Order Code IB10033
CRS Issue Brief for Congress
Received through the CRS Web
Federal Crop Insurance:
Issues in the 106th Congress
Updated January 14, 2000
Ralph M. Chite
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Background
Crop Insurance Basics
Crop Insurance Issues and Congressional Action
Premium Subsidy
Administration Proposal
House-Passed Bill (H.R. 2559)
Senate Bills
Multiple-Year Crop Losses and Actual Production History
Administration Proposal
House-Passed Bill (H.R. 2559)
Senate Bills
Livestock Coverage
Administration and Legislative Proposals
Private Sector Incentives
Administration Proposal
House-Passed Bill (H.R. 2559)
Senate Bills
Noninsured Crop Disaster Assistance Program (NAP) Changes
Administration Proposal
House-Passed Bill (H.R. 2559)
Senate Bills
Budgetary Impact of Crop Insurance Legislation
LEGISLATION
FOR ADDITIONAL READING

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Federal Crop Insurance: Issues in the 106th Congress
SUMMARY
Policymakers have been examining the
1) a declining rate of premium subsidy by the
efficacy of current farm risk management
federal government as levels of coverage
programs, most notably the federal crop insur-
increase; 2) insufficient coverage for those
ance program, and are in the midst of consid-
who experience multiple years of disasters; 3)
ering major legislative changes. The current
the lack of any insurance products for live-
economic condition of the farm sector (low
stock producers; and 4) the need to compen-
commodity prices) and farmer discontent with
sate private companies for developing new risk
some of the modifications made by the 1996
management programs.
farm bill to the farm commodity price support
programs are prompting congressional action.
On September 29, 1999, the full House
approved a comprehensive crop insurance bill
The federal government has spent an
(H.R. 2559), which would increase the portion
average of $1.5 billion per year on crop insur-
of the premium paid by the government, pro-
ance since 1994. The government pays the full
vide improved coverage for farmers affected
cost of the premium for catastrophic (CAT)
by multiple years of natural disasters, authorize
coverage and pays a portion of the premium
pilot insurance programs for livestock farmers,
for higher levels of coverage. Private insur-
and give the private sector greater representa-
ance companies sell and service the policies,
tion in policymaking.
but are reinsured by the government for most
of their losses and expenses.
The cumulative cost of H.R. 2559 is
estimated at about $6 billion through FY2004.
Major reforms were made to the crop
Authority for any new spending comes from
insurance program in 1994 in hopes of perma-
the FY2000 budget resolution, which allows
nently replacing expensive ad hoc disaster
for a reserve fund of $6 billion that can be
payment programs with a more heavily subsi-
used for farm risk management modifications
dized crop insurance program. However, the
or income assistance, beginning FY2001.
enactment of multi-billion dollar farm financial
assistance packages in both FY1999 and in
A bill in the Senate comparable to H.R.
FY2000 has encouraged consideration of
2559 is the Roberts-Kerrey bill (S. 1580).
additional modifications. Some are opposed
Senate Agriculture Committee Chairman
to providing any additional federal funds to
Lugar has introduced legislation (S. 1666) that
crop insurance because of concerns that such
would take a different approach to farm risk
subsidies encourage farmers to bring environ-
management enhancement by providing a
mentally fragile land into production.
direct payment to any farmer who adopts at
least two risk management practices. Because
Overall farmer participation in the pro-
of the lack of consensus, committee markup
gram has increased in recent years, but partici-
was postponed until no later than March 8,
pation rates for levels of coverage beyond the
2000. Separately, the FY2000 agriculture
CAT level, have not changed significantly.
appropriations act (P.L. 106-78) contains
Several farm and insurance industry groups
emergency spending of $400 million to further
have identified a number of factors that they
subsidize crop insurance premiums in the
perceive inhibit participation. Among these are
2000 crop year.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On September 29, 1999, the full House passed by voice vote a comprehensive crop
insurance enhancement bill (H.R. 2559), which, among its many provisions, offers higher
levels of premium subsidy and improves yield coverage when a farmer is affected by multiple
years of disasters. Also on September 29, Senate Agriculture Committee Chairman Richard
Lugar introduced legislation (S. 1666) that takes a different approach than H.R. 2559 to
encourage farmers to manage their risk. S. 1666 would provide $5 billion in additional
direct payments over 4 years to farmers who adopt at least two risk management practices,
including crop insurance and participation in the futures market. Supporters of a Kerrey-
Roberts bill (S. 1580), which is comparable in scope to H.R. 2559, had pressed for a
committee markup of their crop insurance bill. Sponsors of the two pending Senate
measures (S. 1666 and S. 1580) were unable to reach a compromise before the end of the
1999 session. Supporters of S. 1580 had planned to offer their bill as an amendment to
separate legislation before Congress adjourned for the year. However, an announcement
by Chairman Lugar that the committee will mark up a risk management/crop insurance bill
by March 8, 2000 led to the withdrawal of the amendment.
Meanwhile, the FY2000 agriculture appropriations bill (P.L. 106-78, H.R. 1906) , was
signed into law on October 22, 1999. P.L. 106-78 contains emergency spending of $400
million for USDA to offer a discount on the farmer-paid premium for crop insurance in the
2000 crop year.
BACKGROUND AND ANALYSIS
Background
Farming is commonly viewed as an inherently risky enterprise. In their operations,
farmers are exposed to both production risks and price risks. Farm production levels can
vary significantly from year to year, primarily because farmers operate at the mercy of nature
and frequently are subjected to weather-related and other natural disasters. Farm operators
can also experience wide swings in the prices they receive for the commodities they grow,
depending on total production levels and demand conditions both domestically and
internationally. Since farm income is primarily determined by the combination of production
and prices, annual farm income therefore can be volatile.

