Statement of Dallas R. Smith
before the Senate Agriculture Nutrition and Forestry Committee

Mr. Chairman and members of the Committee, I am pleased to appear before you today on behalf of the United States Department of Agriculture's (USDA) Risk Management Agency (RMA).   Before beginning my testimony, I would like to express my personal gratitude to the members of this Committee for their continued support of  RMA and our private sector partners in strengthening the safety net for farmers.  Today, I would like to review the legislative changes USDA has proposed to put the Federal crop insurance program on a more solid financial footing, highlight several new initiatives and provide the Committee with additional information requested by the committee's staff.

CASTING THE SAFETY NET
Risk management programs, such as crop insurance, are USDA's primary means of helping farmers survive a crop loss.  Since enactment of the Federal Crop Insurance Reform Act of 1994 (1994Act), participation has nearly doubled.  In the 1993 crop year, Federal crop insurance provided $11.3 billion in protection covering 700,000 policies and 83.7 million acres.  Today, crop insurance provides $25.3 billion in protection covering more than 1.3 million policies on 181.3 million acres.  Participation has remained high despite modification of the linkage requirement so that it no longer required producers to obtain crop insurance in order to participate in USDA farm programs.   This increase is significant because ad hoc disaster assistance is no longer available to help producers survive a crop loss.

To encourage additional participation, RMA expanded coverage on 29 insured crops into 343 additional counties in 26 States last year.  We plan to expand coverage on 25 crops into 144 additional counties in 16 States in 1998.  Crop Revenue Coverage (CRC), which helps protect producers from losses in yield, price, or combinations of both factors, is now available on more than 90 percent of the corn, wheat, cotton, soybean, and grain sorghum acreage in the U.S.  We expect to expand CRC further in the future.

Early this year, Secretary Glickman became personally involved in the quest to build participation by writing a letter to nearly 400,000 formerly-insured customers encouraging them to re-examine their risk management needs and obtain crop insurance.  This outreach effort was coordinated with crop insurance companies and community-based organizations seeking to build our customer base.

Mr. Chairman, the commitment and team work demonstrated in this year's outreach effort illustrate the effort that will be required to keep participation at consistently high levels in the future.  The Secretary has shown great confidence in the private crop insurance industry, and companies have responded to his challenge.  In fact, speaking to producers, a recent industry publication stated:

 We are going to work with lenders, elevator operators, commodity brokers, extension educators and anyone else who plays a part in your risk management choices.  Together we are going to respond to the Secretary of Agriculture's call for a nationwide risk management education campaign.  Together, we are going to figure out how to make all our products and services work harder and more efficiently for you.  After all, if we don't all cooperate to help make you successful, how can we expect to be successful?

As a result of recent legislation, RMA's core mission has also expanded in significant new ways.  The 1996 Farm Bill moved the agency beyond administering traditional yield-based crop insurance programs.  RMA is now orchestrating a risk management education initiative, developing innovative new plans of insurance, and crafting an options pilot program to help dairy producers manage price volatility.

Mr. Chairman, time and experience have demonstrated that crop insurance is a highly effective and equitable means of providing farmers risk protection.  To the extent that the Federal crop insurance program has grown in cost and budget in recent years, it is directly attributable to expansion of coverage, and is a predictable and healthy consequence of current farm policy.  To continue providing producers the currently high level of service, we are proposing that decisive action be taken to resolve a funding issue that has hovered over the program since 1994.

When the Federal Crop Insurance program was reformed in 1994, the program was not fully funded with "mandatory" spending.  Beginning in the 1998 reinsurance year, about half of the funds for administrative expense reimbursement to insurance companies, $188 million in fiscal year 1998 were provided from discretionary spending, subject to the annual appropriations process.  This situation creates enormous difficulties for the crop insurance industry because reinsurance agreements and many of the underlying crop insurance contracts are executed before the appropriations cycle is completed.  The results and timing of the appropriations process could have a significant impact on the availability of policies, service, and the ability of companies to plan their operations and to create new products and services.

BUILDING THE FOUNDATION
Because more than one million farmers have come to depend on a stable crop insurance program, USDA has proposed to put the crop insurance program on a firmer financial foundation.  USDA proposes to shift the funds needed for companies' administrative and operation (A&O) expenses from discretionary to mandatory spending, and we will propose  corresponding savings in mandatory spending offsets.  In fiscal year (FY) 1999, USDA will provide the offsets for this funding from sources other than the crop insurance program.  From FY 2000 through FY 2003, USDA proposes that about half of the offsets be shared by producers and crop insurance providers with the balance from other sources.  These savings will be reflected in the budget baseline thereafter.  Producers, as primary beneficiaries of the services and products developed  the insurance industry, will benefit from the stability of the program created by swift enactment of our legislative proposal.  USDA proposes the following beginning in FY 2000:

  Limit payment eligibility under the catastrophic risk protection (CAT) insurance program to $100,000 per person.
 In crop year 1997, about 9,500 producers had CAT insurance policies that exceeded $100,000 for all insured crops.  While maintaining the essential safety net for producers, the proposed limitation prevents the CAT program from potentially paying millions of dollars to these large farming operations.

