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95–621 PDF 2004

REVIEW OF THE FEDERAL CROP

INSURANCE SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON

GENERAL FARM COMMODITIES

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 21, 2004

Serial No. 108–36

(

Printed for the use of the Committee on Agriculture

agriculture.house.gov

COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

JOHN A. BOEHNER, Ohio

Vice Chairman

RICHARD W. POMBO, California

NICK SMITH, Michigan

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

DOUG OSE, California

ROBIN HAYES, North Carolina

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

DENNIS R. REHBERG, Montana

SAM GRAVES, Missouri

ADAM H. PUTNAM, Florida

MAX BURNS, Georgia

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

CHRIS CHOCOLA, Indiana

MARILYN N. MUSGRAVE, Colorado

DEVIN NUNES, California

RANDY NEUGEBAUER,Texas

——— ———

CHARLES W. STENHOLM, Texas,

Ranking Minority Member

COLLIN C. PETERSON, Minnesota

CALVIN M. DOOLEY, California

TIM HOLDEN, Pennsylvania

BENNIE G. THOMPSON, Mississippi

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

BARON P. HILL, Indiana

JOE BACA, California

RICK LARSEN, Washington

MIKE ROSS, Arkansas

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico

ED CASE, Hawaii

RODNEY ALEXANDER, Louisiana

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

BEN CHANDLER, Kentucky

STEPHANIE HERSETH, South Dakota

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

MARK UDALL, Colorado

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

——— ———

PROFESSIONAL STAFF

WILLIAM E. O’CONNER, JR., Staff Director

KEVIN KRAMP, Chief Counsel

STEPHEN HATERIUS, Minority Staff Director

ELYSE BAUER, Communications Director

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

JERRY MORAN, Kansas, Chairman

JOHN A. BOEHNER, Ohio,

NICK SMITH, Michigan

Vice Chairman

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

WILLIAM L. JENKINS, Tennessee

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

TIMOTHY V. JOHNSON, Illinois

MIKE PENCE, Indiana

DENNIS R. REHBERG, Montana

SAM GRAVES, Missouri

MAX BURNS, Georgia

CHRIS CHOCOLA, Indiana

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

COLLIN C. PETERSON, Minnesota

Ranking Minority Member

BENNIE G. THOMPSON, Mississippi

RODNEY ALEXANDER, Louisiana

MIKE ROSS, Arkansas

CALVIN M. DOOLEY, California

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

BOB ETHERIDGE, North Carolina

BARON P. HILL, Indiana

ED CASE, Hawaii

DENNIS A. CARDOZA, California

JIM MARSHALL, Georgia

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

(II)

(III)

C O N T E N T S

Page

Moran, Hon. Jerry, a Representative in Congress from the State of Kansas,

opening statement ................................................................................................ 1

Peterson, Hon. Collin C., a Representative in Congress from the State of

Minnesota, opening statement ............................................................................ 2

WITNESSES

Collins, Keith, Chief Economist, U.S. Department of Agriculture ...................... 3

Prepared statement .......................................................................................... 27

Davidson, Ross J., Jr., Administrator, Risk Management Agency, U.S. Department of Agriculture .............................................................................................. 5

Prepared statement .......................................................................................... 31

(1)

REVIEW OF THE FEDERAL CROP INSURANCE

SYSTEM

WEDNESDAY, JULY 21, 2004

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GENERAL FARM COMMODITIES

AND RISK MANAGEMENT,

COMMITTEE ON AGRICULTURE,

Washington, DC.

The subcommittee met, pursuant to call, at 10:02 a.m., in room

1300 of the Longworth House Office Building, Hon. Jerry Moran

(chairman of the subcommittee) presiding.

Present: Representatives: Smith, Chocola, Neugebauer, Peterson,

Alexander, Pomeroy, Etheridge, Larsen, and Stenholm [ex officio].

Staff present: Craig Jagger, Matt O’Mara, Callista Gingrich,

clerk; Howard Conley, and John Riley.

OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mr. MORAN. The hearing of this subcommittee will now come to

order. We are here today to review the Federal Crop Insurance

System, and I appreciate very much the witnesses that we have before us. We are here, I think, to discuss a rather lengthy list of

items, all with the purpose of trying to find ways to improve the

delivery and effectiveness of crop insurance for farmers across

America.

Last year, this subcommittee conducted four hearings, two field

hearings—one in Ada, Minnesota, one in Lubbock, Texas, and two

hearings here in Washington with the purpose of listening to farmers, farm organizations and commodity groups, as to how the crop

insurance system could be improved. Following those hearings, we

compiled a list of the concerns raised by those various witnesses,

which I have shared with our committee members, as well as with

USDA and RMA in particular.

Today this is an opportunity that I thought would be useful to

subcommittee members, as well as to RMA, in a sense to force

RMA to evaluate those items that were raised, and an opportunity

for subcommittee members to question the Risk Management

Agency about those suggestions, and where RMA was headed, and

whether it was possible for RMA to make changes, or whether legislative changes would be required. Certainly not here to poke at

the shortfalls of the crop insurance system, but rather we are here

to consider ways to improve its effectiveness as a Risk Management tool for producers.

2

A number of issues on that list from a Kansas perspective, but

I think from across the country the topic No. 1 was what to do in

the case of multi-year disasters, and I appreciate the Risk Management Agency’s forum held in Kansas City, Missouri, in May. I appreciate being a participant in that in which the industry, crop insurance companies, and the academics were invited to discuss how

to handle multi-year disasters, and ultimately proposals were requested. As I recall, June 30 was the deadline for those proposals,

and I am particularly interested in hearing what RMA has to say

about the status of that effort to develop a product or a policy related to multi-year disasters.

I intend that this hearing present an opportunity for substantial

back-and-forth between the subcommittee members and our folks

from RMA. An updated list of those issues has been circulated to

our members, and the testimony by Mr. Davidson has, I think, 25

items in which RMA has addressed. So I appreciate the creation of

that document. We now have something that we can wave at each

other and say here is what is important, and here is what we are

doing, and here is what needs to be done. I would welcome subcommittee members raising issues that are not necessarily on the

list that have arisen since our hearings last year.

I conclude my remarks just with a mention of the renegotiations

of the SRA. Concerns have been raised by lawmakers and crop insurance companies. I notice, in your testimony, that this is an issue

that you at least mention. I am delighted to learn that the companies have all signed the SRA. My concern all along has been the

timing and potential delay, and concerns about the lack of competition and loss of companies in further consolidation of the industry.

So although this hearing is not designed to address the issue of

SRA negotiations, Mr. Davidson or Mr. Collins, I would not be surprised at what that topic might arise today. I conclude my remarks

again by thanking you for your testimony, and what I know is a

significant effort to prepare for today’s hearing, so I thank RMA for

its efforts.

Mr. Peterson, I would recognize you for any of your opening remarks.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA

Mr. PETERSON. Thank you, Mr. Chairman, and thank you for

holding this hearing. I know that we have, as you said, had several

hearings on the subject of crop insurance, and I think that there

is a consensus, at least between myself and yourself, that there are

problems with the current system, especially in regard to affordable coverage, multi-year losses, and other key factors that have affected our producers.

I know personally in northwest Minnesota, we, as I have said

many times, have experienced multi-year losses, and we are looking at another year where we have got some isolated areas that are

in the same problem. We have one area up in the north of my district that over half the crop was not planted again this year because of wet weather. Some of those guys have only had one crop

out of the last 10 years, and, of course, this affects the APH and

3

t-yields, and the system. Even though we have improved it some,

it really does not work for folks that are in that situation and we

continue to look for ways to try to address that. I think that the

preventative planning has been helpful coverage, but there is still

a need, in my opinion, for some kind of a predictable disaster assistance program to go along with crop insurance, such as the bill

that I have introduced that would give the Secretary the authority

to provide disaster payments to counties that have been declared

a disaster area by the Secretary, similar to what we do with EMA.

I think that would be a helpful situation for folks that are in this

type of situation, maybe a cheaper way to deal with it with that

kind of a system, as opposed to trying to change the crop insurance

system to deal with it.

We also have a number of companies in my area that have been

concerned about these SRA’s and would like to get in a little bit

of discussion about what the final outcome of those agreements

were, so once again, thank you, Mr. Chairman, for holding the

hearing. I thank the witnesses for being with us today, and I look

forward to a productive session. Thanks.

Mr. MORAN. Mr. Peterson, thank you. I do know that you have

a great interest in the issue of disaster assistance and how to

eliminate the need for ad hoc, and to make the system more certain. And I look forward to working with you to address those

issues. Our first panel, and only panel, consists of Dr. Keith Collins, the Chairman of the Federal Crop Insurance Corporation, and

the Chief Economist for the U.S. Department of Agriculture, along

with Mr. Ross Davidson, who is the Administrator of the Risk Management Agency. Both of you have been before this subcommittee

many times. We welcome you back.

