently not included in either 
collateral valuation or anticipated income. The farmers of these crops 
are therefore more likely to be required to put personal property up as 
collateral for operating loans in addition to the crop itself, and are 
less likely to have a farm plan that shows a positive cash flow. While 
lenders do not recognize the higher value of specialty crops, they do 
recognize the higher expense of producing them.\11\
    Recent crop disaster payments have been based on benefits received 
under crop insurance or the Non-Insured Disaster Assistance Program 
(NAP). While this choice makes sense in that it rewards participation 
in risk management programs, it leaves those farmers who are not 
eligible for effective crop insurance programs without assistance. If 
proposed crop disaster payments are combined with crop insurance, 
conventional farmers will receive compensation for nearly 100% of their 
damage, whereas producers of value-added, niche and specialty crops 
without effective crop insurance will receive nothing.
    In our experience, there is currently no crop insurance that 
provides effective risk management for the value that farmers add 
through either specialized production or marketing. The lack of risk 
management for value-added products, and the reduction in access to 
credit and other disaster programs that accompanies it creates a 
financial disincentive for farmers to make the transition, and 
increases the risk and vulnerability of those that do.
    The challenge for crop insurance is that the emerging markets and 
differentiated products do not come with the uniformity and automatic 
data collection that provides the underpinning of conventional 
commodity crop insurance. The very aspects of these markets that make 
them vibrant and exciting and profitable--the ability to respond 
quickly to a wide variety of specific niches of quality and 
production--are the same aspects that make it extremely difficult to 
program for them. The traditional product development approach of 
developing a crop-specific risk profile and then releasing a crop-
specific insurance product is unable to address the diversity of 
emerging products, enterprises and markets.
    In recent years, RMA has been piloting the Adjusted Gross Revenue 
(AGR) and Adjusted Gross Revenue-Lite (AGR-Lite) crop insurance 
programs. AGR and AGR-Lite provide income insurance based on the 5 year 
average of gross farm revenue as established on Schedule F of the 
farmer's taxes, including value added through specialty markets and 
addressing the complexity of many small and mid-size farms. Since 2005, 
North Carolina has been fortunate enough to be one of the pilot states 
for AGR-Lite.
    While AGR and AGR-Lite are simple in concept, they have proven to 
be extremely complicated in implementation. Because of the complexity 
of both application and claims adjustment, crop insurance agents are 
reluctant to promote it and farmers are reluctant to trust it. 
Specifics in the requirements of the program have made it difficult to 
determine eligibility of income and coverage of losses, and some 
farmers have beensurprised to discover the limitations of their 
coverage only when their claims were adjusted. In short, this program 
is not working.
    These difficulties have been borne out in declining enrollment 
numbers, both in North Carolina and nationally, despite significant 
outreach efforts. From a high of 970 policies nationally in 2003, 
enrollment dropped steadily to 551 in 2007. As the only programs that 
address value-added markets, it is critical that we get AGR and AGR-
Lite right.
Recommendation
    The AGR/AGR-Lite programs should be extended, but reformed to be 
more accessible and affordable, and then expanded to be available 
nationally. Reform should include specific steps to address 
shortcomings in the program, but should emphasize streamlining the 
application and claims adjustment processes, and shifting the program 
structure to reward diversification and innovative marketing.\12\
Issue 3: Inequity for Organic Producers
    Of the rapidly growing high-value markets, organic is the best 
recognized and provides the clearest example for crop insurance. Many 
current crop insurance programs are available for organic crops, but 
the structure of these programs penalizes organic farmers and creates a 
financial disincentive for seeking organic certification. When an 
organic producer signs up for crop insurance, they pay an extra 5% 
surcharge that is assessed to offset perceived additional risk 
associated with organic production, although this perceived risk has 
not been quantified by research.
    When farmers receive crop insurance and other disaster program 
benefits, these benefits do not recognize the added value of organic, 
and payments are calculated based on the conventional price. For an 
organic farmer who receives a price for organic product that is double 
the conventional price, 75% crop insurance coverage based on the 
conventional price actually covers 37% of the farmer's income. Organic 
farmers in essence pay more for less coverage. This double inequity 
needs to come to an end.
    When an organic farmer's lawsuit to receive assistance under the 
Crop Disaster Program based upon the market price for organically grown 
adzuki beans was successful,\13\ USDA promptly changed the program 
regulations to allow assistance only at the conventional price. The 
courts have upheld the new regulation \14\ so action by Congress is the 
only way to ensure that organic farmers receive assistance based on 
their market price, just as conventional farmers receive assistance 
based on the market price for their goods.
Recommendation
    Organic producers should have access to insurance programs that 
meet their needs without putting them at a competitive disadvantage to 
conventional producers. The 2007 Farm Bill should eliminate the current 
5 percent surcharge on premiums for organic producers and establish a 
deadline for providing payments that reflect organic market prices to 
organic producers.\15\
    In closing, access to effective crop insurance programs is 
essential for farmer's transition to the emerging markets that are the 
key to the health and vibrancy of mid-scale agriculture. Thank you for 
the opportunity to testify today, and I welcome any questions from the 
Committee.
Notes
    1. Percentage of coverage was determined using percentage of 
eligible acreage participating from the RMA State Crop Insurance 
Profile (http://www.rma.usda.gov/pubs/state-profiles.html) and the 
percentage of farm receipts by commodity from North Carolina Department 
of Agriculture and Consumer Services Agricultural Statistics Service 
(http://www.ncagr.com/stats/cashrcpt/cshcomyr.htm). Percentage of 
greenhouse/nursery participation was estimated using the percentage of 
total value of greenhouse/nursery products that were represented by 
crop insurance liability.
    2. ``Under a production contract, the farmer provides services to 
the contractor, who usually owns the commodity under production. For 
example, contractors in poultry production usually provide chicks to 
the farmer along with feed and veterinary/transportation services. The 
farmer then raises the chicks to maturity, whereupon the contractor 
transfers them to processing plants. Contractors often provide detailed 
production guidelines, and farmers retain far less control over 
production decisions. The farmer's payment resembles a fee paid for the 
specific services provided, instead of a payment based on the market 
value of the product.''

Nigel Key and James MacDonald, ``Agricultural Contracting; Trading 
Autonomy for Risk Reduction.'' USDA Economic Research Service. Amber 
Waves Volume 4 Issue 1. February 2006. Pg. 28.

    3. Eldon Gould, Review of the Federal Crop Insurance System. 
Hearings before the Subcommittee on General Farm Commodities and Risk 
Management of the House Committee on Agriculture, March 15, 2006.
    4. P.L. No. 106-113, Appendix V, Title I, Chapter 1, 113 Stat. 
1501.
    5. Emergency Supplemental Appropriations to Address Hurricanes in 
the Gulf of Mexico, P.L. No. 109-148, Division B, Title I. (December 
20, 2005) and Emergency Agricultural Disaster Assistance Act of 2006, 
which was enacted into law on June 15, 2006 as Title III of the 
Emergency Supplemental Appropriations Act for Defense, the Global War 
on Terror, and Hurricane Recover Act of 2006. The formal citation of 
the Act is P.L. No. 109-234).
    6. For more information about the issues associated with 
agriculture of the middle, including current research and overview 
documents see the web site of the National Task Force to Renew 
Agriculture of the Middle at www.agofthemiddle.org.
    7. North Carolina Department of Agriculture and Consumer Services 
Press Release, ``North Carolina leads nation in loss of farms . . . 
again.'' 2/19/07. http://www.ncagr.com/paffairs/release/2007/2-
07farmloss.htm.
    8. Stewart, Hayden, Noel Blisard, Sanjib Bhuyan and Rodolfo Nayga, 
``The Demand for Food Away From Home, Full service or fast food.'' 
United States Department of Agriculture Economic Research Service 
Agricultural Economic Report Number 829. January, 2004.
    9. Schnieders, Rick, ``Presentation to the Georgetown University 
Law School.'' Available at http://www.agofthemiddle.org/papers/
sysco.pdf.
    10. Kirschenmann, Fred, Steve Stevenson, Fred Buttel, Tom Lyson and 
Mike Duffy, ``Why Worry About Agriculture of the Middle.'' White paper 
prepared for the National Task Force to Renew Agriculture of the 
Middle. Available at http://www.agofthemiddle.org/papers/
whitepaper2.pdf.
    11. The full report on the Farmer/Lender Project is available at 
http://www.rafiusa.org/pubs/puboverview.html.
    12. Draft AGR/AGR-Lite reform recommendations:

    1. Streamline application process and adjustment process to 
        increase farmer access to the program and encourage crop 
        insurance agent participation, clarifying coverage and 
        benefits.

    2. Provide higher levels of coverage on AGR/AGR-Lite whole farm 
        revenue programs. Current deductibles are too high for 
        producers. The maximum effective coverage for AGR-Lite is 72% 
        (80% coverage, 90% payment rate). In many cases, thin profit 
        margins do not allow a 28% drop in revenue without severely 
        impacting the viability of the farm operation. Consider an 85% 
        coverage level and 100% payment rate like several of the MPCI 
        coverages.

    3. Add a ``floor'' to the 5-Year income history used to determine 
        coverage levels. Low revenue can reduce the approved AGR to the 
        point where the insurance will not provide adequate coverage. 
        Example: maintain the 5 year Schedule F average, but allow up 
        to 10 years if available.

    4. Crop insurance payments and Noninsured Crop Disaster Assistance 
        (NAP) are not considered allowable income in the 5 year history 
        but are considered revenue to count for claim purposes. Adding 
        MPCI indemnities and NAP to allowable income would provide a 
        floor to compensate for low revenue years.

    5. The animal/animal product rates need reviewed to more accurately 
        reflect the risk. More analysis is needed to see which risk 
        pool livestock commodities should go into versus simply putting 
        all livestock in the highest risk pool.

    6. Carryover commodities still in the production phase present some 
        unique beginning and ending inventory challenges. The inventory 
        rules should be reviewed to ensure the procedures provide clear 
        directions on how to handle these commodities. In addition, 
        clarity should be provided as to whether or not coverage is 
        provided for these commodities including Christmas trees, 
        shellfish, nursery, and livestock.

    7. Strengthen the policy regarding establishing local market value, 
        particularly for direct marketers. Currently, the policy 
        indicates that if published prices are not available, then the 
        average price offered by two commercial buyers, one nominated 
        by the policyholder and one by the insurance company, should be 
        used. This needs to be strengthened in two ways. First, for 
        direct marketers it should be the best estimate of those 
        involved in direct marketing, as commercial buyers are not 
        involved. Second, the value for estimating the revenue for the 
        producer's intention report for the current year should be 
        determined at the time the intentions report is filed, 
        otherwise the producer loses the price fluctuation protection 
        otherwise provided by the policy. There are reports where the 
        price is either not finalized at the time the intention report 
        is filed or that it is adjusted at claims time. Neither is 
        acceptable because such changes can reduce the producer's 
        protection that was initially sold to them and adversely 
        impacts the collateral value of the policy.

    8. Definition of `Animals' needs to be revised to ensure it is 
        inclusive of production agriculture. The current definition is 
        ``living organisms other than plants or fungi that are produced 
        or raised in farming operations including, but not limited to, 
        aquaculture, bovine, equine, swine, sheep, goats, poultry, 
        aquaculture species propagated or reared in a controlled 
        environment, bees, and fur bearing animals, excluding animals 
        for sport, show, or pets.'' For shellfish farm eligibility it 
        may be helpful to modify the definition by adding: Shellfish 
        (licensed commercial producers under the local approving 
        authority in a certified growing area). This will further 
        define the controlled environment and eliminate recreational 
        versus commercial operations. Another definition issue involves 
        `fryers.' While poultry is currently listed in the definition, 
        a fryer is not. It also needs to be clear that animals under 
        contract are insurable.

    9. Develop mechanisms to extend AGR and AGR-Lite to new and 
        beginning farmers so they have the opportunity to utilize 
        federal risk management programs. Strong consideration should 
        be given to permit such producers to have protection and 
        premium rates established based on information for similar 
        farms that have sufficient historical information to meet the 
        requirements of these insurance plans.

    13. Pringle v. United States of America, 1998 U.S. Dist. LEXIS 
19378 (E.D. Mich. 1998).
    14. Partlo v. Johanns, 2006 U.S. Dist. LEXIS 43071 (D. D.C. 2006).
    15. Proposed Legislative language on organic:

Crop Insurance--Premium Surcharge

          Section 508(d) (7 U.S.C. 1508) of the Federal Crop Insurance 
        Act is amended by adding a new (d) as follows:

                  (d) Surcharge Prohibition.--The Corporation may not 
                require producers to pay a premium surcharge for using 
                scientifically sound sustainable and organic farming 
                practices and systems.

Crop Insurance--Market Prices

          Section 508(c) (7 U.S.C. 1508) of the Federal Crop Insurance 
        Act is amended by adding a new (5)(C)(v) as follows:

                  (v) in the case of organic commodities, shall be, no 
                later than October 1, 2009, the expected or the actual 
                organic market price of the agricultural commodity, as 
                determined by the Corporation.

    Mr. Etheridge. Thank you, sir.
    I would now recognize Mr. Gillen for 5 minutes.

STATEMENT OF DAVID GILLEN, FARMER; VICE CHAIRMAN, PUBLIC POLICY 
               ACTION TEAM, NATIONAL CORN GROWERS
 ASSOCIATION; CHAIRMAN, BOARD OF DIRECTORS, SOUTH DAKOTA CORN 
              GROWERS ASSOCIATION, WHITE LAKE, SD

    Mr. Gillen. Thank you, Mr. Chairman.
    Mr. Chairman, Members of the Subcommittee, thank you for 
this opportunity to provide you input as you review the Federal 
Crop Insurance Program.
    My name is David Gillen. Along with my wife Carol, we own 
and operate a no-till grain farm at White Lake, South Dakota. 
We have been operating our century farm for 29 years, raising 
corn, wheat and soybeans.
    Currently, I serve as Vice Chair of the National Corn 
Growers Public Policy Action Team and Chairman of the South 
Dakota Corn Growers Association Board of Directors.
    On behalf of NCGA, our 32,000 plus members from 48 states 
and more than 300,000 producers who contribute to corn check-
off programs, I cannot overemphasize the importance of an 
effective and affordable Federal Crop Insurance Program to our 
member growers' risk management planning. Assuming commodity 
markets remain above current farm price support levels over the 
next several years, crop insurance becomes even more critical 
for protecting producers' farm revenue.
    As recently as 2005, when we experienced the second highest 
corn harvest ever, many producers were impacted by substantial 
crop losses due to severe drought, flooding and other adverse 
weather events that resulted in indemnity payments exceeding 
$697 million. In a year when growers were facing considerable 
jumps in input costs, particularly fuel and fertilizer, the 
income protection from Federal crop insurance was essential for 
keeping many farm operations out of serious financial trouble. 
Also, 2006 was the worst drought in my area in 28 years of 
farming.
    Crop insurance has a huge impact in how we run our farm 
operations. In addition to removing risk and providing much 
stability to the industry, we need a crop insurance program 
that rewards good management and sound risk management 
practices.
    One policy change proposed by NCGA would enhance the 
incentive for producers to assume more risk in exchange for 
higher levels of revenue protection. Because the size of the 
unit has a significant effect on the cost of crop insurance, we 
believe it is very important to eliminate the disparity between 
subsidized premiums for coverage by optional or basic and the 
larger enterprise and whole farm coverage. Only 3 percent of 
acres are covered using enterprise units, compared to almost 61 
percent for optional units and 36 percent for basic units. The 
key reason enterprise and whole farm unit coverage is used so 
little is because of the economic disincentive created by this 
continuing disparity.
    Premiums are discounted for enterprise units and whole farm 
coverage. However, the reduction in costs does not adequately 
reflect the declining yield variability with larger units. 
Under the current subsidy structure, optional unit coverage is 
a better buy for most producers. If the same program dollars 
that a producer spends, for example, on 75 percent optional 
coverage could be spent on 85 percent enterprise coverage, the 
produce would have better coverage on his whole farm, even 
though he would have to absorb the losses on individual units.
    Our view is that the carrot approach, rather than the stick 
approach, should be used to encourage more use of this type of 
coverage, particularly enterprise unit. NCGA's proposed change 
would allow producers to continue use of coverage by optional 
or basic units. One considerable advantage for producers that 
select optional units is that a high yield on one unit does not 
affect the coverage on another unit. We anticipate that some 
growers will continue to prefer this optional unit coverage 
that protects against losses on each individual unit.
    NCGA is recommending for your consideration legislation 
language to authorize changes that would eliminate this flaw in 
the subsidy structure. We believe this reform would enhance 
program efficiency without adding to the budget baseline. It 
would likely reduce the moral hazard.
    By encouraging greater use of enterprise unit coverage, 
producers would be rewarded for better management, assuming 
more risk and directing even more attention to detail on 
individual units. Moreover, the need for disaster assistance 
would be lessened when producers buy up to higher levels of 
insurance. In today's tight budget environment, any step we can 
take to reduce the administration costs, inequities and the 
potential for program abuse is beneficial to farmers and the 
taxpayer. The structure of the Federal Crop Insurance Program 
should encourage producers to insure adequate revenue to avoid 
devastating losses but must not artificially stimulate 
production.
    Mr. Chairman, I want to thank you again for this 
opportunity to share with this Committee NCGA's views and 
policy recommendations for further improving the Federal crop 
insurance system for our member growers. We appreciate your 
leadership and continued support of the corn industry. Thank 
you.
    [The prepared statement of Mr. Gillen follows:]