 Our analysis assumes some CAT policyholders will purchase buy-up (additional) coverage.  This action will save $50 million in crop year 2000, increasing to $56 million in 2003 under the Administration's baseline projections.

  Reduce A&O subsidies for insurance providers from 27 percent to
 25 percent of premiums for the standard plans of insurance.
 This action, combined with the proposed limitation on CAT coverage, saves an estimated $35-40 million per year.  The reduction in the companies' A&O represents a partial recuperation by the Department of A&O savings believed to have been generated for companies through economies of scale created by the rapid increase in business.

  Lower premium subsidies for higher levels of coverage.
 Buyers of additional coverage must also absorb a portion of the reductions needed to maintain the overall program.  However, to keep the incentive to "buy-up" strong, USDA is only proposing a small reduction in premium subsidy.  Current law provides premium subsidy for additional coverage equal to the premium for coverage of 50 percent of the yield approved indemnified at 75 percent of the expected market price (50/75).  The Department proposes to reduce the subsidy to equal the premium for coverage of 50 percent of the approved yield indemnified at 72.5 percent of the expected market price, which will increase an average producer's premium about 10 cents per acre.

  Reduce the statutory loss ratio target from 1.075 to 1.060 beginning in FY 2000.
 This action will improve the actuarial soundness of the program and help achieve progam
stability.  The increased cost to producers will be minimal.  The savings attributed to this action
are relatively small, about $30 million total during the FY 2000-2003.

To summarize the annual crop insurance offsets beginning in the year 2000, we expect payment limitations on larger CAT policies to offset $58 million; an adjustment to the expense reimbursement paid to insurance companies to offset $37 million; a modification of the premium subsidy for additional coverage and a lower loss ratio together offset $33 million; and a lower loss ratio to provide offsets of $30 million.  Mr. Chairman, these offsets are necessary to shift sales commissions to the mandatory account under PAYGO.  By adopting these measures, we will preserve a viable safety net for producers, and make the program more cost effective.  Now, I would like to review some recent program changes that illustrate our commitment to making sure producers have the tools they need to manage risk under current farm laws.

PROGRAM IMPROVEMENTS
I am pleased to report that in December of last year, we completed long-awaited revisions to the prevented planting regulations.  The changes, which affect about 84 percent of our policyholders, resulted from recommendations submitted by both crop insurance companies and commodity groups.  These new provisions give producers significantly better protection by increasing prevented planting coverage and reducing the time necessary to pay claims.

For the most part, these prevented planting changes have been favorably received by farmers and agents.  However, some have voiced specific concerns about the minimum qualifying acreage and insurance period requirements.  RMA is currently reviewing these requirements to determine if future changes are warranted.  We will also solicit comments through the Federal Register on provisions in the cotton policy concerning replanting, prevented planting and quality adjustment.  Although changes to the cotton policy cannot be made for the 1998 crop year, we expect to have them in effect before sales close for the 1999 crop year.
 
RISK MANAGEMENT EDUCATION
In conjunction with the educational mandate contained in the 1996 Farm Bill, on February 10,  RMA began seeking innovative ideas for helping farmers manage risk.  RMA, in conjunction with a three agency steering committee that also includes CSREES and the Commodity Futures Trading Commission, will award grants totaling $3 million for projects aimed at delivering training programs to producers, developing curriculum, creating tools to aid in decision making, and for research.

This outreach effort is vitally important to American farmers if they are to acquire the risk management skills necessary to survive and prosper.  Farm organizations, bankers, commodity brokers, crop insurance agents and others play a critical role in this effort because they already have the confidence of their clients and are well positioned to influence risk management decisions.

DAIRY OPTIONS PILOT PROGRAM
Mr. Chairman, the Secretary has authorized RMA to develop an options pilot program for dairy producers that will demonstrate and test a system for providing minimum pricing guarantees through a cost-sharing arrangement with USDA.  The Dairy Options Pilot Program will give producers the education and experience necessary to help manage their price risks.  Under this program, when milk prices fall, producers will be able to offset losses based on projected future earnings, in effect securing the price of their milk.  The pilot program, scheduled to begin this summer, will be limited to six counties in six states that RMA will select on the basis of concentration of production and other factors.

ON THE HORIZON
Recently, the RMA Administrator met with farmers in three States in the Northern Plains to get a sense of how our policies affect those who have endured several years of losses, and who are now trying to obtain enough insurance coverage to stay in business.
As many of you know, northeastern North Dakota and northwestern Minnesota have suffered major wheat losses due to repeated episodes of scab and vomitoxin.  These diseases develop under wet weather conditions, and the market value of affected production can be reduced significantly.  In these situations, affected production often qualifies for "quality loss adjustment."   National factors are currently used because our initial research indicated that regional quality discounts were minimal.  This situation may have changed.  Therefore, RMA is reviewing local price discount schedules from grain elevators in the region, in addition to pricing data from the Minneapolis Grain Exchange, to determine if a regional factors can be devised that will be acceptable to both producers and private crop insurance companies.

