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STATEMENT OF KENNETH D. ACKERMAN, ADMINSTRATOR
before the Subcommittee on Agriculture, Rural Development, and Related Agencies

Feb 29, 2000

Mr. Chairman and members of the Subcommittee, I am pleased to testify in support of the President's fiscal year (FY) 2001 budget for the Risk Management Agency (RMA). Crop insurance remains USDA's principal means of production risk protection for the nation's producers. In 1999, the program provided farmers with more than $30 billion in protection on roughly 196 million acres through approximately 1.3 million policies. During that time, we and our private-sector partners provided hard-hit farmers with nearly $2.2 billion in payments, most delivered within 30 days of claims being filed.

Since 1993, the number of policies, insured acres, and liability have increased significantly. Further, the total crop insurance premium for 1999 exceeded our estimates by approximately 28 percent, representing a sizeable, 24 percent increase over the 1998 level. This remarkable increase can be attributed to the approximate 30 percent premium discount that was offered in 1999. Producers who have expressed concern over the increased cost of higher levels of insurance coverage responded to this initiative by enrolling approximately 20 percent more acres in buy-up coverage compared to the 1998 level. Emergency funding was also provided in 2000 to allow an approximate 25-percent discount on buy-up premium rates.

While impressive results have been achieved in a short period of time, rapidly changing events are forcing a hard examination of the agricultural safety net. The continuing farm crises have exposed weaknesses in the safety net as it too ultimately suffers from depressed commodity prices and deals with those areas hit repeatedly by crop loss in a depressed economic environment. In addition, crops and commodities, like livestock, do not have federally backed insurance available to them, and farmers have far too little instruction on the risk management tools and strategies that can protect and improve their farm revenue.

The Administration recently announced an $11.5 billion initiative to strengthen the farm safety net. This initiative will help thousands of cash-strapped producers lay the basis for more permanent and effective assistance to be enacted in the next farm bill. Components of the reform initiative directly related to the crop insurance program include the following:

  • Premium Discounts -- Extends the initiatives taken in 1999 and 2000 by offering approximately $400 million in premium discounts on buy-up coverage for crop insurance in 2001. In addition, $200 million will be used to pay the delivery costs associated with the increase in coverage this discount will produce and $40 million will fund a reserve against under-estimate of increased program participation. Based on past experience, RMA anticipates that farmers will buy even more coverage and become steady customers.
  • Multi-year Coverage -- Includes $100 million to address the problem of production losses and price declines that extend over several years. These funds will be used to provide producers with more options than currently available so that they are not driven out of the program by sharp reductions in their actual production history and allocated deductible.
  • Livestock Insurance Pilot Program -- Funds $100 million to establish a pilot program for insuring livestock. The pilot program would be designed to subsidize producers" participation and establish intermediaries to offer options contracts. Conceptually, this program may be similar to the Dairy Options Pilot Program.
  • Risk Management Education -- Expands risk management education activities through four methods: risk management clubs, direct producer training workshops, agricultural education at community colleges, and technology based information and education. The $40 million initiative would modified regionally to accommodate the local needs of producers.
  • Research and Development -- Includes $30 million to expand research and development activities through incentives and use of private and public sources utilizing their expertise and resources to address an ever-changing risk environment.

RMA is committed to helping our private-sector partners build participation by providing new crop insurance programs and helping producers understand and manage their agricultural risks. Over the past several years, this goal has carried RMA into many areas beyond providing traditional crop insurance, including the development of innovative products and services based on proposals from the private sector. As a result of these partnerships, we have developed innovative insurance products, a dairy options pilot program, and a wide range of projects to help farmers become better risk managers. Today, I"d like to briefly highlight some recent initiatives and detail plans for FY 2001.

Responding to the Market

To help farmers manage their risk and diversify their operations, RMA has been aggressively creating new programs and expanding the availability of existing plans of insurance. For example:

  • New Crop Programs -- For 1999 alone, RMA created new insurance programs to cover avocado, cabbage, cherries, crambe, cultivated wild rice, barley, mustard, rangeland, and winter squash. Crop insurance provides individual risk protection at higher levels than available under the Noninsured Assistance Program (NAP).

    During FY 2001, RMA will be continuing development of programs to better protect growers not currently covered by crop insurance. For 2000, priorities will be given to the development of insurance programs for cultivated clams, chile peppers, processing cucumbers, Florida fruit trees, onion stage removal, pumpkins, strawberries, and a coverage enhancement option on apples, canola, potatoes, grapes, rice, and citrus fruit.

  • Asiatic Citrus Canker (ACC) -- Several revisions to the Florida Fruit Tree Pilot Program were announced for the 2000 crop year. One key policy change insures producers against losses of citrus trees to ACC. The ACC coverage is part of the standard policy, not an option that the producer would purchase separately. Counties covered under the Florida Fruit Tree policy for crop year 2000 are: Brevard, Broward, Charlotte, Citrus, Collier, Dade, DeSoto, Glades, Hardee, Hernando, Henry, Highlands, Hillsborough, Indian River, Lake, Lee, Manatee, Marion, Martin, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Polk, Sarasota, Seminole, St. Lucie, and Volusia.
  • Adjusted Gross Revenue (AGR) -- The AGR insurance plan is a non-traditional, whole farm risk management tool. The AGR concept uses a producer's historic Schedule F tax form information as a base to provide a level of guaranteed revenue for the insurance period. AGR provides an insurance safety net for multiple agricultural commodities in one insurance product, establishes a common denominator for commodity production-cash receipts, makes simple straightforward use of income tax forms, and reinforces program credibility by using Internal Revenue Service tax forms and regulations. Eligible producers may choose one of three coverage levels: 65 percent coverage and 75 percent payment rate (65/75), 75 percent coverage and 75 percent payment rate (75/75), or 80 percent coverage and 75 percent payment rate (80/75).
  • Dairy Options -- Through training and paying a portion of the transaction costs, the dairy options pilot program helps producers create their own financial safety net by purchasing exchange-traded options on the price of their milk. When milk prices fall, producers are able to offset losses based on projected future earnings, in effect putting a "floor" under their milk prices. Producers in certain pilot states and counties are now actively using the program.