   Prepared Statement of David Gillen, Farmer; Vice Chairman, Public 
Policy Action Team, National Corn Growers Association; Chairman, Board 
                                   of
    Directors, South Dakota Corn Growers Association, White Lake, SD
    Mr. Chairman and Members of the Subcommittee, thank you for this 
opportunity to provide you input as you review the Federal Crop 
Insurance Program. My name is David Gillen. Along with my wife Carol, 
we own and operate a no-till grain farm at White Lake, South Dakota. We 
have been operating our century farm for 29 years raising corn, wheat 
and soybeans.
    Currently, I serve as the Vice Chairman of the National Corn 
Growers Association's (NCGA) Public Policy Action Team and Chairman of 
the South Dakota Corn Growers Association Board of Directors.
    On behalf of NCGA, our 32,000 plus members from 48 states and more 
than 300,000 producers who contribute to corn check off programs, I 
cannot overemphasize the importance of an effective and affordable 
Federal Crop Insurance Program to our member growers' risk management 
planning. Assuming commodity markets remain above current farm price 
support levels over the next several years, crop insurance becomes even 
more critical for protecting producers' farm revenue against 
significant yield losses.
    In 2006, 62 million net acres of corn were insured under federal 
crop insurance for liability protection at approximately $16.7 billion. 
While questions have recently been raised on the amount of resources 
and delivery of the program, there should be no question regarding the 
necessity of the private-public partnership between the Department of 
Agriculture and private insurers to provide the levels of protection 
now available to farmers across the corn belt.
    As recently as 2005 when we experienced the second highest corn 
harvest ever, many producers were impacted by substantial crop losses 
due to severe drought, flooding and other adverse weather events that 
resulted in indemnity payments exceeding $697 million. In a year when 
growers were facing considerable jumps in input costs, particularly 
fuel and fertilizer, the income protection from federal crop insurance 
was essential for keeping many farm operations out of serious financial 
trouble. Also, 2006 was the worst drought in my area in my 28 years of 
farming.
    Over the past several years, NCGA has placed a high priority on 
monitoring the progress of the Federal Crop Insurance Program, 
encouraged greater participation to enhance risk management plans and 
worked to ensure that any problems that arise are adequately addressed 
by the companies and the Risk Management Agency. To be sure, the 
variety of insurance plans offered through this shared cost program has 
enabled producers to purchase policies that better match the needs of 
their farm operations. Ever since their introduction, revenue insurance 
plans have become a very important risk management tool for corn 
growers. For producers who use forward contracts, these popular 
policies allow greater flexibility to market their grain while reducing 
the risks against short or failed crops.
    An article written for the Economic Research Service in November, 
2006 by Drs. Robert Dismukes (USDA) and Keith Coble (Mississippi State 
University) zeroes in on the key reason for the growth of these 
products; ``As a tool based on revenue shortfalls rather than on yield 
or price shortfalls, revenue insurance can be more effective at 
stabilizing income than insurance plans or farm programs that protect 
against yield and price risks.'' They also noted an important advantage 
of revenue insurance over other risk management tools or farm support; 
the plans `match the costs of risk protection with benefits and base 
coverage on the crop's market value'. Every farmer knows that it is 
revenue that pays the bills. This is the fundamental reason why over 
66% of policies for corn sold for the 2006 crop year were written for 
Crop Revenue Coverage (CRC), Revenue Assurance (RA) or Group Risk 
Income Protection (GRIP). These policies, alone, accounted for over 
$1.43 billion, over 90 percent of the total premiums paid. Another 
important reason for the growth in revenue insurance policies is the 
increase in the share of subsidized insurance premiums from less than 
30 percent to 56 percent since 1996.
    These numbers underscore the impact crop insurance can have on our 
farms and how we run our operations. In addition to removing risk and 
providing much stability to our industry, we need a crop insurance 
program that rewards good farm management and sound risk management 
practices and tools.
    One policy change proposed by NCGA would enhance the incentive for 
producers to assume more risk in exchange for higher levels of revenue 
protection. One unintended consequence of increased subsidies coupled 
to levels of protection authorized under the Agriculture Risk 
Protection Act of 2000 is a system that does not fully recognize the 
lower risk exposure of enterprise and whole unit policy coverage. 
Because the size of the unit has a significant effect on the cost of 
crop insurance, we believe it is very important to eliminate the 
disparity between subsidized premiums for coverage by optional (field  
subdivided basic units) or basic (all crop land of a single crop into 
one insurance unit) and the larger enterprise unit (all shares of a 
crop in the county) and whole farm (all eligible insured crops in the 
county) coverage. According to RMA, only 3 percent of acres are covered 
using enterprise units compared to almost 61 percent for optional units 
and 36 percent for basic units. The key reason enterprise and whole 
farm unit coverage is used so little is because of the economic 
disincentive created by this continuing disparity.
    Premiums are discounted for enterprise unit and whole farm 
coverage; however, the actual reduction in costs does not adequately 
reflect the declining variability in yield and/or revenue as a producer 
aggregates acres into the larger insurance units. Under the current 
subsidy structure, optional unit coverage is a better buy for most 
producers. If the same program dollars that a producer spends, for 
example, on 75% optional coverage could be spent on 85% enterprise 
coverage, the producer would have better coverage on his whole farm 
even though he absorbs the losses on individual units.
    Our view is that a carrot rather than a stick should be used to 
encourage more use of this type of coverage, particularly enterprise 
unit. NCGA's proposed change would allow producers to continue use of 
coverage by optional or basic units. One considerable advantage for 
producers that select optional units is that a high yield on one unit 
does not affect the coverage on another unit. We anticipate that many 
growers will continue to prefer optional unit coverage that protects 
against losses on each individual unit.
    One solution for securing more equitable crop insurance premiums 
for larger unit coverage is to decouple per acre premium subsidies from 
the unit of coverage selected by the producer. With assistance provided 
by RMA legal counsel and Congressional staff last year, NCGA is 
recommending for your consideration legislative language to authorize 
changes that would eliminate this flaw in the subsidy structure. We 
believe this reform would enhance program efficiency without adding to 
the budget baseline. Once fully implemented, the proposed change would 
likely reduce moral hazard and the adverse selection of insurance 
coverage.
    By encouraging greater use of enterprise unit or whole farm 
coverage, producers would be rewarded for better management, assuming 
more risk and directing even more attention to detail on individual 
units. Moreover, we expect the need for disaster assistance would be 
lessened when producers buy up to higher levels of insurance. In 
today's tight budget environment, any step we can take to reduce the 
administration costs, inequities and the potential for program abuse is 
beneficial to farmers and the taxpayer.
    Mr. Chairman, I want to thank you again for this opportunity to 
share with this Committee NCGA's views and policy recommendations for 
further improving the federal crop insurance system for our member 
growers. We appreciate your leadership and continued support of the 
corn industry.

