[Federal Register Volume 63, Number 232 (Thursday, December 3, 1998)]
[Rules and Regulations]
[Pages 66715-66717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32155]


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DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 457

RIN 0563-AB62


Common Crop Insurance Regulations; Cotton and ELS Cotton Crop 
Insurance Provisions

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Final rule.

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SUMMARY: The Federal Crop Insurance Corporation (FCIC) finalizes the 
Cotton Crop Insurance Provisions and the Extra Long Staple (ELS) Cotton 
Crop Insurance Provisions for the 1999 and succeeding crop years to 
provide a prevented planting coverage level of 50 percent of the 
insured's production guarantee for timely planted acreage. The intended 
effect of this action is to create a policy that better meets the needs 
of the insured.

EFFECTIVE DATE: November 30, 1998.

FOR FURTHER INFORMATION CONTACT: Stephen Hoy, Insurance Management 
Specialist, Research and Development, Product Development Division, 
Federal Crop Insurance Corporation, U.S. Department of Agriculture, 
9435 Holmes Street, Kansas City, MO 64131, telephone (816) 926-7730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    The Office of Management and Budget (OMB) has determined this final 
rule to be significant and, therefore, it has been reviewed by OMB.

Cost-Benefit Analysis

    A Cost-Benefit Analysis has been completed and is available to 
interested persons from the address listed above. In summary, for 
prevented planting coverage, Government outlays for producer premium 
subsidies are estimated at about $9.9 million; administrative subsidies 
are estimated at about $3.5 million; and underwriting costs are 
estimated at about $1.2 million. If only the portion of the prevented 
planting costs attributable to increasing the payment rate from 45 to 
50 percent are included, the total increase in Government outlays is 
expected to be about $0.2 million. The analysis indicates that rate 
increases for prevented planting coverage vary from region to region, 
depending on locally expected indemnities, from 0.3 percent to 0.9 
percent. On average, at the 50 percent payment rate, about 0.76 
percentage point will be added to cotton and ELS cotton premium rates 
to account for the basic prevented planting coverage. Preliminary 
analysis suggests that the increase in the payment rate will add about 
0.1 percent to total premiums to cover expected losses.

Paperwork Reduction Act of 1995

    Under the provisions of the Paperwork Reduction Act of 1995 (44 
U.S.C. chapter 35), the collections of information for this rule have 
been previously approved by the Office of Management and Budget (OMB) 
under control number 0563-0053 through October 31, 2000. The amendments 
set forth in this rule do not revise the content or alter the frequency 
of reporting for any of the forms or information collections cleared 
under the above referenced docket.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform of 1995 (UMRA) establishes 
requirements for Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments and the 
private sector. This rule contains no Federal mandates (under the 
regulatory provisions of title II of the UMRA) for State, local, and 
tribal governments or the private sector. Therefore, this rule is not 
subject to the requirements of sections 202 and 205 of the UMRA.

Executive Order 12612

    It has been determined under section 6(a) of Executive Order No. 
12612, Federalism, that this rule does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
provisions contained in this rule will not have a substantial direct 
effect on States or their political subdivisions or on the distribution 
of power and responsibilities among the various levels of government.

Regulatory Flexibility Act

    This regulation will not have a significant economic impact on a 
substantial number of small entities. New provisions in this rule will 
not impact small entities to a greater extent than large entities. The 
amount of work required of the insurance companies will not increase 
because the information must already be collected under the present 
policy. No additional work is required as a result of this action on 
the part of either the insured or the insurance companies. Therefore, 
this action is determined to be exempt from the provisions of the 
Regulatory Flexibility Act (5 U.S.C. 605), and no Regulatory 
Flexibility Analysis was prepared.

Federal Assistance Program

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.450.

Executive Order 12372

    This program is not subject to the provisions of Executive Order 
12372 which require intergovernmental consultation with State and local 
officials. See the Notice related to 7 CFR part 3015, subpart V, 
published at 48 FR 29115, June 24, 1983.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
12988 on civil justice reform. The provisions of this rule will not 
have a retroactive effect. The provisions of this rule will preempt 
State and local laws to the extent such State and local laws are 
inconsistent herewith. The administrative appeal provisions published 
at 7 CFR part 11 must be exhausted before any action against FCIC for 
judicial review may be brought.

Environmental Evaluation

    This action is not expected to have a significant economic impact 
on the quality of the human environment, health, and safety. Therefore, 
neither an Environmental Assessment nor an Environmental Impact 
Statement is needed.

