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What Form for Crop Insurance Reform?

Friday, January 1, 1999
filed under: Marketing/Risk Management

The 105th Congress, in an omnibus appropriations bill for fiscal year 1999, passed an emergency $6 billion package for agriculture that included disaster assistance ($2.575 billion) and market loss assistance($3.057 billion, already paid to program participants based on 1996 farm bill transition/AMTA payments). Details of USDA's implementation of the "disaster assistance"

monies were not completely known as of this mid-December writing.

Everyone involved in agriculture will be watching both the world economy and the 106th Congress (which convenes on January 6) to see whether another disaster package is needed - and whether such assistance is politically viable in a nonelection year. In conjunction with another emergency package for 1999 - which would be triggered in part by the severity of the ag economy as of next fall - many also are anxious to learn to what extent the new

Congress attempts to improve risk management programs (i.e., crop insurance), marketing loans and loan deficiency payments (LDPs).

At a December 17 press conference, Secretary of Agriculture Dan Glickman addressed USDA's 1998 accomplish-ments and 1999 priorities. "Helping farmers and ranchers in hard times, promoting rural development and conservation, alleviating hunger, improving food safety, expanding cutting-edge research and addressing longstanding civil rights challenges are just some of the areas in which USDA employees made a real difference in 1998," Glickman


The secretary added that USDA and the Congress "focused on relief for farmers in a crisis" during 1998 - but that for 1999, "we need to develop a sturdy risk management system centered around a strengthened crop insurance program." Incoming House Agriculture Committee chairman Larry Combest (R-TX) and members of the Senate Ag Committee recently have made similar statements.

Improving risk management through strengthening the federal crop insurance program is the next logical step after passage of the emergency disaster assistance package. First, though, let's review the recent past:

In lieu of attempting to make legislative reforms, Congress passed a disaster assistance package containing approxi-mately $2 billion in payments to farmers who suffered weather-related crop losses in 1998, or who suffered multi-year disaster losses in three of the past five years.

USDA decided to set aside $400 million of the loss compensation funds to provide incentive payments to farmers to purchase higher levels of crop insurance for their 1999 crops. Eligible farmers will receive a special 25-to 35-percent premium discount on buy-up coverage. (USDA is still working out how to handle extending this benefit to policy holders with expired sales

closing dates, i.e., for fall-seeded crops.)

The $400 million set aside to subsidize buy-up coverage for the 1999 crop is a good step toward the goal of making higher coverage more affordable; but this response is only temporary. The question for producers - and members of the House and Senate agricultural committees - is whether Congress will keep this ball rolling in an effort to permanently offer higher levels of coverage for affordable premiums.

Along these lines, senators Roberts (R-KS) and Kerrey (D-NE) have requested comments from producer-based trade organizations regarding priorities for crop insurance reform. Working off these comments, the senators may have a draft crop insurance reform bill circulated for discussion by early February.

Such a time frame would coincide nicely with the release of the Administration's fiscal year 2000 budget recommendations. Many are expecting to see, within the Administration's budget, a recommendation to increase funding for the federal crop insurance program. Some speculate the Risk Management Agency will seek in the neighborhood of $2 billion.

Since the budget and appropriations process will be the determining factor behind any substantive crop insurance reforms (everyone agrees an effective program simply needs more funding), legislative proposals will be directed at the 2000 crop year. This leaves open the question of whether Congress will consider another emergency relief package next year for agriculture.

In asking what to expect from Congress in an attempt to improve risk management programs, one must keep in mind the different levels of protection offered by the federal government - and, more importantly, the political philosophies behind those measures. For instance:

o Just how far is Congress willing to go in improving the farmer safety net?

o Is Congress willing to change components of Freedom to Farm in association

with improving crop insurance? Uncapping marketing loans, for example?

o Will Congress attempt to transfer remaining baselines for federal agricultural programs (e.g., transition payments, commodity and marketing loan funding) into the federal crop insurance program, thereby redefining the program's mandate to be "actuarially sound" and completely overhauling the federal ag safety net?

Conventional wisdom suggests that to keep both sides at the negotiating table, the upcoming process of improving the federal crop insurance program will be a middle-of-the-road approach. The concept behind Freedom to Farm must stay completely intact in order for a majority of Republican legislators to support improvements to crop insurance. In other words, this "bite at the apple" will be limited to crop insurance only.

As one of the sponsors of this early crop insurance inquiry, Sen. Roberts will, no doubt, remain a defender of Freedom to Farm and will keep the debate limited to improving crop insurance. Sen. Kerrey, on the other hand, likely will attempt to keep advocates of changing Freedom to Farm - and other Democrat senators still supporting uncapped marketing loans - at the crop

insurance table. Somewhere in the middle may be Senate Agriculture Committee chairman Lugar, who last year supported "privatizing" crop insurance and initially opposed passing any emergency appropriations for agriculture disaster.

This is not to say proposed changes and reforms will be insubstantial. Optimistically, congressional staff advised those suggesting crop insurance changes to first prioritize making the program effective and affordable and worry about the costs later.

Specifically, senators Roberts and Kerrey may seek to enhance revenue insurance. The present crop insurance program authority, for instance, requires coverage to be based on production (e.g., APH or yield) and prohibits coverage based on per-acre production costs or income. This is why effective revenue insurance policies and cost-of-production policies to date are only "pilot programs."

Sen. Roberts may look to subsidize the price side of revenue insurance products similar to CRC. Currently, CRC policies subsidize only the yield side.

With commodity prices much lower than expected in 1998, USDA made commodity loans totaling about $7.1 billion to producers. This was $1.8 billion higher than last fiscal year. Also in 1998, USDA will have made about $2 billion in loan deficiency payments (LDPs) - which, when combined with marketing loan gains, will total an estimated $2.8 billion on 1997 and 1998 crops.

Implementing LDPs has proven quite a headache for USDA, largely because of the unexpected workload - especially related to perceived inequities in the LDP rate across county or state lines. USDA has wide latitude in implementing the marketing loan program, with direction only to minimize government costs and forfeitures and not to encumber or interfere with the orderly marketing of grain. So, for example, it could be the department's prerogative to use one nationwide "Posted County Price" for a commodity and to determine whether to post LDP rates on a daily or weekly basis.

In recent meetings with National Sunflower Association representatives, USDA officials indicated that for the purposes of establishing the LDP, USDA may switch the program to use one nationwide, daily PCP for each eligible program crop. Following board action, NSA made it clear to USDA that it supports the weekly LDP calculated by using a five-day price average rather than the current selection of prices from two random days. NSA representatives also asked USDA to update transportation differentials factored into calculating the LDP.

The consensus is that the farm "safety net" is torn and must be repaired. Few are ready to go back to acreage controls or paid diversions, although some have mentioned expanding Conservation Reserve Program (CRP) acreage.

While Congress is preparing to be proactive in addressing risk management programs and export opportunities, the extent of assistance will, unfortunately, be tied to the severity of farm disaster and economic losses.

Since the industry will not fully realize these pressures until next fall, look for another assistance package - one hopefully accompanied by meaningful and affordable crop insurance reform - by October.

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