    Mr. Etheridge. Thank you, sir.
    The Chair would like to remind Members that they will be 
recognized for questions in order of seniority for Members who 
were here at the start of the hearing. After that, Members will 
be recognized in order of their arrival to the hearing. So I 
appreciate the Members understanding of that.
    I now recognize myself for 5 minutes.
    Mr. Marlow, assuming AGR and AGR-Lite could be reformed, 
would they serve as effective risk management products for 
contract producers or do we still need separate policies that 
can be available for contract farmers? Are there special risks 
to contract producers that require a separate type of crop 
insurance policy?
    Mr. Marlow. Yes, if it was reformed. Currently there is a 
prohibition in AGR and AGR-Lite against its coverage of 
contract producers. If that was shifted and we were able to fix 
the program, it could be an effective risk management tool for 
contract producers.
    As I mentioned, we are seeing people being very concerned 
about risks of quarantine, of outbreaks of different diseases 
and also bioterrorism, which are not currently allowed or 
allowable coverage; and we would like to expand to improve 
those as a part of the program.
    But the answer to your question is, yes, it could be a very 
effective tool, but it is currently blocked by the regulations 
of the program.
    Mr. Etheridge. Share with us a little bit more the issues 
related to quarantine. Because if they are under contract, who 
is the person you are hurting? Just the grower himself?
    Mr. Marlow. Certainly, because animals are owned by the 
company but raised by the farmer, the impact of a quarantine or 
depopulation is shared between the company and the farmer. The 
challenge is that most producers have a significant mortgage on 
their operation, and even if they lose production, they don't 
lose their mortgage payments. So they are losing that income, 
and so the segment of that income that does come to the farmer 
would be very important to cover in the case of a quarantine or 
any kind of other depopulation.
    Mr. Etheridge. Or a heavy disease that creates a 
depopulation.
    Mr. Marlow. Absolutely.
    Mr. Etheridge. That helps them to get on the record, 
because not everyone who sits on this panel deals with that.
    Ms. Wilcox, you want to eliminate the 5 percent premium if 
an underwriter risks the review that you will rely on them to 
conduct. If they cannot document significant, consistent and 
the systemic variations in loss history between organic and 
conventional crops, in your view, how significant must the 
difference be to justify keeping the 5 percent premium? And can 
you quantify that for us so I will understand it?
    Or, assuming this review is completed, are you going to be 
faced with another debate between you and RMA, whether any 
differences a review finds in risk between organic and 
conventional is significant enough to justify the premium?
    Ms. Wilcox. Well, Mr. Chairman, we acknowledge in our 
testimony that both of those questions are very difficult to 
answer since we don't have the data. We would like very much to 
be able to have the studies done. We don't know whether there 
will be a difference found.
    We do know that there is sometimes in some segments of 
organic agriculture a diminution of production during the 
transition period, and normally there is a recovery in the 
fourth or fifth year. The transition is 3 years. And sometimes 
there is a recovery right during transition while the farmer 
learns about new techniques and new ability to farm 
organically. So we are open to that discussion with RMA.
    We are grateful for the fact that we are even going to get 
any data, because that was not going to be collected for a long 
time. But they have now begun the collection, and we are 
willing to live with the results and have those discussions 
with them.
    Mr. Etheridge. Okay. Thank you.
    I recognize the gentleman from Louisiana.
    Mr. Boustany. Thank you, Mr. Chairman.
    Ms. Wilcox, I want to follow up on the question the 
Chairman just asked.
    In looking at the organic crops one of the problems is 
making sure you have access to organic markets, and that is 
part of the reasoning for the 5 percent extra that is added in 
the premium. You want to get rid of that. But in looking at 
access to markets, I want to dig into how that is determined. 
Is it just simply a pricing mechanism?
    For instance, when an organic farmer has crops that they 
want to bring to market, do they make comparisons? And is it 
simply a pricing decision or are there some other factors?
    Ms. Wilcox. Well, it is a demand decision, actually, 
Congressman.
    As I said in my initial testimony, we are now at 3 percent 
of the retail market for food and beverages in the United 
States. Our members tell us that they could sell much more 
organic product if they could manage to produce it and deliver 
it to market. So the demand is definitely there.
    The 5 percent, as I understand it, on the premium is a 
number that the Department decided to attribute to risk for the 
insurance. They demand that the farmer pay an extra 5 percent 
premium for his insurance. If the farmer does suffer a loss the 
formula only pays him for the conventional price that his 
neighbor would get if he went to market.
    Mr. Boustany. Would an AGR or AGR-Lite type of program 
work?
    Ms. Wilcox. Well, AGR-Lite has been used by some organic 
farmers, or has attempted to be used by some organic farmers. 
But they have met with a lot of the difficulties that my fellow 
panelists outlined, and it is a very complex system.
    As you probably know, with organic, you do rotate crops. So 
we are a multi-crop process. And so then they have to account 
for each crop and how much they planted, which time and which 
field. It gets very, very complicated.
    Mr. Boustany. Thank you.
    Mr. Marlow, in looking at the AGR and AGR-Lite programs, in 
your testimony, you make a recommendation that the program 
should be extended but reformed to be more accessible or 
affordable and then expanded to be available nationally. And 
you said that reforms should include specific steps to address 
shortcomings in the program. And also it should emphasize 
streamlining the application and claims adjustment process and 
shifting the program's structure to reward diversification and 
innovative marketing.
    You talk about how difficult it is to implement the 
program. Why? Give me more detail as to what are the real 
problems in implementing this. What are farmers faced with in 
this?
    Mr. Marlow. The concept of the program is that a person 
should be able to come in with basically 5 years of their 
schedule left and use that or the gross number to basically set 
their crop insurance.
    Fundamentally what happens when they come in is they then 
have to put together a report on their operation which outlines 
each of the individual crops that they have produced, the 
amount produced and the price that they have received for each. 
They must also provide documentation for each of those levels. 
They then have to put together a farm plan which then documents 
all of the different crops that they are going to produce, what 
price they expect to get and what they expect their yields to 
be.
    So that instead of simply insuring that gross number, in 
essence what it does is it creates individual crop insurance 
plans for each of those individual crops and then puts them 
together into the AGR-Lite plan. The farmer then has to do 
quite a bit of record keeping, documentation, planning; and all 
these things have to go quite a long ways.
    The challenge is that agents don't want to do this. It is 
very complex for an agent to sign someone up and to understand 
what it is. So we are getting a lot of resistance from crop 
insurance agents who are not trained on it and don't want to 
offer it. With many farmers, their initial inquiries about this 
product are either negative or deflecting.
    Mr. Boustany. If you could come back to us with some 
specific recommendations on how to simplify that, we would 
enjoy hearing those recommendations.
    Thank you. I will yield back.
    Mr. Etheridge. I thank the gentleman.
    The gentle lady from South Dakota, Ms. Herseth Sandlin.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman.
    I appreciate all the testimony today. I want to 
particularly commend the testimony of Mr. Gillen a leader not 
only in South Dakota both in agriculture and a number of 
different commodities, but in the growing biofuels industry and 
his leadership nationally as well. So I do want to pose some 
questions to you, Mr. Gillen.
    Since our field hearing in South Dakota last fall that we 
had in Wall, South Dakota, there have been a number of 
proposals to address a particular issue that came up during 
that field hearing. We heard about the concern that Federal 
farm programs were providing farmers with incentives to plow 
virgin prairie land, and I understand the same complaint has 
been made about crop insurance with its ability to move yields 
to new land. So among those proposals that have been floated 
since that field hearing by various conservation groups, 
outdoor groups and others, some would curtail or eliminate 
certain Federal subsidies for any land that is converted from 
grass or native prairie into farm ground. Some are advocating 
limiting farm bill benefits to LDP and counter-cyclical 
payments only. Some support allowing crop insurance on the land 
but deny them price support assistance. Some, of course, want 
to eliminate all Federal support for converted grass. And some 
even want to ban the practice altogether. So what are the 
positions of the South Dakota Corn Growers and the National 
Corn Growers Association on this particular issue?
    Mr. Gillen. Thank you very much.
    That is an issue that has come to light recently because 
there is a native sod that is being broke up. Our biggest 
concern is why it is being done, and we feel that the biggest 
reason it is happening is the crop insurance. The crop 
insurance people are being able to apply the T-yield or their 
APH to that property. If that wasn't taking place, a lot less 
of this sod would be broken up.
    But the position of the National Corn Growers is that we 
still want--if somebody wants to convert the grass to farmland, 
we still want program support. But we just do not want crop 
insurance be the reason why it is being broken up.
    So what we are proposing is there would be no insurance 
initially when that grass is brought into crop production, and 
there would be no insurance until the actual production history 
was developed over a 4 year period. So that would mean there 
would be no APH movement from the producer's average production 
to that tract of land or there would be no T-yield there. So 
there wouldn't be any crop insurance protection until after 4 
years.
    We feel that that is a fair way to go. But we don't feel 
that all the program force should be taken away because--it 
would be between the haves and have-nots. How can you have 
producers on one side of the fence having support and producers 
on the other side not, just because that sod was broken 
earlier.
    I think that would address the issue.
    Ms. Herseth Sandlin. The proposal as it relates to the crop 
insurance issue in particular, how do you define ineligible 
land for that first 4 years? Land that has never been cropped? 
Land that hasn't been cropped for X number of years? And would 
you have a different treatment for CRP land?
    Mr. Gillen. Our only recommendation is for native grass 
that has never been broken, and on the FSA maps there would be 
no record of any crop. So as long as there was ever a record of 
a crop ever being grown, that wouldn't be a part of this. It 
would only be applied of native sod that is being grown.
    Ms. Herseth Sandlin. Thank you.
    On a different issue, as it relates to unit coverage, 
National Corn Growers support changing the premium structure, 
subsidy structure for crop insurance to encourage farmers to 
insure larger units. As you explained in your testimony that 
can be enterprising or whole farm units rather than the 
separate coverage, optional, or basic for individual fields or 
the particular crop.
    Now how much would the subsidy structure need to be changed 
in order to get the effect that NCGA is seeking? Because I know 
that you say there has been some increase in utilization, 
coverage with that particular product and I think 30 percent to 
56 percent since 1996. So what are you proposing? How far do we 
need to go to bump that percentage up even further?
    Mr. Gillen. I make that decision. But, right now, only 3 
percent of the producers use enterprise unit coverage and 61 
percent use optional. So there is a definite discrepancy there.
    At the 75 percent level, they are subsidized, I believe, at 
55 percent; and at 85 percent they are subsidized at 38 
percent. So the enterprise unit coverage at the 85 percent 
level would have to be somewhere above 38 percent but not above 
55.
    In my farm, if I could take the same subsidy, and the total 
premium, the subsidy part of the premium and the farmer premium 
and at 75 percent option needed coverage, I could take those 
total dollars and if I could apply those total dollars to 85 
percent enterprising the coverage. I would have to assume the 
risk of the loss of those individual units, but I would have 10 
percent better coverage on my whole farm. It wouldn't cost the 
taxpayer any money, and it wouldn't be any more money out of my 
pocket. It is just how the formula is put together. It is just 
a method between enterprise units.
    So this also comes to the issue with low APHs. If producers 
were able to buy up coverage at the 85 percent level, there 
would be less of a need for disaster assistance, and they would 
have better coverage if they had low APH. It fixes a lot of 
issues; and it would increase the cost very little or, 
actually, zero if more producers were incentivized to move in 
this direction.
    Ms. Herseth Sandlin. Thank you very much, Mr. Chairman.
    Mr. Etheridge. The gentleman from Texas, Mr. Neugebauer, 
for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Ms. Wilcox, you pointed out the fact that today in some of 
the organic crop insurances they will pay a 5 percent premium, 
but they are reimbursed at the standard commodity rate. So if I 
am growing organic asparagus and I lose my crop, I am going to 
get paid at the same rate as just the normal asparagus crop. 
What is the price differentiation between organic and just 
general commodities that are not grown organically in the 
marketplace today?
    Ms. Wilcox. Well, that is one of the things we would like 
to determine officially. But I can tell you that in some cases 
it can be as much as 50 percent more. In asparagus, I couldn't 
tell you the differential. But in corn, for instance, for 
organic corn, we can be at almost double the price.
    But we don't have those kinds of official numbers from USDA 
on a consistent basis. They have just started to collect 
segregated pricing data, and we are very grateful for that. 
That they have started, but we need that to continue so that 
our farmers will have a base on which to be compensated.
    Mr. Neugebauer. Do you think the appropriate resources are 
in place to continue that process; or do we need to look at 
that?
    Ms. Wilcox. Well, we asked in our testimony to be sure that 
we can do that on a comprehensive basis. Right now, there is a 
pilot program under way between RMA and AMS, and we need to be 
sure that that is going to cover all the commodities on an 
enrolled basis, and we need to look at that in the farm bill, 
yes.
    Mr. Neugebauer. To the rest of the panel, and particularly 
in the organic area, are there other holes in the organic 
system. As we sit down and look at this farm bill and possibly 
some changes in the crop insurance program, what is brought out 
in the testimony?
    Mr. Marlow. We would certainly support the policy of 
increasing the record keeping. Having really solid data on 
these markets, on prices, on volumes is very important and 
becomes critical for other programs. It is very hard to program 
for something that you don't know how big it is or how much it 
is or what it looks like and can't get that hand around it.
    Part of the question is going to be where the burden of 
proof is in terms of releasing the 5 percent surcharge. The 
OTA's proposal is that the burden of proof is we need to prove 
that there is not greater risk.
    The other way to look at it is to say, and what we believe, 
is that, because organic is an accepted production practice, 
that the burden of proof should be on the Risk Management 
Agency to prove that there is additional risk. We should remove 
the surcharge unless the proof goes in the other direction.
    We both want a lot of data to be able to get our hands 
around it. The question is, where should the burden of proof 
lie in terms of this issue of the 5 percent surcharge? But 
certainly this issue of getting at the AGR and the income-based 
products are a way that you can get at the diversity of crops 
and the diversity of markets that people are accessing, which 
is really critical to organic.
    Mr. Neugebauer. I guess if I am understanding correctly, 
you could make a shorter crop and an organic crop and possibly 
still have more income than a normal crop.
    Mr. Marlow. Absolutely. I was speaking to a farmer in 
northeastern North Carolina last week who has moved 20 of his 
1,200 acres into organic. His corn has a lower yield, but he is 
making more money on it. He is moving, this year, 30 acres into 
transition.
    But the challenge is, in terms of looking at crop 
insurance, is that that risk, that lower yield is going to show 
up in his actual production history. So, therefore, as he gets 
crop insurance, he will get crop insurance based on that actual 
production history, so his yields are going to be set at that 
organic level. So that actual production history isn't going to 
capture what he has with that.
    We are seeing this transition more and more. But it is very 
challenging for them to get good risk management on that.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Etheridge. I thank the gentleman.
    The gentleman from North Carolina, Mr. Pomeroy.
    Mr. Pomeroy. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    One of the things that I would like the Subcommittee to do 
is be cognizant of other hearings being held across the face of 
Congress on crop insurance. And as we, amongst ourselves, get 
into the weeds of the program and understand the valuable risk 
management, and practical essentials risk management 
contributes, even though we try to make it better. We have to 
be aware that some of our colleagues are sitting in other 
hearings and thinking the whole darn thing is a scam. We need 
to really get to the bottom of what points of fact are driving 
their concerns, even dispel them if they are erroneous or deal 
with them if they are factual.
    I think I have worked as hard on crop insurance as anybody 
in Congress. But, if there are problems with it, let's get to 
the bottom of it. I am not defensive about it. I don't have any 
pride of authorship about it. If there are problems, we want to 
fix them.
    On the other hand, a good deal I think of the perception 
out there is erroneous, and we need to dispel that with our own 
expertise about what this contributes in terms of risk 
management.
    In that one, I turn to our friend from the Corn Growers, my 
fellow Dakotan, albeit South Dakotan, Mr. Gillen. Worst drought 
in 28 years.
    Mr. Gillen. Yes, sir.
    Mr. Pomeroy. Do we need a disaster bill?
    Mr. Gillen. Permanent one or current one?
    Mr. Pomeroy. Current one.
    Mr. Gillen. There are producers out there that do. What 
helped us a lot this last time around was revenue insurance, 
those that have revenue insurance with FCIC. We got paid extra 
per bushel on corn. That extra dollar a bushel was huge. The 
crop insurance worked for us.
    But the other producers, the wheat people in my area, the 
people that didn't have RA they didn't get in on that.
    Mr. Pomeroy. We have got a problem with some of the high-
risk areas in the Dakotas where year after year it drives your 
APH down to where you can't secure enough protection for the 
financial exposure that you have got. It has also been a 
problem at least in North Dakota.
    Mr. Gillen. Yes, it is.
    To answer that, when you are insuring corn at $2.50 or 
$2.60 where we have been at, there is a huge hole that 
producers can't absorb. When the coverage like this year's was 
at $4, it helps a lot in that area.
    Mr. Pomeroy. The migration of the coverages to this CRC 
coverage, in your view, would that have been possible without 
the enhanced subsidies we committed in the ARPA legislation of 
1999?
    Mr. Gillen. That legislation was very good as far as the 
increase in the subsidy, enough to make them more affordable.
    Mr. Pomeroy. You have to make it happen.
    Actually, from a cost benefit standpoint for a farmer, the 
extra risk coverage you got really wasn't worth it in terms of 
what you had to lay out in premium, but that extra subsidy then 
made that higher coverage level a better deal and that has 
allowed the innovation of these revenue products which free the 
farmer to further mitigate risk by trading futures. Is that 
right?
    Mr. Gillen. Yeah. It did allow producers to use the futures 
market as long as they had that risk management tool on the 
crop insurance side to use it.
    What we are proposing, what the enterprise would cover 
would take them even further yet, as far as bushels, being able 
to buy a higher level of coverage. If they are willing and 
producers like myself are willing to absorb those losses on 
those individual units, and if a subsidy was changed, the 
percentage was changed in enterprise units, we can get that 
extra 10 percent coverage, from 75 to 85 percent coverage. To 
me, that is huge and is going a long way for a producer that 
has a low APH.
    Mr. Pomeroy. It is. But I will tell you why the people I 
represent use individual units or basic units is to get their 
coverage, nudge their coverage up as high as it can go because 
they want to maximize their risk protection. And when you 
indicate, well, that won't be necessary if they buy subsidized 
premiums, can buy up at the higher level for the enterprise 
unit, I agree with you. But I don't think it is an even trade 
from an actuarial standpoint. I think substantially more 
subsidies would have to be provided to get the kind of 
subsidized buy-up for the enterprise unit than for the 
individual unit, don't you?
    Mr. Gillen. To increase the enterprise unit would be 
adequate, I think. There are producers out there that have 
several different units and they want individual coverage on 
those units and they don't want to give that up. This would 
address that. This wouldn't change their coverage at all. This 
would just be for producers that want to put all their crop 
insurance into one unit.
    Mr. Pomeroy. Right. I think conceptually what you are 
talking about there makes sense. I like moving to an enterprise 
unit. It would eliminate a lot of cheating in the program, too, 
in my view.
    On the other hand, I think that we are going to have to 
have substantially more subsidy if we are going to have the 
same kind of premium affordability at higher coverage levels 
for the enterprise unit. I believe people are deciding on the 
individual unit because that, right now, is the only way they 
can afford to get the higher coverage levels that they want, 
and the higher risk protection that they want. If you are going 
to switch that to an enterprise unit I think you are going to 
talk about a pretty substantial increase in subsidy, wouldn't 
you?
    Mr. Gillen. You wouldn't have that increase in subsidy.
    Getting back to your point of affordability of insurance, 
the National Corn Growers have come forward on the farm bill 
with a revenue package revenue proposal and this is integrated 
with the crop insurance. And what that means is you would work 
with the crop insurance farm level and the accounted level 
support. It would be like a permanent disaster, and it would 
plug that hole. It was integrated, and you get the higher of 
the two, either the farm level support or the kind of level 
support. As long as it is integrated, you could reduce your 
premium by 40 to 60 percent, because the crop insurance 
wouldn't have that risk anymore. The revenue proposal would 
cover that risk. That would be huge, long way of addressing the 
issue of premiums being too high.
    Mr. Pomeroy. I know my time is up. I am just about done. Is 
that the cost of production coverage?
    Mr. Gillen. No, sir.
    Mr. Scott. I would ask the gentleman to yield if he had 
time to yield.
    Mr. Pomeroy. Yes, I will yield; and the gentleman can 
consume the balance of my time.
    Mr. Etheridge. I thank the gentleman for his question.
    The gentleman from Colorado, Mr. Salazar.
    Mr. Salazar. Well, thank you, Mr. Chairman.
    I appreciate the panel's being here today. As many of you 
know, I am a farmer, and I do raise organic seed for Gourmet 
Farms, organic potato seed. We understand how expensive it is 
to raise organic seed.
    Ms. Wilcox, you mentioned in your testimony could you just 
give me an incident of how a crop could be contaminated without 
fault of the producer.
    Could you expand on that and give me an example?
    Ms. Wilcox. Well, typically, it is caused by grit from a 
neighbor, sometimes a neighbor over 100 miles away, and it can 
be either a chemical or it can be genetically modified 
material.
    Mr. Salazar. Would you then say that Federal crop insurance 
should be liable for an issue like this, or would this be more 
of a legal matter to where the farmer could pursue legal 
avenues to compensate himself if someone caused that harm or 
that injury?
    Ms. Wilcox. Well, we have many farmers who would like to be 
able to pursue that as a liability against not only the 
contaminator but also the company that produced the product. 
But we know from experience in other countries, namely, in 
Canada, that that has actually bankrupted farmers who have 
attempted to do that. And in our country, under product 
liability, it appears that we would have to have product 
liability reform in order to be able to do that. So we have 
been looking at whether there would be the possibility of 
coverage that would potentially help the farmer when he does 
have a contamination that is completely not his fault.
    Mr. Salazar. Well, thank you.
    Mr. Segler, regarding your request to insure pecan farmers 
by farm number, can you give me an example of about how 
expensive it is to raise pecans per acre?
    Mr. Segler. The cost of pecans runs somewhere between 
$1,000 to $1,200 per acre. It takes us 9 months to grow them, 
so it is a tremendous investment. And when you look at most all 
other crops that can insure by individual farms, if you had a 
farm on one side of the county and another on the other side of 
the county, as it stands now, you could have a loss on one farm 
and the other farm might make up the difference that you lost 
as far as insurance coverage. But, you would still have a loss, 
and we have to average everything in the county. That is not 
true with most all other crops.
    Mr. Salazar. Okay.
    Has RMA actually provided us an explanation for not 
allowing this option for pecan growers?
    Mr. Segler. Not on that part. They have on the 10 percent 
cup yield protection. They say that it is a revenue-orientated 
crop, and that is true in one aspect, but that is only half the 
equation. They do not recognize that it is the same as corn or 
cotton, that it takes both production and price to determine 
the guaranteed insurance coverage. Both equations have to be 
there.
    Mr. Salazar. Okay. Thank you very much. Oh, go ahead. Have 
you finished? Thank you. I do appreciate it.
    Thank you, Mr. Chairman. I yield back.
    Mr. Etheridge. The gentleman from Georgia, Mr. Marshall, 5 
minutes.
    Mr. Marshall. Thank you, Mr. Chairman. I am going to 
continue with some questions for my fellow Georgian, Mr. 
Segler.
    First of all, I guess I should say Congress appreciates the 
work you have done for some 20-odd years, and I hope that pecan 
growers will appreciate it. Was it the regional office that 
proposed to RMA National that there be a modification to meet 
some of your needs? What was the proposed modification that 
National said no? Was it on the 10 percent cup?
    Mr. Segler. The 10 percent cup, both after the catastrophic 
forms that we had in 2004 and 2005. In both years, the regional 
office of RMA submitted to the Kansas City office the request 
to implement the 10 percent cup, paralleling the catastrophic 
damage of the 2004 and 2005 hurricanes with the same damage 
that we had in 1996 on peaches when they froze out. It is, in 
my opinion, a shame, Mr. Congressman, that we have to go to the 
Congress of the United States to get something done that RMA 
administratively took care of in 1996.
    Mr. Marshall. Yes. Let me try to draw that analogy a little 
bit more.
    So RMA's response was that this was a revenue crop and 
cannot be done. Yet, it was done administratively for peaches. 
Is that what you are telling me? I know a number of farmers who 
have peaches and pecans, and there is different care involved. 
There is pruning involved. There is fertilizing involved. For 
some reason, pecans are labeled as revenue crop and cannot get 
the 10 percent cup limit, and then peaches are not, and you 
can. Can you explain that?
    Mr. Segler. No, sir. They probably can explain it better 
than I because it is the same as the CRC program for corn and 
cotton. It takes both yield and price to determine the ERT. 
RMA, the people that I have been involved with since 2003 in 
trying to get this corrected. They simply have a hard time 
understanding not only why we do not have this, but why the 
crop insurance was ever written without it.
    Mr. Marshall. By the way, there is a whole bunch of Georgia 
corn growers out there to make sure we get this done.
    Mr. Segler. I draw the analogy between peaches and pecans. 
I am real troubled by peaches and pecans. It seems to me that 
there is really, truly, no difference there at all. I am 
saying, Mr. Congressman, in 1996, when Georgia and the 
Southeast experienced a 5-bushel-per-acre yield, RMA recognized 
that yield as catastrophic damage. They implemented 
administratively this 10 percent cup because they had it on 
other crops, on the peaches for 1997. After 1997, it became a 
part of their policy.
    I can assure you that unless this is rectified immediately, 
not 2 or 3 years from now, we will not have crop insurance on 
pecans. It will go down to zero because we are having to put 
some catastrophic numbers in like zero. It happened in Texas as 
well. This is something that should not be permitted.
    Mr. Marshall. I appreciate your being here.
    Mr. Etheridge. I thank the gentleman.
    Let me thank our panelists for being here today. Thank you 
for your comments, and if you have others you would like to 
share with us, please do so very shortly because this Committee 
is going to be moving forward.
    Now let me invite our second panel if they will come to 
join us at the table.
    Let me welcome you, our full panel.
    On this panel is Mr. Bill Kubecka. Is it pronounced ``cue-
beck-ah''?
    Mr. Kubecka. Yes, sir.
    Mr. Etheridge. He is the past President of the National 
Sorghum Producers in Palacios, Texas.
    Mr. Gary Iverson is the Executive Director of the Great 
Northern Growers Cooperative in Sunburst, Montana.
    Mr. Steve Chapman is the President of the American Sesame 
Growers Association of Lorenzo, Texas.
    Mr. Tim Watts is the President of Watts and Associates, 
Incorporated, in Billings, Montana.
    Welcome.
    When you are ready, Mr. Kubecka, you may begin with 5 
minutes. Let me remind each of you your total testimony will be 
included in the record, and if you would, try to summarize that 
within 5 minutes. Thank you.

