Statement by

Kyle Phillips on behalf of

National Corn Growers Association

before the

Committee on Agriculture, Nutrition, & Forestry

U.S. Senate

March 17, 1999

Mr. Chairman, members of the committee, my name is Kyle Phillips, and I am a corn farmer from Knoxville, Iowa. I appreciate the opportunity to appear before you to discuss ways to improve the risk management tools available to producers. I am testifying today on behalf of the National Corn Growers Association (NCGA), which represents more than 30,000 farmers in 47 states. I currently serve as President of the Iowa Corn Growers Association.

The National Corn Growers Association commends you for holding this hearing. Producers cannot control the dual risks of weather and price. However, with revenue-based risk management tools, producers can avoid the disastrous effects of low yield and low prices. The subsidy structure of the federal crop insurance program should encourage producers to insure adequate revenue but must not artificially stimulate production.

Under the current subsidy structure, catastrophic policies are subsidized at 100 percent of premium; policies that insure 65 percent of yield are subsidized at 42 percent of premium; and policies that insure higher levels of coverage and crop revenue are subsidized at less than a third of the risk-based premium.

This regressive subsidy structure encourages producers to insure with catastrophic coverage or else at 65 percent of yield and 100 percent of price (65/100). Then when disaster strikes, they discover that they are woefully underinsured and are generally dissatisfied with the entire program.

With an Actual Production History (APH) of 128 bushels per acre, a producer's yield would have to fall below 83 bushels per acre before triggering an indemnity at 65 percent. Most producers consider this deductible too high. The cost to increase coverage to 75/100, which would insure 96 bushels per acre, nearly doubles the producer's premium.

$400 million of the disaster aid from last fall will be available for additional premium subsidies this year. The Risk Management Agency expects to subsidize an additional 30 percent of the farmer paid premium. The additional subsidy makes all buy-up products more affordable and enables producers to choose higher levels of coverage or revenue products without bearing the entire additional cost.

The inverted subsidy structure of S. 529, introduced by Senators Roberts and Kerrey and co-sponsored by both of my senators and many other member of this committee, includes provisions to make adequate coverage more affordable for future crop years. Because the definition of "expected market price" in S. 529 includes actual market price for revenue products, the subsidies will also apply to revenue products.

Revenue insurance enables producers to insure both price and yield. The various revenue products available to corn producers in Iowa exemplify the types of new and innovative risk management products that can meet a variety of producers' needs. The private insurance sector should be encouraged to develop a wide array of risk management tools by assuring a fair return to private research and development efforts.

The most commonly used formula to establish a spring revenue threshold for corn uses the February average of the December futures contract on the Chicago Board of Trade. Consequently, the actual cost of revenue insurance products is not available until after February 28. Producers must then get quotes from busy agents and compare cost and coverage of the various crop insurance products before the March 15 sales closing date. Congress should consider revising sales closing dates to give producers adequate time to make appropriate risk management decisions.

The federal crop insurance program must meet the needs of producers throughout the country. We recognize that multiple-year losses can drastically reduce the coverage available to even the best producers in some geographic areas. The National Corn Growers Association supports efforts to enable producers to insure reasonable yields. However, we also want to maintain the integrity of the Actual Production History concept. The solution to meet these conflicting demands should not increase the cost of insurance in those areas where yields are more predictable.

Although it is outside the scope of this committee's jurisdiction, we would encourage the Committee to consider other incentives for insurance. Specifically, NCGA supports a federal income tax credit for farmer-paid premiums. This concept could be applied to new price insurance products that are outside the federal crop insurance program, such as trade options for agricultural commodities. It could also serve as an additional incentive for subsidized crop insurance products. The intention is to encourage all producers to take appropriate steps to manage production and price risk.

Finally, producers should be encouraged to make informed risk management decisions without weighing the possibility of political intervention. All crop insurance contracts should provide for full refund of farmer-paid premiums in the event Congress provides ad hoc crop loss assistance for the insured year. This way, insured producers will be rewarded for their risk management efforts in a manner that removes the political risk from their decision to insure. There should be no cost to include a premium forgiveness clause in crop insurance contracts unless Congress enacts crop loss disaster assistance, then the cost would equal the total cost of farmer-paid premiums for the crops eligible for disaster assistance.

This Committee faces a daunting challenge to meet all of the competing demands for risk management reform. We look forward to working with you to improve the crop insurance program to provide adequate coverage at affordable prices without taking all of the risk out of production agriculture.