Written Statement of

W. Scott Marlow

Director of Farm Sustainability Program

The Rural Advancement Foundation International -- USA

To the

House Agriculture Committee

Subcommittee on Commodities and Risk Management Hearing

May 14, 2007

Chairman Etheridge and Ranking Member Moran, members of the
subcommittee, thank you very much for this opportunity to address the
subcommittee about crop insurance, and specifically about how crop
insurance affects the ability of farmers to adjust to recent shifts in
our agricultural economy.

My name is Scott Marlow, and I am the director of Farm Sustainability
for the Rural Advancement Foundation International -- USA. RAFI-USA is a
non-profit organization based in Pittsboro, NC that addresses issues of
equity, sustainability and diversity in agriculture and rural
communities. I am also here on behalf of the thousands of farmers in
North Carolina and across the country that we have worked with over the
last 15 years to help access new markets, seek equity in production
contracts, get reward in the marketplace for the environmental
stewardship that they do or help find ways to keep going in the face of
disasters of weather or price. My testimony is based on the specifics of
our experience in North Carolina, but we are also addressing these
issues with farmers from across the southeastern United States, and the
rest of the country.

While crop insurance has a long history of providing effective risk
management for the traditional crops of North Carolina agriculture,
recent changes in our farm economy mean that the Risk Management Agency
faces a series of challenges in providing effective risk management for
a significant percentage of North Carolina farm income, and we expect
these challenges to increase in the years to come.

Between Hurricane Floyd in 1999 and Hurricane Katrina in 2005, the
percentage of eligible North Carolina acreage participating in crop
insurance increased from 56% to almost 78%, but the percentage of North
Carolina farm receipts covered by crop insurance, based on North
Carolina Department of Agriculture and Consumer Services and Risk
Management Agency data, fell from 19% in 1999 to around 13% in 2005, and
the percentage of farm income eligible for crop insurance fell from
approximately 38% to 28%. ^1^ It is not that crop insurance changed, but
that crop insurance did not change to keep up with changes in North
Carolina's farm economy.

The segments of the farm economy with extensive crop insurance,
commodities such as tobacco, cotton and corn, while vitally important to
many farmers in our state, have dropped in their percentage of North
Carolina farm receipts. The fastest growing segments of North Carolina's
farm economy - livestock produced under production contracts, specialty
crops like greenhouse, nursery and Christmas trees, and emerging
value-added markets such as organic and specialty livestock - are all
underserved, if served at all, by current crop insurance programs. We
are moving rapidly from crops with extensive risk management and
disaster programs to enterprises with ineffective or no risk management.
Today I would like to focus on three issues associated with this
transition.

**Issue 1. Lack of risk management for operations with production
contracts.**

The greatest percentage of North Carolina farm income, almost 60%, now
comes from broilers, turkeys and hogs. The structure of these livestock
industries has significant effect on the outlook for risk management
programs. According to the 2002 Census of Agriculture, 69% of hogs and
essentially 100% of broilers raised in our state were raised under
production contracts where, according to USDA definitions, the producer
never owns the animal.^2^ We are also seeing anecdotal evidence of
production contracts being adopted in specialty crops and other
non-livestock areas.

In the past, the Risk Management Agency has acknowledged the gap in risk
management for livestock producers^3^, and in hearings before this
subcommittee last week, Dr. Keith Collins outlined 2 current pilot
programs for livestock. It is important to note, however, that animal
ownership is essential for eligibility in both of these programs and
neither will provide risk management for livestock produced under
production contracts. Livestock producers are also increasingly
concerned about the risks of disease outbreaks, quarantine or
preventative depopulation by either state or federal officials as they
are currently not insurable causes of loss.