    STATEMENT OF WILLIAM H. ``BILL'' KUBECKA, FARMER; PAST 
      PRESIDENT, NATIONAL SORGHUM PRODUCERS, PALACIOS, TX

    Mr. Kubecka. On behalf of the National Sorghum Producers, I 
would like to thank the House Committee on Agriculture and this 
Subcommittee for the opportunity to discuss the manner in which 
RMA operates the Federal Crop Insurance Program.
    My name is Bill Kubecka, and I farm in Matagorda and 
Jackson Counties in the upper coast of Texas. I raise sorghum, 
cotton, and rice in a diversified operation that also includes 
cow-calf pairs and aquaculture. I believe that sorghum is a 
self-insurance crop as it takes less water to produce a crop, 
but it does not get treated as such by RMA.
    Sorghum farmers are very, very frustrated with RMA's 
operation of their risk management programs because their 
policies run contradictory to sorghum's inherent risk 
management characteristics. RMA has based sorghum price 
elections on long-term, historical sorghum-corn price 
relationships. But with ethanol changing the market dynamics 
for feed-grains, this is not relevant. RMA must change their 
way of doing business when it comes to sorghum. Penalizing 
sorghum because it is not traded on a futures market is wrong.
    On my farm, I can consistently market sorghum at a 10 
percent premium to corn, some years at a 30 percent premium. 
Yet RMA set my 2007 price election at a 6 percent discount to 
corn. RMA's administration has resulted in an extra 16 percent 
deductible on my sorghum insurance. In effect, this makes a 65 
percent deductible policy more like a 50 percent deductible 
policy.
    If the Committee includes changes in the farm bill to RMA's 
risk management programs, NSP asks that, first, sorghum price 
elections accurately reflect local prices; second, that 
expected county yields do not have large, short-term 
variations; third, that a transparent system of establishing 
transitional yields is implemented; and last, that RMA expand 
the Pilot Forage Sorghum Program.
    According to RMA, in 2006, a USDA-sponsored risk management 
program covered 67 percent of sorghum acreage. That number is 
significantly lower than other crops. Corn had 79 percent of 
its acreage covered, cotton 92 percent, wheat 77 percent, and 
soybeans 80 percent.
    With participation at significantly lower rates than other 
crops, this shows that the program has problems. Sorghum 
farmers do not see or receive the same benefits as other crops. 
We find it ironic that our crop's risk management advantages 
are essentially discounted when price elections are lower than 
high water-use crops that are more risky to grow in the semi-
arid sorghum belt.
    Price elections need to more accurately reflect local cash 
prices. 1,000,000,000 gallons of new ethanol demand will come 
on line in 2007 and early 2008 in the sorghum belt, and this 
will continue to increase the price of sorghum.
    Drought has decimated sorghum yields: During the past 
couple of years, parts of the sorghum belt have received the 
third lowest rainfall since modern record keeping began. Gross 
Revenue Insurance Program and Group Risk Plan, also known as 
GRIP and GRP, are supposed to use long-term yields as a basis 
for insurance. However, if you look at page 10 of my written 
testimony, you will find a map that shows where RMA has 
increased an expected yield by 3 percent in one county and then 
decreased the expected yield by over 30 percent in an adjoining 
county. Producers who have had their yield histories destroyed 
by a short-term drought now have their long-term, area-wide 
coverage decreased dramatically for the same reason. The 
expected county yields should be based upon a function that 
accounts for increased yield due to technology and genetics.
    While transitional yields, better known as T-yields, really 
only affect new producers of a crop, RMA must utilize a more 
transparent system of assigning T-yields that does not penalize 
one crop against another.
    RMA created the Forage Sorghum Pilot Program in 2005 at the 
request of NSP. NSP has been working with RMA to make 
significant changes to the program for the 2007 crop year to 
rebalance T-yields across the sorghum belt. NSP wants to work 
with the Committee and RMA to make sure that this program 
expands and is actuarially sound.
    In conclusion, NSP's Board asks that Congress solve 
problems with risk management programs before expanding crop 
insurance and before the Committee creates additional programs 
that will be based on crop insurance numbers.
    I appreciate the opportunity to submit this testimony in 
support of bettering the crop insurance safety net for sorghum 
producers. I want to end by saying that setting sorghum risk 
management programs equal with other crops is good, sound, 
policy for saving water and lessening America's foreign energy 
dependence. Thank you.
    [The prepared statement of Mr. Kubecka follows:]

  Prepared Statement of William H. ``Bill'' Kubecka, Past President, 
                National Sorghum Producers, Palacios, TX
Introduction
    On behalf of the National Sorghum Producers, I would like to thank 
the House Committee on Agriculture and this Subcommittee for the 
opportunity to discuss federal crop insurance and its impact on the 
sorghum industry and my farm.
    My name is Bill Kubecka, and I farm near Palacios in Matagorda and 
Jackson Counties in the Upper Coast of Texas. I raise sorghum, cotton, 
and rice in a diversified operation that also includes cow-calf pairs 
and aquaculture.
    NSP represents U.S. sorghum producers nationwide and our mission is 
to increase the profitability of sorghum producers through market 
development, research, education, and legislative representation.
    NSP is committed to work with the Committee and its staff as it 
works to reauthorize our nation's farm laws. The organization and 
industry are supportive of the current farm bill. However, we believe 
that Congress can clarify several program details so that USDA 
interpretation does not impact producers' ability to use sorghum in a 
profitable cropping system.
    One program that could be improved is USDA's risk management 
program. Crop insurance is a major component of the farm safety net for 
grain sorghum. It is a crop grown predominately in the semi-arid Great 
Plains, where weather volatility (lack of rain) is the major 
determinant in year-to-year yield variation. This testimony will focus 
on three areas of crop insurance as they relate to grain sorghum: price 
elections, expected county yields, and transitional yields. The 
testimony will also briefly discuss forage sorghum. But first, we need 
to examine the current situation that sorghum producers encounter.
Industry Overview
    The Great Plains states produce the largest volume of grain 
sorghum, but the crop is grown from Georgia to California and from 
South Texas to South Dakota. According to the National Agricultural 
Statistics Service (NASS), last year sorghum was produced in many of 
the states that you represent. This includes Georgia, Mississippi, 
Kentucky, Arkansas, Kansas, South Carolina, Nebraska, Colorado, South 
Dakota, Missouri, Louisiana, Texas, Oklahoma, and California.
    Over the past ten years, grain sorghum acreage has ranged from a 
high of 13.1 million acres in 1996 to a low of 6.5 million acres 
planted in 2006. Annual production from the last 10 years has ranged 
from 795 million bushels to 360 million bushels, with an approximate 
value of 1.2 billion dollars annually.
    The creation of the Conservation Reserve Program in the 1985 farm 
bill had a significant impact on the sorghum industry. Poor risk 
management programs have played a role also. Today's sorghum acreage is 
one-third of what it was prior to the 1985 farm bill. It is a goal of 
the industry to increase producers' profitability and to take acres 
back closer to the pre-1985 farm bill level. NSP expects that returning 
acreage to that level will help ensure the infrastructure to supply the 
needs of the ethanol industry, livestock industry and export markets. 
The sorghum industry has submitted to USDA a national checkoff proposal 
which will allow producers the opportunity to direct research funds 
towards their priorities. It will also ensure research and development 
funding to continue to improve our crop. In addition, forage sorghum 
utilized as silage, hay and direct grazing represents approximately an 
additional five million acres of production. The USDA reported that in 
2006, 347,000 acres of sorghum were harvested for silage, producing 
approximately 4.6 million tons of silage.
    The U.S. is the world's chief exporter of grain sorghum, and the 
crop ranks fifth in size in the U.S. behind corn, soybeans, wheat, and 
cotton.
    In the last two years, approximately 45% of the crop was exported. 
Further, last year the U.S. had almost 90% of world sorghum export 
market share. In 2005-2006, Mexico bought more than two-thirds of our 
exported grain. NAFTA has created a strong market for U.S. sorghum to 
Mexico and producers in my area benefit from historically high basis 
because of this market.
    Of the 55% of the crop that is not exported, 26% goes into pork, 
poultry, and cattle feed; 24% goes into ethanol production; 4% goes 
into industrial use; and 1% goes into the food chain.
    In fact, sorghum's newest market is the exponentially growing 
ethanol industry. We have seen a 57 percent increase in that market 
over the last 2 years and expect it to grow even faster over the next 
12 months as we have over one billion gallons of ethanol capacity 
coming on line in sorghum growing areas in the next 12 months.
    Outside of the U.S., approximately half of total production of 
grain sorghum is consumed directly as human food. In addition, the U.S. 
dominates world sorghum seed production with a billion dollar seed 
industry focused on 200,000 acres primarily in the Texas Panhandle.
    Sorghum is a unique, drought tolerant crop that is a vital 
component in cropping rotations for many U.S. farmers.
Background on Sorghum Farmers' Crop Insurance Use
    For 2006, 67% of sorghum acreage was covered by a USDA-sponsored 
risk management program. That number is significantly lower when 
compared to other crops. For example, corn had 79% of its acreage 
covered; cotton, 92%; wheat, 77%; and soybeans, 80%. Obviously, crop 
insurance for sorghum does not work as well as other crops. Our members 
have been asking a lot of questions regarding the low participation 
rate. We would hope that USDA would be working to promote sorghum 
production in the semi-arid sorghum belt, especially as the prices for 
starch--corn and sorghum--are being driven up by the ethanol industry. 
Setting sorghum risk management programs equal with corn is essential 
to sound water saving policy and essential to a sound energy policy.
    Part of the reason for low sorghum participation is that yields 
have dropped significantly because of the recent drought. Certain parts 
of the sorghum belt received the third lowest rainfall since modern 
record keeping started. In fact, yields are so low that there is almost 
no yield left to insure. Producers are very hesitant to utilize a 
program that has limited coverage when growing a drought tolerant crop.
    More importantly, producers plant sorghum because it is a self-
insurance crop as it takes less water and less inputs to produce a 
crop. NSP's members feel that sorghum is perfect crop for risk 
management, because sorghum is much more drought tolerant than other 
crops in the semi-arid sorghum belt. The plant goes dormant during 
periods of no rain, rather than die as other crops do. We find it 
ironic that our crop's risk management policies are essentially 
discounted when compared to other crops that are more risky to grow in 
the semi-arid sorghum belt.
Price Elections
    The mechanism used by USDA's Risk Management Agency (RMA) to set 
price elections for grain sorghum provides a lower level of protection 
as compared to other crops. The most widely used RMA program for 
sorghum farmers is Crop Revenue Coverage (CRC). In 2006, 63% of the 
insured sorghum acres were covered by CRC insurance, as it allows 
producers to manage for both yield and price risk. Crops with large 
volumes of production have an exchange-traded futures market to 
determine the price used in their risk management programs. RMA uses an 
average of closing futures prices for a given time period to determine 
the CRC price election. Sorghum, however, does not have an exchange-
traded futures market, so its price election is determined by RMA and 
is based on its price relationship with corn. We ask that the Agency do 
a better job of reflecting the sorghum price. The renewable fuels 
industry has significantly changed the demand for sorghum. In fact, the 
NSP staff has a hard time keeping track of all the new ethanol demand 
that is impacting local prices of sorghum.
    Prior to 2004, RMA set the price election of sorghum at a flat 95% 
of the corn price election, basing that on historical feeding value 
relationships. Beginning with the 2004 crop year, the CRC Commodity 
Exchange Endorsement (CEE) changed their policy to state that RMA will 
set the grain sorghum price election based on the ``United States 
Department of Agriculture (USDA) January estimate of corn and grain 
sorghum prices.'' Sorghum worked with Congress and USDA to implement 
the change in hopes that RMA's programs would more accurately reflect 
local prices but that has not happened.
    For example, the January USDA estimates include WASDE and NASS 
publications. In the January 2007 WASDE report, the corn price range 
was $3.00-$3.40/bu and the sorghum price range was identical at $3.00-
$3.40/bu. In the January 2007 NASS Agricultural Prices publication, 
USDA projected the January price for corn at $3.23/bu and the sorghum 
price at $3.60/bu. However, when RMA announced the CRC price election 
for sorghum, it was $3.55/bu, while the price election for corn was 
$3.76/bu. This is a 21_/bu deficit when WASDE had projected identical 
price ranges and NASS had published sorghum prices as 37_/bu higher 
than corn. Our producers are becoming more and more frustrated with 
insurance policies that are discounted as compared to other crops they 
are planting.
Figure 1.


    Using the baseline to set the CRC price election for sorghum is 
wrong. The baseline is assembled by the Interagency Commodity Estimates 
Committee (ICEC) within the World Agricultural Outlook Board which 
publishes the WASDE estimates. In discussions with the head of the ICEC 
Feed Grains Committee, the baseline was never intended to be used as a 
pricing tool since the sorghum price is based on a long-term historical 
ratio to the corn price. NSP's board believes that a crop insurance 
program based on a futures market, or in sorghum case, a forward 
looking policy, is a much better tool than a backwards looking, 
historical price risk management tool. 
    The ethanol industry is radically changing the dynamics of the 
sorghum market, and RMA must realize this. Within a couple of years, 
86% of the sorghum in Kansas will be produced in a county within 50 
miles of an ethanol plant. That new demand is dramatically increasing 
the local price of sorghum. The new demand mentioned above does not 
take into account the proposed plants, but only those that will 
actually be producing ethanol by the end of 2008.
    This type of radical change to the sorghum market cannot be 
captured by a long-term historical ratio of sorghum to corn prices. If 
you expand this type of analysis to the whole United States, 61% of the 
total US sorghum crop will be near an ethanol plant. RMA is penalizing 
sorghum producers in this dynamic market by using an antiquated ratio.
    In my own instance, sorghum has traded above corn for the past ten 
years with some time periods having sorghum at 135% the price of corn 
at the Corpus Christi market. Consistently, however, I trade 10% over 
corn in my market. I am being discriminated against by RMA with a price 
election that, for 2007, is 6% less than corn. This, in effect, is an 
extra 16% deductible on my sorghum insurance making a 65% deductible 
policy more like a 49% deductible policy compared to corn. While this 
testimony will not attempt to predict the effect of price elections on 
cropping decisions, it is a known fact that price elections do affect 
cropping decisions for farmers. As bankers look at insurance guarantees 
for producer financing, the price election difference between corn and 
sorghum is a critical point. In some cases, the market may send one 
signal to plant sorghum, but the insurance guarantee is better for corn 
due to a higher price election. The insurance price election is now 
becoming a factor that is included in farmers' decisions on which crop 
will be planted. We would encourage this Committee to promote policy 
that would encourage producers to use insurance as a risk management 
tool. Sorghum producers deserve a level playing field to compete with 
other crops.
    While most of the price election section has dealt with CRC, the 
MPCI price election for sorghum must also be corrected. Although this 
price election is not based directly on the corn price, the 
deficiencies are still evident. In 2006, the MPCI price election for 
sorghum was 97.5% of that of corn, while in 2007, the sorghum price 
election is only 94.3% of corn. This reduction in comparison to corn is 
in direct opposition of the data presented in USDA publications showing 
sorghum equal to or above corn.
    If the ability to change crop insurance language does happen in the 
next Farm Bill debate, NSP would ask that language be inserted that 
sorghum price elections be set at a level no less than corn for all 
insurance products.
Expected County Yields
    Expected county yields are used in the area-wide insurance policies 
now offered by RMA-Group Risk Plan (GRP) and Group Risk Income 
Protection (GRIP). While, in 2006, only 3% of sorghum's insured acres 
were covered by these policies, the producers using the policies find 
them to be the only affordable insurance they can purchase due to 
decimated yield histories from prolonged drought. RMA, however, is 
using short-term weather gyrations to vastly change expected county 
yields from year to year. The expected county yield is a 30-year 
weighted trend yield that is used to calculate losses for each county 
in determining indemnities for area-wide policies. While farming 
technology and seed genetics has improved vastly in the last 30 years, 
RMA moves expected county yields based upon short-term weather patterns 
and not long-term trends.
    As noted in Figure 2, Rawlins County, Kansas has increasing trend 
yields calculated using a variety of methods except for the short-term 
dominated method used by RMA. This type of ``X-pattern'' between RMA's 
expected county yields and other yield trend methods demonstrates that 
RMA is not using a true long-term trend for yields. This then runs 
counter to the whole philosophy of area-wide coverage--using long-term 
trends for insurance coverage. As permanent disaster programs are 
mentioned, some programs may consider using county expected yields to 
calculate disaster payments. This would make these yield trends very 
important to the success of such a program.
    In reference to Map 1, RMA cannot justify increasing an expected 
yield by 3% in one county and then decreasing the expected yield by 
over 30% in an adjoining county. Long-term weather patterns, farming 
technology, and genetics span across county and state lines. Producers 
who have had their yield histories destroyed by a short-term drought 
now have their long-term area-wide coverage decreased dramatically for 
the same reason. These large gyrations make the use of GRIP and GRP 
highly variable over the sorghum belt and do not reflect the true 
nature of the insurance policy. GRIP and GRP are used to insure county-
wide variability. That variability will include weather, but that 
weather should not be the reason for these large changes in expected 
county yields. The expected county yields should be based upon a log 
function that accounts for increased yield due to technology and 
genetics. Dr. Art Barnaby of Kansas State University has developed such 
a function that may be further simplified as research is done on trend 
yields.
Transitional Yields
    While transitional yields, better known as T-yields, really only 
affect new producers of a crop, RMA must utilize a more transparent 
system of assigning T-yields that does not penalize one crop against 
another. For example, in Kay County, Oklahoma, the corn yield 
decreased, but RMA increased the T-yield, while holding the sorghum T-
yield flat. RMA again is discriminating against sorghum. The actual 
corn yield has decreased from a high in 2003 of 106.8 bushels per acre 
to 34.5 bushels per acre in 2006. Based upon a history of following 
short-term yield patterns, RMA should have decreased the T-yield for 
Kay County. However, RMA increased the T-yield by 48% from 52 bushels 
per acre in 2006 to 77 bushels per acre in 2007. RMA did not adjust the 
T-yield for sorghum between 2007 and 2006, which reflects the flat 
yield trend from 2003 to 2006.
Forage Sorghum
    This RMA pilot project is becoming more and more important to the 
sorghum industry as the cellulosic ethanol industry develops. Forage 
sorghum is high yielding and uses a third less water that other 
silages. NSP supports a forage sorghum insurance program.
    RMA created the forage sorghum pilot program in 2005 at the request 
of NSP. NSP has been working with RMA to make significant changes to 
the program for the 2007 crop year to rebalance T-yields across the 
sorghum belt. NSP wants to work with the Committee and RMA to make sure 
that this program expands and is actuarially sound.
Conclusion
    Crop insurance is a critical part of the safety net for sorghum 
producers; however, only 67% of sorghum acreage is covered by a USDA 
risk management product. NSP's board asks that this Committee seriously 
discuss why this situation exists and implement policy to improve 
coverage of sorghum. Our board believes that increasing the acreage 
covered by a USDA risk management product is good, sound water policy 
and good, sound energy policy. USDA's risk management products can be 
improved for sorghum and made more equitable across crops if steps are 
taken to address the issues of price elections, expected county yields, 
and transitional yields.
    NSP asks that language be inserted in the next farm bill that will 
(1) assure sorghum price elections are no less than corn price 
elections, (2) develop expected county yields that do not have large 
short-term variations, and (3) implement a transparent system of 
establishing transitional yields.
    Also, since the crop insurance program works so poorly for sorghum, 
NSP's board asks that Congress fix the sorghum problems before 
expanding crop insurance and creating additional programs that will be 
based off of crop insurance numbers.
    I appreciate the opportunity to submit this testimony and work for 
the betterment of the crop insurance safety net for sorghum producers.
Figure 2.



