The Fiscal Year 2000 Budget Resolution contains six billion dollars for use in fiscal years 2000-2009 that can be used as direct payments to farmers or to help farmers manage risk.  Chairman Domenici of the Budget Committee has sent a letter to me and to Senator Harkin describing the limitations on this spending.  His entire letter will be made a part of the record, but let me summarize his main points.  First, none of the money may be expended in fiscal year 2000.  Second, new spending may not exceed two billion dollars per year in fiscal years 2001-2004.  Third, while the Agriculture Committee may spend six billion over five years  —  fiscal years 2000-2004 —  the total amount of new money that may be spent over ten years  —  fiscal years 2000-2009 —  is also six billion dollars.  Thus, if the Committee chooses to spend nearly all the six billion dollars in years 2001-2004 (as most of the major crop insurance bills do), then the spending must be sunsetted in 2004 so that the limitation on spending in years 2000-2009 is not breached.

 On Tuesday the Congressional Budget Office released its preliminary cost estimate of my bill, S. 1666, the Farmer’s Risk Management Act of 1999.  CBO estimates that my bill will produce a small budget savings in fiscal year 2000 and that over the five-year 2000-2004 period will increase budget authority and outlays by $5.592 billion and by $5.510 billion respectively.  The budget authority figure is $408 million below the allowable $6 billion over 2000-2004.  Because my bill sunsets increased spending after 2004, CBO estimates that its 2000-2009 cost is also well under $6 billion.  To maintain this budget score, CBO has asked for three technical changes in the legislative language to clarify the bill’s intent.  The CBO cost estimate will be made part of the record.  The bottom line is that my bill meets all of the Budget Resolution’s spending limitations by a comfortable margin.

 I believe that risk management is broader than crop insurance alone. To keep U.S. agriculture competitive, farmers will have to consider a variety of practices including: engaging in sophisticated marketing practices; considering alternative crops; and purchasing crop insurance.  An approach to risk management that focuses solely on the crop insurance program’s subsidy structure is too narrow to address the many risks faced by farmers.

 In crafting my own risk management bill, I was guided by four principles.  First, the greatest possible amount of the six billion dollars should go directly to farmers.  In the crop insurance program, private insurers receive substantial compensation for selling and servicing multi-peril policies on the government’s behalf.  Overall, the insurance companies receive about one-third of the federal financial support of the program.  Farmers get the remaining two-thirds.  In my view, farmers should receive more of the new federal spending.

 Second, the six billion dollars should be provided in such a manner so that it does not distort
 planting decisions.  Leading economists believe that crop insurance encourages the planting of crops

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 on marginal and environmentally challenged acreage.  I believe that Dr. Gardner will address this point in his testimony.  Federal risk management spending should not inadvertently subsidize overproduction when world-wide agricultural stocks are already large.  Subsidizing overproduction postpones the day when agricultural prices will rebound.

 Third, the six billion dollars should be distributed equitably among farmers and among regions.  In terms of eligible 1998 acres insured, farmers’ participation by state ranges from a low of 4 percent to a high of 93 percent.  Clearly, farmers in some parts of the country do not view crop insurance as a useful risk management tool.  By spending the bulk of the increased federal assistance on crop insurance, we are denying farmers in some parts of the country risk management help.

 Fourth, farmers should be encouraged to pursue a variety of risk management strategies, including, but not limited to, crop insurance.  Within broad parameters, farmers should be able to choose the risk management strategy that best meets their needs.

 My bill complies with these four principles.  First, of the six billion dollars in available new spending, over five billion is sent directly to farmers.  Second, because the money is sent directly to farmers and is based on historical production, it is far less likely to distort planting decisions.  Third, because it is not limited only to one form of risk management - crop insurance, it is more equitable among regions.  Fourth, in order to better meet farmers’ individual needs, it lets farmers choose risk management strategies from a menu of options.

 The bill directs the Secretary of Agriculture, for the 2001-2004 crops, to offer to enter into a contract with a producer in which the producer receives a risk management payment if the producer performs at least 2 of the following risk management practices each applicable year:

1. Purchase Federal or private crop insurance (for example, private crop hail) that is equivalent to at least catastrophic risk protection, for at least one principal agricultural commodity produced on the farm for which federal crop insurance is available.

2. Hedge price, revenue, or production risk by entering into at least one standard exchange-traded contract for a future or option on a principal agricultural commodity ( either crops or livestock) produced on the farm.

3. Hedge price, revenue, or production risk on at least 10% of the value of a principal agricultural commodity produced on the farm by purchasing an agricultural trade option.