Dr. Collins, any knowledge of how many times you have testified

before a committee of Congress in your career?

Mr. COLLINS. I don’t have enough fingers and toes to keep track,

Mr. Chairman.

Mr. MORAN. It is very encouraging to know that our Chief Economist counts by using his fingers and toes. We would welcome your

testimony, Dr. Collins.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, AND

CHAIRMAN, FEDERAL CROP INSURANCE CORPORATION, U.S.

DEPARTMENT OF AGRICULTURE

Mr. COLLINS. Thank you very much, Mr. Chairman, Mr. Peterson, and members of the subcommittee. Thanks for the opportunity

to come up here today and update the subcommittee on the activities of the Board of Directors of the Federal Crop Insurance Corporation, and to join Mr. Davidson in following up on the series of

crop insurance issues that the subcommittee has identified.

As you noted, Mr. Chairman, I currently serve as Chair of the

Corporation’s Board of Directors, and the Board has the responsibility for general management of the corporation. Since the last

time we were up here, your last oversight hearing, before the subcommittee a little over a year ago, the Board has held 11 public

meetings. We have taken 50 official actions, including approving 15

program expansions and modifications. I could give a lot of examples of that.

4

I will give a couple. One important one I want to mention is the

expansion that we have undertaken with the Adjusted Gross Revenue-Lite, or AGR-Lite, plan of insurance. This policy fills an important void in FCIC’s product line because it makes available crop insurance for small to medium-sized producers of livestock and specialty crops, among other commodities. AGR-Lite covers farmers’

and ranchers’ adjusted gross revenue for the whole farm. It is

based on 5 years of Federal income tax data, and it is a simplified

version of the Adjusted Gross Revenue plan of insurance. Since its

initial approval of sale in Pennsylvania, AGR-Lite has been expanded to 16 other States that are primarily located in New England and mid-Atlantic States and the Pacific Northwestern States.

Another recent Board action was to reinstate the Livestock Risk

Protection, or LRP policy, for fed and feeder cattle and the Livestock Gross Margin, or LGM, policy for hogs. LRP was suspended

following the finding of BSE in the State of Washington, and LGM

was suspended last December following a determination that the

contract had serious program integrity issues. RMA has worked

successfully over the last 6 months with the owners of these products to identify modifications that have been requested by the

Board, and each of the products is expected to be selling again this

fall.

Because livestock products are new activities for the FCIC emanating from ARPA, the Board has requested a major review and

analysis of each of these livestock programs. We have requested

that those analyses be conducted 1 year after the products have returned to the marketplace. Other Board recent Board actions have

included expanding the blueberry and pecan pilot programs, approving a sugarbeet stage removal pilot program, and a silage sorghum pilot program, also modifying and expanding group risk income protection plan of insurance.

On the management front, I want to mention that the Board recently completed rewriting the delegations of authority for the corporation for the first time since the early 1990’s. The Board worked

for over a year with RMA management and the Office of General

Counsel to review all statutory responsibilities, and ensure that all

are properly delegated for action. The Board also strengthened

standards for reimbursement to outside entities for research/development, and maintenance costs for products submitted for approval.

As we look ahead for the next 12 months, the Board’s current

agenda includes expected action on 15 pilot project evaluation reports, and at least six feasibility and development contracts that

are planned for completion during this period. In addition, there

are some 65 other pilot evaluations and research and development

contracts and partnerships underway under RMA oversight right

now. We also expect a number of new products will be submitted

to the Board, under section 508(h) of the Act, from the private sector in the coming year.

Regardless of where these products come from, the Board’s goal

will be to ensure, 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. Increasingly, the Board will have to consider the efVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
5

fects of its actions on the resources of RMA, particularly in light

of the Agency’s appropriations falling short of requested and needed levels. 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.

That completes my comments. Thank you, Mr. Chairman.

[The prepared statement of Mr. Collins appears at the conclusion

of the hearing.]

Mr. MORAN. Thank you, Dr. Collins. Mr. Davidson.

STATEMENT OF ROSS DAVIDSON, ADMINISTRATOR, RISK

MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE

Mr. DAVIDSON. Mr. Chairman and members of the subcommittee,

I am pleased to appear before you today and report on the progress

and plans of the Risk Management Agency. As background, I submit a summary status report on the various aspects of the program

for the record. At the outset, I draw your attention to the charts

attached to my statement for some perspective on the issues we

will discuss today.

The first chart shows indemnities paid for the 2003 crop year by

county in the U.S., are currently estimated at about $3.2 billion.

The vast majority of counties receive significant benefit from this

program, and we are working to expand the program to new areas,

commodities, risks and producers.

The second chart demonstrates some measures of program

growth over the past 10 years. In 2004, nearly 3,800 new county

crop programs will be added; liability will grow from just over $40

billion to nearly $46 billion, and cost reimbursements to the private

sector delivery system will continue to increase dramatically.

However, RMA’s appropriated operating budget has remained essentially flat for the past 10 years. We are very concerned that

without the additional funds requested in the President’s budget,

RMA will have difficulty in maintaining its current level of services, will not be able to safely sustain additional information systems and program changes required by new product development

or changes in existing products.

The third chart shows the amount of time and deliberation that

it takes to bring a new product to market, on average, 9 years from

concept to full implementation. RMA is working hard to encourage

and oversee the responsive and responsible development of new

products while expediting the process where feasible.

And the final chart shows the value of and the progress RMA is

making in preempting fraud, waste and abuse through the use of

data mining, remote sensing and other advanced technologies, and

cooperation with FSA, OIG, insurance providers, and States’ attorneys and others. We have preempted multiple millions of dollars of

improper payments through these and other measures. We constantly balance competing needs to make our products fraud-proof

while seeking to provide responsive, useful risk protection to farmers. We still have work to do but are making good progress in our

fight against fraud.

RMA has also made significant progress in providing new and

existing programs to producers. As I said, in 2004, a record number

6

of county crop program expansions were approved, including several livestock, revenue assurance, AGR-Lite, and various specialty

crop programs. In January 2004, RMA released a statement of objectives for research and development of Risk Management Products for Pasture/Rangeland and Forage, with the goal of serving

the vital needs in this area of livestock producers. We expect to

award contracts by early August. In addition to that, Mr. Chairman, as you have noted, the multi-year loss issue is being addressed, and we also expect to award contracts in the early fall for

those.

Our 2004 Requests for Application for Outreach Education and

Research Partnerships for new non-insurance risk management

tools seek to deal with many of the more current and compelling

risk management issues. We have received nearly 300 proposals for

those RFA’s, and awards will be made in August and September.

Currently, RMA has 31 active pilot programs. The regulations to

implement the FCIC Board’s decisions on blueberries, pecans and

millet have been written and are in various stages of review, comment and clearance. In addition, regulations are in process for significant modifications to various programs, including apples, citrus

coverage, processing tomatoes and peanuts.

We have worked hard on fraud deterrence. The 2002 Crop Year

Compliance Annual Report to Congress will be delivered very soon.

From January through December 2002, RMA estimates that approximately $125 million was saved by deterring or preventing potentially fraudulent claims through data mining and other related

activities, and we have similar savings in 2003. We are optimistic

about the benefits of data mining in our and program integrity and

delivery compliance efforts, should funding continue beyond 2005.

The 2005 SRA builds on these results by incorporating data mining into the selection of policies that will be reviewed by companies

as part of their quality control requirements. As of June 30, 14

companies, representing 100 percent of the Federal Crop Insurance

Program, had signed the new 2005 SRA. The Agency continues to

receive inquiries from additional insurance companies interested in

joining the program. We are currently reviewing two such applications, and expect to receive a third in the near future. We are anxious again to work closely with the companies, associations and

other interested parties to collectively strengthen the crop insurance program.

The attached update on issues raised at the subcommittee hearings conducted last year shows that we are making good progress

on many points. Our ability to positively address specific requests

within preferred timelines is based on the Agency’s charge to serve

the producer while adhering to principals of program integrity, actuarial and agronomic soundness, legal sufficiency, contractual provisions, fiscal prudence, and, as always, doing what can be done

with appropriated Agency resources. RMA will continue to fulfill its

mission and produce the best results for American agriculture

within that framework.

Again, I thank you for the opportunity to participate in this important oversight hearing, and I look forward to responding to

questions.

7

[The prepared statement of Mr. Davidson appears at the conclusion of the hearing.]

Mr. MORAN. Mr. Davidson, thank you for your testimony. Thank

you for the effort of you and your staff in preparing the documents

attached to your testimony. I think it can become a very useful tool

for both RMA and for our subcommittee’s oversight and development of products and solving issues. Would you just further address for me the results of the forum that we had in Kansas City

regarding multi-year disaster? What kind of timetable are we on?

What kind of proposals did you receive? How do you think things

are going?