There is precedence for benefits to producers of livestock under
production contracts in *ad hoc* disaster programs. The 2000
Supplemental Appropriations Act passed on Nov. 29, 1999 targeted \$ 10
million for contract growers^4^ under the Livestock Indemnity Program.
Following Hurricane Katrina and the other Gulf Coast hurricanes of
2005, Congress made some assistance available to contract growers in the
form of Livestock Indemnity Payments and Emergency Conservation Program
cost share assistance for cleaning up debris from poultry barns and/or
costs to reconstruct or repair barns if there were uninsured losses.^5^
However, *ad ho*c programs that Congress may or may not pass after a
specific disaster are no substitute for risk management that contract
growers may incorporate into their farm business planning on an ongoing
basis.

*Recommendation:*

*Crop insurance programs must be developed that insure against the risks
associated with production contracts and the unique ownership structure
that they bring, either by developing crop insurance programs specific
to production contract income, or by including production contracts in
currently existing programs that insure income rather than products.
Livestock programs must also include the peril of quarantine,
depopulation by federal or state government and bio-terrorism as
insurable causes of loss.*

**Issue 2: Lack of risk management for value-added products critical to
mid-scale agriculture.**

Nationally, we are losing the mid-scale farms that have made up the
backbone of our agricultural economy and land stewardship. The most
rapid loss is among those farms that are too large to access the growing
direct market economy, but too small to compete in the undifferentiated
commodities market -- the agriculture of the middle. ^6^ Last year,
North Carolina led the nation in the loss of farms. ^7^

But we are also seeing a rapid rise in demand for high-quality,
specially-raised products like organic produce, heirloom vegetables and
specialty meats, what we call "food with a taste, a place and a face,"
driven by consumer demand and an increase in spending on away-from-home
food. ^8^ According to Rick Schnieders, the C.E.O. of the Sysco
Corporation, the defining aspect of retail food is price, whereas the
defining aspect of restaurants and food service is differentiation. As
consumers shift more of their food dollar to food consumed outside the
home, there will be greater demand for the type of differentiation of
products that only mid-scale farmers can provide. ^9^

These emerging markets for natural, organic and specialty foods have
grown beyond the ability for the small farmers who pioneered them to
fill, and require the capacity and the management capability of the
mid-scale farmers that we are currently losing. The greatest hope for
mid-scale farmers is the transition to production of high-value,
specialized crops and livestock brought to niche markets in ways that
bring a greater percentage of the food dollar back to the farm, and our
greatest challenge is assisting mid-scale farmers in connecting to these
markets before they go away.^10^

Crop insurance plays an important role in encouraging or discouraging
that transition, both in providing risk management, and because crop
insurance determines access to credit and access to additional disaster
program benefits. In a 2004 survey of tobacco farmers, RAFI-USA found
that 67% identified access to capital as a key barrier to diversifying
their farm. In a yearlong study with agricultural lenders in North
Carolina, we found that lenders based the expected value of crops for
both collateral and budgets on assured income as determined by either
conventional commodities markets or crop insurance. Because the added
value of specially marketed crops like organic is uninsured, it is
frequently not included in either collateral valuation or anticipated
income. The farmers of these crops are therefore more likely to be
required to put personal property up as collateral for operating loans
in addition to the crop itself, and are less likely to have a farm plan
that shows a positive cash flow. While lenders do not recognize the
higher value of specialty crops, they do recognize the higher expense of
producing them. ^11^

Recent crop disaster payments have been based on benefits received under
crop insurance or the Non-Insured Disaster Assistance Program (NAP).
While this choice makes sense in that it rewards participation in risk
management programs, it leaves those farmers who are not eligible for
effective crop insurance programs without assistance. If proposed crop
disaster payments are combined with crop insurance, conventional farmers
will receive compensation for nearly 100% of their damage, whereas
producers of value-added, niche and specialty crops without effective
crop insurance will receive nothing.

In our experience, there is currently no crop insurance that provides
effective risk management for the value that farmers add through either
specialized production or marketing. The lack of risk management for
value-added products, and the reduction in access to credit and other
disaster programs that accompanies it creates a financial disincentive
for farmers to make the transition, and increases the risk and
vulnerability of those that do.