    Etheridge. Thank you, sir.Mr. Iverson.

   STATEMENT OF GARY W. IVERSON, EXECUTIVE DIRECTOR, GREAT NORTHERN 
                   GROWERS COOPERATIVE, SUNBURST, MT

    Mr. Iverson. Mr. Chairman and Members of the Committee, it is an 
honor to be here today to talk about an oilseed that has the potential 
to dramatically improve the rural economies of many western states and 
help our country achieve energy independence. That oilseed is camelina, 
and it can be used as a feedstock to produce biodiesel, just like 
canola, sunflower seeds, or soybeans.
    My name is Gary Iverson, and I am the Executive Director of the 
Great Northern Growers Cooperative in Sunburst, Montana. Our 
Cooperative is dedicated to working with agricultural producers to 
market value-added agricultural commodities which are adapted to 
Montana conditions and provide economic development to our state.
    My story relates to Montana, but it could equally apply to 
Minnesota, Washington, Oregon, Colorado, Utah, Nebraska, North or South 
Dakota, all of whom have growing conditions well suited to camelina.
    Camelina is a member of the mustard family. It is a summer annual 
oilseed crop. It is also known as False Flax or Gold of Pleasure. The 
Romans called it the Romans' Pleasure. The seed was widely grown in 
Eastern Europe from ancient times until the 1940s when it was replaced 
by canola.
    Soybeans, sunflower, and canola are the main oilseed crops grown in 
temperate climates in the United States and are the principal 
feedstocks currently used to produce biodiesel. These oilseed crops are 
not suitable to marginal lands with low moisture, low fertility, or 
higher pH soils. For example, soybeans are ideally suited to the corn 
belt, but are not well adapted to arid northern and Rocky Mountain 
states.
    In recent years, farmers have shown increased interest in growing 
sustainable crops with reduced requirements for fertilizer, pesticides, 
and energy input that can be used for both food and fuel production. 
Camelina is that crop. It requires minimal inputs and is well suited to 
marginal soils, arid climates and lower soil fertility.
    Camelina can be grown as a dryland crop using minimal till. 
Camelina production can be limited by high humidity, weather that is 
virtually unknown in Montana, which causes downy mildew, the only 
significant disease of camelina. Grown in areas with high moisture and 
high fertility soil, oilseeds like canola will outyield camelina. 
However, under dryland conditions, camelina yields will be nearly 
double that of canola.
    Camelina is of particular interest to biofuel manufacturers because 
of the low cost of production. It may also be an effective biofuel for 
cold climates as the cold point of camelina oil is 10 to 15 degrees 
lower than soybean or canola.
    Camelina production is rapidly increasing in the Northern Great 
Plains. Montana is currently the largest producer of camelina in the 
world. Last year, 10,000 acres were grown in Montana. This year, that 
number will expand to 50,000 acres. The number of acres grown in 
Montana and other states will continue to grow rapidly as the demand 
for biodiesel continues to increase.
    There are two roadblocks to getting farmers to move acreage into 
camelina production. The first challenge is that there are currently no 
labeled pesticides available to control weeds and pests. This barrier 
is being resolved as research scientists and as pesticide manufacturers 
move the appropriate products into the market.
    The bigger challenge is the lack of Ag Department safety-net 
programs. I spend my days working with agriculture producers, educating 
them about the potential markets for this exciting new energy crop. No 
matter how great the promised return on investment might be, the lack 
of crop insurance is a major roadblock to new crop acceptance. Farmers 
have trouble getting their banker to support loans for crops without 
crop insurance. Farmers are also hesitant to move away from a crop with 
a long track record and the full bundle of USDA program support to a 
new crop with no safety net whatever.
    Montana's Governor, Brian Schweitzer, recently referred to camelina 
as his new girlfriend. As our country works to develop homegrown 
sources of clean renewable fuels, we believe states like Montana can 
substantially contribute to energy feedstock production. In fact, we 
project that camelina will surpass 1,000,000 acres in Montana in the 
next 2 to 3 years. In order to achieve this benchmark, Montana farmers 
need risk protection and support from Farm Services Agency and from 
other state and Federal agencies.
    Camelina is a new crop to North America. It does not have the sort 
of yield and price data that is required to obtain Federal crop 
insurance under the normal process, a process that may take years to 
navigate. Congress can best promote the increased production of 
renewable fuels by instituting a targeted program administered by the 
Department of Agriculture that would provide the needed safety net to 
growers in the short term to allow this industry to take root and 
deliver on the promise of energy independence.
    Thank you.
    [The prepared statement of Mr. Iverson follows:]

   Prepared Statement of Gary W. Iverson, Executive Director, Great 
               Northern Growers Cooperative, Sunburst, MT
    Mr. Chairman and Members of the Committee:

    It is an honor to be here today to talk about an oilseed that has 
the potential to dramatically improve the rural economies of many 
western states and help our country achieve energy independence. That 
oilseed is camelina, and it can be used as a feedstock to produce 
biodiesel, just like canola, sunflower seeds or soybeans.
    My name is Gary Iverson and I am the Executive Director of the 
Great Northern Growers Cooperative in Sunburst, Montana. Our 
Cooperative is dedicated to working with agricultural producers to 
market value-added agricultural commodities which are adapted to 
Montana conditions and provide economic development to our state. My 
story relates to Montana, but it could equally apply to Minnesota, 
Washington, Oregon, Colorado, Utah, Nebraska, North Dakota or South 
Dakota, all of whom have growing conditions well suited to camelina.
    Camelina, a member of the mustard family, is a summer annual 
oilseed crop. It is also known as False Flax or Gold of Pleasure. The 
seed was widely grown in Eastern Europe from ancient times until the 
1940's when it was replaced by canola.
    Soybeans, sunflower, and canola are the main oilseed crops grown in 
temperate climates in the United States and are the principal 
feedstocks currently used to produce biodiesel. These oilseed crops are 
not suitable to marginal lands with low moisture, low fertility, or 
higher Ph soils. For example, soybeans are ideally suited to the Corn 
Belt, but are not well adapted to arid, northern and Rocky Mountain 
states.
    In recent years, farmers have shown increased interest in growing 
sustainable crops with reduced requirements for fertilizer, pesticides, 
and energy input that can be used for both food and fuel production. 
Camelina is that crop. It requires minimal inputs and is well suited to 
marginal soils, arid climates, and lower soil-fertility.
    Camelina can be grown as a dry-land crop using minimal till. 
Camelina production can be limited by high humidity--weather that is 
virtually unknown in Montana--which causes downy mildew, the only 
significant disease of camelina. Grown in areas with high moisture and 
high fertility soil, oilseeds like canola will out yield camelina. 
However, under dry land conditions, camelina yields will be nearly 
double that of canola.
    Camelina is of particular interest to bio-fuel manufactures because 
of the low cost of production. It may also be an effective biofuel for 
cold climates, as the cloud point of camelina oil is 10 to 15 degrees 
lower than soybean or canola.
    Camelina production is rapidly increasing in the northern Great 
Plains. Montana is currently the largest producer of camelina in the 
world. Last year 10,000 acres were grown in the state. This year, that 
number will expand to 50,000 acres. The number of acres grown in 
Montana and other states will continue to grow rapidly as the demand 
for biodiesel continues to increase.
    There are two roadblocks to getting farmers to move acreage into 
camelina production.
    The first challenge is that there are currently no labeled 
pesticides available to control weeds and pests. This barrier will be 
resolved as advances are made to selectively breed more resilient 
varieties of camelina and as pesticide manufacturers move the 
appropriate products into the market.
    The bigger challenge is the lack of Department of Agriculture 
safety net programs. I spend my days working with agriculture 
producers, educating them about the potential markets for this exciting 
new energy crop. No matter how great the promised return on investment 
might be, the lack of crop insurance is a major roadblock to new crop 
acceptance. Farmers have trouble getting their banker to support loans 
for crops without crop insurance. Farmers are also hesitant to move 
away from a crop with a long track record and the full bundle of USDA 
program support to a new crop with no safety net whatsoever.
    Montana's Governor, Brian Schweitzer, recently referred to camelina 
as his new girlfriend. As our country works to develop home-grown 
sources of clean, renewable fuels, we believe states like Montana can 
substantially contribute to energy feedstock production. In fact, we 
project that camelina will surpass 1 million acres in Montana in the 
next few years. In order to achieve this benchmark, Montana farmers 
need risk protection and support from Farm Services Agency and other 
state and federal agencies.
    Camelina is a new crop. It doesn't have the sort of yield and price 
data that is required to obtain Federal crop insurance under the normal 
process--a process that I understand takes many years to navigate. 
Congress can best promote the increased production of renewable fuels, 
by instituting a targeted program administered by the Department of 
Agriculture that provides the needed safety net to growers in the short 
term to allow this industry to take root and deliver on the promise of 
energy independence.
    Thank you.

    Mr. Etheridge. I thank the gentleman for his testimony.
    Mr. Chapman.

  STATEMENT OF STEVEN D. CHAPMAN, PRESIDENT, AMERICAN SESAME 
                GROWERS ASSOCIATION, LORENZO, TX

    Mr. Chapman. Thank you, Mr. Chairman and Members of the 
Committee. My name is Steven Chapman. I am a fourth-generation 
farmer from Lorenzo, Texas, and I grow cotton, sorghum, wheat, 
and peanuts. I am also a Member of the Board of Plains Cotton 
Growers Association. I also grow another crop that I am here 
today to talk to you about. That is sesame.
    I am the founding President of the newly formed American 
Sesame Growers Association, headquartered in San Antonio.
    In addition to Texas, sesame is commercially grown in 
Oklahoma, Kansas and Arizona, and it has huge potential. Our 
Association's top priority and objective and the sole reason I 
got off my tractor in the middle of planting season, got on a 
plane and flew 1,600 miles to be here today is simple. We 
respectfully request a pilot program for Actual Production 
History Multi-Peril Crop Insurance for sesame.
    Mr. Chairman, the irony is sesame is a very low-risk crop. 
Let me be clear. We do not need crop insurance because of 
sesame's inherent production risks. We need crop insurance 
because of the commercial practicalities of securing acres and 
financing.
    The bottom line is this: Landlords and lenders demand crop 
insurance. Since crop insurance is unavailable to sesame, land 
and loans are given only to other crops. The lack of crop 
insurance means that accountants and actuaries, not farmers, 
are deciding what to plant on Texas farms. The sesame acreage 
that is produced to date is self-financed on owned land.
    Mr. Chairman, sesame production is an American success 
story that has yet to be told, and it will never be told if we 
do not get crop insurance and get it soon. Let me first explain 
the agronomics; second, the economics; and, third, the policy 
solution for crop insurance.
    It is a low-cost, low-risk crop that allows farmers to make 
a profit. In last summer's drought, we saw that it was often 
the only crop that survived in some areas. It is an excellent 
rotation crop for cotton, corn, wheat, soybeans, and peanuts. 
This is one of our principal uses for sesame. It conditions the 
soil and reduces cotton root rot and root knot nematodes, which 
improves our subsequent cotton crop. This is why we say, 
``Sesame is cotton's best friend.'' sesame is used for bakery, 
confection, and is crushed for oil. Because it is toasted 
before it is crushed, it does not compete with other U.S.-
produced vegetable oils. Almost all of the sesame consumed in 
the U.S. is imported. Quite candidly, our domestic customers 
have food safety concerns, given recent news. So do many other 
countries like Japan. They both want a U.S. supply.
    With crop insurance and a chance to expand, ASGA believes, 
through our conversations with commercial traders and 
processors around the world, the U.S. could be a net exporter 
with a 20 percent world market share within a decade. That 
equates to about 750,000 acres. Right now, because ASGA farmer 
members believe that we are in a race with Brazil to capture 
this market, timing for crop insurance policies is critical.
    So let me wrap up my testimony with our proposed policy 
solution, Mr. Chairman. We want a pilot program for Actual 
Production History Multi-Peril Crop Insurance for the 2008 
sesame crop year. Because sesame grows in the same areas, under 
the same conditions, and with similar practices as sorghum, 
sesame fits well as an addition to the Coarse Grains Crop 
Provisions and a modification of the Sorghum Loss Adjustment 
Manual. The economic and agronomic merits of sesame earned us a 
spot on the agenda at a Board meeting of the Federal Crop 
Insurance Corporation.
    Our request for a new policy was denied by the FCIC Board 
because they have a guideline of not granting new insurance 
policies for small-acreage crops. That decision has put us in a 
vicious circle. RMA and FCIC say sesame cannot be insured 
because the acreage is too small, but the acres are too small 
because sesame cannot be insured. We have done everything we 
can do administratively with FCIC and RMA.
    Clearly, the situation sesame growers and potential sesame 
growers find themselves in is an unintended consequence of the 
FCIC's acreage guidelines. Thus, it is a matter of policymaking 
and a proper role for Congress to remedy the problem and to 
provide some equity to the Crop Insurance Program.
    Indeed, sesame is considered a minor oilseed under the farm 
bill, but it is the only minor oilseed without a crop insurance 
policy. Sesame is a program crop, and it is the only program 
crop without a crop insurance policy.
    Thank you very much for your interest, attention and 
consideration.
    [The prepared statement of Mr. Chapman follows:]