Mr. DAVIDSON. We have have received a significant number of

proposals, Mr. Chairman. Those proposals are currently in the contract evaluation process. We started that July 12 and are continuing it. We anticipate that in early fall, we will be able to award

some contracts, but it is a little bit too early to be able to characterize what those are, because they are just in the process of evaluation at this time. But, my Kansas City staff tells me that they are

very pleased that there were significant number of proposals that

came in over a broad range of ideas.

Mr. MORAN. Suggesting that RMA believes there are proposals

out there that can address this issue, that it is something that

there is a possibility for addressing the issue, it is nothing that is

going to go away?

Mr. DAVIDSON. Well, certainly the issue is critical to us, and everybody talks about it. Since I have come to the program, it has

been on everybody’s lips, and we do want to do something about

it. As you know, some of these proposals may, in fact, require legislative change, some may require funding. There may be some for

which we can make some modifications within the existing structure. So the nature of those proposals really remains to be seen,

to see what additional help we will need to be able to address the

issues.

Mr. MORAN. Dr. Collins, one of the issues you raised in multiyear disaster discussions related to is the weather pattern anomaly. Is it something that is insurable because it occurs on a rare

occasion, or is this becoming the standard weather that we face in

certain portions of the country? Do you have any additional scientific basis to tell us the answer to that question?

Mr. COLLINS. No, sir. I really do not. I just simply raise it as a

point. I think that whatever comes out of this contract work will

ultimately come to the Board for approval, if it is something that

we can implement under our statute and regulation. If it is something that requires legislative change, it would have to go to Congress, obviously. But, if it comes to the Board, that is a concern

that the Board will have. The concern that the Board will have is

are we creating something that would create over-insurance?

We do have adjustment mechanisms now, as you know, for multiyear yield losses. We have the 60 percent plug. We have a maximum 10 percent reduction in APH in any one year. We actually

have floors on APH, which range from 70 percent all the way up

to 90 percent, depending on the product. In each of those cases,

when those mechanisms are put in place to help a producer who

has had multiple year losses, we raise the premium for the proVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
8

ducer, so they do not get a higher APH without paying for it. And

so I think that that is something that the Board will want to look

at. If we start to go to an alternative way to temper the effects of

weather on yields over time, are we going to be able to do it in a

way that is fiscally responsible? Are we going to have to re-rate the

policy as a result of that? And that is where the weather question

comes in, I think. And it will be involved in the rating issue.

So, no, I really do not have any information on that, but certainly

weather patterns have a big effect on the performance over time,

and have to be taken into consideration.

One example I would give is everyone knows about the loss ratios of Federal Crop Insurance Corporation during the 1980 to

early 1990 period. We had a loss ratio in excess of 1.5 from 1990

through 1993. And, of course, that was because we had the 1988

drought, the 1993 floods and so on, whereas the loss ratio over the

last decade has been about one, because we have had a much better weather pattern for the Nation as a whole, although we have

had this continuing problem in some areas like the Northern Plains

and in parts of Texas over the last decade.

So we have to be able to sort out these weather patterns. I will

leave that to the actuaries and the weathermen to figure out.

Mr. MORAN. Mr. Davidson, just a couple of things before my time

expires. You mentioned in your testimony in this issue of de-minimis loss—the concern that we are requiring farmers to harvest and

determine the yields before crop insurance is able to make an adjustment. You mentioned in your testimony that establishing a deminimis yield would cause the rates to rise. Could you tell me what

you are talking about? And also, I see that my time has expired.

Yesterday, I sent you a letter, not that I am expecting a response

to it today. I know you are good, but not that good. Dealing with

sorghum and the issue of GRP and GRIP and making it more

available for sorghum producers, and I look forward to working

with you on that issue. But, the de-minimis yield?

Mr. DAVIDSON. De-minimis yield basically is that if you have a

very small production on your farm, and the loss adjuster comes

out and finds that it is a very small production, the loss adjuster

has to assess how much yield there is there in order to be able to

assess what the indemnity payment would be. Sometimes that

amount is less than what would be economically viable for a producer to actually go out and harvest and bring to market. We frequently get questions about, well, why do you not just zero out

something that is a 5 percent or a 10 percent yield and just call

it a zero, thereby increasing the indemnity that would be paid. Because it would increase the indemnity that would be paid, we have

to reflect in the insurance rate that additional amount of indemnity

that would result from zeroing out.

Mr. MORAN. I understand. So it is the difference that I am learning about is it is a difference between adjusting the loss as compared to the indemnity payment?

Mr. DAVIDSON. That is correct.

Mr. MORAN. OK. The gentleman from Minnesota.

Mr. PETERSON. Mr. Chairman, I will defer to the ranking member of the full committee, Mr. Stenholm.

Mr. MORAN. The gentleman from Texas, Mr. Stenholm.

9

Mr. STENHOLM. Thank you, my friend. RMA use the new process

for negotiating the recent SRA. In past rounds, it negotiated with

companies as a group. This time, you declared you could not. Can

you provide the subcommittee with the background on this?

Mr. DAVIDSON. I would be happy to, Mr. Stenholm. When we

first began preparations for the re-negotiation of the SRA this last

year, we were advised that the Office of Inspector General and the

Office of the Department of Justice, had asked that they be consulted prior to the beginning of those negotiations because of concerns in the prior negotiation that certain areas of anti-trust might

have been a concern. We did so.

We consulted with the Department of Justice and we were given

counsel with regard to how the negotiations could be conducted on

a basis that would be consistent with anti-trust law. We structured

the negotiations so that the Agency would not inadvertently or advertently draw the parties of the negotiation into a situation where

there may be questions raised by the Justice Department on how

the negotiations were conducted. As a result of that, we chose to

meet with individual companies in an individual negotiating process. We also listened to trade associations give input on general

issues, but not representing individual or multiple companies. And

of course, we invited comments from the general public, including

many that have an interest in the crop insurance program.

We continued, at the Justice Department’s request, to monitor

the negotiations, to make sure that we were within the guidelines

that we were hearing from them, and throughout the negotiations

have continued in that vein. It is a different process than had been

conducted previously. While, many may think of that as a dark

cloud, with not much of a silver lining, the Agency, actually, has

experienced a great benefit, and we believe that individual companies experience great benefit in being able to individually express

their concerns to us. We learned a lot more about the impacts of

the program on individual companies, and believe that the process,

while it is different and more constrained from a group negotiation

process, nonetheless provided significant benefits in that area.

Mr. STENHOLM. Can you provide the subcommittee with a written legal opinion explaining why crop insurance companies could

not negotiate as an industry with RMA that you have just now described in general?

Mr. DAVIDSON. We requested the written document from the Department of Justice. They declined, but I would suspect that if

there were a request from Congress, they might comply.

Mr. STENHOLM. I just made that request, so I would appreciate

you carrying that on to Justice.

Mr. DAVIDSON. Yes.

Mr. STENHOLM. In your testimony, you note that the data mining

efforts of RMA and the Center for Agriculture Excellence have

saved millions of dollars. You also mention that the return on investment is significant, but you do not mention the amount of the

investment. How much did we invest in order to get the great results that you mentioned in your opening testimony?

Mr. DAVIDSON. We are just entering into the second to last option year under this contract. A total of $18 million was originally allocated to this effort. We will have expended virtually all of that by

10

the end of 2005, leaving another option year without full funding

available. But, approximately $18 million would have been expended by that time period. Some $141⁄2–15 million has been expended to today.

Mr. STENHOLM. And the estimated savings to the taxpayer with that $141⁄2 million was what in your testimony?

Mr. DAVIDSON. I do have some detailed data with regard to that.

And there are various aspects of this, but we believe, for example,

the major savings that came out of this was through a spot check

directed by the data mining activity. And we believe that that spot

check in 2001 preempted approximately $72 million of improper

payments; in 2002, approximately $110 million of improper payments; and in 2003, approximately $81 million of improper payments. For all activities for controlled fraud waste and abuse, including other activities such as the OIG hotline and other activities

the total savings for 2001 was $94 million; for 2002, $126 million;

and for 2003, about $92 million. So there are significant savings for

that kind of an investment.

Mr. STENHOLM. Thank you very much. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Stenholm. The gentleman from Indiana, Mr. Chocola.

Mr. CHOCOLA. Thank you, Mr. Chairman. Both of you touched

upon livestock risk management programs, and Dr. Collins, I think

you mentioned in your testimony that some had been suspended

and will be subject to further review. Could you expand on that a

little bit, and talk about what you see the future of those programs

might be?

Mr. COLLINS. Oh, sure. I would be happy to. The Board of Directors and RMA have both been very concerned about the provision

of adequate risk management tools for the livestock industry. It is

one of our highest priorities, as we look out to the future. And it

is certainly an untapped area for FCIC. The kind of products that

we are focusing on are really two-fold: those that address the feed

question—not energy feeds like corn, because we have lots of insurance there, but the forage/rangeland and pasture issues. We have

very limited coverage in those areas. We have a group risk plan for

rangeland now that has about 9 million acres in it. We have something in excess of 500 million acres of rangeland in the United

States, including public lands, so very limited coverage. We have

a forage policy. Likewise, it has very limited participation in it. So

those are tools that need to be improved, and that is one of the

major contract efforts that we have underway now, and that, I

think, in the very near future, we are going to be awarding contracts to develop new insurance tools for rangeland and

pastureland and forage land.