Over the years, the federal government has played an active role in helping to temper the
effects of risk on farm income. On the production side, the government has widely expanded
coverage and increased the subsidy of the federal crop insurance program. To help mitigate
price risk, the government for many years administered price and income support programs
for producers of major field crops. Beginning in the 1970s and up until 1996, these
commodity support programs provided direct payments to participating producers, when
market prices fell below a government-set target price. However, the omnibus 1996 farm bill
(P.L. 104-127) terminated target price deficiency payments for wheat, feed grains, cotton and
rice growers and replaced them with fixed but declining 7-year annual contract payments that
are no longer tied to market prices. Consequently, farmers have been required to assume
greater responsibility for managing their price risk. Pilot projects were authorized by the
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1996 farm bill to develop revenue insurance (income protection) products as part of the
federal crop insurance program.
A confluence of several events has caused many farm groups and policymakers to call
for a reexamination of federal farm risk management programs, especially the crop insurance
program. In late 1997, prices for many of the major farm commodities declined significantly,
causing a drop in farm income for many producers. Also, over the last several years, some
regions have experienced multiple years of natural disasters, which have limited production
and reduced farm income. Many farm groups have complained that the current crop
insurance program has provided inadequate coverage for producers when natural disasters
strike. They also contend that the 7-year contract payments do not provide adequate
protection for farmers when prices drop as they have since 1997.
In response to farm group pleas for assistance, a nearly $6 billion emergency farm
financial assistance package (P.L. 105-277, the FY1999 Omnibus Appropriations Act) was
enacted in 1998 to address losses caused by low prices and natural disasters. Half of this
amount went to contract payment recipients in the form of direct income-support. Most of
the balance was paid to any producer (including contract holders) who experienced either a
1998 crop loss or multiple-years of losses caused by a natural disaster. (For more on this
assistance, see CRS Report 98-952, Emergency Agricultural Provisions in the FY1999
Omnibus Appropriations Act.) An $8.7 billion financial assistance package was enacted
within the FY2000 agriculture appropriations act (P.L. 106-78) as many commodity prices
remained low in 1999. Because of the large price tag associated with these assistance
packages, the 106th Congress is considering major modifications to the current federal crop
insurance program and is seeking ways to enhance available risk management tools so that
future ad hoc financial and disaster assistance programs might be avoided.
Crop Insurance Basics
The federal crop insurance program is administered by the U.S. Department of
Agriculture’s Risk Management Agency (RMA). The program is designed to protect crop
producers from unavoidable risks associated with adverse weather, plant diseases, and insect
infestations. Insurance policies are sold and completely serviced through approved private
insurance companies that have their losses reinsured by USDA. Whether or not a crop is
covered under the program is an administrative decision made by USDA. The decision is
made on a crop-by-crop and county-by-county basis, based on farmer demand for coverage
and the level of risk associated with the crop in the region, among other factors. Most of the
major crops (wheat, corn, other feed grains, cotton and rice) are covered in nearly every
county in which they are grown. Fruits, vegetables and other specialty crops are also covered,
but availability of coverage varies by region. In total, approximately 70 crops are covered.

There are four sources of federal costs for the crop insurance program. USDA absorbs
a large percentage of the program losses (the difference between premiums collected and
indemnities paid out), subsidizes a portion of the premium paid by participating producers,
compensates the reinsured companies for a portion of their operating and administrative
expenses, and pays the salaries and expenses of the RMA. (See Table 1.)
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Table 1. Government Cost of Federal Crop Insurance
— in Thousand $ —
Fiscal Year
Net Program
Premium
Adminis.
Other
Total
Losses or
Subsidyb
Expense
Administrative
(Gains)a
Reimbursem.c
Costs d
1981
97,056
46,966
0
104,714
248,736
1982
(60,361)
91,418
18,506
110,341
159,904
1983
146,645
64,559
26,184
96,715
334,103
1984
211,411
98,352
75,709
101,905
487,377
1985
215,896
100,088
107,275
98,110
521,369
1986
215,824
89,633
101,308
97,465
504,230
1987
55,563
73,391
106,990
73,318
309,262
1988
609,404
103,379
154,663
77,981
945,427
1989
400,023
190,546
265,890
88,080
944,539
1990
233,872
213,297
271,616
87,146
805,931
1991
246,986
196,146
245,157
83,928
772,217
1992
232,261
197,405
245,995
88,352
764,013
1993
750,654
197,543
249,817
104,745
1,302,759
1994
(126,934)
246,589
291,738
78,053
489,446
1995
187,719
774,114
373,094
104,591
1,439,518
1996
87,961
978,499
490,385
64,165
1,621,010
1997
(373,015)
945,024
450,253
73,669
1,095,931
1998
(75,039)
940,157
426,895
81,682
1,373,695
1981-1998 FY
3,055,926
5,547,106
3,901,475
1,614,960
14,119,467
Total (e)
a Net Program Losses = Total Premiums less Loss Claims adjusted for net gains or losses shared with private
insurance companies
b Premium Subsidy = Portion of Total Premium Paid by the Government
c Administrative Expense Reimbursements = Paid to Private Insurance Companies for their Delivery
Expenses
d Other = Primarily the Salaries and Expenses of USDA’s Risk Management Agency
e FY1999 data are not yet available, and are expected to be released by USDA in its FY2001 budget request
in Feb. 2000.

Source: USDA Risk Management Agency
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Under the current program, a participating producer is assigned: 1) a “normal” crop yield
based on the producer’s actual production history, and, 2) a price for his commodity based
on estimated market conditions. The producer can then select a percentage of his normal
yield to be insured and a percentage of the price he wishes to receive when crop losses exceed
the selected loss threshold. The producer pays a premium that increases as the levels of
insurable yield and price coverage rise. However, all eligible producers can receive
catastrophic (CAT) coverage without paying any premium. The premium for this level of
coverage is completely subsidized by the federal government. The farmer pays an
administrative fee of $60 per crop per county for CAT coverage, and in return can receive
a payment equal to 55% of the estimated market price of the crop, on losses in excess of 50%
of normal yield.
