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## 

## 

## [National SOrghum Producers]{.underline}

## [Crop insurance Testimony]{.underline} 

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## Presented to:

## House Agriculture Subcommittee 

## on 

## General Farm Commodities and Risk Management

## May 14, 2007

**1300 Longworth House Office Building**

**Washington, D.C.**

**presented by**

## Bill Kubecka

## P.O. Box 1024

**Palacios, TX 77465**

Introduction

On behalf of the National Sorghum Producers, I would like to thank the
House Committee on Agriculture and this subcommittee for the opportunity
to discuss federal crop insurance and its impact on the sorghum industry
and my farm.

My name is Bill Kubecka, and I farm near Palacios in Matagorda and
Jackson Counties in the Upper Coast of Texas. I raise sorghum, cotton,
and rice in a diversified operation that also includes cow-calf pairs
and aquaculture.

NSP represents U.S. sorghum producers nationwide and our mission is to
increase the profitability of sorghum producers through market
development, research, education, and legislative representation.

NSP is committed to work with the Committee and its staff as it works to
reauthorize our nation's farm laws. The organization and industry are
supportive of the current farm bill. However, we believe that Congress
can clarify several program details so that USDA interpretation does not
impact producers' ability to use sorghum in a profitable cropping
system.

One program that could be improved is USDA's risk management program.
Crop insurance is a major component of the farm safety net for grain
sorghum. It is a crop grown predominately in the semi-arid Great Plains,
where weather volatility (lack of rain) is the major determinant in
year-to-year yield variation. This testimony will focus on three areas
of crop insurance as they relate to grain sorghum: price elections,
expected county yields, and transitional yields. The testimony will also
briefly discuss forage sorghum. But first, we need to examine the
current situation that sorghum producers encounter.

Industry Overview

The Great Plains states produce the largest volume of grain sorghum, but
the crop is grown from Georgia to California and from South Texas to
South Dakota. According to the National Agricultural Statistics Service
(NASS), last year sorghum was produced in many of the states that you
represent. This includes Georgia, Mississippi, Kentucky, Arkansas,
Kansas, South Carolina, Nebraska, Colorado, South Dakota, Missouri,
Louisiana, Texas, Oklahoma, and California.

Over the past ten years, grain sorghum acreage has ranged from a high of
13.1 million acres in 1996 to a low of 6.5 million acres planted in
2006. Annual production from the last 10 years has ranged from 795
million bushels to 360 million bushels, with an approximate value of 1.2
billion dollars annually.

The creation of the Conservation Reserve Program in the 1985 farm bill
had a significant impact on the sorghum industry. Poor risk management
programs have played a role also. Today's sorghum acreage is one-third
of what it was prior to the 1985 farm bill. It is a goal of the industry
to increase producers' profitability and to take acres back closer to
the pre-1985 farm bill level. NSP expects that returning acreage to that
level will help ensure the infrastructure to supply the needs of the
ethanol industry, livestock industry and export markets. The sorghum
industry has submitted to USDA a national checkoff proposal which will
allow producers the opportunity to direct research funds towards their
priorities. It will also ensure research and development funding to
continue to improve our crop. In addition, forage sorghum utilized as
silage, hay and direct grazing represents approximately an additional 5
million acres of production. The USDA reported that in 2006, 347,000
acres of sorghum were harvested for silage, producing approximately 4.6
million tons of silage.

The U.S. is the world's chief exporter of grain sorghum, and the crop
ranks fifth in size in the U.S. behind corn, soybeans, wheat, and
cotton.

In the last two years, approximately 45% of the crop was exported.
Further, last year the U.S. had almost 90% of world sorghum export
market share. In 2005-2006, Mexico bought more than two-thirds of our
exported grain. NAFTA has created a strong market for U.S. sorghum to
Mexico and producers in my area benefit from historically high basis
because of this market.

Of the 55% of the crop that is not exported, 26% goes into pork,
poultry, and cattle feed; 24% goes into ethanol production; 4% goes into
industrial use; and 1% goes into the food chain.