  Prepared Statement of Steven D. Chapman, President, American Sesame 
                    Growers Association, Lorenzo, TX
    Thank you Mr. Chairman, and Members of the Committee.
    My name is Steven Chapman. I am a fourth generation farmer from 
Lorenzo, Texas, and I grow cotton, sorghum, wheat, and peanuts. And I 
grow another crop that I am here today to talk to you about--sesame.
    I am the founding President of the newly formed American Sesame 
Growers' Association, headquartered in San Antonio.
    In addition to Texas, sesame is commercially grown in Oklahoma, 
Kansas, and Arizona.
    Our Association's top priority and objective, and the sole reason I 
got off my tractor in the middle of planting season, got in a plane and 
flew 1,600 miles to be here today, is simple.
    We respectfully request a pilot program for Actual Production 
History Multiple Peril Crop Insurance for sesame.
    Sesame has huge potential to bring profitability to farm balance 
sheets across Texas, Oklahoma, and elsewhere--if, and only if, we are 
to obtain basic crop insurance.
    Mr. Chairman, the irony is sesame is a very low risk crop. Let me 
be clear, we don't need crop insurance because of sesame's inherent 
production risks. We need crop insurance because of the commercial 
practicalities of securing acres and financing.
    The bottom-line is this: landlords and lenders demand crop 
insurance. Since crop insurance is unavailable to sesame, land and 
loans are given only to other crops.
    The lack of crop insurance means that accountants and actuaries--
not farmers--are deciding what to plant on Texas farms.
    The sesame acreage that is produced to date is self financed on 
owned land.
    Mr. Chairman, sesame production is an American success story that 
may never be told if we do not get crop insurance. And get it soon.
    Let me explain first the agronomics, second the economics, and 
third the policy solution for crop insurance.
    Sesame is a crop with huge potential--from Kansas to Oklahoma to 
Texas to California to Arizona.
    It is a low cost, low risk crop that allows farmers to make a 
profit without relying on program payments.
    It is drought tolerant requiring \1/4\ the water of corn, \1/3\ the 
water of sorghum and \1/2\ the water of cotton. In last summer's 
drought, we saw that it was often the only crop that survived in some 
areas.
    It is an excellent rotation crop for cotton, corn, wheat, soybeans 
and peanuts. This is our principal use for sesame.
    It conditions the soil and reduces cotton root rot and root knot 
nematodes, which improves our subsequent cotton crop. This is why we 
say, ``Sesame is cotton's best friend.''
    And, quite frankly, the issues with WTO are not going to get better 
for us as cotton farmers and we badly need alternatives. Sesame is an 
excellent one.
    The reason sesame offers this opportunity is because plant breeding 
by a Texas company, Sesaco, has yielded new varieties of sesame. These 
varieties can be mechanically harvested with a combine. Because these 
are relatively new varieties we have only recently had a crop that 
needed to be insured.
    All the traditional sesame production is harvested by hand because 
the sesame capsule opens as it dries and drops the seed on the ground.
    As for the economics . . . the current U.S. production is about 
2,500 tons grown on 10,000 acres. All U.S. sesame is grown on contract.
    Sesame is used for bakery, confection, and is crushed for oil. 
Because it is toasted before it is crushed, it does not compete with 
other U.S. produced vegetable oils.
    Almost all of the sesame consumed in the U.S. is imported.
    Quite candidly, our domestic customers have food safety concerns 
given recent news. So do many other importers, like Japan. They both 
want a U.S. supply.
    With crop insurance and a chance to expand, ASGA believes, through 
our conversations with commercial traders and processors around the 
world, the U.S. could be a net exporter, with a 20 percent world market 
share within a decade.
    That equates to about 750,000 acres.
    Right now, we as ASGA farmer members believe we are in a race with 
Brazil to capture this market. Thus timing for a crop insurance policy 
is critical.
    So let me wrap up my testimony with our proposed policy solution, 
Mr. Chairman.
    We want a pilot program for actual production history multiple-
peril crop insurance for the 2008 sesame crop year.
    We think the policy should be limited to mechanically harvestable 
sesame varieties that are already marketed under contract.
    That way there will be no coverage for revenue risks, only 
production risks.
    Because sesame is used in rotation it only replaces other insured 
crops and, therefore, will not add additional costs to RMA's programs. 
Sesame could actually lower RMA's liabilities in dollars per acre. 
Because sesame grows in the same areas, under the same conditions and 
with similar practices as sorghum, sesame fits well as an addition to 
the Coarse Grains Crop Provisions and a modification of the Sorghum 
Loss Adjustment Manual.
    The economic and agronomic merits of sesame earned us a spot on the 
agenda at a Board meeting of the Federal Crop Insurance Corporation.
    Our request for a new policy was denied by the FCIC Board, however, 
because they have a guideline of not granting new insurance policies 
for small acreage crops.
    That decision has put us in a vicious circle: RMA and FCIC say 
sesame cannot be insured because the acreage is ``too small.'' But the 
acres are ``too small'' because sesame cannot be insured.
    We have done everything we can do administratively with FCIC and 
RMA.
    Clearly, however, the situation sesame growers--and potential 
sesame growers--find themselves in is an unintended consequence of the 
FCIC's acreage guidelines.
    Thus, it is a matter of policymaking and a proper role for Congress 
to remedy the problem, and to provide some equity to the crop insurance 
program.
    Indeed, sesame is considered a minor oilseed under the farm bill. 
And it is the only minor oil seed without a crop insurance policy.
    Sesame is a program crop. It is the only program crop without a 
crop insurance policy.
    As I said earlier Mr. Chairman, sesame is a great American success 
story that could never be told unless quick action is taken now to 
provide an actual production history multiple-peril crop insurance 
pilot program for the 2008 sesame crop year.
    Thank you very much for your interest, attention and consideration.

    Mr. Etheridge. Thank you, sir.
    Mr. Watts.

  STATEMENT OF TIM J. WATTS, PRESIDENT, WATTS AND ASSOCIATES, 
                       INC., BILLINGS, MT

    Mr. Watts. Thank you for the invitation, Mr. Chairman and 
Members of the Subcommittee.
    Members of the panel, thank you.
    I would submit that this might be the first time in the 
history of Congress that we have had two individuals from 
Montana testify on any witness list.
    I am Tim Watts, President of Watts and Associates. Watts 
and Associates is an economic consulting firm in Billings, 
Montana, focused on crop insurance development. In the U.S., we 
have been awarded approximately 40 projects from RMA and FCIC, 
with many complete and a few in progress. We have also been 
active in the international community, with efforts in Canada, 
India, and have been active with contracts with the World Bank.
    We believe the U.S. crop insurance system is one of the 
best systems in the world. There are frequently emerging 
innovative systems proposed internationally. To stay one of the 
best systems in the world, we have to constantly be vigilant of 
these emerging technologies and emerging new processes in order 
to improve our existing system and provide the best service 
that we can to our customers, mainly agricultural producers and 
U.S. taxpayers.
    We applauded Congress' decision in approving ARPA 
legislation in 2000 to expand the crop insurance safety net by 
encouraging new and innovative and next-generation crop 
insurance plans for major and minor crops--with an emphasis on 
the word ``minor'' crops--and also by leveling the subsidy 
playing field between crops and among crops. We encourage 
Congress to renew this mandate in the 2007 Farm Bill.
    We have listened to the requests today, and we receive 
similar requests from producer groups every month, desiring to 
start, expand, or refocus crop insurance for their commodities. 
These requests cover such national issues as energy costs 
related to the costs of production coverage, livestock 
insurance, quality adjustment issues as experienced in North 
Dakota, Texas, and virtually every region in the U.S., and new 
generational approaches as well as new individual crop coverage 
such as sesame.
    These regional and national issues are expensive to solve, 
historically costing between $250,000 to several million 
dollars for development costs. Just as an example, this would 
be one of the development efforts recently funded.
    The most promising avenue for addressing the need of crop 
insurance for individual crops is the so-called ``508(h) 
process'' that allows a private group to submit a product, 
which if approved by the FCIC Board, is then incorporated in 
the Federal system, and the submitter is reimbursed for the 
cost of developing and maintaining the product. If it fails, 
the submitter eats the development cost; i.e., he bears the 
entire financial risk.
    This process, however, has been much underused over the 
years, primarily because it places the entire financial risk on 
the submitter. As a result, according to the Congressional 
Research Service, out of about $80,000,000 made available by 
Congress under ARPA over a 6 year period, the 508(h) program 
utilized less than $9,000,000 of the allocation of the 
$80,000,000.
    We suggest amending the 508(h) process for two purposes. 
First, we make it more user-friendly to producer groups by 
having the FCIC Board share in the financial risk at an earlier 
point and provide an iterative environment for a higher chance 
of success. Second, we give the FCIC Board more control over 
its own agenda. Details of the proposed approach are in my 
written testimony.
    With these changes, we believe it can address national 
issues such as the adverse shifts in production costs, i.e., 
energy; declining yields; regional issues such as quality loss 
and highly tailored coverage for specialty crops; and new 
generational approaches to crop insurance.
    Because we have structured our proposal as a small change 
to the currently funded 508(h) process and make no changes in 
the current funding authorization level, we anticipate a zero 
budget score impact.
    Thank you very much for the invite.
    [The prepared statement of Mr. Watts follows:]

 Prepared Statement of Tim J. Watts, President, Watts and Associates, 
                           Inc., Billings, MT
    Mr. Chairman:

    Thank you for the opportunity to appear before the Subcommittee on 
General Farm Commodities and Risk Management to present the views of 
Watts and Associates, Inc. on the Federal Crop Insurance Program and 
how it can be improved. Watts and Associates, Inc. is a private 
economic research firm specializing in risk management-based solutions 
to the problems facing agricultural producers. Not only is Watts and 
Associates, Inc. one of the most active firms supporting USDA's Risk 
Management Agency (RMA) and the Federal Crop Insurance Corporation 
(FCIC) by performing product-related research on a contract basis, but 
we also have completed significant projects in the farm risk management 
field for clients ranging from the World Bank, the Governments of 
Canada and India, to a variety of private sector groups. A list of 
recent projects is included as part of Appendix A.\1\
---------------------------------------------------------------------------
    \1\ Appendix A will not be printed, but is available for viewing at 
http://agriculture.house.gov/testimony/110/h70514/TimWatts.doc.
---------------------------------------------------------------------------
    We believe the United States Federal crop insurance system is one 
of the best in the world. Based on our experience, we believe strongly 
that it remains the best option available to protect American farm 
producers from the uncontrollable risks posed by adverse weather and, 
increasingly, by adverse movements in commodity prices. As a result, we 
have applauded Congress's decision, reflected in the Agricultural Risk 
Protection Act (ARPA) of 2000, to encourage the development and 
deployment of innovative new insurance products to cover an expanding 
universe of new crops, new concepts, and new approaches. We encourage 
you to continue this emphasis in the new farm bill. One of the mandates 
included in ARPA 2000 that we believe holds particular promise for the 
future is the so-called ``508(h) process'' under which private groups--
farm organizations, insurance companies, and others--are given the 
opportunity to present new insurance concepts to the FCIC Board and, if 
approved, to have them incorporated into the Federal crop insurance 
system, eligible for subsidy and reinsurance. The private group, in 
turn, can then be reimbursed for the costs entailed in developing the 
product and maintaining it.
    The 508(h) process, even under its current structure, has had 
successes, including the introduction of such new products as CRC, 
Livestock Risk Protection, Livestock Gross Margin, and AGR-Lite. Still, 
based on our experience working with the 508(h) process as an outside 
contractor (both as a product developer and as an outside expert 
reviewer of proposals pending before the FCIC Board), we believe that 
this program has the potential to produce benefits far beyond its 
current use. With structural improvements we will outline below, the 
508(h) program can become a principal vehicle for producer 
organizations to take the initiative and the responsibility for 
resolving many of the chronic issues that have faced the Federal Crop 
Insurance Program for many years, including, for instance:

  --National issues such as the impact on farmers of adverse shifts in 
        production costs, particularly energy, through approaches such 
        as Crop Margin Coverage (a new concept developed by Watts and 
        Associates, Inc.);

  --The problem of declining yields from repeated years of 
        uncontrollable losses;

  --Regional issues such as the unique problems of quality loss for 
        crops in the Northern Plains, the need for highly-tailored 
        coverage for specialty crops with smaller markets, or for 
        highly-tailored solutions to problems or specialties affecting 
        growers in limited areas; and

  --Innovative insurance for livestock risks.

    The currently-unused potential of the 508(h) process was dramatized 
recently in a review by the Congressional Research Service (attached to 
this testimony as Appendix B) which showed that, out of some $80 
million made available for reimbursement of research, development, and 
maintenance costs under 508(h) during the first 6 years of the program, 
only $8,977,260 were spent for that purpose. The reasons for this 
under-use of 508(h), we believe, are structural, and can be addressed 
with carefully designed structural reforms. For instance, the 
development of a new insurance product--including the development of 
actuarial rates, underwriting standards, policy forms, marketing plans, 
and the rest--can be expensive, ranging at the low end from a few 
hundred thousand dollars for addressing regional quality issues to, at 
the high end, several million dollars for a new generation approach to 
commodity crops. Currently, a producer organization undertaking to 
develop and present a new product under the 508(h) process must 
shoulder this entire financial burden, and bear the risk of losing the 
entire investment if the FCIC Board ultimately disapproves the product. 
It is an all-or-nothing proposition. If controversy arises during the 
Board's consideration of the product, such as through new issues being 
raised by outside expert reviewers, the Board's review can be delayed 
or extended by months or years. For the producer group sponsoring the 
idea, this means that any potential reimbursement is delayed along with 
it, causing financing costs to accrue over time.
    From the perspective of the FCIC Board, the current 508(h) process 
poses a host of management challenges. The FCIC Board has a duty to 
review each proposed new product fully and rigorously based on a number 
of standards including actuarial and underwriting soundness, 
marketability, and protection of the interests of producers. Adding to 
the time and expense of this process is the legal requirement that each 
proposed new product be submitted for analysis to a minimum number of 
outside expert reviewers. The FCIC Board itself is given little 
authority to control its agenda in order to assign scarce resources to 
those proposals that best fit its overall assessment of program needs.
    We at Watts and Associates, Inc., working with our outside counsel, 
former RMA Administrator Kenneth Ackerman, and after having worked in a 
producer driven system for product development in Canada, have 
developed a concept for adjusting the 508(h) process to address both 
these concerns: to make it more user-friendly to outside producer 
groups while giving the FCIC Board greater authority to control its 
agenda. Our proposal is built around the following points and steps 
(see draft legislative language, attached as Appendix C):

    1. Choice:  The developer would choose whether to proceed under:

      a. 508(h) as it currently exists, which would remain in effect as 
            an option, or

      b. The new alternative process outlined below.

    2. Application: Only producer groups working with developers 
        comprised of individuals with experience in the process, 
        including at least one who has pre-qualified for GSA contract 
        payment rates, would be allowed to use the new process. As a 
        first step, the developer would prepare a concept paper to 
        illustrate design features and limitations of the new approach 
        or tool. Using the existing pool of ``experts'' approved by the 
        Board for product review, the developer would choose two who 
        would review the proposal and must agree that the concept has 
        merit.

    3. Initial Board Meeting: After incurring the uncompensated costs 
        associated with Step 2, the producer group and developer would 
        meet with the Board to seek its initial approval to pursue the 
        product. If the Board agrees, then future development costs 
        would be covered by reimbursement at the developer's pre-
        qualified GSA rates (proving that the rates have been 
        competitively determined).

    4. Development: The developer would proceed to develop and complete 
        a draft submission, consisting of all the materials needed to 
        implement the product as described under the current 508(h) 
        regulations and including (a) an opinion from the two expert 
        reviewers as to the soundness of the draft submission and (b) 
        an actuarial certification. The developer would be required to 
        maintain an auditable record of hours billed and costs 
        incurred. If the Board desires an intermediate feasibility step 
        prior to the draft submission, an assessment of feasibility 
        could be inserted at this stage.

    5. Second Board Meeting: The developer would then present the 
        submission to the Board and the Board would decide whether the 
        product should proceed further. If so, it would appoint three 
        additional experts to review the product in consultation with 
        the developer and the previous experts. In addition, RMA would 
        be asked to provide a formal review of the proposal at this 
        stage. Interaction between the developer and reviewers would be 
        encouraged to facilitate the sharing of ideas and addressing of 
        concerns.

    6. Third Board Meeting: The Board, based on the final input it 
        receives from the developer and reviewers, would decide whether 
        or not to offer the product to producers. If so, the developer 
        would be responsible for providing materials and working with 
        RMA to facilitate implementation.

    7. Reimbursement: The developer would apply for reimbursement as 
        per the existing 508(h) process, and reimbursement would be 
        paid at GSA hourly rates multiplied by the lesser of a 
        reasonable number of hours (ascertained by comparison to 
        similar projects) or the actual hours spent by the developer on 
        the product. However, if the Board ultimately deems the product 
        incomplete under Step 5 and the developer fails to correct it 
        after being given an opportunity to do so, development costs to 
        date of discovery would be covered only at 75 percent. If the 
        Board ultimately declines to accept the product under Step 6 
        for any reason, the development costs to date of discovery 
        would be covered only at 85 percent.

    8. Maintenance: The developer would be responsible for product 
        maintenance, and its related costs would be reimbursable at the 
        approved GSA rates for a period of 3 years. At the end of the 
        third pilot year, the developer could either surrender 
        ownership of the product to RMA or maintain it and assess a 
        user-fee structure, as under current 508(h) rules.

    9. Funding: Funding for reimbursement of products under the new 
        alternative process would come from two existing authorized 
        pools: the one for contracted development and the other for 
        reimbursement of private development currently funded at not to 
        exceed $25 million and $15 million annually. Since the funding 
        comes from existing authorized sources, we do not anticipate 
        any budget score attaching to this proposal.

    We believe that, with these modest adjustments, implemented under 
existing funding caps, the 508(h) process could become a prime avenue 
for agricultural producers, the ultimate customers of this vital 
government program, to take a larger role in assuring that Federal crop 
insurance addresses their needs. These changes would also provide the 
FCIC Board an additional tool for management of the direction of the 
crop insurance development efforts.
    Thank you for this opportunity to present our views to the 
Subcommittee. We appreciate your consideration, and would be pleased to 
answer any questions you might have.
         Appendix B--Congressional Research Service Memorandum


    (a) Striking subsection (b)(1) and replacing it as follows:

          ``(b) Reimbursement of research, development, and maintenance 
        costs

                  ``(1) Research and development reimbursement

                  ``The Corporation shall provide a payment to 
                reimburse an applicant for research and development 
                costs directly related to a policy that--

                          (A) Is submitted to the Board following the 
                        procedures of paragraph (7) of this subsection 
                        or
                          (B) Is

                                  (i) submitted to the Board and 
                                approved by the Board under section 
                                508(h) of this title for reinsurance; 
                                and
                                  (ii) if applicable, offered for sale 
                                to producers.''

    (b) Adding at the end of subsection (b) a new paragraph (7) to read 
as follows:

                  ``(7) Reimbursement Agreements.

                          ``(i) A person proposing to prepare for 
                        submission to the Board under section 508(h) of 
                        this Act a crop insurance policy, a provision 
                        of policy, or applicable rates of premium, may 
                        apply to the Board for a reimbursement 
                        agreement.
                          ``(ii) Applications.