Any producer who opts for CAT coverage has the opportunity to purchase additional
insurance coverage from a private crop insurance company. For an additional premium paid
by the producer, and partially subsidized by the government, a producer can “buy up” the
50/55 catastrophic coverage to any equivalent level of coverage between 50/100 and 75/100,
(i.e, up to 75% of “normal” crop yield and 100% of the estimated market price.) In limited
areas (mainly the Northern Plains), production can be insured up to the 85/100 level of
coverage.
A buy-up option that has been available since 1997 on a pilot basis on major crops and
has been quite popular is revenue insurance. Revenue insurance combines the production
guarantee component of crop insurance with a price guarantee to create a target farm
revenue guarantee for a crop farmer. Under revenue insurance programs, participating
producers are assigned a target level of revenue based on market prices for the commodity
and the producer’s production history. An insured farmer who opts for revenue insurance can
receive an indemnity payment when his actual farm revenue falls below a certain percentage
of the target level of revenue, regardless of whether the shortfall is caused by low prices or
low production levels.
For farmers who grow a crop that is not insurable under the federal crop insurance
program, USDA has permanent authority to make direct payments to farmers under the
Noninsured Assistance Program (NAP). NAP provides payments equal to the catastrophic
level of insurance coverage (55% of the market price paid on losses in excess of 50% of
normal yields) to any producer in a region that has experienced a 35% crop loss. For more
information on the mechanics of crop insurance, see Managing Risk in a New Policy Era
(CRS Report 97-572) and Farm Disaster Assistance: USDA Programs and Recent
Legislative Action (CRS Report 98-682).
Crop Insurance Issues and Congressional Action
Recent surveys have shown that nearly two-thirds of eligible acreage is enrolled in the
crop insurance program. However, a quarter of all eligible acreage is enrolled only in
catastrophic (CAT) coverage, which is the most basic level of coverage designed to minimally
protect producers against a major disaster. Although farmers are encouraged to purchase
buy-up coverage to further protect against production risks, only about 40% of eligible
acreage has been enrolled in buy-up coverage in recent years, a level that has not changed
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much through the 1990s. Many farm groups argue that bolstering participation in crop
insurance should be a high priority. If crop insurance is affordable and provides adequate
coverage, supporters say, it would forestall political pressure for expensive ad hoc disaster
payment bills each year. Many farm groups also would like to see the current revenue
insurance programs be made more widely available, especially in light of current low
commodity prices and the elimination of target price deficiency payments for major
commodities.
Others argue for a more deliberate approach to any changes to the program. Some are
concerned that applying any more federal money to crop insurance might not be fiscally
prudent, especially since program reforms in 1994 did not preclude the need for over $15
billion in ad hoc farm financial assistance provided by Congress in FY1999 and FY2000.
(The 1994 reforms infused $1 billion per year of new spending and required that producers
who opt out of crop insurance sign a waiver disqualifying them from receiving any disaster
payments. Disaster assistance provisions in subsequent appropriations acts allow producers
to receive disaster payments irrespective of the waivers. The 1994 act also reserved $400
million in disaster funds to further subsidize crop insurance premiums for the 1999 crop year.)
Critics wonder if any new federal money should be channeled into crop insurance before a
more thorough investigation of whether crop insurance is the proper federal risk management
tool. Critics also point out that reform of the federal program might be caught in a catch-22:
the federal program will not be improved until participation improves, say critics, but
participation will not increase as long as ad hoc disaster payments are regularly made
available. Others are concerned that increased crop insurance subsidies will promote
overproduction, which could potentially depress farm commodity prices, and cause
environmentally sensitive land to be entered into production.
The federal crop insurance program has been scrutinized by the Administration, the
House and Senate Agriculture Committees, and various farmer and insurance industry groups,
to identify any shortcomings that might be discouraging farmer participation. A series of
hearings was conducted on crop insurance/risk management issues in both the House and
Senate Agriculture Committees earlier this year. The Risk Management Subcommittee of the
House Agriculture Committee completed markup of comprehensive legislation (H.R. 2559)
on July 21, 1999. Full House committee action was completed on August 3. H.R. 2559 was
passed by voice vote on September 29, 1999. The budget parameters for legislative changes
were established by the FY2000 budget resolution (H.Con.Res. 68), which provides a $6
billion reserve fund for any reported legislation that provides “risk management or income
assistance for agricultural producers in FY2001 through FY2004.” (See “Budgetary Impact
of Crop Insurance Legislation” below.)
In the Senate, several crop insurance bills have been introduced to address many of the
perceived problems with the program. S. 1580 (Roberts/Kerrey) and S. 1109
(Cochran/Lincoln) would make modifications to the crop insurance program similar to H.R.
2559. Senator Richard Lugar, the chairman of the Agriculture Committee, has stated that
increased subsidies for crop insurance might not be the most efficient way to encourage
farmers to manage their risk. He has introduced legislation (S. 1666) that would take a
different approach than H.R. 2559 or any of the Senate crop insurance bills. S. 1666 would
allow any farmer to receive a direct payment, if the farmer adopts at least two risk
management practices, such as purchasing a crop insurance policy or entering into a futures
or option contract, among other specified possibilities. Total farmer payments would be $5
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billion over 4 years (2001-2004) and would be based on the farmer’s historical crop yields.
Producers could receive a payment regardless of whether the producer grows an insurable
crop.
Supporters of S. 1580 had planned to offer their bill as a floor amendment to separate
legislation before Congress adjourned for the year in November 1999. An announcement by
Chairman Lugar that the committee will mark up a risk management/crop insurance bill by
March 8, 2000 led to the withdrawal of the amendment.
Meanwhile, the FY2000 agriculture appropriations act (P.L. 106-78) was signed into law
on October 22, 1999. The measure contains emergency spending of $400 million for USDA
to offer a premium discount to all farmers who purchase crop insurance in the 2000 crop year.