Then, on the other side of the question, there is the animal itself,

and what kind of protection we are providing for animals. And

there, we are limited by the Agricultural Risk Protection Act. It

gives us the authority to enter into new products in that arena, but

I think the cap is $20 million a year in program costs. Under that

provision and law, we have had several products submitted to us.

We have approved products which are basically derivative kinds of

options products. They are price protection products. One of them

11

is simply a form of an option price for live cattle, fed cattle and

hogs. The other one is a spread between the price of the animal you

could get in the marketplace and the cost of the feed to produce the

animal, corn and soybeans. And we have those products in place.

A couple of them were suspended over the past year.

The livestock risk protection, for fed cattle and feeder cattle

prices was suspended with the finding of BSE because back when

that occurred, futures markets were locked limit down for several

days in a row. Meanwhile, options markets plunged. The premium

is based on the futures markets, and so we had a disconnect. We

had an opportunity for people to be able to buy a product that was

likely going to pay an indemnity that we could not rate for, and

so that product was suspended, the sales were suspended.

LGM was suspended for a different reason. What we did on that

product, it was only sold periodically, and the premium was based

on futures prices as of the mid-month, and then we allowed the

contract to be sold for the next 2 weeks. Well, what happened is

future prices moved during that 2-week period. The rating was inconsistent then with the expected indemnity, and so we had a program vulnerability. It is the same issue that has come up with the

mutual fund industry where people were allowed to trade after

markets had closed based on the mutual fund prices at the end of

the day. The traders then have more information that is imbedded

in the price of the product, and they can capitalize on that. So we

had to suspend the LGM product as well.

What the Board has done subsequent to that is set up a series

of standards that we want those products to meet so that we will

not have those kinds of program vulnerabilities. One of the standards is that we now require the product to be purchased from the

time the market is closed until 9 o’clock the following morning, so

you no longer have this multi-day period in which to buy the product. Second, we put a cap on the daily sales volume of these products of $1 million a day, and that is a reflection of the fact that

we have this $20 million cap on the program. Third, we do not

allow the product to be sold on any day when the rating is based

on a futures price that was locked limit down or locked limit up.

And the fourth criterion that we have put in place is that depending on the product—we have different rules for different products—

we set up some standards under which sale of the product could

be suspended in the event of catastrophic events. That last one has

not been fully worked out with one of the owners of one of the

products. We are going to take that up as an issue at our Board

meeting next week, and we hope to resolve that issue next week.

We hope to be able to release these products probably within another month or so, and have them for sale some time in the fall.

So that is a thumbnail sketch of the kinds of things we are doing

in livestock.

Mr. CHOCOLA. And there will be a 1-year review after these are

available?

Mr. COLLINS. Yes. After they come up for sale, then we are going

to require a 1-year evaluation. Typically on a pilot, we only do an

evaluation after 3 years, but that is our rule for crops, which are

harvested only once a year. These are products that are traded frequently, and so we think we are going to have enough market inVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
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formation to be able to do an adequate review after 1 year of trading.

Mr. CHOCOLA. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Chocola. The gentleman from Minnesota, Mr. Peterson.

Mr. PETERSON. Thank you, Mr. Chairman. You may have told me

this, but can you tell me why you felt it was necessary to make

these cuts? A number of us asked you to develop a budget-neutral

program, and I guess you ended up with $36 million in cuts. What

drove that? What was the reason that you felt we needed to do

that, or were you told you had to do that?

Mr. DAVIDSON. Well, as I think you are probably aware, for several years prior to the negotiation of this SRA, the administration

has sought through legislative changes to find savings within the

crop insurance program. That started before I came with a proposal

in the President’s budget following with a limitation on underwriting gains, for example, another proposal on the limitation on the

amount that could be reimbursed to the companies for administrative costs. This year, the administration decided that—and I think

it was consistent with what we had heard also from Congress that

these kinds of savings should be sought within the bounds of an

SRA re-negotiation. And so the choice of the administration was to

seek those savings here in the negotiation. We sought to design the

savings that were targeted in a way that companies could make adjustments to their own operations and their own financial operations so they could absorb those savings without having a significant adverse impact on the companies, things such as the reinsurance arrangements with third parties.

We believe that the savings were designed in such a way that

gave flexibility to companies to have a number of options to make

those adjustments. The whole intent was that, if you remember

this chart that I have put out, there is a very steep slope of increase of the cost of administering this program, as reflected in the

ANO reimbursements in total, as well as on a per-policy basis. 65

percent increase over a 5-year period, and that is a compounded 10

percent annual increase. Now, there was concern that that was a

trend that was unhealthy for the program overall. We have continuing concerns that companies need to look very carefully about

how they could effectively administer their service in this program

at minimal cost. And so this was one of the ways that we were advised that should be pursued, and we pursued it in the best way

possible.

Mr. PETERSON. Did you have some kind of data? This Milliman

and Roberts model, and apparently you hired them to do some kind

of a study for $1 million?

Mr. DAVIDSON. The Milliman and Roberts model was a model

that was developed by this actuarial consulting firm to help us inform the Agency with regard to what the impacts of the various

proposals would be, particularly impacts on the underwriting aspects of the program. Some of the changes that were affected had

to do with the risk sharing between the insurance companies and

the Agency, the amount of assigned risk policies that companies

could put into the assigned risk fund and therefore transfer a significant amount of risk to the Agency, and to assess the impact of

13

those required to relatively sophisticated model that would run

that, based upon the current structure of the program and the proposed structure of the program. So that is what the model has been

used for.

Mr. PETERSON. And as I think a number of us sent a letter asking for information about what was in that study, and as I understand it, we have never received a response to that or that information.

Mr. DAVIDSON. Well, actually, our response offered to be able to

sit down with staff and walk through it verbally and we are still

very willing to do that if we can spend some time with your staff

on that, we would be happy to do that.

Mr. PETERSON. That is the only way it can be done, you think?

Mr. DAVIDSON. Well, there were some concerns, and there are

some FOIA requests for information related to this, and we are still

in the deliberations of what can be shared and what cannot be

shared under the FOIA, but, we would offer to sit down and go

through the model and its structure verbally with staff.

Mr. PETERSON. All right. Well, we will follow up with you on

that.

Mr. DAVIDSON. Right.

Mr. PETERSON. I was not aware that that offer had been made.

Mr. DAVIDSON. That was in our letter response, so we were willing to do that.

Mr. PETERSON. Thank you. Thank you, Mr. Chairman.

Mr. MORAN. The gentleman from Texas, Mr. Neugebauer.

Mr. NEUGEBAUER. Mr. Chairman, thank you, and thank you for

calling this important meeting. Mr. Davidson, I want to also compliment you and thank you. When my office has called over on specific issues, you all have been very responsive. You have not always

given me the answer I wanted to hear, maybe, but you have been

very responsive and we appreciate that open dialog that you have

provided. As you know, last week I introduced a new piece of legislation that would allow producers to take two existing products and

combine them to help them get a higher level of coverage, because,

as you recall, when we had our hearing out in Lubbock, we heard

testimony from producers, and one of the concerns is that being

able to, with the increasing cost of production and inputs, getting

the coverage that covered the cost of putting those crops in. And

so, we have introduced this concept and we sent that over to your

office for review, and I would just like to get your initial feedback

on where you think you all are with this program. And since this

does take two existing products, our ability to streamline this product and get it on the market for our producers?

Mr. DAVIDSON. I would be happy to respond to that. As we understand the legislation, and we are still studying it to fully comprehend how it would fit within a crop and our existing programs.

We understand that the intent is to allow producers to purchase a

Group Risk Plan policy in addition to their underlying APH policy,

or whatever other policy they may have, as a means of covering

their deductible. And the intent is that the summation of both of

those would not exceed 100 percent of the indemnity coverage. We

have evaluated this to some extent with regard to how it would fit

within the current programs. It appears we have both programs in

14

place, and so it appears that something like this could be implemented relatively efficiently and effectively within the administrative aspects of the program. There are some questions that we have

that we would like to continue to talk to your staff about with respect to whether or not there is a possibility that a farmer could

end up being over-insured in this program, recognizing that the

Group Risk Plan—they cannot affect their indemnity there. I think

a very positive element of this. But, from an overall perspective, it

appears to be a very good faith effort to try to address a sticky

problem.