                                  ``(I) The application for a 
                                reimbursement agreement shall consist 
                                of such materials as the Board may 
                                require, including

                                          (i) A concept paper that 
                                        describes the proposal in 
                                        sufficient detail for the Board 
                                        to determine whether it 
                                        satisfies the requirements of 
                                        subparagraph (II) of this 
                                        paragraph; 
                                          (ii) Statements of support 
                                        from not less than two experts 
                                        chosen from among experts 
                                        approved by the Board as 
                                        qualified to conduct 
                                        independent reviews under 
                                        section 505(e) of this Act, 
                                        stating that the concept is 
                                        feasible and achievable from an 
                                        actuarial and underwriting 
                                        perspective;

                                  ``(II) The Board shall approve the 
                                application by majority vote if it 
                                finds that:

                                          ``(i) The proposal--

                                                  a. Provides coverage 
                                                to a crop, hazard, or 
                                                region not 
                                                traditionally or 
                                                adequately served by 
                                                the Federal Crop 
                                                Insurance Program;
                                                  b. Provides crop 
                                                insurance coverage in a 
                                                significantly improved 
                                                form;
                                                  c. Addresses a 
                                                recognized flaw or 
                                                problem in the program; 
                                                or
                                                  d. Introduces a 
                                                significant new concept 
                                                or innovation to the 
                                                program.

                                  (II) The applicant demonstrates the 
                                necessary qualifications to complete 
                                the project successfully in a timely 
                                manner with high quality, and has pre-
                                qualified for contract payment rates 
                                with the General Services 
                                Administration; and
                                  (III) The proposed budget and 
                                timetable are reasonable.

                          ``(iii) Agreements.

                                  (I) Upon approval of the application, 
                                the Board shall enter into an agreement 
                                with the person for the development of 
                                a formal submission meeting the 
                                requirements for a complete submission 
                                established by the Board under section 
                                508(h) of this Act. Payment for work 
                                performed under the contract shall be 
                                based on rates previously approved by 
                                the General Services Administration, or 
                                a fixed price based upon those rates, 
                                and the limitations of paragraph (6) of 
                                this subsection shall not apply. The 
                                parties may terminate the agreement at 
                                any time by mutual consent. If the 
                                agreement is terminated at any time 
                                prior to final approval of the 
                                submission, the submitter shall be 
                                entitled to payment of all costs 
                                incurred to that point, or, in the case 
                                of a fixed rate agreement, an 
                                appropriate percentage.

                          ``(iv) The Board shall consider any product 
                        submitted to it developed under this paragraph 
                        under the rules it has established for products 
                        submitted under section 508(h) of this Act, 
                        except that--

                                  (I) If the Board ultimately finds the 
                                submission to be incomplete under its 
                                standards for qualifying for outside 
                                expert review and the developer has not 
                                corrected the submission after being 
                                given an opportunity to do so, the 
                                payment due to the submitter under the 
                                agreement established under 
                                subparagraph (ii) shall be reduced by 
                                twenty-five percent.
                                  (II) If the Board finds that the 
                                submission is complete, but the 
                                submission fails to win final Board 
                                approval, the amount due the submitter 
                                will be reduced by 15 percent.
                                  (III) If the Board approves the 
                                submission, the reviewer will be paid 
                                100 percent of the amount due. 
                                  (IV) Notwithstanding the limitations 
                                of section 505(e)(3) of this Act, the 
                                independent experts chosen to conduct 
                                reviews of the submission shall 
                                include--

                                          (a) The Risk Management 
                                        Agency; and
                                          (b) The Office of General 
                                        Counsel.''

    Mr. Etheridge. I thank the gentleman for his testimony.
    I offer each Member 5 minutes of questioning, and the Chair 
will take the first 5 minutes.
    Mr. Kubecka, how does RMA's current method of crop 
selection for sorghum compare with the previous practice of 
just setting it at 95 percent of the corn price election, and 
would going back to that system be worse or better than the 
current system?
    Mr. Kubecka. I am not completely knowledgeable about 
exactly how they set it previously. Because, I live on the Gulf 
Coast, and so insurance is not that important to me directly. 
But as far as sorghum is concerned, my understanding is that 
historically it was set at 95 percent.
    Now what challenges us is for instance, we are getting a 
premium for corn, and a lot of it is because of some of the 
other policies that we have instituted, not necessarily in crop 
insurance but other marketing efforts and all. So this has been 
a challenge for the sorghum producers, to understand how the 
Kansas City office has come up with this percentage. Actually, 
it is not known. They will not share that knowledge with us. So 
to compare one against the other, I cannot do it because they 
have not shared that with us. It is not transparent.
    Mr. Etheridge. You are saying it is not an open process?
    Mr. Kubecka. It is not an open process. That is what my 
understanding is. It raises a broader question then.
    Mr. Etheridge. Thank you.
    Mr. Chapman, you have heard Mr. Kubecka's testimony about 
the problem sorghum producers are having with their price 
selections. In your testimony, you indicate that crop insurance 
policies for sorghum will work well for sesame.
    Given that sesame is not traded on the Exchange, how do you 
foresee RMA's determining price election for sesame, and could 
your growers not face some of the same problems that sorghum 
growers are now facing that we have just talked about? I would 
be interested in your comments on that.
    Mr. Chapman. Well, first of all, all of the sesame that we 
are growing right now is an nondescent variety, which means you 
can combine it. All other sesame is hand-harvested. A Texas 
company owns the patent on this on nondescent variety, so we 
are contracting all of our acres through them, so the price 
part of it is already there. I mean, we are contracting all of 
our sesame at a particular price, and they are basing their 
prices on world markets as far as Korea, Japan, India and here 
in the United States.
    Mr. Etheridge. Is that the way all sesame is done? Is all 
sesame under contract or just what you do in Texas?
    Mr. Chapman. As far as I know, it is all under contract.
    Mr. Etheridge. So you are saying yours is the only sesame 
that is harvested by combines?
    Mr. Chapman. Yes, sir.
    Mr. Etheridge. All the rest of it----
    Mr. Chapman. Is by hand. That is correct.
    Mr. Etheridge. In the United States or just in Texas?
    Mr. Chapman. As far as I know, all of it in the United 
States is harvested by combine. I mean that is not a descent 
variety.
    Mr. Etheridge. In the U.S.?
    Mr. Chapman. Yes, sir.
    Mr. Etheridge. Okay. Thank you.
    The gentleman from Louisiana, Mr. Boustany.
    Mr. Boustany. Thank you, Mr. Chairman.
    Mr. Kubecka, do you see insurance products evolving over 
time whereby the producer and the refiner of ethanol will 
combine to create some sort of insurance product? I am just 
thinking out of the box. We are dealing with a lot of difficult 
insurance issues here.
    Mr. Kubecka. Personally, I do not see anyone taking over 
the government's offer. The government is going to offer it 
first. That is only my personal feeling on it; certainly, I 
think from a production standpoint, especially in our area. We 
have had a premium, and sorghum stayed pretty consistent in our 
area, that corn had moved in because we have had decent prices. 
We are behind on yield a little bit, but otherwise we are 
pretty much up there, and I do not see that they would be 
stepping in to take over the government program, myself.
    Mr. Boustany. Mr. Iverson, do you see any potential there?
    Mr. Iverson. Well, one, camelina is an oilseed, not an 
ethanol product. It would be a biodiesel.
    Mr. Boustany. Again, it would be a local market?
    Mr. Iverson. Yes. The ideal thing about camelina is it is a 
crop that is adapted to the area that is inbetween soybeans and 
canola. Canola basically does very well in Canada and in some 
of the higher rainfall areas and irrigated areas in the U.S. 
Soybeans have to have longer growing seasons than Montana and 
several mountain states have to offer, and camelina is the only 
oilseed that we know of that will thrive in a low-rainfall 
condition.
    So, basically, we are looking at the potential for Montana 
and the inner mountain area to provide feedstock primarily for 
West Coast markets more than anything, because there is a lot 
of demand and a lot of potential for biodiesel in Washington, 
Oregon and California, and we are in an ideal location to 
supply that market. Also, our feedstock has some very good 
potential markets in places like Idaho and Utah as well as for 
livestock in Montana, so the feedstock does not have to move 
very far, and the oil crop is moving toward the West Coast.
    Does that answer your question? Is that what you are 
asking?
    Mr. Boustany. Yes. It was kind of a theoretical question. I 
just wanted to get your perspective on it, and I guess, in your 
case, the lack of available pesticides is an issue that is 
hurting you.
    Mr. Iverson. That issue is fairly well solved because we 
have identified the chemicals that we have and that we need, 
primarily grass killers because camelina is going to replace a 
lot of chem fallow and summer fallow and maybe extend some 
rotations a little bit, but it is going to be involved with 
wheat and barley. We need to be able to control those grassy 
weeds at the wheat and barley stands when you are inbetween 
crops. And we have two chemicals that should be approved 
through the IR-4 Program next year. We have kind of solved 
that. That problem is solving itself. We need to solve the Crop 
Insurance Program.
    Mr. Boustany. Thank you.
    Mr. Chapman, I was impressed with your testimony on sesame. 
And obviously, as a cotton and peanut farmer, you got into this 
to seek tremendous market potential and export potential over 
time. What is the current production?
    Mr. Chapman. Currently, I believe there are between, I 
think, 13,000 and 20,000 acres in the United States, some of 
course in Oklahoma, Texas, Arizona, those areas.
    Mr. Boustany. Is Texas the only area where it is being 
harvested by combine?
    Mr. Chapman. Well, that is in the United States. You know, 
most of the sesame goes to this Texas company, and they bred 
this nondescent variety. It is easily able to go through a 
combine, and that is what is being produced mostly in the 
United States.
    Mr. Boustany. I see. You went to the FCIC with a proposal, 
and it was rejected; is that correct?
    Mr. Chapman. Yes. They kept telling us that we did not have 
enough acreage.
    Mr. Boustany. Did you make the case about the potential 
future markets and the potential for an expansion and acreage?
    Mr. Chapman. Yes, sir.
    Mr. Boustany. They did not buy that?
    Mr. Chapman. No.
    Mr. Boustany. And that was the only reason for the 
rejection as far as you know?
    Mr. Chapman. As far as I know.
    Mr. Boustany. Okay. You threw into that equation also the 
fact that it would not add additional liability.
    Mr. Chapman. Exactly.
    Mr. Boustany. Thank you, Mr. Chairman. I have more 
questions to ask if we have one more round.
    Mr. Etheridge. I thank the gentleman.
    The gentleman from North Dakota, Mr. Pomeroy.
    Mr. Pomeroy. Thank you, Mr. Chairman.
    Mr. Iverson, camelina, that sounds like something North 
Dakota would be very interested in. I have not heard much about 
it.
    Mr. Iverson. North Dakota is very interested in it. Western 
North Dakota is working out very well. Any area that is too dry 
for canola and too cool for soybeans is camelina country.
    Mr. Pomeroy. How has production accelerated? Is it coming 
along? Is production exploding? Is it growing nicely?
    Mr. Iverson. Yes. We hoped to have 100,000 acres this year. 
We only had 50,000 but it is difficult for farmers to start a 
new crop, and this is the third year of production in Montana. 
We started out in 2005 with about 500 acres.
    Mr. Pomeroy. Are you getting enough product to have a 
biodiesel market for it?
    Mr. Iverson. At this point so far, we are marketing all new 
oil into the cosmetic market because of the Omega 3 in it and 
the meal, of course. We are working with different feed 
markets. We are selling a product that we call Omega 
MealTM, which is a trademarked term.
    Mr. Pomeroy. Is this basically a cousin of flax?
    Mr. Iverson. Not really. It is a plant. It is a plant that 
is similar to mustard and canola, but it has a flaxlike pod, 
and that is why it is called a ``false flax.''
    Mr. Pomeroy. I love your Governor's catchy way of saying 
things. He says camelina is his new girlfriend.
    Mr. Iverson. Brian is very excited about camelina.
    Mr. Pomeroy. He is. It has got much more of a ring than 
saying, ``I am nutty about dry beans and lentils.''
    Mr. Iverson. The other comment he made is, if he had 
another daughter, he would name her ``Camelina.''
    Mr. Pomeroy. I will look forward to learning more about 
camelina.
    Mr. Watts, essentially, you are saying in your testimony 
that ARPA has launched substantial innovation, and even more 
innovation will be launched if inventors or developers do not 
have to bear all of the cost and all of the risk of getting RMA 
approval.
    Mr. Watts. Mr. Congressman, yes. We are currently trying to 
think through the camelina issue along with somewhere in the 
neighborhood of another 20 specialty crops. At the end of the 
day, the current system asks either the producer association or 
the developer or the insurance company that is interested and 
that is shouldering all of the financial risk. It is the intent 
to service the needs of public policy and the requests such as 
organic pecans.
    Mr. Pomeroy. Are these new areas that need the coverage, 
that we are hearing from in the prior panel, that you could 
potentially create things for if you are given an opportunity 
to by the RMA Board?
    Mr. Watts. That is correct. Our concept provides financial 
hurdles so we do not create the cottage industry and try to get 
fleshed-out ideas in front of the Board.
    Mr. Pomeroy. You have done some very good work in North 
Dakota in working with North Dakota commodity groups. I 
appreciated the positive statements you had about crop 
insurance in your testimony. Are you paying attention to those 
who are very highly critical of this program as to the 
industry's bearing no risk and the other criticisms coming at 
it?
    Mr. Watts. Yes, we have heard some of those criticisms.
    Mr. Pomeroy. I would really like you to pay a lot of 
attention to those criticisms and help us put it in 
perspective. My own thought is that some of these criticisms 
are based on some favorable loss history of recent years that 
does not take note of the horrible loss history just a few 
years earlier. I do not have my hands around the full thrust of 
the critique. Yet we are going to have to really understand 
them to make the case back in terms of continuing support for 
the Crop Insurance Program.
    I see my time is up, but I will look forward to working 
with you on that, Mr. Watts.
    I yield back.
    Mr. Etheridge. I thank the gentleman.
    Mr. Watts, if you have data to share with this Committee as 
it relates to the question the gentleman from North Dakota 
asked, the Chair and others would really appreciate a document 
or something on that because it would be helpful as we move 
forward.
    Mr. Watts. Thank you, Mr. Chairman.
    Mr. Etheridge. If you would do that, I would appreciate it.
    The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    A couple of points going back to the panel dialogue with 
Mr. Watts.
    You have heard two panelists here talking about the need to 
get some kind of Crop Insurance Program so they can expand that 
program. I have some other commodities that people are thinking 
about growing. You said that $80,000,000 was authorized for 
this program, and only $9,000,000 was used. Is that the number? 
Was that over the 5 year period or what period of time was 
that?
    Mr. Watts. It was over a 6 year period.
    Mr. Neugebauer. So does it make sense then to come up with 
some kind of a cooperative program where, say, a new producer 
group just getting started would bring some resources to the 
table and begin that process? Is there a way along the process 
where you do not have to go to the very end to say, ``we have 
probably headed in a direction we are not going to be able to 
get to,'' and so you can at that point in time cut your losses. 
Or say this is doing a staging in these studies? Does that make 
sense to you?
    Mr. Watts. Yes, that makes a lot of sense. In fact, as we 
thought through this, we were trying to figure out basically if 
you were going to fail, let us fail early in the process versus 
getting a producer association's hopes up. A lot of investment 
which somewhat draws the lines between the current 
administration and the producer association. Maybe the idea has 
merit, and maybe there are some suggestions along the way that 
can turn it towards the successful effort versus something that 
has a lot of investment and becomes a failure. We are 
suggesting more of an iterative process. So the Board has an 
ability to look at this early on, along with a couple of expert 
reviewers, to sanction the effort moving forward and to try to, 
I guess, shut off at the pass the ideas that are never going to 
make it through the process. Versus getting several hundred 
thousand to a few million invested in it over time and having a 
lot of emotional investment in that process also. So we have 
attempted to do exactly what you have suggested.
    Mr. Neugebauer. You know, one of the things that is 
frustrating to me is that, because of the nature of crop 
insurance, but even with a pilot program as has been requested 
by Mr. Chapman, we still will be--what--5, or 6 years at the 
earliest from actually getting any program that would offer 
crop insurance for sesame.
    Mr. Watts. Yes. Current discussions that I have had places 
the number somewhere between 5 and 8 years to put the pilot out 
if it goes through the current contracting process. The 508(h) 
approach is substantially quicker, and we have attempted to 
provide some shortcuts, not to integrity, but shortcuts to the 
process in order to more quickly get to the bottom line of 
whether it makes sense to move forward or not.
    Mr. Neugebauer. If you had the resources and you could take 
on these two commodities through that program, what would be 
the earliest date that you would be able to offer crop 
insurance under that?
    Mr. Watts. Even if you looked at an expedited process you 
would have to publish, basically, the guidelines in mid-2008, 
2009. That is as quickly as you would get a pilot program on 
the ground even in an expedited system.
    Mr. Neugebauer. Has there ever been any thought about 
looking at a way to come up with a fast-tracking system that 
would have a more generic policy where some of these 
commodities line up parallel with other commodities and would 
be able to get to the market quicker?
    I guess the point I am making is, in the world that we live 
in today, if you have got a company that takes you 4 or 5 years 
to change your product, you are not going to be around. I mean 
the only place that works is the government, and obviously it 
is not working all that well.
    So are there some things that we need to look at outside 
the box of being able to be more reactive to a changing and 
cultural market in this country as producers are trying to make 
decisions based on economics and not on programs? I think that 
is what I heard these two gentlemen talk about. They are trying 
to figure out how to make money, which is a good thing. How can 
we get there?
    Mr. Watts. Well, I think there is probably no answer to 
your question, but I will try to answer it in two parts.
    The first one is we hope that we have provided an expedited 
process, but in moving at the speed of business and handling 
the tension between the putting out a Congressionally-mandated, 
actuarially sound product and covering new emerging crops such 
as camelina and sesame that provides this natural tension. 
There are some methods out there such as insuring with a proxy 
crop. In sesame, that could be sorghum. That could be wheat. 
You could do it at a county level. With camelina, there is 
potential there, even though it does not have as many similar 
characteristics as maybe sesame does to sorghum and wheat.
    So as we move through those processes, are there ways to 
level the substantive playing field and not provide an APH-type 
coverage? Yes. Some of the international community is moving 
towards that. Does it provide as good a coverage as APH? No. 
Does it have more basis risk? Yes. So are there some trade-offs 
that we could make between extremely effective coverage, such 
as the APH, and getting something covered quicker? I think the 
answer is yes. We have actually been working on a product that 
goes across 200 crops.
    Mr. Neugebauer. I will finish, but I would think those two 
gentlemen sitting to your right would tell you, if you would 
just get them something so they could leverage that financially 
by being able to go to a lender and expanding the ability to do 
that in the interim, it would be a step in the right direction.
    I yield back.
    Mr. Etheridge. I thank the gentleman.
    Before we adjourn, Mr. Watts, you mentioned earlier that 
there is a slight adjustment. Do you feel comfortable today in 
telling me what you meant when you said ``slight adjustment'' 
or would you rather address that in your written testimony and 
share it with us a little later?
    Mr. Watts. The ``slight adjustment'' is that we do not 
believe that it is appropriate to reduce the effectiveness of 
the expert review process or to back away from an actuarial 
sound system. We do believe that there is a way to reduce the 
timeline associated with new product development and to provide 
an iterative process between the Board, the developer, and the 
producer group that has a higher chance of success. We think 
that is simply a refocus of the construct. If you look at the 
legislative language, it is not long.
    Mr. Etheridge. I hope you will share that with us in the 
document you are going to send to us what Congressman Pomeroy 
was talking about.
    Before we adjourn, I am going to recognize the gentleman 
from Louisiana, Mr. Boustany, for closing comments.
    Mr. Boustany. Thank you.
    Mr. Watts, before we close out, I just wanted to ask. You 
know, we have to strike a balance with the 508(h) program, and 
I agree with you that the programs are too high right now, and 
it is certainly putting a damper on the expansion of the crop 
insurance safety net, but it is striking a balance.
    What do we do to prevent a swing in the other direction 
whereby you end up spending tax dollars on a bunch of ideas 
that do not pan out? I read through the information you sent to 
us in your written testimony, and I have some concern in that 
regard that we could be spending money on a lot of ideas that 
do not go anywhere. So do you have other ideas of where you 
might strike that balance?
    Mr. Watts. Thank you for the question.
    I cannot tell you how deeply concerned we are about that 
particular issue. It would be a shame to, quote, as you said in 
your opening statement, ``to use this to create a new cottage 
industry.'' We have seen, as all Members on the Subcommittee 
have, from time to time ideas that have been put forward that 
do not have a lot of substance, unfortunately. Is there a 
process or is there a way to separate the chaff, so to speak.
    Is there a process? Is there a way to separate the chaff, 
so to speak? The process that we have proposed, which we would 
be glad to have the thoughts of changes, is to create a concept 
paper. And that concept paper, in order to even be accepted, 
has to be fleshed out to the point that the concept is 
understandable. And, second, the two experts out of the 
existing pool have signed on that this has the potential to 
make it through the process, not to change the rigor of the 
process, which we would be vehemently against that, but to 
provide a financial and intellectual hurdle.
    This is tough stuff to do, to provide a hurdle so we do not 
put a lot of the chaff in front of the Board, and we believe 
that that financial hurdle to be shouldered is somewhere 
between $50,000 and $75,000. We would spend more money than 
that before we took even a concept to the Board, and shoulder 
those two extra views that are somewhere between $5,000 and 
$10,000 apiece and working with the expert reviewers. We are 
one, and the only thing you have in that business is your 
reputation. I think the process that we proposed has a hurdle 
in it to attempt to not have your concern realized.
    Mr. Boustany. One quick follow-up. How many competitors do 
you have to your business in terms of working with producer 
groups to develop products like this?
    Mr. Watts. It is a very small pool and it is a very small 
pool internationally within the U.S.
    Mr. Boustany. Within the U.S., I mean how many, five? Less 
than five?
    Mr. Watts. Probably less than five.
    Mr. Boustany. Okay. Thank you. Thank you, Mr. Chairman, 
that is all I have. This was a very good hearing. I want to 
thank both panels for their testimony and their answers to the 
various questions we have asked.
    Mr. Etheridge. I thank the gentleman.
    Let me thank this panel and the previous panel for your 
time and the work you have put in in getting the testimony 
ready, for submitting it promptly, and for your testimony 
today.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 days to receive additional 
material and written responses from witnesses to any questions 
posed by a member of the panel.
    This hearing of the Subcommittee on General Farm 
Commodities and Risk Management is adjourned.
    [Whereupon, at 4:40 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
Responses to Questions by Members of the House Agriculture Committee 
        Subcommittee on General Farm Commodities and Risk Management 
        During the May 14 Hearing on Crop Insurance
W. Scott Marlow,
Director, Farm Sustainability Programs,
Rural Advancement Foundation International--USA,
Pittsboro, N.C.