A similar provision was contained in the FY1999 omnibus appropriations act (P.L. 105-277),
which enabled USDA to reduce the farmer-paid premium by approximately 30% in the 1999
crop year. In addition to the $400 million in additional premium subsidy, CBO estimates that
the provision will cost the government $250 million in FY2000 program-related costs
(including reimbursements to the private insurance companies for their administrative costs
and potentially higher indemnity payments to participating farmers.)
The Administration has not offered specific legislation to modify crop insurance.
However, the Administration’s views on crop insurance issues are contained in two
documents — a Feb. 1, 1999 white paper entitled Strengthening the Farm Safety Net: The
Administration’s Principles and Preliminary Proposals for Reforming Crop Insurance
(available at [http://www.usda.gov/news/releases/1999/02/crop]) and recent USDA testimony
before Congress [http://www.act.fcic.usda.gov/pubafrs/ar/house_031099.html]. Additional
crop insurance proposals might also be offered by the Administration when it releases its
FY2001 budget request on February 7, 2000.
The following sections highlight some of the major perceived problems with the program
and review the Administration position and selected legislative options offered to date. (See
the “Legislation” section at the end of this report for a synopsis of introduced bills.)
Premium Subsidy
Under the current program, USDA determines for each insurable crop what the total
premium needs to be to cover the expected indemnity (loss) payments, so that the program
can operate on an actuarially sound basis. The federal government spends just under $1
billion each year subsidizing the total premium to make insurance more affordable for
farmers. The premium for catastrophic (CAT) coverage (50/55 coverage, i.e., losses in
excess of 50% of normal yields are covered at 55% of the estimated market price) is
subsidized 100% by the federal government. However, the percentage of the premium
subsidized by the government declines as the level of coverage rises. For example, in 1998
the government on average paid: 55% of the premium for 50/100 coverage; 42% of the
premium for 65/100 coverage; and 23.5% of the premium for 75/100 coverage. Under
current law, the government is prohibited from subsidizing the additional premium cost of
increasing the level of coverage from 65/100 to 75/100 coverage. Also, producers have to
pay the full cost of the premium for adding the price-protection component of revenue
insurance to the standard crop insurance policy. Consequently, many policymakers believe
that the current subsidy structure does not provide enough incentive for farmers to purchase
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an adequate level of insurance. Many argue that the subsidy structure should be inverted so
that the government pays a higher percentage of the subsidy as the level of coverage
increases, and that the premium for revenue insurance products be subsidized at the same rate
as standard crop insurance. Others, however, are concerned that overly generous subsidies
might encourage planting in high risk areas and increase the risk exposure of the government.
(See Table 2 below for a comparison of current subsidy levels with proposed changes.)
Table 2. Comparison of Premium Subsidies:
Current Law and Selected Proposals
Government-Paid Portion of Premium as a Percent of Total Premium
Coverage
Current
Admini-
H.R. 2559
Roberts-
Cochran-
Level
Law (1)
stration
(House-
Kerrey (3)
Lincoln
Proposal
Passed)
(S. 1580)
(S. 1108)
50/55
100%
(2)
100%
100%
(2)
60/70
54.0%
100%
64%
55%
100%
50/100
55.0%
(2)
67%
55%
(2)
55/100
46.1%
85.3%
64%
45%
50%
60/100
37.8%
70%
64%
45%
50%
65/100
41.7%
56.7%
59%
50%
50%
70/100
31.9%
55%
59%
50%
50%
75/100
23.5%
55%
54%
55%
50%
(1) Current law subsidy levels do not include the 30% discount given to all producers for the 1999 crop year only with
funds reserved from the disaster provisions of the FY1999 Omnibus Appropriations Act (P.L. 105-277).
(2) The Administration proposal and Cochran-Lincoln (S. 1108) would raise the level of free catastrophic coverage from
the current 50/55 level to 60/70. This would preclude the need for farmers to buy 50/55 or 50/100 coverage, since these
levels of coverage are lower than the proposed new CAT coverage level.
Source: USDA Risk Management Agency and sponsors of bills.
Administration Proposal. The Administration supports an increase in the premium
subsidy for higher levels of coverage. It has proposed that the subsidy level for the 70/100
level of coverage be increased so that the farmer cost would be the same for 70/100 as it is
currently for 65/100 coverage. For coverage above the 70/100 level, USDA has proposed
that the government pay 50% of the additional cost of purchasing coverage beyond the
70/100 level. For example, if a farmer opts for 75/100 coverage, the government would pay
50% of the difference between the premium for 75/100 coverage and the premium for 70/100
coverage. USDA projects that the subsidy rate for these higher levels of coverage would rise
to about 55% of premium. The Administration has also proposed that premiums for revenue
insurance products be subsidized on a comparable basis with standard crop insurance and that
the level of CAT coverage be raised from 50/55 to 60/70, with a continued 100% premium
subsidy for CAT coverage.
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House-Passed Bill (H.R. 2559). H.R. 2559 would increase the percentage share of the
premium paid by the government for all levels of additional coverage. As passed by the
House, H.R. 2559 would require the government to pay 67% of the premium for 50/100
coverage up to 55/100; a 64% subsidy for 55/100 up to 65/100; a 59% subsidy for 65/100
up to 75/100 coverage; a 54% subsidy for 75/100 up to 80/100; a 40.6% subsidy for 80/100
up to 85/100; and a 30.6% subsidy for 85/100 or greater, when available. The bill also would
allow a producer to receive the same level of subsidy for a revenue insurance product as the
level of subsidy provided for a basic crop insurance policy. (Current law requires producers
to pay the full additional premium cost of buying up to revenue insurance.) The higher
subsidy rates would take effect with the 2001 crop year.
A separate provision in H.R. 2559 would require USDA to review periodically the
methodologies it uses for determining premiums, and adjust the premiums in time for the 2000
crop year if adjustments are necessary. Another provision would offer a farmer an additional
premium discount, if the producer has a history of low crop losses relative to other producers
of the commodity in the same area.