In fact, sorghum's newest market is the exponentially growing ethanol
industry. We have seen a 57 percent increase in that market over the
last 2 years and expect it to grow even faster over the next 12 months
as we have over one billion gallons of ethanol capacity coming on line
in sorghum growing areas in the next 12 months.

Outside of the U.S., approximately half of total production of grain
sorghum is consumed directly as human food. In addition, the U.S.
dominates world sorghum seed production with a billion dollar seed
industry focused on 200,000 acres primarily in the Texas Panhandle.

Sorghum is a unique, drought tolerant crop that is a vital component in
cropping rotations for many U.S. farmers.

Background on Sorghum Farmers' Crop Insurance Use

For 2006, 67% of sorghum acreage was covered by a USDA-sponsored risk
management program. That number is significantly lower when compared to
other crops. For example, corn had 79% of its acreage covered; cotton,
92%; wheat, 77%; and soybeans, 80%. Obviously, crop insurance for
sorghum does not work as well as other crops. Our members have been
asking a lot of questions regarding the low participation rate. We would
hope that USDA would be working to promote sorghum production in the
semi-arid sorghum belt, especially as the prices for starch -- corn and
sorghum -- are being driven up by the ethanol industry. Setting sorghum
risk management programs equal with corn is essential to sound water
saving policy and essential to a sound energy policy.

Part of the reason for low sorghum participation is that yields have
dropped significantly because of the recent drought. Certain parts of
the sorghum belt received the third lowest rainfall since modern record
keeping started. In fact, yields are so low that there is almost no
yield left to insure. Producers are very hesitant to utilize a program
that has limited coverage when growing a drought tolerant crop.

More importantly, producers plant sorghum because it is a self-insurance
crop as it takes less water and less inputs to produce a crop. NSP's
members feel that sorghum is perfect crop for risk management, because
sorghum is much more drought tolerant than other crops in the semi-arid
sorghum belt. The plant goes dormant during periods of no rain, rather
than die as other crops do. We find it ironic that our crop's risk
management policies are essentially discounted when compared to other
crops that are more risky to grow in the semi-arid sorghum belt.

Price Elections

The mechanism used by USDA's Risk Management Agency (RMA) to set price
elections for grain sorghum provides a lower level of protection as
compared to other crops. The most widely used RMA program for sorghum
farmers is Crop Revenue Coverage (CRC). In 2006, 63% of the insured
sorghum acres were covered by CRC insurance, as it allows producers to
manage for both yield and price risk. Crops with large volumes of
production have an exchange-traded futures market to determine the price
used in their risk management programs. RMA uses an average of closing
futures prices for a given time period to determine the CRC price
election. Sorghum, however, does not have an exchange-traded futures
market, so its price election is determined by RMA and is based on its
price relationship with corn. We ask that the Agency do a better job of
reflecting the sorghum price. The renewable fuels industry has
significantly changed the demand for sorghum. In fact, the NSP staff has
a hard time keeping track of all the new ethanol demand that is
impacting local prices of sorghum.

Prior to 2004, RMA set the price election of sorghum at a flat 95% of
the corn price election, basing that on historical feeding value
relationships. Beginning with the 2004 crop year, the CRC Commodity
Exchange Endorsement (CEE) changed their policy to state that RMA will
set the grain sorghum price election based on the "United States
Department of Agriculture (USDA) January estimate of corn and grain
sorghum prices." Sorghum worked with Congress and USDA to implement the
change in hopes that RMA's programs would more accurately reflect local
prices but that has not happened.

For example, the January USDA estimates include WASDE and NASS
publications. In the January 2007 WASDE report, the corn price range was
\$3.00 - \$3.40/bu and the sorghum price range was identical at \$3.00 -
\$3.40/bu. In the January 2007 NASS *Agricultural Prices* publication,
USDA projected the January price for corn at \$3.23/bu and the sorghum
price at \$3.60/bu. However, when RMA announced the CRC price election
for sorghum, it was \$3.55/bu, while the price election for corn was
\$3.76/bu. This is a 21¢/bu deficit when WASDE had projected identical
price ranges and NASS had published sorghum prices as 37¢/bu higher than
corn. Our producers are becoming more and more frustrated with insurance
policies that are discounted as compared to other crops they are
planting.