    Question. In response to the following question posed by Mr. 
Etheridge: ``Assuming AGR and AGR-Lite could be reformed, could they 
serve as an effective risk management product for contract producers or 
do we still need separate policies that can be available for contract 
farmers?''
    Answer. As an income-based product, Adjusted Gross Revenue-Lite 
(AGR-Lite) could become an effective risk management tool for producers 
of contract livestock, or other products produced under production 
contracts. Other than issues of access and simplification that are 
common to all farmers who apply for AGR-Lite, the Risk Management 
Agency (RMA) must address issues of eligibility before this program can 
be used by farmers with production contracts. RMA policies currently 
require all farmers to possess an ownership share in the livestock or 
products they are seeking to insure against loss. This determination is 
an agency regulation, and is not required by statute.
    Today most farmers engaged in production contracts cannot claim an 
ownership share of the products they produce, preventing their 
participation in the AGR-Lite program. To remedy this result, changes 
must be made to the program's authorizing language clarifying Congress' 
intention that income insurance be made available to farmers 
participating in production contracts not granting them an ownership 
share of the product.
    AGR-Lite could also address potential farmer losses stemming from 
disasters, including severe weather events, quarantine, disease 
outbreak or depopulation due to a severe disease outbreak. 
Historically, agricultural disaster legislation addressing contract 
livestock losses has been enacted on several occasions. In the 
aftermath of Hurricane Katrina and the other Gulf Coast hurricanes of 
2005, Congress approved P.L. No. 109-148, to address hurricanes in the 
Gulf of Mexico. P.L. No 109-234, the Emergency Agricultural Disaster 
Assistance Act of 2006, was enacted into law on June 15, 2006 as Title 
III of the Emergency Supplemental Appropriations Act for Defense, the 
Global War on Terror, and Hurricane Recover Act of 2006. The 2006 
legislation provided some assistance to contract growers in the form of 
Livestock Indemnity Payments as well as Emergency Conservation Program 
cost share assistance for cleaning up debris from poultry barns and/or 
costs to reconstruct or repair barns if there were uninsured losses. 
However, assistance from ad hoc disaster programs that may or may not 
be passed by Congress is no substitute for risk management programs 
that contract farmers can incorporate in their farm planning on an 
ongoing basis.
     In addition to the risk posed by weather-related disasters, 
farmers face several levels of risk associated with disease, including 
the possibility of a disease outbreak on their own farms, and the 
depopulation that would accompany it. Without an ownership share in the 
livestock in these events, farmers would not be compensated for that 
loss without support through subsequent disaster legislation.
    Another risk faced by contract livestock producers is the 
possibility of a disease outbreak occurring on a farm in their region, 
but not on their farm. In this situation, a farmer could be required to 
depopulate their farm by state or federal officials, with the 
accompanying loss of income, but the loss would not be a direct result 
of a disease outbreak. Once again, without access to AGR-Lite, or other 
forms of indemnity, the farmers loss would potentially be financially 
devastating
    A third risk is that a disease outbreak, and accompanying loss of 
market would precipitate a reduction in industry or region-wide 
production, and that a farmer's production would be reduced, either 
through company cutbacks or through delays in receiving additional 
livestock, resulting in loss of income. While income-based crop 
insurance coverage like AGR-Lite is designed to insure against market 
losses, there is question as to whether such a cutback in contract 
production would be regarded as an insurable loss or a change in 
production capacity, and therefore not insurable. Mortgages for 
livestock facilities are based on a certain number of flocks or animals 
per year, and production delays can cause the inability to maintain the 
flock or livestock numbers required under the mortgage. Although such a 
shortfall would be directly traceable to the disease outbreak, the 
shortfall might be classified as a ``business decision'' on the part of 
the contracting company, potentially eliminating the possibility of the 
farmer receiving reimbursement for the loss.
    All of the scenarios described above could be effectively addressed 
through clarification of the definition of insurable loss to include 
risks associated with disease or bioterrorism, including depopulation 
by state or local officials and loss of production or market associated 
with disease or bio-terrorism.
    Question. In response to the following request made by Mr. 
Boustany: ``If you could come back to us with some specific 
recommendations on how to simplify (AGR and AGR-Lite) we would enjoy 
hearing those recommendations.''
    Answer. In our experience with farmers who have evaluated AGR-Lite 
crop insurance for their farms, and in the experience of officials that 
we have consulted with who have assisted farmers in North Carolina and 
several other states with this program, there are several aspects of 
AGR and AGR-Lite that cause difficulty for farmers.
    The threshold concern is the inherent complexity in the program. 
The program requires significant documentation. As a part of the 
application, the farmer must submit 5 years of form 1040 Schedule F. 
The farm plan and farm reports can wait until the adjustment process, 
but this may cause problems, and insurance agents who sell the program 
often request this documentation at the time of application.
    There may be ways to simplify the forms, but the requirement that 
the farmer demonstrate both historical gross income and the capacity to 
produce that income during the insurance year cannot be escaped. This 
issue should be addressed by significant outreach and education, 
including clear information about required documentation and program 
specifics.
    But outreach and education alone will not solve the difficulties. 
The number of program participants is declining, suggesting that 
farmers have used the program and it did not meet their needs. There 
are several aspects of the program itself and the manner in which the 
program is being implemented that can be simplified and shifted to 
correct this problem.
    1. Assure access to trained Crop Insurance Agents or provide 
alternative access to the program.  Many farmers seeking information 
and assistance on AGR-Lite have reported finding it difficult to 
identify trained insurance agents to assist them in the application 
process. Many of the farmers with whom my organization has worked 
received delayed, discouraging or erroneous information as a result of 
their initial contact. Other areas of the country have also had 
challenges with identifying trained insurance agents that were both 
knowledgeable and willing to assist farmers with the application 
process.
    Because AGR and AGR-Lite are critically important programs, and the 
only programs available to insure a significant percentage of farm 
income, we believe that in the absence of trained insurance agents 
within a given county who market this program effectively, the Farm 
Services Agency (FSA) office of that county should be allowed to 
provide access to the program, much in the same way that they currently 
provide access to the Non-insured Disaster Assistance Program (NAP). 
The FSA administrates NAP in order to assure access to risk management 
products by farms that are not served by crop insurance, and we believe 
that they should have the opportunity, determined on a county-by-county 
basis, to provide AGR and AGR-Lite for the same reason and in the same 
way.
    2. Clarification of insurable income and inclusion of on-farm 
processing as insurable income. A second source of confusion for 
farmers is the delineation between the value of the crop as it comes 
out of the field which determines insurable income, and income 
attributed to post-harvest processing, which is considered uninsurable. 
To illustrate, under the current policy standards, if a farmer puts 
their cabbage in a box for market, the value of that box is not 
insurable and must be subtracted from the farmer's insurable gross 
income even if the cabbage is not marketable without the box. To truly 
work as an effective risk mitigation tool for farmers, income insurance 
must include the minimal processing such as washing, bagging or boxing 
that is required to access given markets.
    The more complex processing that takes place on-farm, usually by 
small-scale producers selling to direct markets such as roadside stands 
or farmers markets, should also be taken into consideration for income 
determination purposes under the program. Income produced through 
value-added activities such as turning fruit into jam, vegetables into 
pickles, or milk into cheese is currently not eligible for 
consideration under the program. For small-scale producers, this on-
farm processing is integral to farm income, and is not a an aspect of 
production that can be readily removed from income estimates. Farmers 
should therefore have the opportunity to include this income in their 
AGR-Lite policy.
    3. Require set level of coverage at time of application.  An 
additional complaint we have heard from farmers concerns contracting 
for a set amount of coverage, only to find during claims adjustment 
that specific requirements of the program not made clear during 
application makes them eligible only for a lower level of coverage. The 
result is a reduction of payment after the loss to an amount much less 
than that on which the farmer had relied.
    We believe that once the underwriter agrees to a level of coverage 
during the application process, that level of coverage should not be 
changed for reasons other than fraud or failure to abide by the farm 
plan, as long as the farmer has made a good-faith effort to produce the 
income and has informed the crop insurance agent of necessary changes 
in a timely manner. The creation of this level of certainty in the 
contracting process would greatly increase farmer confidence in the 
program, and would significantly simplify the claims adjustment 
process.
    4. Increase level of coverage.  Gross income coverage under AGR-
Lite is currently capped at 80 percent coverage (75 percent for 
producers of a single crop) with 90 percent payment rate, or 
effectively 72 percent. In an individual crop policy, a 20 or 30 
percent loss frequently equals a far smaller reduction in gross income 
because the farmer will take steps to replace lost income from other 
crops or enterprises. Therefore individual crop losses addressed by 
crop specific crop insurance are often less dangerous to the overall 
financial solvency of the farm. Gross income losses of 20 percent, on 
the other hand, include all loss mitigation and are frequently 
devastating. It is therefore necessary for AGR and AGR-Lite to provide 
higher rates of coverage, preferably as high as 95 percentage coverage 
with a 100 percentage payment rate, in order to assure farm survival.
    5. Include crop insurance and Non-insured Disaster Assistance 
Program payments in 5 year income average.  One of the benefits of the 
AGR-Lite program is that it can be combined with crop insurance 
products for specific crops. For instance, a farmer with corn and mixed 
vegetables that are sold at a farm stand can get APH or income-based 
crop insurance for his corn, and combine it with AGR-Lite to provide 
risk management for the rest of his income. However, under current 
regulations, crop insurance and NAP payments are counted when 
determining AGR-Lite benefits, but are not used to determine the 
farmer's 5 year income average. Failure to include insurance and NAP 
payments significantly reduces the farmer's average gross income, and 
therefore the farmer's coverage. Crop insurance and NAP payments should 
either count for both payment and average income determinations, or 
should count for neither.
    6. Strengthen the policy regarding establishing local market value, 
particularly for direct marketers.  Currently, AGR-Lite policies aver 
that if published prices are not available, then the average price 
offered by two commercial buyers, one nominated by the policyholder and 
one by the insurance company, should be used. This should be refined in 
two ways. First, when local market values are being determined for 
producers engaged in direct marketing, other local markets and not 
commercial buyers should be supplying average price estimates. Second, 
the product value used to estimate the revenue in the producer's 
intentions report for the current year should be decided at the time 
the intentions report is filed, otherwise the producer loses the price 
fluctuation protection afforded by the policy.
    7. Definition of `Animals' needs to be revised to ensure it is 
inclusive of production agriculture. The current programmatic 
definition of ``animal'' is ``living organisms other than plants or 
fungi that are produced or raised in farming operations including, but 
not limited to, aquaculture, bovine, equine, swine, sheep, goats, 
poultry, aquaculture species propagated or reared in a controlled 
environment, bees, and fur bearing animals, excluding animals for 
sport, show, or pets.'' The definition should be clarified to ensure 
that livestock engaged in contract production agriculture falls within 
the meaning of the term ``animals'' and is eligible for loss indemnity 
under the AGR-Lite program.
    8. Develop mechanisms to extend AGR and AGR-Lite to new and 
beginning farmers so they have the opportunity to utilize federal risk 
management programs. Access to risk management programs is especially 
important to beginning farmers. USDA already has provisions to support 
beginning farmers in their lending programs, and risk management is 
very important for access to credit. Strong consideration should be 
given to permitting beginning farmers and ranchers to have protection 
and premium rates established based on information for similar farms 
that have sufficient historical information to meet the requirements of 
these insurance plans.
    9. Clarify and simplify procedures for documentation of carryover 
inventory documentation.  Carryover commodities still in the production 
phase present some unique beginning and ending inventory challenges. 
The inventory rules should be reviewed to ensure the procedures provide 
clear directions on how to handle these commodities. In addition, 
clarity should be provided as to whether or not coverage is provided 
for these commodities including Christmas trees, shellfish, nursery, 
and livestock.
    10. Add a ``floor'' to the 5-Year income history used to determine 
coverage levels. Low revenue can reduce the approved AGR to the point 
where the insurance will not provide adequate coverage. This is 
especially important in areas of the country that have seen multiple 
disasters in the past 5 years. One possibility to address this issue is 
to maintain the 5 year Schedule F average, but allow up to 10 years if 
available to decrease the effect of individual disaster years.

                                  
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