ON BEHALF OF THE
NATIONAL FARMERS UNION
REGARDING THE
CROP INSURANCE REFORM ACT
OF 1998
AND OTHER PROPOSALS
PRESENTED TO THE
SENATE AGRICULTURE COMMITTEE
WASHINGTON, D.C.
MARCH 10, 1998
STATEMENT OF PHIL CYRE, ON BEHALF OF THE NATIONAL FARMERS UNION, PRESENTED TO THE SENATE AGRICULTURE COMMITTEE, ON MARCH 10, 1998
Thank you for holding a hearing regarding the Crop Insurance Reform Act and other risk management proposals. I am Phil Cyre from South Dakota. I operate a 3,000 acre farm where we produce wheat, corn, soybeans, barley, oats, and sunflowers. I serve as vice president of South Dakota Farmers Union, and today I am testifying on behalf of the 300,000 members of the National Farmers Union.
In the absence of support for ad hoc disaster assistance to producers of farm commodities, the value of risk management protection to farmers can scarcely be overestimated. The region I live and farm in has, over the past 5 years, experienced some of the most severe weather-related disasters in recorded history. The losses suffered due to last year's winter storms and the floods caused by spring snow-melt reached into the hundreds of millions of dollars; some terrible losses of foundation herd livestock occured. The relief provided by the Livestock Indemnity Program was greatly appreciated. The floods of the spring of 1997 reached once-in-500-year levels.
Despite low supply-to-useage ratios, commodity prices have fallen to levels that will not permit producers affected by this disaster an opportunity to begin to rebuild cash reserves and retire debt enough to self-insure against the next crop loss. This is a primary factor in the high use of crop insurance in the Dakotas. I recommend strongly that efforts are made to continue to support MPCI coverage as an ongoing feature of USDA policy. In addition to providing an excellent risk management tool, the use of crop insurance policies as collateral for operating credit has become increasingly common. We should not underestimate the value that risk management coverage provides to lenders.
I cannot underestimate the amount of credit that is made available to farmers through crop insurance. Lenders are very comfortable lending money based on crop insurance coverage. This is one of the most important reasons to maintain crop insurance.
Given the importance of this subject to our everyday operation, I welcome the opportunity to provide comments on how the Crop Insurance Reform Act of 1998 and proposals from the insurance industry and the Risk Management Agency (RMA) would impact producers. I would also like to bring to your attention an important immediate concern regarding prevented planting, especially as it is applied to prairie pothole regions.
Impact of the Crop Insurance Reform Act of 1998
Mr. Chairman, we appreciate your interest in reforming and improving
the crop insurance program. We are optimistic about some of the new
products for revenue coverage, and we are supportive of measures which
encourage companies to provide new and innovative types of coverage.
At the same time, we are cautious about provisions to shift the RMA to
a regulator- only status, and believe there are several reasons those provisions
should not be enacted at this time.
When Congress enacted the Crop Insurance Reform Act of 1994, one of the goals was to enhance the program so that producers could get adequate risk protection which would in turn, reduce the need for disaster assistance. We are concerned that some provisions now under consideration could reduce coverage or leave some producers without coverage.
We look forward to the day when more crops are shifted from the Noninsured Assistance Program (NAP) status to become crops which are eligible for crop insurance coverage. It is our understanding RMA is working toward this goal. We believe this goal will be reached sooner if RMA is allowed to continue its use of pilot programs.
We are also concerned that private companies may be reluctant to serve producers of some specialty crops, or producers who raise a crop which is grown in only a small part of a state. This year will be the first that producers in all states will experience private delivery of catastrophic coverage. We should take the opportunity to see how single delivery works for catastrophic coverage before discontinuing RMA's role in providing other federal coverage.
There may be some benefit in restructuring the FCIC board of directors. However, we do not favor restructuring the FCIC board in a manner which results in reducing the number of farmer representatives from three to two.
In addition, we have several questions about how other functions of the RMA and the government would change under the proposed reform. 1. Would RMA still be responsible for negotiating the reinsurance contract with private insurance companies? 2. Would RMA continue to set policy terms and conditions? 3. Would RMA continue to guarantee payment of authorized claims? 4. Would the government continue to subsidize partial premiums?
Impact of the Crop Insurance Industry Proposal
The industry proposal would reduce the loss ratio to zero. We oppose this provision since the likely result of this change would be to make crop insurance unaffordable in the areas it is most needed.
The industry also proposes to accept a one percent reduction in administrative expense reimbursement. This is in contrast to both the chairman's proposal and the RMA proposal which call for a two percent reduction. While we believe a reduction can be absorbed, we would like to see some safeguard to be sure that the cut is not passed on directly to the agents who are working to deliver coverage.
Impact of the Risk Management Agency Proposal
In general, we have been pleased with the openness of the Risk Management Agency (RMA). We appreciate ongoing opportunities we have had to meet with RMA and participate in discussions about policy proposals as well as share our concerns as various needs arise.
The current proposal from the Risk Management Agency (RMA) is limited to measures designed to produce budgetary savings. While we appreciate the need for savings, we are concerned about provisions which would lower the available level of coverage.
We do not oppose setting a cap of $100,000 per producer for castastrophic coverage. Producers who need to have additional coverage still have the option of purchasing buy-up coverage.
We would like to see an analysis of the impact of lowering the loss ratio target from 1.075 to 1.060 before commenting on that provision. At a time when farm programs are moving toward a free-market approach, risk management is one of the few tools left for producers.
We are also concerned that reducing premium subsidies for higher levels of coverage sends exactly the wrong signal to producers. We should be encouraging producers to seek higher levels of insurance, not making such coverage unaffordable.
Prevented Planting Coverage in the Prairie
A provision in the Standard Reinsurance Agreement (SRA) negotiated last summer requires prevented planting areas to be on contiguous acreage. While this requirement may be workable for some regions of the country, it effectively precludes coverage in areas with wetlands and prairie potholes.
Last year, as a result of the worst winter in recorded history, I had 847 acres of ghost planting and an additional 414 acres of prevented planting. The new 20/20 rule with the contiguous acreage requirement, had it been in place last year, could have resulted in another disaster for me. This rule could have made 100 acres of a 500-acre tract of land on my farm uninsurable as prevented planting. Producers must be able to access insurance coverage that is capable of managing risk. The current wetlands regulations, coupled with the unusual moisture levels of our soils, makes the prairie pothole regions vulnerable to uninsured prevented planting acreage. An adjustment in the rules is needed that will remove the contiguous provision from the terms of coverage. I will gladly provide additional testimony if requested.
Producers are already experiencing problems from scab caused by too much moisture, which is resulting in lower actual production history (APH) averages. Reducing the land eligible for prevented planting coverage compounds the APH situation.
Conclusion
We commend those who have offered proposals designed to reduce costs. However, if reducing costs translates to reducing coverage, there is a problem. Crop insurance of one of the few remaining pieces of the safety net. Therefore, we are requesting an economic analysis including regional impacts, to provide further information on how the various proposals affect the producers' cost of the risk management products and whether the proposals would result in coverage being expanded or decreased.
Thank you for the opportunity to present our comments. We look forward to working with Congress and RMA to ensure the program works in a way which allows producers to insure against risk and reduce taxpayer exposure.