Figure 1.

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Prior to the RMA change, NSP met with RMA to present current pricing
data to ensure that sorghums' risk management prices accurately
reflected local prices. NSP now believes the CRC price election is set
based upon the USDA baseline that is published in February of each year.
The baseline projects the corn and sorghum prices for a 10-year period.
NSP believes that the ratio between sorghum and corn for the upcoming
crop year is what is used by RMA to set the price election for sorghum
per the CRC CEE. In the February 2007 baseline, the sorghum-corn ratio
was .943. This was found by taking the sorghum price of \$3.30/bu and
dividing by the corn price of \$3.50/bu. RMA then used a ratio of .944
when determining the CRC price election (\$3.55/bu for sorghum divided
by \$3.76/bu for corn). Since the price election change in the 2004 CEE,
the ratio used by RMA has never deviated more than ½% from the ratio in
the corresponding baseline.

Using the baseline to set the CRC price election for sorghum is wrong.
The baseline is assembled by the Interagency Commodity Estimates
Committee (ICEC) within the World Agricultural Outlook Board which
publishes the WASDE estimates. In discussions with the head of the ICEC
Feed Grains committee, the baseline was never intended to be used as a
pricing tool since the sorghum price is based on a long-term historical
ratio to the corn price. **NSP's board believes that a crop insurance
program based on a futures market, or in sorghum case, a forward looking
policy, is a much better tool than a backwards looking, historical price
risk management tool**.

The ethanol industry is radically changing the dynamics of the sorghum
market, and RMA must realize this. Within a couple of years, 86% of the
sorghum in Kansas will be produced in a county within 50 miles of an
ethanol plant. That new demand is dramatically increasing the local
price of sorghum. The new demand mentioned above does not take into
account the proposed plants, but only those that will actually be
producing ethanol by the end of 2008.

This type of radical change to the sorghum market cannot be captured by
a long-term historical ratio of sorghum to corn prices. If you expand
this type of analysis to the whole United States, 61% of the total US
sorghum crop will be near an ethanol plant. RMA is penalizing sorghum
producers in this dynamic market by using an antiquated ratio.

In my own instance, sorghum has traded above corn for the past ten years
with some time periods having sorghum at 135% the price of corn at the
Corpus Christi market. Consistently, however, I trade 10% over corn in
my market. I am being discriminated against by RMA with a price election
that, for 2007, is 6% less than corn. This, in effect, is an extra 16%
deductible on my sorghum insurance making a 65% deductible policy more
like a 49% deductible policy compared to corn. While this testimony will
not attempt to predict the effect of price elections on cropping
decisions, it is a known fact that price elections do affect cropping
decisions for farmers. As bankers look at insurance guarantees for
producer financing, the price election difference between corn and
sorghum is a critical point. In some cases, the market may send one
signal to plant sorghum, but the insurance guarantee is better for corn
due to a higher price election. The insurance price election is now
becoming a factor that is included in farmers' decisions on which crop
will be planted. We would encourage this Committee to promote policy
that would encourage producers to use insurance as a risk management
tool. Sorghum producers deserve a level playing field to compete with
other crops.

While most of the price election section has dealt with CRC, the MPCI
price election for sorghum must also be corrected. Although this price
election is not based directly on the corn price, the deficiencies are
still evident. In 2006, the MPCI price election for sorghum was 97.5% of
that of corn, while in 2007, the sorghum price election is only 94.3% of
corn. This reduction in comparison to corn is in direct opposition of
the data presented in USDA publications showing sorghum equal to or
above corn.

**If the ability to change crop insurance language does happen in the
next Farm Bill debate, NSP would ask that language be inserted that
sorghum price elections be set at a level no less than corn for all
insurance products.**

Expected County Yields

Expected county yields are used in the area-wide insurance policies now
offered by RMA -- Group Risk Plan (GRP) and Group Risk Income Protection
(GRIP). While, in 2006, only 3% of sorghum's insured acres were covered
by these policies, the producers using the policies find them to be the
only affordable insurance they can purchase due to decimated yield
histories from prolonged drought. RMA, however, is using short-term
weather gyrations to vastly change expected county yields from year to
year. The expected county yield is a 30-year weighted trend yield that
is used to calculate losses for each county in determining indemnities
for area-wide policies. While farming technology and seed genetics has
improved vastly in the last 30 years, RMA moves expected county yields
based upon short-term weather patterns and not long-term trends.