H.R. 2559 would continue to provide a 100% premium subsidy for CAT coverage at the
50/55 coverage level. The bill gives farmers the opportunity to obtain a higher level of CAT
coverage than the 50/55 level, if the producer opts for Group Risk Plan (GRP) coverage.
GRP, currently available in certain areas on certain crops, is based on county yields rather
than an individual farmer’s actual production level. It pays all insured farmers in an area when
the entire area’s production of an insured crop falls below a certain percentage of the normal
production of the area. Because large area-wide losses occur less frequently than individual
losses, premiums are generally lower for GRP than for regular crop insurance. The bill would
allow a farmer to increase the level of CAT coverage from 50/55 to a higher level of GRP
coverage, as long as the total premium subsidy is the same.
Senate Bills. In the Senate, several comprehensive bills to modify the crop insurance
program include premium subsidy provisions. These include bills introduced by Senators
Roberts and Kerrey (originally S. 529, but later superseded by S. 1580), and by Senators
Cochran and Lincoln (S. 1108).
Among its many provisions, the Roberts-Kerrey bill (S. 1580) would invert the premium
subsidy for levels of coverage higher than CAT coverage, so that the premium subsidy as a
percentage of the total subsidy would be the highest for the higher levels of coverage. They
would require USDA to pay 45% of the premium for levels of coverage greater than 50/100
but less than 65/100; 50% of the premium for coverage from 65/100 up to 75/100; and 55%
of the premium for 75/100 coverage or higher. S. 1580 would also allow a farmer to receive
a 5% additional premium subsidy for any level of coverage, if the producer adopts 2 of several
risk management practices. Such practices include entering into a futures or option contract,
forward pricing at least 20 percent of the value of a principal commodity produced on the
farm, paying off a portion of farm debt, among other options.
S. 1108 addresses the perceived problems with the program as identified by Southern
farmers, particularly producers of cotton and rice. For these commodities, participation in
the crop insurance program is relatively low and farmers contend that premiums are too high
for the coverage they receive. Rather than offer increased subsidies for higher levels of
coverage, S. 1108 would provide a flat premium subsidy of 50% for all levels of additional
coverage. Both Senate bills, like the House Agriculture Committee bill, mandate that revenue
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insurance products be subsidized at the same rate as a standard crop insurance policy and
retain the 100% subsidy rate for CAT coverage. However, S. 1108 concurs with the
Administration request to raise the level of CAT coverage from the current 50/55 to 60/70.
S. 1108 also would offer discounted premiums to any producer who has purchased insurance
in the previous 5 consecutive years, but did not file a loss claim during the period. Both S.
1108 and S. 1580 also would require USDA to develop alternative methodologies for pricing
insurance products and adopt the methodology that results in the lowest premium required
of producers. Any adopted methodology must still allow the program to be operated on an
actuarially sound basis (i.e., total premiums must cover anticipated losses.)
Senator Grams' bill (S. 357) would establish a 3-year pilot program for specific
commodities in certain states beginning in 2000 and would require USDA to subsidize all
levels of coverage between 65/100 and 85/100 at a rate of 31% of total premium.
Multiple-Year Crop Losses and Actual Production History
The level of crop yield coverage is viewed by farmers as one of the most critical features
of the program, and a major determinant of whether a farmer will purchase insurance. In
determining what a normal production level is for an insurable farmer, USDA requires the
producer to present actual annual crop yields (usually stated on a bushel per acre basis) for
the last 4 to 10 years. The simple average of a producer’s annual crop yields over this time
period then serves as the producer’s actual production history (APH). If a farmer does not
have adequate records, he can be assigned a transition yield (T-yield) for each missing year
of data, which is based on average county yields for the crop.
A producer can insure a certain percentage of his APH, up to 75% in most regions, and
as high as 85% in selected regions. If an insured farmer’s actual yield falls short of his
insured yield, the producer potentially can receive an indemnity (loss) payment. Farm groups
in regions that have been stricken with multiple years of natural disasters in recent years
(particularly the Northern Plains and Texas) have complained that the current system of
calculating APH discriminates against them and causes them to be assigned crop yields that
are below their true production potential. When producers are affected by multiple years of
disasters the years of little or no harvested production tend to significantly reduce the
producer’s APH. These producers would like to see some accommodation made so that the
producer’s yield guarantee is not severely reduced by multiple-year crop losses. Moreover,
some farmers have complained that a low APH prohibits them from purchasing adequate
levels of insurance to cover their costs of production. Others question the logic of insuring
crops on land vulnerable to high risk of losses.
Administration Proposal. Nothing in current law specifically requires USDA to adjust
yields for multiple years of disasters. However, current USDA regulations prohibit a farmer’s
APH from falling more than 10% in any one year, nor can it fall any lower than 80% of the
transition yield for certain major row crops. Also a producer’s APH cannot rise more than
20% from one year to the next. The Administration has proposed that USDA be authorized
to offer a new multi-year “umbrella” insurance product to complement single-year policies.
USDA also has announced that it will examine alternatives to the current method of
determining the yields used as the basis for coverage.
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House-Passed Bill (H.R. 2559). As passed by the House, effective in the 2001 crop
year, H.R. 2559 sets a floor under a farmer's past and future annual yields so that yields in any
year would never fall below 60% of the transition yield for that commodity.
Senate Bills. The Roberts/Kerrey bill (S. 1580) also contains a provision that would
require USDA to adjust APH for those affected by multi-year disasters. The bill defines a
multi-year disaster as a loss to any producer who suffers a natural disaster in 3 of the most
recent 5 years, which results in a cumulative reduction in APH of at least 25%. A producer
who suffers a multi-year loss would be able to exclude one year of production history for each
5 years included in APH. If this exclusion caused a farmer’s premium to rise, USDA would
be required to pay any additional premium costs for the farmer. Producers who receive an
exclusion would be permitted to have their APH rise each year without limit, until the APH
reaches the level for the crop year preceding the first year of the multi-year disaster. The
exclusion would sunset as soon as USDA makes available a subsidized policy that
“adequately” insures against multi-year losses.