The challenge for crop insurance is that the emerging markets and
differentiated products do not come with the uniformity and automatic
data collection that provides the underpinning of conventional commodity
crop insurance. The very aspects of these markets that make them vibrant
and exciting and profitable -- the ability to respond quickly to a wide
variety of specific niches of quality and production -- are the same
aspects that make it extremely difficult to program for them. The
traditional product development approach of developing a crop-specific
risk profile and then releasing a crop-specific insurance product is
unable to address the diversity of emerging products, enterprises and
markets.

In recent years, RMA has been piloting the Adjusted Gross Revenue (AGR)
and Adjusted Gross Revenue -- Lite (AGR-Lite) crop insurance programs.
AGR and AGR-Lite provide income insurance based on the five-year average
of gross farm revenue as established on Schedule F of the farmer's
taxes, including value added through specialty markets and addressing
the complexity of many small and mid-size farms. Since 2005, North
Carolina has been fortunate enough to be one of the pilot states for
AGR-Lite.

While AGR and AGR-Lite are simple in concept, they have proven to be
extremely complicated in implementation. Because of the complexity of
both application and claims adjustment, crop insurance agents are
reluctant to promote it and farmers are reluctant to trust it. Specifics
in the requirements of the program have made it difficult to determine
eligibility of income and coverage of losses, and some farmers have been
surprised to discover the limitations of their coverage only when their
claims were adjusted. In short, this program is not working.

These difficulties have been borne out in declining enrollment numbers,
both in North Carolina and nationally, despite significant outreach
efforts. From a high of 970 policies nationally in 2003, enrollment
dropped steadily to 551 in 2007. As the only programs that address
value-added markets, it is critical that we get AGR and AGR-Lite right.

*Recommendation:*

*The AGR/AGR-Lite programs should be extended, but reformed to be more
accessible and affordable, and then expanded to be available nationally.
Reform should include specific steps to address shortcomings in the
program, but should emphasize streamlining the application and claims
adjustment processes, and shifting the program structure to reward
diversification and innovative marketing.*^12^

**Issue 3: Inequity for organic producers.**

Of the rapidly growing high-value markets, organic is the best
recognized and provides the clearest example for crop insurance. Many
current crop insurance programs are available for organic crops, but the
structure of these programs penalizes organic farmers and creates a
financial disincentive for seeking organic certification. When an
organic producer signs up for crop insurance, they pay an extra 5%
surcharge that is assessed to offset perceived additional risk
associated with organic production, although this perceived risk has not
been quantified by research.

When farmers receive crop insurance and other disaster program benefits,
these benefits do not recognize the added value of organic, and payments
are calculated based on the conventional price. For an organic farmer
who receives a price for organic product that is double the conventional
price, 75% crop insurance coverage based on the conventional price
actually covers 37% of the farmer's income. Organic farmers in essence
pay more for less coverage. This double inequity needs to come to an
end.

When an organic farmer's lawsuit to receive assistance under the Crop
Disaster Program based upon the market price for organically grown
adzuki beans was successful^13^, USDA promptly changed the program
regulations to allow assistance only at the conventional price. The
courts have upheld the new regulation^14^ so action by Congress is the
only way to ensure that organic farmers receive assistance based on
their market price, just as conventional farmers receive assistance
based on the market price for their goods.

*Recommendation:*

*Organic producers should have access to insurance programs that meet
their needs without putting them at a competitive disadvantage to
conventional producers.  The 2007 Farm Bill should eliminate the current
five percent surcharge on premiums for organic producers and establish a
deadline for providing payments that reflect organic market prices to
organic producers.*^15^

In closing, access to effective crop insurance programs is essential for
farmer's transition to the emerging markets that are the key to the
health and vibrancy of mid-scale agriculture. Thank you for the
opportunity to testify today, and I welcome any questions from the
committee.