Mr. NEUGEBAUER. Thank you, and I look forward to working

with you on that. I think the importance of this, and I think the

importance of the hearing in a lot of the questions you are hearing

and the inputs you are hearing back from, is, agriculture is big

business now, and we have a good farm bill that was put in place

in 2002. I think the one piece of agriculture that seems to be missing is, as I listen to producers, is the fact of managing this very

large risk that we are taking in. Certainly, in the past, we have

had ad hoc disaster programs where we have had catastrophic

events in regions or areas, and, quite honestly, sometimes it takes

years for Congress to decide whether that was an event they wanted to act on. Unfortunately, that is way too late for many of our

producers, and so I think the ability to transition from politics to

just a good business product and having something that producers

can rely on if they do have catastrophic-type events happen within

the region or county, it is just good business.

Along those same lines, if you will recall from our testimony that

we had in Lubbock, was the ability in my area, contrary to some

folks belief, we have producers farming thousands of acres. Again,

they are managing their risk, and some of those folks are farming

dry lands, some of them are farming irrigated, and particularly,

when we talk about cotton, an we heard many of our producers say

that they wanted some flexibility in managing their risk and their

product and their crop mix between their coverage levels that they

carry for the dry land, and for the cotton. Can you give me some

reflection on where we are? I think the last time we talked, you

had it was something that you all were considering and you would

look at? I think Plains Cotton Growers and some other groups offered some solutions up at that time. And so I would like to hear

some of your thoughts on that.

Mr. DAVIDSON. I am actually drawing a bit of a blank on specifically what you are referring to.

Mr. COLLINS. I can perhaps start this. I know there are a number of issues that we have dealt with, but the particular one you

are referring to—you may be referring to how we treat coverage

levels or the availability of alternative plans of insurance on optional units.

Mr. NEUGEBAUER. Right.

Mr. COLLINS. You mentioned irrigated and non-irrigated, one of

the issues there has been whether we would provide different coverage levels on an optional unit for irrigated acreage versus, say,

a basic unit for non-irrigated acreage.

Mr. NEUGEBAUER. Right.

15

Mr. COLLINS. And I would say that this has been an interest of

the Board of Directors of FCIC, and just as a general statement—

let me state this because the Board has taken this action: the

Board has passed, in last December, a sense of the Board resolution discouraging the Risk Management Agency from offering alternative coverage levels based on practice type or plan of insurance.

The reason for the Board action, and it certainly probably pre-dates

your interest in the reason for the Board action on that is that the

Board has been concerned about the portfolio of products we have

right now. For example for cotton, or corn, or soybeans, includes

crop revenue coverage, revenue assurance income protection, indexed income protection, available on basic units, optional units,

enterprise units, whole-farm units. Different coverage levels now

are being asked to go into all of those products.

This does several things. It increases the complexity of the program. It stresses the delivery system. It also puts a burden on

agents to understand all of these things. It leads to misconceptions

about the programs. It leads to mistakes about the programs. It is

difficult for RMA to keep up with the rating of all these different

products that are out there. That is part of the delivery system

issue. So for that reason, the whole complexity and the burdens it

places, including burdens on producers for record keeping, all of the

abundance of burdens that it places that derive from complexity,

is one reason that the Board has been concerned about that.

The second reason that the Board has been concerned about it

is it obviously will increase indemnities over time. I mean, that is

why producers want it. They want to be able to tailor their risk

management plan to the particular idiosyncrasies of their operation, which from a producer point-of-view, it is probably a good

idea. They want to tailor their risk management plan. From a corporation point-of-view, it will increase the indemnities over time. It

creates the possibility of adverse selection across the different types

of plans of insurance. You will pick out and increase your insurance where you expect the greatest loss to occur. And it can also

lead to moral hazard issues.

So I think, based on the financial implications of this, based on

the complexity issues, the Board has been concerned about different coverage levels on optional units of the same crop in the

same county. I think the idea is that if you have a crop, and you

have produced it in that county you are getting an income out of

that crop. You could have situation where your income off of most

of your crop is very, very high, so that your net farm income for

the year is above normal for cotton, and then we may be making

an indemnity payment on one piece of your operation because you

have been able to carve out a product just for that piece of the operation. I think we have to ask the question is that the way we

want a broad safety net program that is designed for catastrophic

events to work? Should someone get an indemnity payment on cotton in a county when their income from that crop is otherwise

above average?

So I have raised a bunch of issues here and it is that discussion

that the Board had about this issue, going back to last December,

and we raised a caution to RMA about proceeding down this route.

So that is the best I can tell you about that.

16

Maybe Mr. Davidson would want to amplify or clarify——

Mr. DAVIDSON. We listen to our Board of Directors.

Mr. NEUGEBAUER. I know my time has expired, Mr. Chairman.

I will be brief here. I think the thing that we have to recognize is

even though those are the same commodities, the cost of producing

that commodity from a dry-land standpoint and an irrigated standpoint are different. And while the revenue issue is anticipated, the

costs are real, and I think we, in all due respect to your Board of

Directors, what I hear is a lot of reasons why we should not do it.

But what I would like to do is hopefully sit down and have some

dialogue about what are some of the issues that your Board is concerned about, and what are some of the ways that we can address

those?

I think that some of the producer groups have offered up some

solution as to some of the issues that you have brought forward.

And, certainly, most of the commodity groups that I have talked to

are interested in making sure that the abuse part of it is addressed

in the issue, but not to the detriment of not allowing programs to

come onto the market just because we are trying to reduce the 1

percent of the folks that may be abusing that process. So I hope

that we can continue that dialogue.

Mr. COLLINS. That is good response, Mr. Neugebauer, and I

think the Board’s charge on this is very broad, and we would certainly be willing to take a look at aspects of this.

Mr. NEUGEBAUER. Thank you very much.

Mr. MORAN. The gentleman from North Dakota, Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. What is going to come

next, but I am going to start by saying I have the highest regard

for you, the chairman, and the highest regard for the Administrator. Having said that, I am concerned about the process and the

product of this SRA re-negotiation.

The process: I would like to have had this hearing earlier. I know

the chairman and I have a healthy disagreement about how this

might have unfolded. You did not want us to be party to the negotiations and for very good reason. That is not a legislative undertaking. I am frustrated that oversight occurs after it is all done

and, hell, we cannot do any good or bad at this point. It is done.

So that is not oversight to me, and I am feeling frustrated about

that.

I am also feeling frustrated about the process. I mean, I do not

understand, with McKieran-Ferguson on the books, this anti-trust

objection, as of 8 years of insurance regulation, I have not encountered that view in this way that would suddenly change completely

the way SRA’s have been negotiated in the past. I would go along

with the request that we want the document from DOJ. If it was

just somebody opining that is—we ought to know that, but if there

is a document, we want to see that.

We also want the Milliman and Roberts document. It is one thing

to get this presented orally, but we are not talking about classified

information here, to my knowledge. And I think it is time now that

we take a look at what was the basis—what was guiding the Department’s actions through these negotiations. So I specifically reiterate the request for the document. If we cannot have the document, I want a reason why we cannot have the document.

17

You cite the rising cost of the program. I cite this as a success

of legislative effort to get the risk protection out to farmers that

they require, so that we do not have to be as dependent upon disaster programs, which, if you lay against this chart, have also had

a very substantial budget effect.

Mr. DAVIDSON. I would agree with that.

Mr. POMEROY. This chart encompasses two legislative acts specifically designed to, first of all, in 1993, broaden participation, and

then with ARPA, increase the insured values so there is more protection.

Mr. DAVIDSON. Yes.

Mr. POMEROY. And so, my opinion, this shows the committee’s

done some pretty good work at getting meaningful protection out

to farmers. Now what I had in mind when I offered the amendment

to ARPA that we would have an SRA negotiation, was that the Administrator would take a pretty good look at what was on the books

thereby way of a reinsurance agreement. Those have to be evaluated, I believe, on a periodic basis, just to make sure that it is appropriate, we are not being overly generous, that it is working

right.

I believe this budget-driven approach that you speak of, to try

and take as much savings out of the program as could be gotten,

really is a different approach entirely. That is not about the Technical Reinsurance Deal, that is an effort by the administration to

administratively, without legislative input, change the terms of the

deal that was contemplated with the ARPA legislation. And this

public/private partnership has got some delicacy to it. And I think

that, again, a budget-driven approach as opposed to an evaluation

of how the insurance markets are working, is one that endangers

the public/private partnership, and may change delivery of the

service on the ground, and may change the ability of us to keep the

support for crop insurance going forward, so I did not like that

changed approach.

Now, I have got some questions at the end of this tirade. One

further comment. The fact that companies are now signing up, I do

not take that as validation of the end product. To me, what choice

do they have? It is like the Jack Benny, ‘‘your money or your life?’’

He responds, ‘‘I am thinking.’’ It is like that. It is a take the risk

of this deal or leave the business, and that is obviously not much

of a choice to take the risk. But I do think, from what I have heard

from, not just the insurance sector but also the banking sector, that

there is great concern we are going to have a significant reduction,

in terms of players in the field.

