STATEMENT OF

THE AMERICAN FARM BUREAU FEDERATION

TO THE

SENATE AGRICULTURE, NUTRITION

AND FORESTRY COMMITTEE

REGARDING

CROP INSURANCE REFORM

Presented by

Craig Hill

Iowa Farm Bureau Federation

October 14, 1999

Mr. Chairman, we appreciate your efforts to consider this important issue. I am Craig Hill, a corn, soybeans and hog farmer from Milo, Iowa. I serve on the Iowa Farm Bureau Federation board of directors and am representing the American Farm Bureau Federation. Reform and expansion of the current crop and revenue insurance programs is one of Farm Bureau's highest priorities for 1999. Since crop insurance is presently the primary risk management program, we are striving to develop a system that increases participation, provide farmers affordable coverage and continue to move toward additional revenue insurance policies for all commodities.

It is imperative that Congress enact major reforms of the crop and revenue insurance programs. The following points highlight our major priorities.

Farmer premium subsidies must be increased, especially at the higher levels of coverage. As farmers purchase higher levels of coverage, premium subsidy levels decrease, and the cost rises disproportionately, providing a disincentive to purchase coverage above 65/100. At the 65/100 level, the government pays 42 percent of the premium while the producer pays 58 percent. However, at the 85/100 level, the government pays only 13 percent while the producer must pay 87 percent. This means the out-of-pocket cost to the producer nearly triples. As a result, virtually all buy-up coverage ceases beyond the 65/100 coverage level.

An example may be helpful. A cotton farmer in Florida producing 650 pounds of cotton at a 70 cent price election can guarantee $296 per acre liability coverage at the 65/100 level. If he selects the 75/100 coverage, he can guarantee himself $341 per acre, or $45 more. However, the 65/100 premium costs $33.45 per acre while the 75/100 costs $78.32 per acre. The bottom line is that it costs that cotton farmer $44.87 more per acre premium in order to increase his liability coverage per acre by $45. Obviously, that would not be a prudent business decision.

No single issue related to crop insurance is more important to producers than their belief that they are going to be offered adequate insurance coverage on their commodities. In addition, bankers must be assured that crop insurance protection is available year in and year out so that lending practices will not be disrupted. In fact, an improved crop insurance program should enhance credit availability.

Crop and revenue insurance products must be made available for all commodities including livestock. While the current program provides a risk management tool for most of the production of the major commodities, there are 1,500 additional crops which are not covered by the program. Coverage for livestock (with the exception of the Dairy Options Pilot Program) is unavailable. The Risk Management Agency (RMA) does not have the staff or resources to accomplish complete coverage availability. The private sector has demonstrated its ability to be creative and responsive to growers' needs for new crop insurance products. However, there is a disincentive for new product development. Under current law and regulations, once a company has the Agriculture Department's approval for marketing a new product, any competing crop insurance company can market the same product.

The cost reimbursement proposal in the Kerrey/Roberts bill would help solve this problem and make product development more attractive for insurance companies. A company that can develop and exclusively market their product can gain some advantage over its competitors and, therefore, justify the research and development costs for new products. We are concerned, however, that "fixing" this problem will cause approval of multiple products with minor differences from products that are already available. Farmers are confused enough about the duplication of options available; we need to work toward simplification of the programs rather than adding to their confusion.

While we want to do everything possible to encourage private sector development, we are not convinced the private sector will address the needs of all crops. We believe RMA should continue to develop new products, but should focus on those types of products and on those commodities in which the private sector is not likely to focus.

We believe it is critical to encourage farmers to purchase insurance at the 70 and 75 percent and even higher coverage levels to the maximum extent possible. These coverage levels balance the ability of farmers to withstand a disaster financially against insuring normal yield variations and will reduce the pressure for future production loss ad hoc disaster programs.

Crop insurance rating practices should be modified to encourage broader participation particularly among lower risk producers. Crop insurance rating practices rely on a 20-year historical, actuarial database to determine the risk or probability of loss and establish premium levels for particular areas and crops. Prior to the 1994 Crop Insurance Reform Act, the actuarial database for many commodities reflected low participation rates and significant adverse selection. Although crop insurance program participation has increased, the historical data continues to reflect the now unrepresentative data accumulated in prior years. The resulting higher premiums do not correspond to the current actual risk and over-represent the impact of a single adverse event. This has discouraged producers from program participation or purchasing adequate coverage.

Alterations must be made so the program is able to respond to multi-year disasters.

Current crop insurance policies have been ineffective in providing adequate coverage levels for producers who experience multi-year crop losses due to factors beyond their control. This failure is at least partly responsible for the $6 billion disaster payment made last fall and some of the $8.7 billion that will be made available this fall. The problems of multi-year disasters should be partially addressed by allowing producers to drop one year of production records for the purpose of Actual Production History calculations.

Farm Bureau supports the legislation introduced by Senators Pat Roberts and Bob Kerrey to reform the federal crop insurance program and thanks the cosponsors for their support.

We appreciate the opportunity to present our views regarding reform of the crop insurance program. As risk management becomes increasingly more important to our nation's agricultural producers and agricultural lending institutions, we must work together to ensure the continued strength of the program. Reform must assure broad-based availability and affordable crop insurance products.

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