Federal Crop Insurance: Issues in the 106th Congress

Federal Crop Insurance: Issues in the 106th Congress

Order Code IB10033
CRS Issue Brief for Congress
Received through the CRS Web
Federal Crop Insurance:
Issues in the 106th Congress
Updated June 2, 2000
Ralph M. Chite
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Background
Crop Insurance Basics
Pros and Cons of Crop Insurance Enhancement
A Brief Legislative History of Crop Insurance Enhancement Legislation
Major Provisions in the Crop Insurance Conference Agreement
Premium Subsidy
Background
Conference Agreement
Multiple-Year Crop Losses and Actual Production History
Background
Conference Agreement
Livestock Coverage
Background
Conference Agreement
Private Sector Incentives
Background
Conference Agreement
Noninsured Assistance Program (NAP) Changes
Background
Bill Comparison
Crop Insurance and the Budget Resolution
LEGISLATION
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Federal Crop Insurance: Issues in the 106th Congress
SUMMARY
On May 25, 2000, the House and Senate
identified a number of factors that they per-
gave final approval to legislation (H.R. 2559)
ceive inhibit participation.
that will reduce significantly the farmer cost of
acquiring a crop insurance policy. The Presi-
The approved conference agreement on
dent is expected to sign the measure soon.
H.R. 2559 addresses many of these perceived
The conference agreement will require $8.2
problems. The vast majority of the new spend-
billion in new federal spending for the crop
ing authorized by the bill will be used to in-
insurance program over the next 5 years, in an
crease the portion of the premium paid by the
attempt to attract more farmers into the pro-
government on behalf of the producer for
gram and lessen dependence on ad hoc disaster
coverage higher than the CAT level, and to
assistance.
subsidize a portion of the additional cost of
revenue insurance products for the first time.
The federal government has spent an
average of $1.5 billion per year on crop insur-
Among its many other provisions, the
ance since 1994. The government pays the full
conference agreement also provides improved
cost of the premium for catastrophic (CAT)
coverage for farmers affected by multiple years
coverage and pays a portion of the premium
of natural disasters; authorizes pilot insurance
for higher levels of coverage. Private insur-
programs for livestock farmers, gives the
ance companies sell and service the policies,
private sector greater representation in
but are reinsured by the government for most
policymaking; and eases eligibility require-
of their losses and expenses.
ments for a permanent disaster payment pro-
gram for noninsurable farmers.
Major reforms were made to the crop
insurance program in 1994 in hopes of perma-
The final FY2001 budget resolution
nently replacing expensive ad hoc disaster
(H.Con.Res. 290) served as the source of
payment programs with a more heavily subsi-
funds for the new spending required by the
dized crop insurance program. However, the
crop insurance conference agreement. The
enactment of multi-billion dollar farm financial
resolution permitted new agricultural program
assistance packages in both FY1999 and in
spending of $8.2 billion over the FY2001-05
FY2000 encouraged consideration of addi-
period for modifications to the federal crop
tional modifications. Some were opposed to
insurance program. Separately, H.Con.Res.
providing any new funding to crop insurance
290 also contained a reserve fund of $7.14
because of concerns that such subsidies en-
billion to provide emergency farm financial
courage farmers to overproduce and bring
assistance for FY2000 and FY2001, in re-
environmentally fragile land into production.
sponse to continued low farm commodity
prices. A separate title (Title II) authorizing
Overall farmer participation in the pro-
this funding was included in the conference
gram has increased in recent years, but partici-
agreement on H.R. 2559.
pation rates for levels of coverage beyond the
CAT level, have not changed significantly.
Several farm and insurance industry groups
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MOST RECENT DEVELOPMENTS
On May 25, 2000, the House and the Senate gave final approval to the conference
agreement (H.Rept. 106-639) on a comprehensive federal crop insurance enhancement bill
(H.R. 2559). The President is expected to sign the measure. Among its many provisions, the
agreement offers higher levels of premium subsidy to farmers participating in the federal
crop insurance program, and improves insurance coverage when a farmer is affected by
multiple years of disasters. The projected cost of the crop insurance legislation is $8.2
billion over 5 years, as permitted by the FY2001 budget resolution (H.Con.Res. 290). A
separate title (Title II) within the conference agreement authorizes an estimated $7.1 billion
in emergency financial assistance to farmers in FY2000 and FY2001.