I believe that, even with RMA, the more established the company, the more favorable your proposal looks. I just do worry about

it, in the end, anti-competitive effects of the program. Specifically,

question: we have got an awful lot of preventive planning acres in

North Dakota, about 21⁄2 million acres, and you have determined

that ARPA prohibits allowing any grazing or haying of prevent

planned land. Is there basis in statute for that, Mr. Administrator,

or is that your administrative interpretation?

Mr. DAVIDSON. No, it is not an administrative interpretation.

There is a basis in statute. When ARPA was passed, there were a

couple of provisions that dealt with double cropping as well as preVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
18

venting planting, and there was provided in the legislation that

there would be a reduced indemnity if a second crop was raised

after a successful first crop where double cropping was not a typical part of the agricultural practice. Particularly with prevented

planting, there was a specific statute, and I would be happy to give

you the cite later on, if you would like it. And I think, in fact, the

letter——

Mr. POMEROY. I remember the discussion.I did not contemplate

grazing, for example, something that might grow on land as a second crop.

Mr. DAVIDSON. The challenge is is that if a second crop is harvested for value, and harvesting includes whatever method that

may be, be it grazing or otherwise, then that produces an economic

value, and within the bounds of the statute itself, the law itself, it

would require us to reduce the indemnity on the first payment, the

preventive planning payment, down to 35 percent. So while we did

implement regulations to bring that to fruition last year, and the

basic provisions, this is the first year that this is impacting is because those regulations have just come out. The regulations followed the statute and did not add anything or detract anything

from the statute, and it is really the statute that has created the

constraint on us at this point in time. Whether that was intended

or not, that is the effect, according to our counsel.

Mr. POMEROY. Prevent plant is very important coverage, very

easily abused, I believe, and yet critical, and so I favor the restriction on double cropping. I think that the interpretation of grazing

as an alternative crop on land that previously grew soy beans, for

example, is a bit of a stretch. But, I will take a look at the underlying statute.

Mr. MORAN. As the gentleman from North Dakota knows, I hold

him in high regard, but his time has expired. The gentleman from

Washington, Mr. Larsen.

Mr. LARSEN. Thank you, Mr. Chairman, for the opportunity to be

here today and have a chance to ask some questions at the hearing.

I want to first thank RMA, and also Mr. Collins, representing the

FCIC for helping with the expansion of AGR-Lite in Washington

State, and the Pacific Northwest generally, but certainly to my

State, where we have more opportunities under AGR-Lite to get

products offered to the specialty crop farmers that are scattered

throughout the State, so I want to thank you for that.

I want to ask about apples—you were asked the apple question

last time you were here, if I am not mistaken, but present apple

crop insurance policy stipulates that damaged apples are not covered by the base policy, as long as those apples were as good or

better than juice-grade. Juice-grade tend to be low-grade apples,

and under current economic conditions, do not have a lot of market

value. So the many F farmers have great distinction needs to get

back to more reasonable level of their lost income. So I know there

is a proposal to give growers producing apples designating it for

the fresh market, the option to purchase coverage for U.S. fancy

grade, which is a higher specification grade. Can you let me know

where that effort is, and do you have any thoughts, or are you

thinking about how that model might be applied to berries or stone

19

fruits that have similar issues between low-grade and highergrade?

Mr. DAVIDSON. Let me first say that all of the issues related to

the apple policy have been vetted extensively, as you are probably

aware, not only with apple growers in your State, but throughout

the Nation over an extended period of time, and all of those considerations have been folded into a proposed regulation that will be

published shortly. We have gone through the comments and it is

in the process, so I am pretty much limited in what I can say specifically about that, because it is in a regulatory process. But I can

just say that those issues will be addressed in the regulation.

Mr. LARSEN. Can you give us the anticipated date of publishing

of the regulation?

Mr. DAVIDSON. Imminent.

Mr. LARSEN. OK.

Mr. DAVIDSON. Then, you asked also about the application of that

model to stone fruit, and I guess we would probably need to spend

a little bit more time, but certainly there are concerns that I have

noted as I have gone through my 26 listening sessions of the past

year-and-a-half throughout the Nation, of concerns about quality,

and reflecting prices that are appropriate for the quality of the

fruit and its intended use.

Mr. LARSEN. Yes.

Mr. DAVIDSON. And so certainly that is very germane to other

stone fruit—probably needs to be addressed.

Mr. LARSEN. Somebody will take a look at what the regulations

says, then, and see where we can go from there.

Mr. DAVIDSON. Yes, we would entertain any suggestions from

grower groups.

Mr. LARSEN. OK. That would be useful for us to fall upon here

to begin to provide some more options. Folks maybe do not have

them. Regarding seed potatoes, and you may have addressed this

in the question about cotton. I think, generally, it is the principles

applied on the cotton question may be applied here with seed potatoes. We got one of the certified seed counties in the country in my

district, and farmers, like those who produce seed potatoes, are

constantly moving and leasing new fields, which makes the current

unit regulation difficult.

If you have a two 500-acre farms where the only difference is

that one of the farms is a road devaluing the field in half while the

other is undivided. Why does the one with a road need a different

risk management program than the one with the undivided field,

and what thoughts you have prevent fraud, but also give the farmers some flexibility they need to cover the crops they need to plant

on a unit. Any thoughts there?

Mr. COLLINS. You are looking at me, Mr. Davidson.

Mr. DAVIDSON. I would be happy to address that, but, Mr. Chairman, you have given me some guidance on units so maybe you

would be the best to address it.

Mr. COLLINS. It is a difficult question to answer, and it is a concern that we have had as we look broadly across all of our policies.

Mr. LARSEN. Yes.

Mr. COLLINS. The Board, I believe, feels that when the product

is a commodity—that is, it is all planted at one time, produced one

20

way with similar cultural practices, marketed the same way, we

like to see that under one unit. We do not like to see the proliferation of units. Units should exist when the crops are fundamentally

different. You have got two different units because maybe it is different varieties of wheat planted at different times of the year, a

Spring wheat, a Winter wheat, or it is Durham wheat and other

Spring wheat which have different quality characteristics, or is irrigated versus non-irrigated, which are subject to different perils.

So it is a difference in perils or a difference in the characteristics

of the crop that justifies different units. When it is the same crop,

seed potatoes on 1,000 acres, and whether it has a road or not a

road, I personally would prefer to see that as one unit. Now, that

does not answer your question why does it exist that way.

Mr. DAVIDSON. We do recognize, I believe, units where there is

significantly different topography and things of that nature that

in—particularly in your State, you might find——

Mr. COLLINS. Where the perils may be different.

Mr. DAVIDSON. Right. Where the perils are different, yes.

Mr. LARSEN. Well, I will do some follow-up with——

Mr. COLLINS. Yes. It is an issue we are struggling with. It is an

issue that, as we have approved new products, we have paid close

attention to the unit structure. It does not mean we have gone back

and looked at all of our existing hundreds of products and the unit

structure of all of them, but I am telling you sort of the thinking

now of the Board about what we do with these kinds of actions we

take in the future.

Mr. LARSEN. I will just follow up with some details on this with

you, and you have always been very cooperative in helping out my

office and listening to our concerns. I shall look forward to continuing to work with you on that.

Mr. DAVIDSON. We will work with you with our regional office as

well.

Mr. LARSEN. Yes.

Mr. DAVIDSON. I think you have good working relations with

them.

Mr. LARSEN. They are great out there.

Mr. DAVIDSON. Yes.

Mr. LARSEN. They are doing a great job. Thanks.

Mr. DAVIDSON. Thank you.

Mr. LARSEN. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Larsen. The gentleman from North

Carolina, Mr. Etheridge.

Mr. ETHERIDGE. Thank you, Mr. Chairman. Mr. Davidson, I read

with interest your testimony, particularly in the section regarding

the new sweet potato pilot insurance program because we have

quite a bit in my district, and, obviously—in fact, that would—in

my interest. And our farmers are quite interested in the new pilot

program, as you can appreciate, and particularly pleased to see

that you are talking about expanding the number of participating

counties, since we have some of the higher producing exposures in

our area. My question is three-fold.

Number 1, how long will this expert review take? No. 2, when

can we expect the FCIC Board to be voting on the proposal, if you

know that at this point. And, finally, should the expert review

21

panel find there are problems with where we are, will there be

enough time to correct those adjustments that need to be made in

time to insure that the program is in place for the 2004–05 crop

year?

Mr. DAVIDSON. I have been advised that the expert review is due

to come back to the agency and to the Board of Directors on the

20th of August, that there will be a meeting of the Board of Directors at the first week of September where those will be considered.

It is our intent, if all goes well, to be able to have that available

for the 2005 crop year.

Mr. ETHERIDGE. Thank you.

Mr. DAVIDSON. Now, if all does not go well, we will have to see

what it is that is making something not go well to——

Mr. ETHERIDGE. Yes, and I believe that is a concern. If there are

some issues that need to be resolve, obviously, that would be great

because you have got a lot of folks out there who have a lot of exposure that they would like to take advantage of having insurance.