The Cochran-Lincoln bill (S. 1108) would set a floor under the insurable yield of all
producers by prohibiting the yield in any year from dropping below 85% of the transition yield
(which is the yield assigned by USDA to a producer who lacks production history.) Like S.
1580, if this higher level of coverage results in a higher premium cost, S. 1108 would require
USDA to pay all of the additional premium costs.
A three-year pilot program within the Grams bill (S. 357) would allow a farmer to
exclude one crop year from his production database, if the crop was produced in each of the
last 5 years. The Baucus/Craig bill (S. 629) would allow a producer to exclude one year of
production history for every 4 years of available data. S. 629 also would require USDA to
offer a level of price coverage that is set no lower than the estimated cost of production for
that commodity.
Livestock Coverage
In recent years, livestock producers have been faced with record supplies of red meat
and poultry, contributing to depressed prices and income for livestock in general and hogs in
particular. Traditionally, livestock has been a sector of production agriculture that has
received a minimal amount of price and income support from the federal government.
However, some groups have expressed interest in new authority for some type of subsidized
revenue insurance product for livestock producers in conjunction with the federal crop
insurance program. Current law gives USDA the discretion to determine whether a farm
commodity is insurable. However, the statute specifically excludes livestock as an insurable
commodity under the federal crop insurance program.
Administration and Legislative Proposals. The Administration has proposed that
USDA be given the authority to offer revenue-based insurance products for livestock on a
pilot basis, as proposed by the private sector and be given $50 million in mandatory funding
for these insurance products. As amended on the House floor, H.R. 2559 would require
USDA to conduct two or more pilot programs to evaluate the effectiveness of risk
management tools for livestock farmers. Each pilot program would last up to three years,
and would begin in FY2001 with annual spending limits of $20 million in FY2001, $30
million in FY2002, $40 million in FY2003, and $55 million in FY2004 and each subsequent
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year. The Roberts/Kerrey bill (S. 1580) and a Daschle bill (S. 19) would strike the
prohibition on livestock as an insurable commodity from current law. S. 1580 authorizes
several new pilot insurance programs including a pilot revenue insurance program for hog and
cattle producers in Iowa, which also would allow a participating farmer to insure the entire
farm’s revenue (including income from corn and soybeans) in one blanket policy. A separate
pilot program for coverage of all currently noninsurable commodities (including livestock)
also would be authorized to be conducted in areas at the discretion of the Secretary of
Agriculture. S. 19 would mandate a pilot program for livestock revenue insurance. S. 1580
would permit but not require that USDA include livestock as an insurable commodity.
Private Sector Incentives
Private insurance companies are free to develop new risk management programs and
submit them to USDA for approval to be reinsured under the federal crop insurance program.
For example, private companies have developed some of the revenue insurance products that
are now available on a pilot basis on various crops in certain areas. Currently, USDA is not
authorized to reimburse the private companies for developing and maintaining these new
products. Many companies claim that this lack of compensation has a negative effect on the
number of new products developed by the private sector and the number of risk management
tools available to farmers in general. Private entities will not engage in product development,
they say, if the developer has no opportunity to recover its expenses. Private insurers also
point out that newly developed and approved insurance products can be adopted immediately
by any competitor without the competitor reimbursing the insurance company for its
development costs, which they say further stymies product innovation.
Administration Proposal. The Administration has proposed that USDA be authorized
to 1) reimburse private companies for the cost of any new successful products they develop;
2) contract with the private sector to develop new products for smaller crops; 3) reduce
regulatory procedures for developing and updating policies; and 4) develop more pilot
insurance programs with greater flexibility.
House-Passed Bill (H.R. 2559). Beginning in FY2001, the House-passed bill would
require USDA to reimburse the research, development and maintenance costs of any private
entity that develops a new insurance product. The entity could receive a payment for up to
4 years following approval, with the payment amount determined by USDA. Also under the
bill, if any farm commodity is considered by USDA to be inadequately served by crop
insurance, USDA can enter into a contract with a private entity to carry out research and
development of insurance plans for that commodity. H.R. 2559 would allow USDA to spend
up to $55 million annually for reimbursements, of which $10 million would be reserved for
under-served commodities. Any entity that develops a new plan of insurance, but does not
seek a reimbursement from the government, can receive a fee from any insurance provider
that elects to sell the new plan of insurance.
H.R. 2559 also would give the private sector more representation and power on the
Federal Crop Insurance Corporation (FCIC) Board, which is responsible for making policy
decisions relating to the scope of the federal crop insurance program. Currently the
administrator of USDA’s Risk Management Agency serves as the manager of the FCIC
board. The House-passed bill would remove the voting rights of the manager of the
Corporation and would add a fourth farmer to the 9-voting-member Board. The bill also adds
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the chief economist of USDA and a person with experience in regulating insurance as voting
members, and requires the Chairman of the Board to be a non-Government employee.
Senate Bills. The Roberts-Kerrey bill (S. 1580) includes a fee structure that would
allow companies that develop approved insurance products to be compensated by competitors
who adopt their product. Beginning in 2000, any approved insurance provider that developed
a product approved prior to January 1, 1999 would receive $2 per policy for the first 5 years,
$1 for the next 3 years, and $0.50 for every year thereafter. For any product approved after
January 1, 1999, the developing company could receive a fee, as determined by the provider
who developed the plan and as approved by the FCIC Board.
The Cochran-Lincoln bill (S. 1108) states that insurance providers who develop new
plans of insurance have the right to receive a fee from insurance companies that elect to sell
that plan of insurance. S. 1108 allows any approved provider that develops a new insurance
product after the date of enactment to determine what the fee should be, with the approval
of the FCIC Board. The Board would collect the fee and distribute it to the developing
company.
Like the House-passed bill, both S. 1580 and S. 1108 would remove voting rights from
the Administrator of USDA’s Risk Management Agency on the FCIC Board, add a
representative from the insurance industry, and require the Chairman of the Board to be from
the private sector. S. 1108 also would add two additional farmer representatives to the Board,
while the House committee bill adds one farmer.