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
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
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strike. They also contend that the 7-year contract payments do not provide adequate
protection for farmers when farm commodity prices are low, as they have been 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.)
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.
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Table 1. Government Cost of Federal Crop Insurance
— in Thousand $ —
Net Program
Adminis.
Other
Losses or
Premium
Expense
Administrative
Fiscal Year
(Gains)a
Subsidyb
Reimbursem.c
Costs d
Total
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
1999
(80,338)
1,295,454 e
494,836
66,021
1,775,973
FY1981-99
Total f
2,975,588
6,842,560
4,396,311
1,680,981
15,895,440
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 Premium subsidy for 1999 includes a $357.4 million premium discount provided on an emergency basis in
the FY1999 Omnibus Appropriations Act (P.L. 105-277)
Source: USDA Risk Management Agency
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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 (CRS Report 98-
682).
Pros and Cons of Crop Insurance Enhancement
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
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. For the most part, the strongest supporters of crop insurance enhancements
are producers in the Plains states and other regions that are prone to drought and other
recurring disasters.
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
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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.) 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.
A Brief Legislative History
of Crop Insurance Enhancement Legislation
Over the last several years, 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 in 1999.
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, 1999. 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 “Crop Insurance and the Budget Resolution” below.)
In the Senate, several crop insurance bills, including S. 1580 (Roberts/Kerrey), were
introduced to address many of the perceived problems with the federal crop insurance
program. S. 1580 would have made modifications to the crop insurance program similar to
H.R. 2559. Senate Agriculture Committee Chairman Richard Lugar, who strongly opposed
S. 1580, stated that increased subsidies for crop insurance are not the most efficient way to
encourage farmers to manage their risk. Instead, he introduced legislation (S. 1666) that
would have made a direct payment to any insurable producer who adopts two of several risk
management strategies. A lack of consensus between supporters of S. 1580 and S. 1666 led
to a several month delay in consideration of a markup bill. At a March 2, 2000 markup,
Senator Lugar offered a chairman’s mark that blended the primary component of his bill with
that of the Roberts/Kerrey bill. Among its many provisions, the chairman’s mark would
have given farmers a choice between receiving an additional crop insurance premium subsidy
or receiving a direct payment in return for adopting two risk management strategies, such as
purchasing a crop insurance policy or entering into a futures or option contract.
As a substitute to the chairman’s mark, Senators Roberts and Kerrey offered a modified
version of their bill as a substitute, which was adopted by the full committee by a 10-8 vote
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on March 2, 2000, and subsequently numbered S. 2251. S. 2251, as amended on the Senate
floor was adopted by the full Senate on March 23, 2000. The Senate-passed measure is
similar to the House-passed bill in that most of the new spending would increase the
government subsidy and reduce the farmer cost of purchasing an insurance policy.
Additionally, S. 2251 reserves $500 million over a 3-year period for direct payments to
producers who adopt two of several prescribed risk management strategies in lieu of
receiving a crop insurance subsidy. A manager’s amendment to S. 2251 was adopted on the
Senate floor. Among its many provisions, it addresses some additional concerns of states that
have a low participation rate in the federal crop insurance program. Conference action on the
two measures was completed on May 25, 2000, with the House approving the agreement by
voice vote and the Senate passing the measure by a vote of 91-4. (See “Major Provisions
in the Crop Insurance Conference Agreement” below for more information.)
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 nearly 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 did not offer 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 USDA testimony before Congress
[http://www.act.fcic.usda.gov/pubafrs/ar/house_031099.html]. Additional crop insurance
proposals were subsequently offered by the Administration as part of its safety net initiative
released with its FY2001 budget request on February 7, 2000. Among the major risk
management provisions in the initiative are anticipated legislative proposals to 1) extend to
the 2001 crop year the 30% discount already offered on an emergency basis for crop
insurance premiums for 1999 and 2000; 2) improve insurance coverage for farmers affected
by multiple years of disasters; 3) establish a pilot program for livestock insurance coverage;
and 4) loosen eligibility requirements for direct payments provided through the Noninsured
Assistance Program (NAP).