Background

    On Wednesday, September 30, 1998, FCIC published a proposed rule in 
the Federal Register at FR 52198-52200 to amend the Common Crop 
Insurance Regulations (7 CFR part 457) by revising 7 CFR 457.104 and 7 
CFR 457.105 effective for the 1999 and succeeding crop years.
    Following filing of the proposed rule at the Federal Register, the 
public was afforded 15 days to submit written comments, data, and 
opinions. A total of 10 written comments were received from an 
insurance service organization, two cotton producer associations, and 
three reinsured companies. The comments received and FCIC's responses 
are as follows:
    Comment: Two producer associations concurred with the proposal to 
provide a replant payment for cotton and ELS

[[Page 66716]]

cotton damaged by excess moisture, hail, or blowing sand or soil but 
only if no additional premium is added for the coverage. One producer 
association recommended that replanting coverage be provided as an 
option at the choice of the producer. Two reinsured companies stated 
that adding replant payments will substantially increase loss 
adjustment expenses, which was not contemplated in the 1999 Standard 
Reinsurance Agreement. One reinsured company recommended that data 
regarding premium rates and workload requirements be published before 
changes are made. Another reinsured company stated that support could 
not be provided without knowledge of rate increases. This commenter 
also indicated that multiple causes of loss often occur, and, 
therefore, it would be nearly impossible to identify damage by cause 
and limit replant payments to excess moisture, hail, or blowing sand or 
soil.
    Response: Additional premium must be charged to provide replanting 
coverage because this increases the risk of loss and is not included in 
the premium rate. Loss adjustment workload for reinsured companies may 
increase due to this provision. However, costs would be recouped 
through the additional administrative subsidies as a result of higher 
premium. The proposed rule limited the causes of loss on which 
replanting payments would be provided in an effort to limit loss 
exposure and subsequent impact on premium rates. Based on the negative 
comments, FCIC has elected not adopt the proposal, and no replanting 
payment will be provided for the 1999 crop year.
    Comment: A producer association stated that the 25 percent 
deductible in price that must be met before cotton is eligible for 
quality adjustment is too high to be useful. The commenter recommended 
that quality adjustment be based on physical standards, and FCIC 
establish a base quality as is done with grains with a trigger of not 
greater than 5 percent adopted. The commenter stated that the quality 
adjustment procedure should not be changed unless the proposal is 
modified substantially. The commenter also recommended that FCIC adopt 
a procedure that does not penalize a producer's APH yield as a result 
of quality adjustment. A reinsured company stated that without knowing 
specific plans for rate increases, the proposal could not be endorsed.
    Response: FCIC must apply a premium rate increase if the quality 
adjustment deductible is lowered. Calculating the quality adjustment 
factor using any reduction in value due to damage will increase 
indemnities, and FCIC has determined that if it adopted the trigger 
suggested, a premium rate increase of approximately 5 percent would be 
required to compensate for the potential increase in losses. FCIC 
concurs with the recommendation that the quality adjustment for cotton 
and ELS cotton be based on physical standards; however, this requires a 
detailed study to evaluate the appropriate cotton classification 
factors for quality adjustment, the deductible to apply, and to measure 
the effect on premium rates. FCIC cannot adopt the recommendation that 
cotton producer's APH yields should not reflect production to count 
after quality adjustment. For all crops that permit a quality 
adjustment, a producer's yield is reduced due to quality adjustment for 
indemnity purposes, and the yield reduction is retained in the 
producer's production history. Cotton should not be an exception. If 
the crop insurance program is to be actuarially sound, the producer's 
production history must reflect all indemnities paid, including losses 
due to quality adjustments. Based on the negative comments, FCIC has 
elected not to adopt the proposed change to quality adjustment, and the 
quality adjustment determination will remain the same as that available 
for the 1998 crop year. However, FCIC will work with the industry to 
explore alternatives to the current quality adjustment determination.
    Comment: A cotton producer association stated that an analysis 
comparing preplanting costs shows that cotton should have a prevented 
planting percentage comparable to corn. The commenter stated that 
deducting preplanting costs from the prevented planting payment for 
each commodity shows that cotton producers fare considerably worse than 
either corn or soybean growers, even if cotton producers receive the 
proposed 50 percent coverage level, and the inequity is believed 
greater when premiums are deducted. The commenter stated that this 
analysis indicates that the soybean prevented planting percentage 
should be less than cotton and corn and questioned why soybeans were 
not included in the Economic Research Service (ERS) study. The 
commenter also expressed opposition to the provision that prohibits 
planting a substitute crop on prevented planting acreage. The commenter 
stated that elimination of the substitute crop provision penalizes 
Southern producers who have more numerous cropping alternatives than 
producers in the Midwest. The commenter recommended that FCIC raise the 
cotton prevented planting coverage level to 60 percent and allow a non-
insurable ghost crop to be planted on the prevented planting acreage. 
If these recommendations cannot be implemented with no additional cost 
to the producer, the commenter asked that prevented planting coverage 
become an option for cotton producers, and any premium reduction due to 
the reduced coverage be credited.
    Response: FCIC has found that the evidence does not support an 
increase in the cotton prevented planting percentage to 60 percent. 
Prevented planting coverage levels should be based on estimated 
preplanting costs for a crop, and not on equivalency to the coverage 
level for other crops. An increase to the 50 percent rate of payment 
for prevented planting of cotton is consistent with the basis on which 
prevented planting payment rates have been established for other crops. 
An adjustment will be made in premium rates for cotton to reflect this 
higher value. However, this increase will be proportional to the 
increase in coverage, i.e., the cost for the prevented planting 
component of the premium rates will increase by approximately 11 
percent, or 0.1 percentage point. This higher rate of payment should 
not affect the frequency with which prevented planting would occur. The 
commenter raised an issue of including crop insurance premium costs in 
the preplanting expenses that are analyzed to determine the rates of 
payment for prevented planting. Premium is based on the risk associated 
with the crop, not the cost associated with planting the crop. 
Prevented planting is only intended to cover costs associated with 
planting. This issue is interrelated with the issue of the overall 
level of cotton premium costs relative to other crops, an issue that 
also was raised by commenters (see below). FCIC has committed to work 
with interested parties in a detailed review of premium rates for 
cotton. FCIC did not request ERS to ignore soybeans in the study of 
prevented planting payment rates. The reason soybeans were not included 
cannot be determined. History has shown that prevented planting cannot 
be provided as an option. This would be inconsistent with the prevented 
planting requirement mandated by the Federal Crop Insurance Act. FCIC 
removed the substitute crop provision because it discovered that 
producers could receive benefits for the crop year that exceeded their 
income received for the crop year if the crop produced the approved 
yield. This is not the intent of crop insurance. Therefore, for 1998 
and