Also under both Senate bills, instead of RMA supervising the activities of the Federal
Crop Insurance Corporation, RMA would be under the direction of the FCIC Board. A new
USDA Office of Private Sector Partnership also would be created to make policy
recommendations to the Board and to assume the responsibility of reinsuring the private
companies, which the Board currently oversees.
Noninsured Crop Disaster Assistance Program (NAP) Changes
The Noninsured Crop Disaster Assistance Program (NAP) is a permanent disaster
payment program administered by USDA’s Farm Service Agency that is separate from the
federal crop insurance program. The program was designed to complement the federal crop
insurance program by offering direct disaster payments to producers who grow a crop that
is not covered by the federal crop insurance program. NAP is intended to be a transitional
program for those growers who are awaiting approval for coverage of their crop in their area
and a more permanent assistance program to those who grow a crop that is not economically
feasible to insure. In order to be eligible for a NAP payment, the area in which the producer
grows a non-insurable crop must first experience a 35% loss of that crop. Once the area loss
requirement is met, an individual producer can receive a payment similar to catastrophic
coverage on an insured crop: 55% of the market price for the commodity on losses in excess
of 50% of normal production (50/55).
Many producer groups argue that NAP has provided inadequate assistance to
uninsurable producers since its inception in 1994. (Total annual payments have been less than
$100 million each year.) They contend that the area loss requirement is too restrictive and
even if a county becomes eligible, the payment rate is too low for individual farmers. The
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FY2000 Consolidated Appropriations Act (P.L. 106-113) waived for one year the minimum
area loss requirement of 35%, for any producer who farms in a region that has been declared
a disaster area by either the President or the Secretary of Agriculture.
Administration Proposal. The Administration has recommended that NAP coverage
be increased from the current 50/55 level to the same level it recommends for CAT coverage,
70% of market price for losses in excess of 40%, or, 60/70 coverage. The Administration has
also proposed that the cost-effectiveness of replacing the area loss requirement with a
Secretarial designation of eligibility be investigated.
House-Passed Bill (H.R. 2559). Effective in the 2001 crop year, H.R. 2559 would
revise the income limitation for potential recipients of NAP payments. Under current law, a
producer with gross revenues in excess of $2 million is ineligible for NAP payments. H.R.
2559 would make this provision less restrictive by basing income on “adjusted gross income”
rather than “gross revenues.” A provision in the subcommittee version of the bill would have
allowed an individual producer to become eligible for a NAP payment if his acreage is located
in a county that has been declared a disaster area by either the President or the Secretary of
Agriculture. This provision was struck by the full committee because of budget constraints.
Senate Bills. The Baucus/Craig bill (S. 629) would eliminate permanently the area 35%
minimum loss requirement, authorize payments of 100% of the market price instead of the
current 55% on eligible crop losses, and require USDA to use Olympic averaging (dropping
the highest year and lowest year) in determining a producer’s normal crop yield. It would
also require producers to pay a service fee of $50 per crop per county for a NAP payment to
help defray some of the additional costs. The Roberts/Kerrey bill (S. 1580) would waive the
35% minimum loss requirement in any declared disaster area, or at the Secretary’s discretion.
Budgetary Impact of Crop Insurance Legislation
One of the most controversial aspects of enhancing the crop insurance program involves
the cost of any such changes. Estimating these costs are complicated by the ripple effects of
some of the proposals. For example, increasing the premium subsidy for farmers will
presumably increase farmer participation in the program, which will in turn increase the
amount of federal subsidy going to the private insurance companies for their delivery costs.
Also, greater farmer participation could likely mean higher total indemnity payments to
farmers and potentially greater program losses for the government to absorb, especially if
higher risk farmers are attracted to the program. The cost of adding livestock revenue
insurance coverage is also difficult to measure, particularly if USDA is given authority to
cover livestock without any program specifics. Since the value of livestock production
accounts for roughly one-half of the value of all agricultural products marketed, the addition
of livestock coverage alone could more than double the cost of the current program.
The FY2000 budget resolution (H.Con.Res. 69), adopted by Congress on April 15,
1999, created a reserve fund of $6 billion over a multi-year period to be used exclusively to
fund the added costs of crop insurance modifications or any type of farm income assistance.
The resolution permits this money to be spent in FY2001 through FY2009 and limits annual
new spending to no more than $2 billion per year for FY2001-2004. None of the reserve fund
can be spent on any legislation that increases spending in FY2000. Any new spending in
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FY2000, or new spending in excess of $2 billion per year by FY2004, or $6 billion in total
over 10 years, would have to be offset with reductions in other federal spending.
When the House-passed crop insurance bill was reported by the Agriculture Committee,
it contained estimated new spending of $471 million in FY2000, mostly in the form of
additional premium subsidy. Because the FY2000 budget resolution prohibits any of the $6
billion reserve fund to be spent in FY2000, the bill was revised prior to floor action to delay
until the 2001 crop year all program enhancements that require higher federal expenditures,
including the higher rate of premium subsidies and the enhanced coverage for multiple-year
losses. The total cumulative cost of the bill through 2004 is approximately $6 billion.
Although the budget resolution prohibits the spending of any of the $6 billion reserve
fund on crop insurance or income enhancement in FY2000, the FY2000 agriculture
appropriations act (P.L. 106-78) contains $8.7 billion in emergency FY2000 spending for
farmers to help them recover from low commodity prices. The package includes $400 million
for crop insurance premium discounts and $1.2 billion in direct payments for farmers affected
by a natural disaster. For more information, see CRS Report RS20416, Emergency Farm
Assistance in FY2000 Agriculture Appropriations Acts.