Major Provisions in the
Crop Insurance Conference Agreement
After more than one year of debate and legislative consideration on how to improve
participation in the crop insurance program, and whether federal involvement in the program
should be further enhanced, Congress completed consideration of the conference agreement
on a crop insurance bill (H.R. 2559) on May 25, 2000. The President is expected to sign the
measure soon. (See “A Brief Legislative History of Crop Insurance Enhancement Legislation”
above for information on the original House- (H.R. 2559) and Senate-passed bills (S. 2536)).
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The conference agreement increases spending on the federal crop insurance program by
$8.18 billion over the next 5 years (FY2001-05), with funding made possible by a reserve
fund created by the FY2001 budget resolution (see “Crop Insurance and the Budget
Resolution” below for more details.)
Most of the new spending (nearly $6.7 billion over 5 years) in the measure will allow
USDA to increase significantly the portion of the premium paid by the federal government,
and to subsidize revenue insurance products at the same rate as regular crop insurance. An
increase in the premium subsidy means that the participating farmer’s out-of-pocket costs for
purchasing insurance will decline in tandem.
Other major risk management provisions in the bill include: 1) an adjustment of
producer’s yields so that insurance coverage does not decline drastically when a producer is
affected by multiple years of disasters; 2) an expansion of USDA authority to conduct pilot
insurance programs, including two new pilot livestock insurance programs and an expansion
of the existing dairy options pilot program; 3) new authority for private insurers who develop
newly adopted insured products to be reimbursed for their research and development costs,
and for the industry to have greater representation on the Federal Crop Insurance Corporation
Board; and 4) the elimination of a minimum area-loss requirement for eligibility in the
noninsured assistance payment (NAP) program, which makes direct payments to farmers who
grow a non-insurable crop that is affected by a natural disaster.
The following sections highlight these major issues, and provides more detail on how
they were addressed in the conference agreement on H.R. 2559.
Premium Subsidy
Background. 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
approximately $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 recent
years, the government on average has 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 a farmer 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 an adequate level of insurance. Many argued 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.
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Conference Agreement. As shown in Table 2 below, the approved conference
agreement on the crop insurance bill increases the percentage share of the premium paid by
the government for all levels of additional coverage. The higher subsidy takes effect with the
2001 crop year. The share of the premium to be paid by the government under the agreement
closely resembles the provisions in the original House-passed bill. Although the percentage
of premium paid by the government will continue to decline as participants move to higher
levels of coverage, the government contribution to premium costs will significantly increase
for all levels of coverage under the conference agreement, particularly for the highest levels
of coverage. For example, the share of the premium paid by the government will rise from
42% to 59% for 65/100 coverage, and from 24% to 55% for 75/100 coverage. Additionally,
the conference agreement requires USDA to subsidize revenue insurance products (or any
new, approved plans of insurance) at the same rate as the level of subsidy provided for a basic
crop insurance policy. (Current law requires producers to pay the full additional premium
cost of purchasing revenue insurance.)
When compared with current law, the premium subsidy structure in the conference
agreement (including the new subsidy for revenue insurance) will cost the government an
additional $6.7 billion over 5 years, according to Congressional Budget Office (CBO)
estimates. This amount accounts for more than 80% of the $8.2 billion total cost of the crop
insurance enhancement legislation. To slightly defray the cost of the additional subsidies, the
agreement requires that a new administrative fee of $30 per crop per county be assessed to
any producer who purchases additional crop insurance coverage beyond the catastrophic
level.
Table 2. Comparison of Premium Subsidies:
Conference Agreement vs. Current Law and House and Senate Bills
Government-Paid Portion of Premium as a Percent of Total Premium
Coverage
Current
H.R. 2559
S. 2251
Conference
Level
Law (1)
(House-Passed)
(Senate-Passed)
Agreement
50/55
100%
100%
100%
100%
50/100
55%
67%
60%
67%
55/100
46%
64%
45%
64%
60/100
38%
64%
45%
64%
65/100
42%
59%
50%
59%
70/100
32%
59%
50%
59%
75/100
24%
54%
55%
55%
80/100
17%
41%
38%
48%
(1) For the last two crop years the actual premium subsidy has been higher than what is shown in the first column of
percentages. Not included above is a further 30% discount given to all producers for the 1999 crop year and a 25%
discount in 2000, under the authority of various emergency supplemental acts.