Notes:

1\. Percentage of coverage was determined using percentage of eligible
acreage participating from the RMA State Crop Insurance Profile
(http://www.rma.usda.gov/pubs/state-profiles.html) and the percentage of
farm receipts by commodity from North Carolina Department of Agriculture
and Consumer Services Agricultural Statistics Service
(http://www.ncagr.com/stats/cashrcpt/cshcomyr.htm). Percentage of
greenhouse / nursery participation was estimated using the percentage of
total value of greenhouse / nursery products that were represented by
crop insurance liability.

2\. "Under a production contract, the farmer provides services to the
contractor, who usually owns the commodity under production. For
example, contractors in poultry production usually provide chicks to the
farmer along with feed and veterinary/transportation services. The
farmer then raises the chicks to maturity, whereupon the contractor
transfers them to processing plants. Contractors often provide detailed
production guidelines, and farmers retain far less control over
production decisions. The farmer's payment resembles a fee paid for the
specific services provided, instead of a payment based on the market
value of the product."

Nigel Key and James MacDonald, "Agricultural Contracting; Trading
Autonomy for Risk Reduction." USDA Economic Research Service. Amber
Waves Volume 4 Issue 1. February 2006. Pg 28.

3\. Eldon Gould, Review of the Federal Crop Insurance System. Hearings
before the Subcommittee on General Farm Commodities and Risk Management
of the House Committee on Agriculture, March 15, 2006

4\. Pub. L. No. 106-113, Appendix V, Title I, Chapter 1, 113 Stat. 1501

5\. Emergency Supplemental Appropriations to Address Hurricanes in the
Gulf of Mexico, Pub. L. No. 109-148, Division B, Title I. (December 20,
2005) and Emergency Agricultural Disaster Assistance Act of 2006, which
was enacted into law on June 15, 2006 as Title III of the Emergency
Supplemental Appropriations Act for Defense, the Global War on Terror,
and Hurricane Recover Act of 2006. The formal citation of the Act is
Public Law Number 109-234)

6\. For more information about the issues associated with agriculture of
the middle, including current research and overview documents see the
web site of the National Task Force to Renew Agriculture of the Middle
at www.agofthemiddle.org.

7\. North Carolina Department of Agriculture and Consumer Services Press
Release, "North Carolina leads nation in loss of farms ... again."
2/19/07. http://www.ncagr.com/paffairs/release/2007/2-07farmloss.htm

8\. Stewart, Hayden, Noel Blisard, Sanjib Bhuyan and Rodolfo Nayga, "The
Demand for Food Away From Home, Full service or fast food." United
States Department of Agriculture Economic research Service Agricultural
Economic Report Number 829. January, 2004

9\. Schnieders, Rick, "Presentation to the Georgetown University Law
School." Available at http://www.agofthemiddle.org/papers/sysco.pdf.

10\. Kirschenmann, Fred, Steve Stevenson, Fred Buttel, Tom Lyson and
Mike Duffy, "Why Worry About Agriculture of the Middle." White paper
prepared for the National Task Force to Renew Agriculture of the Middle.
Available at http://www.agofthemiddle.org/papers/whitepaper2.pdf

11\. The full report on the Farmer / Lender Project is available at
<http://www.rafiusa.org/pubs/puboverview.html>.

12\. Draft AGR/AGR-Lite reform recommendations:

1.  Streamline application process and adjustment process to increase
    farmer access to the program and encourage crop insurance agent
    participation, clarifying coverage and benefits.

2.  Provide higher levels of coverage on AGR/AGR-Lite whole farm revenue
    programs. Current deductibles are too high for producers. The
    maximum effective coverage for AGR-Lite is 72% (80% coverage, 90%
    payment rate). In many cases, thin profit margins do not allow a 28%
    drop in revenue without severely impacting the viability of the farm
    operation. Consider an 85% coverage level and 100% payment rate like
    several of the MPCI coverages.