LEGISLATION
H.Con.Res. 68 (Kasich)
Section 204 of the conference agreement on the FY2000 budget resolution creates a $6
billion reserve fund to be used exclusively for new spending on farm risk management or farm
income assistance over the next 5 to 10 years, excluding FY2000, and not to exceed $2 billion
per year between FY2001 and FY2004. The full House and Senate approved the conference
agreement on April 14 and April 15, 1999, respectively.
H.R. 2559 (Combest)
Among its many provisions, the Agricultural Risk Protection Act of 1999 (as of August
2, 1999) would: 1) increase the premium subsidy for all levels of crop insurance beyond the
catastrophic level; 2) place a floor under a producer's yield so that it does not fall below 60%
of average county yields, or, no more than a 5% drop from year to year; 4) authorize pilot
programs for livestock revenue insurance; and 5) restructure the Board of Directors of
USDA’s Federal Crop Insurance Corporation (FCIC) to allow the private sector to play a
greater role in Board policymaking. Introduced July 20, 1999; referred to the Committee on
Agriculture. Subcommittee on Risk Management markup completed on July 21. Full
committee markup completed on August 3. Passed by voice vote in the House on September
29.
S. 19 (Daschle)
The Agricultural Safety Net and Market Competitiveness Act of 1999 is a
comprehensive bill containing provisions that: 1) express the sense of the Senate that the
federal crop insurance program should be modified to increase the number of eligible
commodities as well as improve access to insurance products, make crop insurance more
affordable, and protect against multi-year disasters; 2) remove the statutory restriction on
livestock as an insurable commodity and establish a revenue insurance pilot program for
livestock. Introduced January 19, 1999; referred to the Committee on Agriculture.
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S. 357 (Grams)
Establishes a 3-year pilot program beginning in crop year 2000 in certain states that
provides an increase in the premium subsidy for higher rates of coverage, an opportunity for
producers to insure the whole farm unit, and the option for a producer to exclude the lowest
production year from the producer’s actual production history. Within 90 days after the
program expires, USDA would be required to report to the House and Senate Agriculture
Committees on the results of the program. Introduced February 3, 1999; referred to the
Committee on Agriculture.
S. 629 (Baucus/Craig)
The Crop Insurance Improvement Act of 1999 1) requires USDA to establish a level
of crop insurance price coverage that is set no lower than the estimated cost of production
for that commodity; and 2) allows a producer to exclude one year of actual production history
for every 4 years of available data. The bill also modifies the Noninsured Assistance Program
(NAP) by 1) removing the current area loss requirement of 35% as a prerequisite for an
individual producer being eligible for a NAP payment; 2) paying producers 100% of the
market price instead of the current 55% on eligible crop losses; 3) requiring USDA to use
Olympic averaging (dropping the highest year and lowest year) in determining a producer’s
normal crop yield; and 4) requiring producers to pay a service fee of $50 per crop per county
for a NAP payment. Introduced March 16, 1999; referred to the Committee on Agriculture.
S. 1109 (Cochran/Lincoln)
The Crop Insurance Equity Act of 1999 would: 1) provide a flat 50% premium subsidy
for all levels of additional crop insurance coverage; 2) increase the level of catastrophic
(CAT) coverage from the current 50/55 level (payment of 55% of the market price for the
commodity for losses in excess of 50%) to 60/70 (which would pay 70% of the market price
on losses after a 40% deductible); 3) require USDA to develop alternative ways of rating crop
insurance plans, and adopt the methodology that results in the least cost to the farmer; 4)
provide further premium discounts to producers who have had insurance coverage for 5
consecutive years without a claim; 5) prohibit any producer’s insurable yields from falling
below 85% of transition (average county) yields; 6) provide additional private sector
participation in the policymaking Board of the Federal Crop Insurance Corp., and place
USDA’s now-independent Risk Management Agency under the direction of FCIC.
Introduced May 24, 1999; referred to the Committee on Agriculture.
S. 1401 (Graham/Mack)
Addresses the concerns of specialty crop growers (fruits, vegetables, nuts, greenhouse
and nursery plants, timber and turfgrass) with respect to crop insurance coverage. Authorizes
a “specialty crop administrator”, a new non-profit corporation empowered to develop new
insurance products for specialty crops. Requires that at least one FCIC Board member
represent specialty crop production. Introduced July 20, 1999; referred to the Committee on
Agriculture.
S. 1580 (Roberts/Kerrey)
The Risk Management for the 21st Century Act makes several permanent comprehensive
modifications to the federal crop insurance program by: 1) increasing the premium subsidy
from current levels for the highest levels of coverage; 2) allowing producers who have
suffered multiple years of disasters to exclude one year from their actual production history
for a limited time; 3) authorizing pilot revenue insurance programs for livestock; 4)
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restructuring USDA’s Federal Crop Insurance Corporation’s Board of Directors to allow the
private sector to play a greater role in Board policymaking; and 5) creating a fee system that
would allow private insurance companies that develop new insurance products to be
compensated for their development costs when competitors adopt these products.
Introduced September 13, 1999; referred to the Committee on Agriculture.
S. 1666 (Lugar)
The Farmers’ Risk Management Equity Act allows a farmer to receive a direct payment
if the farmer adopts two of a number of specified risk management tools, including the
purchase of a crop insurance policy and participation in the futures market. Total payments
would be $5 billion over a four-year period, and would be based on the farmer’s historical
value of production. Introduced September 29, 1999; referred to the Committee on
Agriculture.
FOR ADDITIONAL READING
CRS Report 97-572. Managing Farm Risk in a New Policy Era, by Ralph M. Chite and
Mark Jickling.
CRS Report 98-952. The Emergency Agricultural Provisions in the FY1999 Omnibus
Appropriations Act, by Ralph M. Chite.
CRS Report 98-682. Farm Disaster Assistance: USDA Programs, by Ralph M. Chite.
CRS Report RL30201, Appropriations for FY2000: U.S. Department of Agriculture and
Related Agencies, co-ordinated by Ralph M. Chite.
CRS Report RS20416, Emergency Farm Assistance in FY2000 Agriculture Appropriations
Acts, by Ralph M. Chite
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