4. Cover at least 20% of the value of a principal agricultural commodity (either crops or livestock) produced on the farm with a cash forward or other type of marketing contract.

5. Attend an agricultural marketing or risk management class.  This includes, but is not limited to, a seminar or class conducted by a broker licensed by a futures exchange.

6. Deposit at least 25% of the risk management payment into a FARRM account, or a similar tax deductible account.

7. Reduce farm financial risk by reducing debt in an amount that reduces leverage, or by increasing liquidity.

8. Reduce farm business risk by diversifying the farm’s production by producing at least one new commodity on the farm, or by significantly increasing the diversity of enterprises on the farm.

 A producer’s annual risk management payment will be based on his or her Federal Crop Insurance Corporation (FCIC) average actual production history (APH) established for the 2000 crop for each Federally insurable agricultural commodity grown by the producer.  Under existing FCIC
 procedures, the average APH for a commodity for crop year 2000 is based on a producer’s documented production and acreage history from at least 4 of the 10 immediately preceding crop years.

 Let me give a hypothetical example of how this would work at the farm level.  Suppose we have two farmers.  One farmer produces corn and soybeans on 500 acres and the other farmer produces apples for the fresh apple market on 50 acres.  Both producers farm somewhere, let’s say, in the eastern half of the country.  Corn and soybeans are federally insurable throughout the country and apples are federally insurable in most areas that have significant apple production.  Let’s further suppose that these two hypothetical producers have never purchased federal crop insurance before.

 Under my bill, both farmers would be eligible for risk management payments for each of the 2001 through 2004 crops based on each producer’s average actual production history for corn, soybeans, and apples for the four crop years covering 1996, 1997, 1998, and 1999.  The farmers could document more than four years of production history, but FCIC procedures require a minimum of  four consecutive years.

 Let’s suppose the grain farmer’s average production is 30,000 bushels of corn based on 250 acres and 10,000 bushels of soybeans based on 250 acres.   His average APH would be valued at the 1997-1999 average FCIC established price level for each crop.  This price is $2.38 per bushel for corn and  $5.80 per bushel for soybeans.  At these prices, the average APH value would be $71,400 for corn and $58,000 for soybeans, for an average total value of $129,400.

 Suppose the apple farmer’s average production is 23,095 bushels of apples based on 50 acres. The apple price varies by region.  For this example, I will use a fresh apple price of $4.17 per bushel (assuming 42 pounds/bushel) which would be the applicable price for fresh apples in one of the eastern region’s major apple-producing states.  At this price, the value of the apple producer’s average APH (rounded to the nearest dollar) is $96,307.

 The amount of each producer’s annual risk management payment would be based on a percentage payment rate determined by the Secretary of Agriculture based on $1.275 billion for each of the 2001 through 2004 crops for a cumulative total of $5.1 billion.  Preliminary estimates suggest that the payment rate will be somewhere between 1 percent and 2 percent of production value if 100 percent of the eligible farmers sign up for risk management payments.  Thus, a reasonable estimate is that the percentage payment rate will come out at 1.5 percent of production value.  If this estimate turns out to be correct, our hypothetical grain farmer’s annual risk management payment would be $1,941.  The grain farmer’s risk management payment on a per acre basis works out to $4.28 for corn and $3.48 for soybeans.  The apple farmer’s annual payment would be $1,445 dollars or $28.89 per acre.

 For many farmers, the risk management payment compares favorably to the increased subsidies for crop insurance provided by other bills.  The 2001 risk management payment would be available to farmers on or after October 1, 2000, approximately one year from today.

 In order to qualify for his risk management payment each year, each farmer would have to certify with the Agriculture Department that he had obtained or used 2 of the 8 risk management practices each year.  Each farmer could do this in a large number of ways.  For example, the grain farmer could qualify by entering into a cash forward contract with an elevator for at least 20 percent of his 2001 soybean crop and purchasing exchange-traded options to hedge price risk on his 2001 corn crop.  The apple farmer could qualify by purchasing multi-peril crop insurance on his 2001 apple crop and entering into a marketing contract with a buyer for at least 20 percent of his 2001 apple production.

 Testifying before us today are two witnesses.  Dr. Bruce Gardner, of the University of Maryland, is a familiar face to the Committee.  Along with his distinguished academic career, he has served as Assistant Secretary of Agriculture for Economics.  He is also the President-elect of the American Agricultural Economics Association.  Also joining us is Mr. Craig Hill of the Iowa Farm Bureau Board.