Leveraging Scarce Resources

RMA is leading a joint effort with the Cooperative State Research, Education and Extension Service, the Commodity Futures Trading Commission, and a number of private-sector partners to help producers become active risk managers. In order to leverage scarce resources, the Agency funded approximately $900,000 in grants to diverse partnerships all around the country to better equip producers to manage risk. Without such partnerships, the cost of meeting our educational mandate would increase significantly.

For FY 2000, under current law, we anticipate that 12,300 producers will receive direct training through approximately 600 RMA coordinated/facilitated risk management education sessions. In addition, we anticipate that around 1,000 producers will participate in risk management or marketing clubs. These estimates have dropped and are likely to continue dropping due to lack of funding.

RMA places a strong emphasis on reaching small and limited resource producers on the topic of risk management. These efforts are carried out through partnerships with community based organizations. These outreach efforts will be complemented with an information campaign to highlight educational themes and opportunities.

Administrative and Operating (A&O) Expenses

Discretionary account expenses are estimated to increase by $3.7 million from the fiscal year (FY) 2000 level of $64 million. This increase includes: $1.6 million for pay costs, of which $415,000 is for the annualization of the fiscal year 2000 pay raise and $1.2 million for the anticipated fiscal year 2001 pay raise; $1 million for research and development costs related to the study and evaluation of a program for biobased products as part of the President's initiatives; $700,000 for civil rights activities aimed at increasing the participation of women and minorities, and assuring that underserved and socially-disadvantaged producers/ranchers have full access to RMA programs; and an additional $403,000 for information technology costs. FY 2001 information technology needs include a wide variety of enhancements, additions, services, and maintenance in continued support of system integrity to meet the continuing growth and demands of the program.

FCIC Fund

Under current law, the budget for the FCIC Fund proposes an estimated $1.0 billion increase in program level. This seemingly large increase is a result of using a portion of prior years" unobligated balances -- $953.8 million -- to cover indemnities and other expenses in FY 2000.

Premium subsidy is expected to increase by $66.2 million due, in part, to an estimated increase in participation. In accordance with the Federal Crop Insurance Reform Act of 1994, for the purpose of encouraging the broadest possible participation of producers, FCIC pays a portion of crop insurance premiums. The $956.1 million in premium subsidy, of which $298.6 million is for catastrophic (CAT) coverage and $657.5 million is for additional coverage, assists in providing producers a cost-effective means of managing their risk.

Delivery expenses, which represent the amount of administrative and operating expense reimbursements provided to approved insurance providers for delivering risk management services and products, are based on 24.5 percent of estimated total premium for FY 2001 in accordance with the Agricultural Research, Extension, and Education Reform Act of 1998. As a result of increased total premium, RMA anticipates delivery expenses in the amount of $507.7 million, compared with the FY 2000 estimate of $486.3 million. This increase will assure continued effective delivery of risk management products to the agricultural community.

RMA also expects excess losses, which are based on calculations of increased premium and program losses, to increase by $13.7 million to a level of $298.8 million. This estimate supports a loss ratio of 1.075 and is authorized under the appropriation language 'such sums as may be necessary." Without these funds, which directly support the mission and goal of the Agency, FCIC would be unable to fully fund expected indemnities, thereby weakening the producers" safety net.

The FY 2001 current law funding request for research and development expenses is $3.5 million. No increase or decrease is requested. In accordance with the Agricultural Research, Extension, and Education Reform Act of 1998, RMA's ability to develop new products, support private sector initiatives through section 508 (h) products, and help farmers become better risk managers was severely limited. Under that legislation, RMA's research and education funds were capped at $3.5 million per fiscal year, an immediate 67 percent reduction from the FY 1998 level of $10.7 million. This reduction has created an immediate need for additional funding so that we can continue to provide new products, support private sector initiatives, and provide educational outreach to farmers. This need is being addressed in the Administration's safety net initiative, which provides $30 million for research and development activities and $40 million for risk management education initiatives in 2001.

Conclusion

Mr. Chairman, we must succeed in strengthening the farm safety net or we may have a repeat of prior years" emergency spending package. We have made a good start by reducing farmer premiums by an estimated 30 percent in 1999 and an estimated 25 percent in 2000. However, more can and must be done.

I know of no other program in all of government that has produced a greater return on the taxpayers" dollar (see graphics). While proposals to enhance the crop insurance program are working their way through Congress, RMA is requesting $3.7 million more in discretionary funding. This funding level is essential if RMA's infrastructure is to support and leverage the necessary initiatives and demands for continued maintenance, growth, and expansion of the program. Even at full funding, RMA will only be able to maintain products and services at the current level, while slightly increasing activities aimed at increasing the participation of women and minorities and assuring that underserved and socially-disadvantaged producers and ranchers have full access to all RMA programs. In addition, RMA would be able to support the Presidential Biobased Products/Bioenergy Initiative. Personnel ceilings will continue to hold at FY 1999 levels. Mr. Chairman, this concludes my testimony. I will be pleased to answer any questions.


Graphics Slide 1 RMA Resources Drop, Program Participation Triples

Slide 2 Payments to Farmers Increase

Slide 3 Actuarial Soundness Continues

Slide 4 Crop Insurance Reform Priorities

Last Modified: 12/01/2010
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