3.  Add a "floor" to the 5-Year income history used to determine
    coverage levels. Low revenue can reduce the approved AGR to the
    point where the insurance will not provide adequate coverage.
    Example: maintain the 5 year Schedule F average, but allow up to 10
    years if available.

4.  Crop insurance payments and Noninsured Crop Disaster Assistance
    (NAP) are not considered allowable income in the 5-year history but
    are considered revenue to count for claim purposes. Adding MPCI
    indemnities and NAP to allowable income would provide a floor to
    compensate for low revenue years.

5.  The animal/animal product rates need reviewed to more accurately
    reflect the risk. More analysis is needed to see which risk pool
    livestock commodities should go into versus simply putting all
    livestock in the highest risk pool.

6.  Carryover commodities still in the production phase present some
    unique beginning and ending inventory challenges. The inventory
    rules should be reviewed to ensure the procedures provide clear
    directions on how to handle these commodities. In addition, clarity
    should be provided as to whether or not coverage is provided for
    these commodities including Christmas trees, shellfish, nursery, and
    livestock.

7.  Strengthen the policy regarding establishing local market value,
    particularly for direct marketers. Currently, the policy indicates
    that if published prices are not available, then the average price
    offered by two commercial buyers, one nominated by the policyholder
    and one by the insurance company, should be used. This needs to be
    strengthened in two ways. First, for direct marketers it should be
    the best estimate of those involved in direct marketing, as
    commercial buyers are not involved. Second, the value for estimating
    the revenue for the producer's intention report for the current year
    should be determined at the time the intentions report is filed,
    otherwise the producer loses the price fluctuation protection
    otherwise provided by the policy. There are reports where the price
    is either not finalized at the time the intention report is filed or
    that it is adjusted at claims time. Neither is acceptable because
    such changes can reduce the producer's protection that was initially
    sold to them and adversely impacts the collateral value of the
    policy.

8.  Definition of 'Animals' needs to be revised to ensure it is
    inclusive of production agriculture. The current definition is
    "living organisms other than plants or fungi that are produced or
    raised in farming operations including, but not limited to,
    aquaculture, bovine, equine, swine, sheep, goats, poultry,
    aquaculture species propagated or reared in a controlled
    environment, bees, and fur bearing animals, excluding animals for
    sport, show, or pets." For shellfish farm eligibility it may be
    helpful to modify the definition by adding: Shellfish (licensed
    commercial producers under the local approving authority in a
    certified growing area). This will further define the controlled
    environment and eliminate recreational versus commercial operations.
    Another definition issue involves 'fryers.' While poultry is
    currently listed in the definition, a fryer is not. It also needs to
    be clear that animals under contract are insurable.

9.  Develop mechanisms to extend AGR and AGR-Lite to new and beginning
    farmers so they have the opportunity to utilize federal risk
    management programs. Strong consideration should be given to permit
    such producers to have protection and premium rates established
    based on information for similar farms that have sufficient
    historical information to meet the requirements of these insurance
    plans.

13\. *Pringle v. United States of America*, 1998 U.S. Dist. LEXIS 19378
(E.D. Mich. 1998)

14\. *Partlo v. Johanns*, 2006 U.S. Dist. LEXIS 43071 (D. D.C. 2006)

15\. Proposed Legislative language on organic:

*Crop Insurance -- Premium Surcharge*

*** ***

Section 508(d) (7 U.S.C. 1508) of the Federal Crop Insurance Act is
amended by adding a new (d) as follows:

 (d) Surcharge Prohibition. -- The Corporation may not require producers
to pay a premium surcharge for using scientifically sound sustainable
and organic farming practices and systems.

 

 *Crop Insurance -- Market Prices*

*** ***

Section 508(c) (7 U.S.C. 1508) of the Federal Crop Insurance Act is
amended by adding a new (5)(C)(v) as follows:

 (v) in the case of organic commodities, shall be, no later than October
1, 2009, the expected or the actual organic market price of the
agricultural commodity, as determined by the Corporation.