Testimony Presented by

Richard C. Gibson

to the Committee on Agriculture, Nutrition, and Forestry
United States Senate

April 17, 1997

Thank you, Mr. Chairman, for the opportunity to address this committee.

I am the Chairman and CEO of American Agrisurance, a crop insurance company based in Council Bluffs, Iowa. We write crop insurance in 43 states. The reason I have been asked to testify today is because it is my company that developed Crop Revenue Coverage, or CRC. My comments today will focus on that product, which has proved to be the most successful new crop insurance product ever introduced.

The explanation for CRC's success is simple: farmers recognize its value and want to buy it. They know that the new agriculture risk environment makes protection like CRC critical. Our agents tell story after story about the farmers who have refused to buy crop insurance in the past, who are now coming to them and saying, "This is finally the product I've been waiting to buy."

Many of you were on this committee when the Crop Insurance Reform Act of 1994 was written to encourage private sector development of revenue insurance products. Many have assumed that our work on CRC began at that time. However, our development of this product has been underway for nearly a decade.

The idea for CRC was nothing new -- farmers had long been asking for revenue insurance. We started with the most basic idea in market research: ask the customers what they want. We held meetings with farmers and agents. We met with state commodity groups. Our first draft was a revenue product that looked a lot like the IP product created by the government. The farmers sent us back to the drawing board: "We need units and we need replacement cost coverage," they told us. After 18 months of research, we submitted CRC to the FCIC Board for approval.

It is because we asked farmers what they want that we have helped to increase participation in the program with this product. Ten percent of my company's 1996 CRC business came from farmers who were previously CAT policyholders; another 15 percent came from farmers who had not participated in the program at all. The average number of acres on a CRC policy is 45% higher than on an MPCI policy. CRC is bringing new farmers into the program and getting farmers to buy up from the catastrophic level. Additionally, it is bringing bigger farmers who may offer less risk into the program, many for the first time. These have been the goals of the crop insurance program for many years, and we are finally seeing them realized with this product.

We must all recognize that farmers have proved willing to pay a higher price for improved coverage. CRC can cost anywhere from 25% to 50% more than an MPCI policy. The farmer receives no additional subsidy to buy CRC -- if the subsidy on his MPCI policy was $4/acre on a $10 policy, the subsidy for his CRC policy will be $4/acre, even though the policy might cost $15. What this means is that the farmer is picking up all of the cost for his increased coverage. Iowa and Nebraska farmers paid an average of 65% more to buy CRC on their corn in 1996. Farmers understand the value of CRC and they are willing to pay for it.

The graphs attached to my testimony demonstrate the value of CRC to farmers, and why more than 30% of the industry's corn and soybean policies in Nebraska and Iowa transferred to CRC in its first year.

With CRC, the base price is set at 95% of the market. For 1997 corn, the base price is $2.59. This farmer, with a 65% CRC policy and a 15,385 bushel average yield, has a minimum guarantee of $25,900 in the spring. If the price moves to $4.00 at harvest, his revenue guarantee will increase too and become $38,000 (95% of $40,000). When market prices increase, so does his CRC coverage. The farmer has the security he needs to use alternative marketing strategies and maximize his profit in the market. The key is that CRC guarantees his revenue so he knows he has something to sell.

Additionally, CRC provides downside protection, for the years when prices go down at harvest. With CRC, the farmer does not always have to have a yield loss to receive an indemnity payment.

Conventional wisdom holds that the farmers who will prosper under the FAIR act are those who take their profits from the market. This is where CRC comes in. With CRC as a backstop, the farmer can create and implement a marketing plan. He can -- and as we have seen, he will -- use CRC as a backstop to forward contract or to use puts and calls. He may market through his elevator, through a broker, or through his co-op. CRC gives farmers the incentive to spend additional money for alternative marketing.

The farmers my company insures seem willing to use marketing and to assume additional responsibility to manage their risk. But they cannot do this successfully without the right tools. CRC gives them confidence that they have a secure inventory to market. It offers protection on both the upside and the downside against market volatility. It has brought new and desirable acreage into the program.

CRC is helping to smooth the transition to a market driven agricultural sector. It is a tool farmers want and need. The public-private partnership that delivers CRC is essential to farmers' success in using their new flexibility to prosper as we move forward together.