[[Page 66717]]

subsequent crop years, the substitute crop provision was removed from 
all prevented planting provisions.
    Comment: Two producer associations expressed concern that cotton 
premiums substantially exceed other major commodities relative to risk 
exposure and the level of coverage provided. One commenter stated that 
prior to the Federal Crop Insurance Reform Act of 1994, most cotton 
producers chose not to participate in the crop insurance program. 
Therefore, the actuarial tables prior to 1995 reflect a very 
unrepresentative pool of cotton insurance participants. The commenter 
stated that the rating models used by FCIC should reflect the much 
larger pool of cotton insurance participants since 1995, which would 
result in significantly lower premiums for cotton producers. One 
commenter opposed implementation of the proposed rule if the changes 
result in any increase in premium costs for cotton producers and 
suggested that each of the proposed changes be made optional coverage. 
A reinsured company expressed concern that the proposed changes are not 
beneficial enough to warrant any additional premium.
    Response: FCIC recognizes that many cotton producers believe 
premium rates for cotton to be inequitably high for that crop. FCIC 
traditionally has based premium rates on its experience in each county. 
However, improvements to crop varieties, such as resistance to disease 
and insects, changes to cropping patterns due to ``freedom to farm,'' 
and other changes may be rendering some experience to be unreliable as 
a predictor of potential future losses. The Federal Crop Insurance Act 
directs FCIC to charge premiums that are adequate to pay expected 
losses and build a reasonable reserve. FCIC is reviewing its experience 
for cotton to determine if it does in fact provide a basis to meet the 
tests set forth in the law. If it does not, adjustments will be made as 
appropriate. As stated above, FCIC has eliminated many of the proposed 
provisions that would have raised premium rates. However, FCIC has 
retained the 50 percent coverage because it concluded the benefits 
outweigh the insignificant increase in premium.
    In addition to the changes described above, FCIC has amended the 
following ELS Cotton Crop Provisions:
    1. Sections 10 (d) and (f)--Changed the ELS cotton price quotations 
for prices ``A'' and ``B'' and the price used to adjust AUP cotton 
harvested or appraised from acreage originally planted to ELS cotton 
from the Weekly Cotton Market Review to the Daily Spot Cotton 
Quotation. This publication more accurately reflects the value of the 
ELS cotton.
    Good cause is shown to make this rule effective upon filing for 
public inspection at the Office of the Federal Register. This rule must 
be effective prior to the November 30, 1998, contract change date to be 
effective for the 1999 crop year. Therefore, public interest requires 
that FCIC act immediately to make these provisions available.

