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Cost of production insurance stalls

Wisner, La., crop consultant and cotton producer Ray Young was surprised and disappointed when the Federal Crop Insurance Corporation Board rejected a pilot program for cost of production crop insurance late last year.

But he'll continue to push for the new crop insurance concept that proponents say could lower coverage costs for farmers who consistently make better crops and eliminate some of the abuse that has plagued crop insurance programs.

Young is one of the originators of the cost-of-production concept and a member of the Coalition of American Agricultural Producers, the umbrella organization for a group of farm credit institutions that support the concept. The National Association of State Departments of Agriculture also supports the effort.

Members of the Farm Credit Council of the Farm Credit Bank of Texas first began talking about a new insurance program in March 1999. The Land Bank associations in Alabama, Louisiana and Mississippi are members of the Texas bank.

“We wanted a plan that would be more farmer-friendly, something that would meet our needs and get the fraud and abuse out of the system,” Young said.

Cost-of-production allows producers to insure 70 to 90 percent of actual, documented variable costs of production and land expense. Thus, the most that a producer can lose in any one year is 10 percent of these costs and any other costs not covered.

In 2001, AgriLogic, Inc., a consulting firm based in Texas, received a contract from the USDA Risk Management Agency to develop ground rules for a new cost of production insurance program.

In 2002, six independent experts reviewed the new product and in the summer of 2003 submitted their recommendations to the FCIC. Four reviewers recommended rejection of the cost-of-production product, and two others who supported the product noted several concerns before the product could be accepted.

Young noted that products with unfavorable reviews are often passed by the board. Young personally visited all but two of the board members and the visits were “very positive.” That's why the rejection by the board in October 2003 came as a surprise to Young.

USDA chief economist Keith Collins, who chairs the board, had several positive things to say about the product, including:

  • Cost-of-production uses individual farmers' cost of production data to determine a revenue guarantee, limit liability by capping covered expenses to what has been incurred at the point that the crop is destroyed, and permit increased overage for unexpected cost increases.

  • Cost-of-production also protects against price declines below the loan rate, requires enterprise units which can reduce program abuse and uses farmers' actual prices to determine revenue to count, which can address quality and basis risk.

Disadvantages of the program, according to Collins, focused almost entirely on the complexity of cost-of-production for growers, insurance agents and RMA. Young said that he was told that cost-of-production would be an administrative nightmare.

“But I talked to Congressman Charles Stenholm (D-Texas) and he said that with all the computers and software they have now, it wouldn't be an administrative nightmare,” Young said.

“They also said that it would stress the insurance companies and would stress RMA. They would have to put on more people. Insurance companies would have more paperwork. Stress here and stress there. Well, what about the growers. We're supposed to be helping the growers.”

Young said another company could pick up where the coalition left off, make changes in cost-of-production and resubmit it. “But even though RMA says that we could tweak it and bring it back, we think they've already decided they don't want to do it.

Young noted that the product has been scrutinized by those who designed it and by growers across the country at listening sessions, and a great majority believe it would be a very good product.

“We are not ready to throw in the towel at this point,” Young said. “I believe we still have the political support in the Senate and the House to get something done. We simply need a less expensive product for good producers.”

Meanwhile, Young and Louisiana Ag Commissioner Bob Odom are considering a private submission of the cost-of-production plan for cotton in Louisiana only. “I think we can make it simple enough that they won't be able to use the administrative nightmare excuse.”

Cost-of-production “is cheap for good growers,” Young said. “A bad grower is not going to buy it. It's going to be too costly. Each person pays for his own risk, not his neighbor's risk. For me individually, it's going to give me as much coverage as a 70 to 75 percent buy up, for less money.”

To calculate their coverage under cost-of-production insurance, farmers would prepare an estimate of their expenses for a specific crop. Farmers can also insure fixed costs and land costs, but the latter would be capped at certain levels.

Because coverage would be issued on costs of production, each farmer's premium would be individually rated. So better farmers would have reduced premiums, according to Young. In case of a claim, documentation of expenditures would be required.


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