Mr. DAVIDSON. I will say that, as the Board deliberated this, the

proposal that came back did not include some of the counties that

currently exist where we have had particular concerns about losses.

But the Board ultimately agreed that we should continue to include

those counties to give them a chance, and to see whether or not

these provisions actually work to make a program viable in the

face of some of the difficulties that we had in those counties, and

so hopefully we are going to be able to make this work.

Mr. ETHERIDGE. Good. Thank you, sir. My next question deals

with crop insurance for peanuts, as you can appreciate the area

is——

Mr. DAVIDSON. Yes.

Mr. ETHERIDGE. And we have talked at previous hearings, and

thank you for your help on that, but our ability to insure peanuts

at contract prices, and you are familiar with that?

Mr. DAVIDSON. Yes.

Mr. ETHERIDGE. It is a real challenge, and your testimony did not

address this point, but I know that RMA’s notice incumbent period

that ended in June will also show units for peanuts. I also saw

comments regarding insured peanuts at contract prices, and I appreciate your spending time in working on the issue because I

think this is a big issue. Can you share with us your thoughts on

the process where we are, and is it possible that RMA could have

something approved, or maybe in place, as we work toward the

2005 crop year?

Mr. DAVIDSON. We intend to have this rule effective for 2005. We

are still in the regulation process, or in the rule-making process,

and so I cannot talk specifically about details, but we did receive

a number of comments with respect to the contract price issue, and

to unit issues as well, if I remember correctly, which were two big

issues and hopefully we will be able to address those positively.

Mr. ETHERIDGE. OK. I notice the gentleman from Texas wanted

me to yield on that because I——

Mr. STENHOLM. If you would yield on that.

Mr. ETHERIDGE. OK.

Mr. STENHOLM. Along that same line, are you considering establishing price election for peanuts as one of the options, in a manner

22

similar to the methodology used by USDA and other programs,

based by reviewing the average price during the market year, or

do you have any current thinking on that aspect of setting the

price option?

Mr. DAVIDSON. I am not aware that we are, Mr. Stenholm, but

I would be happy to check into that and get back to you. I may be

limited in what I can say until the rule-making process is over, you

understand, but I will get back to you and say what I can say.

Mr. STENHOLM. Thank you.

Mr. ETHERIDGE. One final thing. Let me give you one more specific before my time runs out. In the Raleigh office, which handles

our region, and they have been very helpful, there is an issue that

deals specifically with our State, and maybe some other, maybe

Virginia, but when farmers do have a disaster, at the end of the

year, especially in tobacco, there are—they are not allowed to move

those pounds to someone else who may need it, and I think it is

specific to our area. Is there anything being done to look at that,

because I think that is a real issue? Assuming things move through

this Congress and this buyout, it might not be an issue after this

year, but it has historically been a problem over the last couple

years, and I think that is something that still needs attention, if

we can.

Mr. DAVIDSON. I would be happy to look further into that. I did

receive a report knowing that you would ask this question, and a

number of the issues here relate to concerns over program integrity

that would have to be dealt with, and I think probably we can just

talk with you.

Mr. ETHERIDGE. We would like to because I do not think it is a

big issue, but for some folks it is, and normally it is in an isolated

area. If we can provide the kind of security we would need for it,

and also help some farmers who really do get hurt unintentionally.

Mr. DAVIDSON. We would be happy to have further conversations.

Mr. ETHERIDGE. Thank you, sir. Thank you, Mr. Chairman. I

yield.

Mr. MORAN. Mr. Etheridge, thank you. We are going to have a

very, I hope, brief round of second questions, and I recognize Mr.

Neugebauer.

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I want to talk

about something that we had briefly talked about a couple of weeks

ago, and that is the deferral period for non-emerged cotton. And we

got the 15-day white planting day, and then we have got the 8-day

deferral period. I continue to hear from producers that if you are

going to—those that have planted before the late planning date and

have non-emerged cotton, feel like they are being penalized and

asked to wait an extended period of time for them to make an optional planting decision for, say, grain sorghum or something like

that. And one of the things we talked about whether there was opportunity for fraud in there or someone that planned to run up to

the late planting date and their crop would be adjusted based on

the fact that they had crop failure when, in fact, that crop had not

been on the ground——

Mr. DAVIDSON. Just the next day.

Mr. NEUGEBAUER. Yes. So now we know what some of the issues

are. What are some of the things that we can work together on to

23

look at that, because it is a real issue, because the way we are

making some of those folks wait now, some of those folks are waiting past the late planning period for, say, an alternate crop like

grain sorghum?

Mr. DAVIDSON. Well, this has been an issue that I personally

have dealt with from the time that I got here because it was raised

fairly shortly after I got into the Agency, and we tried to—at the

time, I think there was a 15-day, or something like that, deferral

period. We worked with the Extension Service in that area to try

to obtain all of the agronomic data that could be obtained on how

long it takes to raise a cotton crop, number of fee units, et cetera,

the latest—or the earliest frost dates, and things of that nature.

The fundamental principle in this regard is, is that once the

farmer plants the crop, it is their obligation to raise it to fruition.

To do what they can to raise it to fruition. Recognizing that in that

area, seed can stay in the ground, and you can have rain, and with

a very nominal amount of rain, the crop can come up and start

being established. So we tried to gear this timeframe to what the

agronomics said is appropriate for raising a crop in the area, and

frankly, went out as far as we could go for the timeframes. If there

is a continuing concern, things that can be discussed are is the late

planting date an appropriate date, things of that nature, and

maybe we can open that question up. There has been reluctance on

the part of the growers to open that issue in the past, but we would

be happy to entertain that. And if there is additional data, if there

are new varieties, or some kind of a genetically changed seed or

something like that that has a different agronomic characteristics,

we would be happy to look at that as well.

Mr. NEUGEBAUER. I think we have been working with your office

on providing some additional information, and also, I think that

some of the producers are willing, maybe, to have some discussion

about the late planting date and seeing if we can come up with a

date that is kind of the date—and talk about whether the deferral

period, then, is relevant in that period of time.

Mr. DAVIDSON. Yes.

Mr. NEUGEBAUER. One quick question, Mr. Chairman, and I will

move on. I know you have made some changes in relation to grain

sorghum and grain sorghum silage, and I believe you have got a

pilot program currently going on, and the price election for those

two is certainly an issue. Grain sorghum prices, which is a good

thing, are up, and what we are hearing from some of our producers

is that they are wanting to make sure that they have some of the

same parity that we have in the corn program, because in some

cases, they feel like that they are being pushed to plant corn, because of the price selection process, and not really reflecting some

of the increased prices in the grain sorghums. Particularly in my

area, that is very important because it takes, certainly, a lot more

water for the corn in many cases than it does the grain sorghum.

So we do not want to be having a farm policy or insurance policy,

I guess, that would be encouraging producers to move to a crop just

because of the insurance coverage available. What are some of the

ways that you are going to be working on to make sure that price

selection for grain sorghum is reflective?

24

Mr. DAVIDSON. Well, we have been addressing this for quite a

while, and did make what I thought was a positive move last year,

to try to ensure that the price selection process was reflective of

what the current market is. And rather than look at a long-term

trend, we looked at a more current trend of what the price relationship between grain sorghum and corn is. Of course, if we had a futures market for grain sorghum, that would be perfect. We do not.

We have to do some kind of a derivative pricing arrangement. We

do rely upon the World Boards Price Determinations for that relationship, and so from the Agency perspective, we have probably

gone about as far as could be expected there. We are required to

have price selections that are reflective of the market, so we try to

get as close to the market as possible, recognizing that it is not always available to help us do that. But Dr. Collins, in his other capacities, might be able to respond to that as well.

Mr. COLLINS. I think that Mr. Davidson summarized it pretty

well. This is an action that the Board took, the Board directed

RMA on how to establish the price selection for sorghum. For a

long time, because there is no futures market for sorghum, particularly on the revenue products, sorghum was established at 95 percent of the price of corn. In fact, the long-term ratio of sorghum to

corn prices is more like 92 percent, so there was a benefit there for

some time, it seems to me. But, then, in 2002 and 2003, we saw

the average corn price equal the average sorghum price for the Nation as a whole, and that raised concerns with the sorghum producers. They visited with us. I personally met with them. Mr. Davidson met with them. And what we decided to do is instead of using

a long-term actuarially-based kind of relationship, we tried to take

into account recent market events. So we have a price forecasting

committee within USDA for sorghum that has been long-standing.

They have been existing for some time. They are comprised of representatives from my office, the Agriculture Marketing Service, the

Farm Service Agency, Economic Research Service, the Foreign Agricultural Service, and, in January, they project forward the price

of corn and the price of sorghum. For example, this January, they

would have predicted—forecasted the price of corn and sorghum for

the 2004 crop, and the ratio that they project is now the ratio that

we use in the sorghum claim of insurance.

