Number range CHAPTER**STATEMENT OF KEITH COLLINS**

**CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE**

**BEFORE THE U.S. HOUSE COMMITTEE ON AGRICULTURE**

**SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND**

**RISK MANAGEMENT**

## July 21, 2004

Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to be at today's hearing on crop insurance and risk
management issues for U.S. agriculture. I currently serve as Chairperson
of the Board of Directors (Board) of the Federal Crop Insurance
Corporation (FCIC). Your invitation requested responses of the
Department of Agriculture (USDA) to 25 issues related to crop insurance.
The witness statement of Mr. Ross Davidson, Administrator of the Risk
Management Agency (RMA), provides detailed responses to those issues. My
brief remarks today are intended to provide an update on the activities
of the Board since the Subcommittee's last hearing on May 22, 2003, the
Board's actions in relation to issues raised for today's hearing.

Since the last hearing, the Board has held 11 meetings and taken 50
official actions. Among these actions, the Board sent 11 proposals for
new insurance products and changes to existing insurance products
submitted by the private sector under section 508(h) of the Federal Crop
Insurance Act (Act) to actuarial and underwriting experts for review.
The Board also evaluated other products developed under contracts
managed by RMA.

Based upon the analysis and recommendations of these expert reviewers,
recommendations from RMA staff, and the judgment of the Board, 15
program expansions and modifications were approved. Included in these
actions were major expansions to the Adjusted Gross Revenue-Lite
(AGR-Lite) plan of insurance, modifications and expansions of the
Livestock Risk Protection (LRP) and the Livestock Gross Margin (LGM)
plans of insurance for livestock, expansions of the blueberry and pecan
pilot programs, and modifications and expansion of the Group Risk Income
Protection plan. The Board also approved two new pilot programs, a sugar
beet stage removal program and a silage sorghum program. One pilot
program, Cost of Production, was disapproved due to actuarial and
underwriting issues discovered during the expert review process. Four
other new product submissions were withdrawn by the submitters, after
various issues were discovered during the expert review process.

In addition to adding to and improving the portfolio of FCIC's risk
management products, the Board has sought to improve the governance of
FCIC by completing the first major restructuring of the delegations of
authority for FCIC since the early 1990s. In an era where boards of
directors are under increased scrutiny by their shareholders for
management oversight, we are pleased to be able to report to the
Subcommittee that the Board, in concert with the RMA management team and
the Office of General Counsel, has conducted an exhaustive review of all
statutory responsibilities and ensured they are properly delegated for
action.

The revised delegations reflect all of the amendments to the Federal
Crop Insurance Act since the early 1990s, including the Federal Crop
Insurance Reform Act of 1994, the Agricultural Risk Protection Act of
2000 (ARPA) and the Farm Security and Rural Investment Act of 2002 (2002
Farm Bill), and provides explicit guidance to FCIC on those activities
delegated to the Manager and those reserved to the Board. This set of
delegations will increase the efficiency and effectiveness of the
operations of the FCIC by allowing Manager Davidson to deal directly on
routine matters and bring only those issues reserved by law, or the
judgment of the Board, to the Board for action.

In other official actions, the Board gave guidance to the Manager
through a series of Sense of the Board resolutions on issues such as
standards for reimbursement to outside entities for research and
development costs and maintenance costs for submitted products under
Section 508(h) of the Act, the suspension of sales for the LGM plan of
insurance, and whether producers should be able to elect coverage levels
by plan of insurance and practice. The Board also evaluated and
authorized the reimbursement of research and development and maintenance
costs to submitters of five 508(h) submitted insurance products.

[Livestock Risk Protection Programs]{.underline}

An issue of concern to the Subcommittee has been the suspension of the
two livestock insurance plans at the end of 2003. On December 17, 2003,
the Board passed a Sense of the Board resolution that recommended that
RMA suspend sales of LGM insurance for swine based on findings that the
plan presented excessive risks to the FCIC. In response, RMA suspended
sales on January 13, 2004. On December 24, 2003, RMA announced that
applications for Specific Coverage Endorsements for Fed Cattle and
Feeder Cattle under the LRP Insurance Policy were temporarily suspended
following the discovery of a cow infected with bovine spongiform
encephalopathy (BSE) in the State of Washington.

On April 6, the Board voted to permit reinstatement of LRP for fed and
feeder cattle, and LGM for swine under certain conditions. RMA has
worked with the owners of these products to implement certain
modifications requested by the Board and each of the programs will be
reissued this fall.

The Board is committed to providing the maximum possible continuity of
livestock price risk protection to producers upon implementation of
changes necessary to ensure actuarial, underwriting, and program
integrity of the LRP and LGM products.

