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

FOR ADDITIONAL READING

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Federal Crop Insurance: Issues in the 106th Congress

SUMMARY

On May 25, 2000, the House and Senate

gave final approval to legislation (H.R. 2559)

that will reduce significantly the farmer cost of

acquiring a crop insurance policy. The President is expected to sign the measure soon.

The conference agreement will require $8.2

billion in new federal spending for the crop

insurance program over the next 5 years, in an

attempt to attract more farmers into the program and lessen dependence on ad hoc disaster

assistance.

The federal government has spent an

average of $1.5 billion per year on crop insurance since 1994. The government pays the full

cost of the premium for catastrophic (CAT)

coverage and pays a portion of the premium

for higher levels of coverage. Private insurance companies sell and service the policies,

but are reinsured by the government for most

of their losses and expenses.

Major reforms were made to the crop

insurance program in 1994 in hopes of permanently replacing expensive ad hoc disaster

payment programs with a more heavily subsidized crop insurance program. However, the

enactment of multi-billion dollar farm financial

assistance packages in both FY1999 and in

FY2000 encouraged consideration of additional modifications. Some were opposed to

providing any new funding to crop insurance

because of concerns that such subsidies encourage farmers to overproduce and bring

environmentally fragile land into production.

Overall farmer participation in the program has increased in recent years, but participation rates for levels of coverage beyond the

CAT level, have not changed significantly.

Several farm and insurance industry groups

Congressional Research Service

identified a number of factors that they perceive inhibit participation.

The approved conference agreement on

H.R. 2559 addresses many of these perceived

problems. The vast majority of the new spending authorized by the bill will be used to increase the portion of the premium paid by the

government on behalf of the producer for

coverage higher than the CAT level, and to

subsidize a portion of the additional cost of

revenue insurance products for the first time.

Among its many other provisions, the

conference agreement also provides improved

coverage for farmers affected by multiple years

of natural disasters; authorizes pilot insurance

programs for livestock farmers, gives the

private sector greater representation in

policymaking; and eases eligibility requirements for a permanent disaster payment program for noninsurable farmers.

The final FY2001 budget resolution

(H.Con.Res. 290) served as the source of

funds for the new spending required by the

crop insurance conference agreement. The

resolution permitted new agricultural program

spending of $8.2 billion over the FY2001-05

period for modifications to the federal crop

insurance program. Separately, H.Con.Res.

290 also contained a reserve fund of $7.14

billion to provide emergency farm financial

assistance for FY2000 and FY2001, in response to continued low farm commodity

prices. A separate title (Title II) authorizing

this funding was included in the conference

agreement on H.R. 2559.

˜ The Library of Congress

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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

Losses or

(Gains)a

Premium

Subsidyb

Adminis.

Expense

Reimbursem.c

Other

Administrative

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

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

Fiscal Year

a

Total

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 98682).

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

Level

Current

Law (1)

H.R. 2559

(House-Passed)

S. 2251

(Senate-Passed)

Conference

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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