It turned out that their projected ratio for the 2004 crop was 95.9

percent, and that did not please some people because the market

had been 100 percent the last couple of years. Nevertheless, if you

look back over the last 23 years of data, there has only been 2 of

out of the 23 years when prices were equal. Sorghum has always

less. And then if you look at the recent prices reported by the National Agricultural Statistics Service for the last couple of months,

sorghum is running about 94 percent of corn. So this is not an easy

issue.

Mr. NEUGEBAUER. Right.

Mr. COLLINS. But we have tried to be sensitive. We have gone

to a new method, which we hope, in future years, will allow sorghum to reflect a price that is equal to corn, or less than corn, or

above corn, depending upon the relative market conditions.

The second part to your questions is, more broadly, besides the

price election. The package of programs. Is it better structured for

25

corn as opposed to sorghum and therefore maybe cause people to

go into corn as opposed to sorghum? And that is an issue that we

are trying to deal with with the consolidation of all of our products.

As you may know, we now own all the revenue products. We own

the APH product, and we have a process going on now to build one

product out of APH, CRC, RA and IP, and in that way, I think you

will see something that puts sorghum on a more equal footing with

corn. Then we still have the question that Mr. Moran opened with,

with respect to GRP and GRIP, and can those be made available

for sorghum? GRP is available for sorghum already, it is just not

bought by sorghum producers. It is available in almost every county in Kansas, and many other counties, and I think we sold 9 policies in 2003. But, there has been a lot more interest in it over the

last year. But people want—not GRP, they want GRIP, G-R-I-P,

the income protection plan. And then the question there is, can we

put something in place for sorghum, and I think our plan is to look

at that. I do not know that we can get in place for 2005, but certainly for 2006, and I will defer to Mr. Davidson because it is going

to be his determination on whether he has got the resources to be

able to get this done in time for 2005.

Mr. DAVIDSON. 2005 would be stretching it at this point because

of the lateness of the year, but we certainly believe that we can do

something for 2006.

Mr. MORAN. The gentleman’s time is expired. Gentleman from

Minnesota, Mr. Peterson.

Mr. PETERSON. Mr. Chairman, a couple parochial things. Has

there been a request made to you to do a pilot program for COPIA?

Do you know what that is?

Mr. DAVIDSON. Well, I think we actually had a phone conversation about this product a while back.

Mr. PETERSON. Have they sent anything?

Mr. DAVIDSON. I am not aware of having received a request for

a pilot program for that product or that commodity, no.

Mr. PETERSON. Does that have to come from a company, or how

does that work?

Mr. DAVIDSON. Could be with a grower group.

Mr. PETERSON. Well, see, they do not have a grower group.

Mr. DAVIDSON. Or a group of producers in the area. They do not

have to have an organized——

Mr. PETERSON. Yes, but this is a crop that was developed in an

ARS station in Morrison. They have not commercially started growing it yet. One of the issues is that they do not have crop insurance, but anyway——

Mr. DAVIDSON. There may be some opportunities, for example,

AGR-Lite, if they are a diversified farming operation, or they are

starting up a new crop. That might be a way of getting coverage.

Certainly, we would have to look at the agronomics of the crop

itself and be able to establish rates and things of that nature.

Mr. PETERSON. Well, I will have to get a hold of them and get

that in the works. But, the other part of the question is that this

card here, is this right? That if we start on this company right now,

it is going to take 9 years before we actually get a product?

Mr. DAVIDSON. Well, I guess we could both address that.

26

Mr. COLLINS. Yes. Let me just make a comment about that. That

chart—I was interested to see Mr. Davidson’s testimony contain

that chart may be unduly pessimistic. But, it may be reflective in

some areas. This is a chart that basically——

Mr. DAVIDSON. Actually, it is reflective of our experience.

Mr. COLLINS. It is reflective of the RMA product development

process, the full cycle, including regulation. Some of this stuff up

front may not happen that way. I mean, as Mr. Davidson just said

on the product you were talking about—we might get a private

company submit a product to us where a lot of this work has already been done, and then we can approve that product in fairly

short order, after the expert review process, and go right into a

pilot. Now, after 3 years after the pilot is evaluated, if the pilot is

performing well, it is entirely possible that we can scale it up at

that point to a much larger client base, even before we have gone

through a regulation. There is no limitation in law in the size of

our pilots.

For example, when we did the blueberry and the pecan pilots, we

scaled those up after the 3 years. After we had a successful pilot

experience, we scaled those up to a lot of producers. Now, you have

to have the rate information available to be able to scale it up, but

it is entirely possible that a private sector submitter could come to

us with a product. We could approve it within 6 months, have a

pilot going the next year, and 3 years later be scaling a successful

pilot up to a broader client base. So that would be the shorter end

of this. But, this is an accurate chart.

Mr. DAVIDSON. It is an accurate chart, and I guess it really depends upon whether it is the initial stages of this are accomplished

in the private sector, or whether the initial stages are contracted

by RMA. In either case, it takes some time to go from idea to a

package that is ready to be presented to the Board of Directors of

the FCIC. And whether a private sector party on their own could

take a shorter period of time, I guess. It would depend upon the

product. But, the product has to come to the Board of Directors

complete and ready to be reviewed, and if it does not, then it gets

kicked back and may take even more time.

Mr. PETERSON. One last thing. The barley people were in to see

me a month ago. They had some concerns about the coverage between malting and feed barley. Has that been resolved, do you

know?

Mr. DAVIDSON. We are in discussions with them to deal with

those issues, I am told.

Mr. PETERSON. And that is that going to get resolved satisfactorily?

Mr. DAVIDSON. We think we will be able to come to some resolution, yes.

Mr. PETERSON. Thank you. Thanks, Mr. Chairman.

Mr. MORAN. Mr. Stenholm, do you have any additional questions?

Mr. STENHOLM. Yes, regarding the data warehousing question,

what is your current plan for continuing the contractual arrangement continuing the process that you have been in now? What are

the current plants?

27

Mr. DAVIDSON. Are you talking about the comprehensive management information system that was asked for by the farm bill?

We are in the middle of the first contract year on that, and the last

report that I have received is that we have just finished all of the

planning stages and are just getting into part of the implementation side, so there is no plan to discontinue that at all. We plan

to take it all the way to the fruition. We think it is a good idea.

We are working with the Farm Service Agency and with the contractor to do that, as well as with our Office of Chief Information

Officer.

Mr. STENHOLM. And, specifically, the data mining aspects of it

that you have mentioned have been so successful with a pretty

minimal cost, there is no intent not to continue in that direction?

Mr. DAVIDSON. Well, as you know, the funding expires on that

coming up in a year-and-a-half and we are concerned about that,

but that that is something that we will——

Mr. STENHOLM. Do you have a recommendation that you will

make to the Congress regarding that?

Mr. DAVIDSON. I am probably not at liberty to tell you what we

would recommend in the President’s budget, but data mining is a

very important part of our ongoing program.

Mr. STENHOLM. Finally on the whole question of declining APH’s,

you mentioned in your testimony that you received some contract

proposals. When do you expect awards to be made, and do you have

an impression as to what kind of methods are the most promising

in those contractual proposals that have been submitted to you?

Mr. DAVIDSON. I am sorry, on which one?

Mr. STENHOLM. On the APH’s.

Mr. DAVIDSON. On the multi-year declining——

Mr. STENHOLM. Multi-year——

Mr. DAVIDSON. It is really too early to be able to tell. We are just

starting to evaluate the proposals, and I have not had a report on

that.

Mr. STENHOLM. Nothing has kind of caught your attention as

you——

Mr. DAVIDSON. Not yet. I have not had any report on what the

various proposals are.

Mr. STENHOLM. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Stenholm. Dr. Collins, Mr. Davidson, thank you very much for spending your morning with us.

Without objection, the record of today’s hearing will remain open

for 10 days to receive additional material and supplementary written responses from witnesses, any question posed by a member of

the subcommittee. This hearing of the Subcommittee on General

Farm Commodities and Risk Management is now adjourned.

[Whereupon, at 11:32 a.m., the subcommittee was adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF KEITH COLLINS

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 Chairman of the Board of Directors of the Federal

Crop Insurance Corporation. Your invitation requested responses of the Department

of Agriculture to 25 issues related to crop insurance. The witness statement of Mr.

Ross Davidson, Administrator of the Risk Management Agency, provides detailed reVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
28

sponses 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 sugarbeet 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

1990’s. 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 1990’s, 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

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 manageVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
29

ment 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 3 years, but the continual nature of the sales cycles for these livestock programs should provide sufficient data to permit a useful review after 1 more year of experience.

2005 STANDARD REINSURANCE AGREEMENT

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

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

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 maVerDate 11-SEP-98 10:45 Sep 08, 2004 Jkt 095608 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\DOCS\10836 HAGRI PsN: HAGRI
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jority 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.

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