Source: USDA Risk Management Agency and sponsors of bills.
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The conference agreement retains the current 100% premium subsidy for catastrophic
(CAT) coverage at the 50/55 level of coverage. However, the administrative fee for CAT
coverage will rise from the current $60 per insured crop, to $100, which according to CBO
will cost farmers an additional $60 million over 5 years. The final agreement also 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 conference agreement allows 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.
One of the major differences between the original House (H.R. 2559) and Senate (S.
2251) crop insurance bills, as originally passed by their respective chambers, was that the
Senate-passed bill would have reserved approximately $360 million for a “choice of risk
management options” pilot program, which was strongly supported by Senate Agriculture
Committee Chairman Richard Lugar. This provision was not adopted by conferees. Under
the pilot program, a producer could have chosen to receive either a subsidized crop insurance
policy, or forego the subsidy and instead, receive a direct federal payment, if the farmer
agreed to adopt two of several eligible risk management practices. This pilot program was
supported by Senators from states with a traditionally low participation rate in the crop
insurance program, primarily in the East.
Multiple-Year Crop Losses and Actual Production History
Background. 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.
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Conference Agreement. Effective in the 2001 crop year, the conference agreement
sets a floor under a farmer's past and future annual yields so that yields in any year cannot
fall below 60% of the transition yield for that commodity. This means that even if a producer
has a total crop loss in any year, the yield used for that year to calculate the producer’s APH
will not be lower than 60% of the historical average production for the region. This provision
was contained in the original House-passed bill, while the Senate bill would have allowed a
producer to exclude one poor year of production history for each 5 years included in APH.
The estimated federal cost of the 60% floor in the conference agreement is $788 million over
5 years, according to the Congressional Budget Office.
No provision 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 supports such enhancements to the program that assist a producer
affected by multiple years of disaster.
Livestock Coverage
Background. 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.
Conference Agreement. The conference agreement requires USDA to conduct two
or more pilot programs to evaluate the effectiveness of risk management tools for livestock
farmers. The pilot programs can provide livestock producers with protection from the
financial risks of price and income fluctuation, or from production losses. The conference
agreement gives USDA the authority to provide reinsurance to private companies offering
livestock insurance, or to subsidize a livestock producer’s purchase of a futures or options
contract. USDA is given the authority to determine which counties are to be included in a
pilot program. The livestock pilot programs would begin in FY2001 with annual spending
limits of $10 million for each of FY2001 and FY2002, $15 million in FY2003, and $20 million
in FY2004 and each subsequent year, for a projected 5-year total cost of $75 million. The
Administration supports giving USDA authority to offer revenue-based insurance products
for livestock on a pilot basis.
The conference agreement also allows USDA to conduct pilot risk management
programs for other farm commodities as a way of testing whether any new program is
suitable for the marketplace and addresses the needs of producers. Another provision in the
agreement expands the existing options pilot program from 100 to 300 counties. The dairy
options pilot program was the first and only such program developed by USDA under its
1996 farm bill authority to conduct options pilot programs. The program educates and
subsidizes dairy farmers in their use of the futures market as a tool for managing price risk.
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Private Sector Incentives
Background. 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.
Conference Agreement. Beginning in FY2001, the conference agreement requires
USDA to reimburse the research, development and maintenance costs of any private entity
that develops a new (or existing) insurance product. The entity could receive a payment for
up to 4 years following approval, with the payment amount determined by USDA. After the
4-year payment period, the insurance provider responsible for maintaining the policy can
develop and charge a fee to any other insurance provider who elects to sell the policy. The
amount of the fee must be approved by USDA’s Federal Crop Insurance Corporation Board.
Also under the conference agreement, 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.
