April 27, 2009
Rickey Bearden depends on crop insurance as an integral part of the risk management program he employs on his Yoakum County, Texas, cotton, peanut and grain farm.
West Texas can be an unforgiving place to farm, subject to prolonged periods of drought, sudden devastating hail storms and wind gusts that can reach hurricane force. Farming without insurance is not an option for Bearden.
“I’ve been farming for 34 years and consider insurance coverage as important as any other input cost,” Bearden said recently in testimony before the House Agriculture Committee Subcommittee on General Farm Commodities and Risk Management. He appeared before the subcommittee representing the National Cotton Council as chairman of the Council’s Crop Insurance Task Force.
Bearden said improvements Congress has made in crop insurance coverage since 2000 have improved the program, but encouraged legislators to continue tweaking it to make insurance coverage, especially for cotton, broader and more affordable.
“West Texas producers are particularly vulnerable to Mother nature,” he said. “In any year, a severe hailstorm or extended drought can spell disaster. USDA data for Yoakum county show that since 2000 our county average yield per planted acre across both irrigated and dryland acres has been as low as 250 pounds and as high as 730 pounds.”
He said volatility on dryland acreage is even greater. “Since 2000, I have experienced four years of zero production on my dryland acres, produced three crops that averaged over 700 pounds and had the others fall somewhere in between. This volatility reminds us why producers need access to crop insurance products that provide effective coverage at affordable prices.”
Bearden said improving risk management options for farmers has been a high priority for the cotton industry for years and the Council supported passage of the Agricultural Risk Protection Act (ARPA) in 2000. That act, he said, was intended to make higher levels of coverage more affordable to farmers.
It helped. “As a result of ARPA reform, well over 90 percent of U.S. cotton acres are protected by some form of crop insurance.”
But it’s not enough. Bearden said the high percentage of covered acres is “somewhat misleading when you consider than 18 percent of those cotton acres are enrolled at catastrophic (CAT) coverage and buy- up coverage is heavily skewed towards lower levels. Those numbers indicate that cotton insurance coverage at higher levels is still not as affordable as higher coverage levels for other commodities.
“It is critical that the Risk Management Agency (RMA) establish a comprehensive strategy to identify why inconsistencies continue to exist across crops and establish a strategic plan for addressing these issues.”
Bearden said most cotton farmers insure their acres at the lower level of coverage, “at around the 60 percent to 65 percent levels. That means cotton producers are still self-insuring on average 35 percent to 40 percent deductible and paying the cost of the underlying insurance policy.”
That leaves a cotton farmer between a drought and a dry place. “Producers can find themselves having invested in a crop all year only to realize a yield that falls to a point at or near their insurance guarantee. In the current economic climate, a year like that can be the farmer’s undoing.”
Bearden said in many cases crop insurance decisions are not left up to the farmer but may be “a non-negotiable prerequisite for securing production financing, even though a shallow loss can still do irreparable damage to these operations. RMA must find a way to make higher levels of coverage affordable to more producers.”
He said RMA has improved coverage and recently had outside sources conduct a review of the cotton program to ensure program integrity. But, even though cotton loss ratios fluctuated in recent years, the program review “resulted in no major changes to the cotton policy.
“NCC supports efforts to further reduce instances of fraud and abuse and we want to be part of the process to ensure that future efforts do not impose unnecessary additional burdens on either producers or insurance providers,” he said.
Bearden offered observations about the current state of crop insurance and suggestions for improvements.
“One of the man issues for cotton insurers is lack of affordability of higher levels of coverage and the exposure to significant shallow losses that prevents effective risk management,” he said. “The council supported proposals introduced in the 2008 farm bill debate regarding use of Group Risk Insurance Protection (GRIP) and other group coverage alongside buy-up coverage to help shield growers from shallow losses. GRIP has worked in many areas of the Cotton Belt.”
He also encouraged insurers to focus on opportunities that allow “regional differences in insurance to be recognized.”
He said farmers should be rewarded for production practices that reduce individual risk. “Producers who practice risk-reducing cultural practices such as planting improved varieties and employing good soil and water conservation practices are actively working to reduce risk and increase productivity. These activities benefit the cotton insurance program immediately by reducing production risks.”
He said individualized experience-based ratings would not disadvantage good producers in situations where counties have bad production situations. “The lack of experience rating has reduced participation at higher levels of coverage for many cotton producers,” he said.
“The current rating structure looks backward and lags well behind the risk reduction curve created by new technology. Practices that reduce risk and improve productivity should be rewarded with lower rates that can translate into improved insurance coverage.”