Because of the problems inherent in the livestock programs and the
general public interest in determining the appropriate role of insurance
and other risk management tools for livestock, the Board has requested
that a review and analysis of each of the livestock programs be
conducted one year after they have returned to the marketplace.
Typically, crop pilot programs are reviewed after three years, but the
continual nature of the sales cycles for these livestock programs should
provide sufficient data to permit a useful review after one more year of
experience.

[2005 Standard Reinsurance Agreement]{.underline}

In 1991, the Board delegated to RMA the responsibility to renegotiate
the SRA on its behalf. This delegation of authority still remains in
effect. RMA completed renegotiation of the 2005 Standard Reinsurance
Agreement (SRA), and all 14 currently reinsured companies signed the
Agreement by the start of the 2005 reinsurance year on July 1, 2004.
Throughout the negotiating process, RMA and Administration officials
provided the Board with regular updates. The Board provided guidance and
opinions when appropriate in order to aid RMA in the negotiation
process. The renegotiation of the SRA was very complex, requiring a
balancing of the interests of crop insurance policyholders, reinsured
companies and agents, and American taxpayers.

[AGR-Lite]{.underline}

AGR-Lite is a whole-farm risk management product owned by the
Pennsylvania Department of Agriculture. On August 1, 2003, the Board
voted to expand the program to reach all counties in Connecticut,
Delaware, Maine, Massachusetts, New Hampshire, Vermont, and Rhode
Island, and selected counties in Maryland, New Jersey, New York, and
West Virginia, in addition to Pennsylvania. Additional modifications
were also approved for the program in all states, including
Pennsylvania. These modifications qualify more livestock and organic and
small-to-medium size producers in these states than are currently
available for coverage under FCIC's Adjusted Gross Revenue plan of
insurance. On May 6, 2004, the Board approved availability of AGR-Lite
in all counties in Alaska, Idaho, North Carolina, Oregon, and
Washington, beginning in the 2005 crop year. AGR-Lite now is available
in 17 States and covers farmers' and ranchers' adjusted gross revenue
from the whole farm based on five years of Federal tax return data.

The Board recognizes that there is great interest in expanding this
program to additional states. Since AGR-Lite is a program owned and
maintained by the Pennsylvania Department of Agriculture, expansion to
additional states requires the Pennsylvania Department of Agriculture to
submit a request to the Board with the appropriate ratings data and
other required information. Those interested in making AGR-Lite
available in their State should contact and work with the Pennsylvania
Department of Agriculture. The Pennsylvania Department of Agriculture
supplies interested parties with the requirements for expansion and has
worked with many states in accomplishing expansion to their areas.

[Approval of New Products]{.underline}

The Board retains the authority for approval of all pilot programs
developed by FCIC under contract, as well as those policies or plans of
insurance submitted to FCIC under the authority of section 508(h) of the
Act. The Board spends a large portion of its time in the review and
analysis of these products to determine whether the interests of
producers are protected and the products are actuarially sound. In
addition to the actions taken over the past year, the Board expects a
considerable amount of such activity in the future. Contract awards for
research and development of new pasture and rangeland risk management
tools are nearing completion, and a solicitation for proposed solutions
to the declining yield issue has been released. RMA is also overseeing
contract research and development on over 20 additional commodities to
determine whether new insurance programs are feasible in areas including
specialty crops, livestock, and aquaculture, with a focus on underserved
areas and crops.

The normal cycle for a pilot program is a lengthy process that can take
several years for complete development into a permanent program. The
cycle includes development, pilot testing, and evaluation, followed by
the rule making process in the Federal Register. In addition to the
products developed under contract for FCIC, the Board accepts product
submissions from outside entities at the beginning of each quarter. We
anticipate that innovative products submitted under section 508(h) of
the Act will continue to come to FCIC from the private sector in the
coming years. Regardless of the source of the proposed product, the
Board is responsible for ensuring before approval that each product is
actuarially sound, is marketable to the majority of farmers of the
covered commodity, and does not negatively affect program integrity or
the delivery system.

The Board is fulfilling, and will continue to fulfill, its statutory
responsibilities, including the provision of oversight, guidance and
direction to FCIC. The Board is committed to strengthening the nation's
crop insurance and other risk management programs and the regulatory
functions of FCIC, including those conducted by RMA on FCIC's behalf.
All of the Board members are pleased to have the opportunity to serve
American agriculture and all are working diligently to ensure this
crucial part of the farm safety net functions as efficiently and as
effectively as possible.

That completes my remarks. Thank you.