Quality losses also lower the "production to count," which is used to compute the actual production history (APH) average yield for subsequent years.  Since this situation has existed for several years, the insurance guarantees for many producers in the Northern Plains region have declined while rates have increased.  This situation has resulted in some lenders limiting or rejecting requests for operating loans because of limited crop insurance collateral.  Low market prices for small grains throughout the nation have further aggravated this situation.

We recognize that we must explore alternatives that will better allow producers to protect themselves in the Northern Plains and other regions where situations may make the standard programs less than adequate for producers.  RMA is exploring alternatives that would allow producers access to a higher APH yield guarantee in exchange for a surcharge, place limitations on crop insurance "units," or other potential offsets.  Policy adjustments like this have significant impacts on risk and the marketing of the product.  Therefore, crop insurance companies will play an active role in determining the final outcome of our review.

Like the farmers of the Northern Plains, producers nationwide have faced the possibility of higher premium rates if they have successive years of crop losses.  In the early 1990s, RMA established a program to improve the actuarial soundness of the Federal crop insurance program and, at the same time, limit across-the-board rate increases for producers whose loss histories are consistent with county averages.  This system, known as the nonstandard classification system (NCS), allows RMA to decrease the yield or increase the premium rate for individual producers based on their own adverse experience, has been frequently criticized because of concerns that it penalizes good producers with adverse rate adjustments due to factors beyond their control.

As a result, RMA is seeking an alternative to the present NCS process and has formally solicited comments for this purpose.  Most of the comments we received recommended the process be changed.  Many also recognized the need to assure that a typical loss experience is properly recognized and rated.

Previous reviews of the NCS process have eliminated many of the conditions that permitted adverse experience to accumulate.  These include actions such as modifying the APH process, tracking policyholder information, and compliance initiatives.  Our experience seems to indicate that more frequent rate adjustment is preferable to the present NCS system, which permits losses to accumulate for 4 years or longer before any action is taken.  So, frequent and gradual rate adjustments may permit removal of the NCS program.  We expect a final determination will be made soon.

NEW PRODUCTS
Program innovation is the life blood of the crop insurance program.  As we have increased the availability and types of products the private sector can market, program participation has increased dramatically in a short amount of time.  RMA has solicited public comment on a regulation concerning the development of new products by the private sector for approval by the FCIC Board of Directors.  The proposal outlines the timing, submission, and approval process so that the Board can efficiently consider product submissions.  Publication of a final rule is expected this spring.  This regulation, once in place, will facilitate innovation, streamline the process and standardize program requirements.

PUSHING THE ENVELOPE

Extending the crop insurance safety net to as many producers as possible is important not only to the individual farmers but to our Nation's economy.  America is the world leader in agriculture and all producers should have an equal opportunity to manage their risk through a Federally supported crop insurance program.  Secretary Glickman is concerned that the RMA safety net reaches as many farmers as possible.  Since developing individual programs for each of the 1,500 different crops produced in the country would be an extremely time consuming process, RMA and insurance company representatives are exploring ideas on how to provide farm-based revenue coverage.   RMA has reviewed a number of approaches from several different sources.  Much work remains to be done, but we believe the goal is worth the effort.

CONCLUSION
Mr. Chairman, the reformed crop insurance program has greatly exceeded expectations.  Participation has increased significantly due to program innovations and the marketing efforts of  18 crop insurance companies and 15,000 agents participating in the program.  Market sensitive programs developed by the private sector will continue to provide farmers the diverse risk management tools they need.

To ensure our agency is prepared to meet these new challenges, RMA launched a thorough review of how we can improve the product development and compliance investigation processes.  These deliberations included insurance company representatives and others.

In terms of financial performance, we believe that the crop insurance program has exceeded expectations.  For instance, from 1987 to 1994, disaster assistance payments averaged roughly $1.2 billion a year, while annual crop insurance outlays averaged roughly $800 million over the same period.  Combined, the total Federal expenditure was roughly $2 billion annually.  Since the 1994 Act, net expenditures for the crop insurance program have averaged roughly $1.2 billion annually.  While much of these savings have been due to favorable weather, still, the reformed crop insurance program has proven to be a good value for all taxpayers.

Mr. Chairman, this program is critical to the continued success of our Nation's farmers and USDA is committed to working with the Committee and others to put the crop insurance program on a firmer financial footing.  I appreciate the opportunity to address this Committee on behalf of the Risk Management Agency, and I will be glad to answer any questions that you or other members of the Committee may have.