Bearden said producers also should be permitted to purchase different levels of coverage for irrigated and dryland production. The current system limits growers to a single coverage level for both practices. “A diverse cotton operation is stuck with balancing the coverage level between two entirely different management situations. The end result is a bad compromise that forces growers to under-insure high input, high yielding, irrigated production and over-insuring lower input, lower yielding, non-irrigated acres.”
He said RMA has tools to monitor coverage levels to prevent fraud and abuse of two-level coverage. “We would suggest with different levels of coverage (RMA could) prohibit growers from purchasing a higher level of coverage on non-irrigated acreage than they select for irrigated acreage.”
Bearden said fiber quality is a primary concern for U.S. cotton growers. “Cotton is unique; our product is sold on an identity-preserve basis and cotton end-users purchase based on the quality characteristics of each individual bale. We believe cotton quality loss provisions should be structured in recognition of the unique bale identity.”
He said a CCC Loan Premium and Discount Schedule has been developed by RMA with Council recommendations. “We’ve made progress with RMA on implementing this provision and encourage the agency to complete this process as quickly as possible to make the new procedure effective for the 2010 growing season.”
He said the revised quality adjustment procedure should become part of the basic premium and be implemented at no additional cost.
Cottonseed coverage is also important and Bearden aid the Council supports a Cottonseed Pilot Endorsement as a pilot program. The concept has been submitted to the Federal Crop Insurance Corporation and sent out for expert review by the FCIC Board.
“This would offer yield coverage for cottonseed as an optional endorsement applicable to buy-up cotton insurance,” he said. The CPE is designed to integrate seamlessly with the existing federal crop insurance cotton program rules and procedures, while allowing producers to insure cottonseed without additional administrative recordkeeping. The endorsement is designed to apply to currently available individual buy-up coverage plans (APH, CRC, RA, etc.) and is not offered for CAT, GRIP or GRP policies.
“We hope after the review the FCIC Board will approve the pilot program for the 2010 growing season.”
Bearden said the 2008 farm bill included a reduction of premiums for enterprise units, a popular action across the country, “even though growers are asked to shoulder additional risk through the enterprise unit structure.”
But Bearden says the provision should encourage farmers to review current insurance programs and perhaps increase participation and lower rates. “Actions like this are needed to ensure levels of participation that enhance the safety net for growers. Insurance is a critical component of the agriculture safety net.”
He said the change also complies with current WTO commitments and allows growers 100 percent protection up to the level of their insurance purchase. “Improving affordability of higher coverage levels to growers is an important, non-trade distorting road to protecting the interests of U.S. commodity producers.”
Bearden discussed the Supplemental Revenue Assistance Program (SURE), a permanent disaster assistance program included in the 2008 farm bill. He encouraged rapid release of final details of the program, which is designed to encourage producers to invest in crop insurance at higher levels of coverage.
“We believe one of the best ways for the program to achieve its goal is to make sure growers are not penalized for increased investments they make to purchase higher, more expensive levels of coverage. This can be done the way it was accomplished in past ad hoc disaster programs by subtracting the amount of the insurance premiums paid by producers and only counting the net insurance indemnity received as a result of an insurable loss as a revenue offset.”
He said that would make a higher level of insurance coverage more attractive to producers. “If the SURE program is to fulfill its purpose — establishing a permanent mechanism to address widespread natural disasters — it is imperative that every effort be made to allow crop insurance and SURE to complement each other.”
He said the Council encourages USDA to publish a Proposed Rule for SURE quickly and allow time for review and comment by commodity groups and Ag Committee members.
Bearden said RMA should review policies on response to large scale natural disasters. Time lapse last year from the time hurricanes hit Texas, Louisiana and Mississippi until RMA announced that expedited appraisal processes could be used were too long, he said. “This process should happen quickly after a disaster.”
Bearden said authorization to renegotiate the Standard Reinsurance Agreement (SRA) was included in the 2008 farm bill to ensure that crop insurance is run efficiently. “SRA is one of the key tools through which this is accomplished but also can be the source of harmful developments that could retard progress or reverse gains made since passage of the Agricultural Risk Protection Act of 2000 by eroding producer or private industry participation.
“Great care must be exercised during negotiations to maintain a reasonable balance between public and private interests. We must guard against forcing changes on approved insurance providers that should result in unintended undermining of service to producers.”
He said it will be important to maintain a process that protects public interests and “fosters an active and competitive private delivery network.”
He said NCC strongly supports the federal crop insurance program and encourages the committee to continue oversight and make sure the product remains a useful tool for producers.
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