As noted in Figure 2, Rawlins County, Kansas has increasing trend yields
calculated using a variety of methods except for the short-term
dominated method used by RMA. This type of "X-pattern" between RMA's
expected county yields and other yield trend methods demonstrates that
RMA is not using a true long-term trend for yields. This then runs
counter to the whole philosophy of area-wide coverage -- using long-term
trends for insurance coverage. As permanent disaster programs are
mentioned, some programs may consider using county expected yields to
calculate disaster payments. This would make these yield trends very
important to the success of such a program.

In reference to Map 1, RMA cannot justify increasing an expected yield
by 3% in one county and then decreasing the expected yield by over 30%
in an adjoining county. Long-term weather patterns, farming technology,
and genetics span across county and state lines. Producers who have had
their yield histories destroyed by a short-term drought now have their
long-term area-wide coverage decreased dramatically for the same reason.
These large gyrations make the use of GRIP and GRP highly variable over
the sorghum belt and do not reflect the true nature of the insurance
policy. GRIP and GRP are used to insure county-wide variability. That
variability will include weather, but that weather should not be the
reason for these large changes in expected county yields. The expected
county yields should be based upon a log function that accounts for
increased yield due to technology and genetics. Dr. Art Barnaby of
Kansas State University has developed such a function that may be
further simplified as research is done on trend yields.

Transitional Yields

While transitional yields, better known as T-yields, really only affect
new producers of a crop, RMA must utilize a more transparent system of
assigning T-yields that does not penalize one crop against another. For
example, in Kay County, Oklahoma, the corn yield decreased, but RMA
increased the T-yield, while holding the sorghum T-yield flat. RMA again
is discriminating against sorghum. The actual corn yield has decreased
from a high in 2003 of 106.8 bushels per acre to 34.5 bushels per acre
in 2006. Based upon a history of following short-term yield patterns,
RMA should have decreased the T-yield for Kay County. However, RMA
increased the T-yield by 48% from 52 bushels per acre in 2006 to 77
bushels per acre in 2007. RMA did not adjust the T-yield for sorghum
between 2007 and 2006, which reflects the flat yield trend from 2003 to
2006.

Forage Sorghum

This RMA pilot project is becoming more and more important to the
sorghum industry as the cellulosic ethanol industry develops. Forage
sorghum is high yielding and uses a third less water that other silages.
NSP supports a forage sorghum insurance program.

RMA created the forage sorghum pilot program in 2005 at the request of
NSP. NSP has been working with RMA to make significant changes to the
program for the 2007 crop year to rebalance T-yields across the sorghum
belt. NSP wants to work with the Committee and RMA to make sure that
this program expands and is actuarially sound.

Conclusion

Crop insurance is a critical part of the safety net for sorghum
producers; however, only 67% of sorghum acreage is covered by a USDA
risk management product. NSP's board asks that this Committee seriously
discuss why this situation exists and implement policy to improve
coverage of sorghum. Our board believes that increasing the acreage
covered by a USDA risk management product is good, sound water policy
and good, sound energy policy. USDA's risk management products can be
improved for sorghum and made more equitable across crops if steps are
taken to address the issues of price elections, expected county yields,
and transitional yields.

NSP asks that language be inserted in the next farm bill that will (1)
assure sorghum price elections are no less than corn price elections,
(2) develop expected county yields that do not have large short-term
variations, and (3) implement a transparent system of establishing
transitional yields.

Also, since the crop insurance program works so poorly for sorghum,
NSP's board asks that Congress fix the sorghum problems before expanding
crop insurance and creating additional programs that will be based off
of crop insurance numbers.

I appreciate the opportunity to submit this testimony and work for the
betterment of the crop insurance safety net for sorghum producers.

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