List of Subjects in 7 CFR part 457

    Crop insurance, Cotton.

Final Rule

    Accordingly, as set forth in the preamble, the Federal Crop 
Insurance Corporation amends 7 CFR part 457 as follows:

PART 457--COMMON CROP INSURANCE REGULATIONS

    1. The authority citation for 7 CFR part 457 continues to read as 
follows:

    Authority: 7 U.S.C. 1506(1), 1506(p).

    2. Sec. 457.104, section 11 of the crop provisions is revised to 
read as follows:


Sec. 457.104  Cotton crop insurance provisions.

* * * * *

11. Prevented Planting

* * * * *
    (b) Your prevented planting coverage will be 50 percent of your 
production guarantee for timely planted acreage. If you have limited 
or additional levels of coverage, as specified in 7 CFR part 400, 
subpart T, and pay an additional premium, you may increase your 
prevented planting coverage to a level specified in the actuarial 
documents.
    3. Sec. 457.105, section 10 of the crop provisions is revised to 
read as follows:


Sec. 457.105  ELS Cotton Crop Insurance Provisions.

* * * * *

10. Settlement of Claim

* * * * *
    (d) Mature ELS cotton production may be adjusted for quality 
when production has been damaged by insured causes. Such production 
to count will be reduced if the price quotation for ELS cotton of 
like quality (price quotation ``A'') for the applicable growth area 
is less than 75 percent of price quotation ``B.'' Price quotation 
``B'' is defined as the price quotation for the applicable growth 
area for ELS cotton of the grade, staple length, and micronaire 
reading designated in the Special Provisions for this purpose. Price 
quotations ``A'' and ``B'' will be the price quotations contained in 
the Daily Spot Cotton Quotations published by the USDA Agricultural 
Marketing Service on the date the last bale from the unit is 
classed. If the date the last bale is classed is not available, the 
price quotations will be determined when the last bale from the unit 
is delivered to the warehouse, as shown on the producers account 
summary obtained from the gin. If eligible for quality adjustment, 
the amount of production to be counted will be determined by 
multiplying the number of pounds of such production by the factor 
derived from dividing price quotation ``A'' by 75 percent of price 
quotation ``B.''
* * * * *
    (f) Any AUP cotton harvested or appraised from the acreage 
originally planted to ELS cotton in the same growing season will be 
reduced by the factor obtained by dividing the price per pound of 
the AUP cotton by the price quotation for the ELS cotton of the 
grade, staple length, and micronaire reading designated in the 
Special Provisions for this purpose. The prices used for the AUP and 
ELS cotton will be the price quotations contained in the Daily Spot 
Cotton Quotations published by the USDA Agricultural Marketing 
Service on the date the last bale from the unit is classed. If the 
date the last bale is classed is not available, the price quotations 
will be determined when the last bale from the unit is delivered to 
the warehouse, as shown on the producer's account summary obtained 
from the gin. If either price quotation is unavailable for the dates 
stated above, the price quotations for the nearest prior date for 
which price quotations for both the AUP and ELS cotton are available 
will be used. If prices are not yet available for the insured crop 
year, the previous season's average prices will be used.
* * * * *
    4. In Sec. 457.105 section 12 is revised to read as follows:

12. Prevented Planting

* * * * *
    (b) Your prevented planting coverage will be 50 percent of your 
production guarantee for timely planted acreage. If you have limited 
or additional levels of coverage, as specified in 7 CFR part 400, 
subpart T, and pay an additional premium, you may increase your 
prevented planting coverage to a level specified in the actuarial 
documents.

    Signed in Washington, DC, on November 30, 1998.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 98-32155 Filed 11-30-98; 2:17pm]
BILLING CODE 3410-08-p