The conference agreement authorizes USDA to spend not more than $10 million in each
of FY2001 and FY2002, and $15 million in subsequent years on reimbursements for research
and development costs of new policies. Of this amount, not more than $5 million each fiscal
year can be used for underserved states.
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.
The conference agreement also 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 chief executive officer of
the FCIC board. The conference agreement removes the voting rights of the manager of the
Corporation and would add a fourth farmer to the 9-voting-member Board. The bills also add
the chief economist of USDA to the Board, and allows the Board to select its own chairman.
USDA had expressed concern that these provisions would lead to weakened government
oversight of the crop insurance program.
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Noninsured Assistance Program (NAP) Changes
Background. 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. Under current law, 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
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.
Bill Comparison. Under the conference agreement, the minimum area loss requirement
is eliminated as a prerequisite for receiving a NAP payment. Consequently, any noninsurable
producer can receive a NAP payment as long as the individual producer has a minimum loss
requirement of 50%. The agreement also institutes a new administrative fee that requires
a potential recipient of NAP payments to pay a $100 per crop administrative fee (which can
be waived for financial hardship cases). As part of its safety net initiative, the Administration
supports replacing the minimum area loss requirement with a Secretarial designation for
eligibility. The net cost of eliminating the area loss trigger, offset by the new $100
administrative fee, is estimated by CBO at $482 million over 5 years.
Crop Insurance and the Budget Resolution
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 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 legislative modifications to federal risk management programs, or for
any type of farm income assistance. This reserve fund served as the budget parameters for
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crop insurance enhancement legislation as it was being considered by their respective
chambers. The FY2001 budget resolution (H.Con.Res. 290), as adopted by both chambers
on April 13, 2000, increased the amount available for new crop insurance spending from $6
billion over 4 years to $8.18 billion over 5 years (FY2001-05), thus giving conferees more
available funding as they worked out the differences between the two crop insurance bills.
Separately, H.Con.Res. 290 also contained a reserve fund of $7.14 billion ($5.5 billion
in FY2000 and $1.64 billion in FY2001) that can be used exclusively for providing emergency
financial assistance to farmers to help them recover from continued low farm commodity
prices. In order for the funds to be made available, the House and Senate Agriculture
Committees had to report authorizing legislation by the end of June. Instead of reporting
separate legislation, the two committees agreed to include authorizing legislation for the
$7.14 billion in a separate title (Title B) of the conference agreement on crop insurance. For
more on this assistance, see CRS Report RL30501, Appropriations for FY2001:USDA and
Related Agencies and CRS Issue Brief IB10043, Farm Economic Relief: Issues and Options
for Congress.
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.Con.Res. 290 (Kasich)
The FY2001 budget resolution increases the baseline budget for mandatory spending
within the agriculture function of the budget (function 350) by $1.42 billion in FY2001 and
$8.18 billion over 5 years (FY2001-2005), in order to allow for funding for crop insurance
enhancement legislation. This increase in the budget baseline precludes the need for the
reserve fund created by H.Con.Res. 68, above. The full House and Senate approved the
conference agreement to H.Con.Res. 290 on April 13, 2000.
H.R. 2559 (Combest)
The conference agreement on the Agricultural Risk Protection Act of 2000: 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;
3) liberalizes the eligibility requirements for the noninsured assistance program (NAP); 4)
authorizes and funds pilot insurance programs for livestock and other noninsured
commodities; and 5) restructures 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, 1999. Full committee markup completed
on August 3, 1999 (H.Rept. 106-300). Passed by voice vote in the House on September 29,
1999. Comparable bill (S. 2251) was marked up by the Senate Agriculture Committee on
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March 2, 2000; reported to the Senate, without report on March 20, 2000. Passed the Senate
on March 23, 2000 by a 95-5 vote. Senate subsequently passed H.R. 2559 on March 23,
substituting the text of S. 2251 for the text of the House-passed bill. The conference
agreement (H.Rept. 106-639) was filed on May 24, 2000. Conference measure passed both
the House (voice vote) and Senate (91-4) on May 25, 2000.
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 RL30501, Appropriations for FY2001: 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
CRS Issue Brief IB10043, Farm Economic Relief: Issues and Options for Congress, by
Geoffrey Becker and Jasper Womach.
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