United States Department of Agriculture
Office of the Secretary
Washington, D.C.  20250
                           
February 1,1999

               STRENGTHENING THE FARM SAFETY NET:
        The Administration s Principles and Preliminary 
             Proposals for Reforming Crop Insurance
                              
                                
In his State of the Union message, President Clinton pledged to work with
Members of Congress of both parties to create a farm safety net that includes
an improved federal crop insurance program. This commitment builds upon many
steps the President has taken to strengthen the farm safety net: In 1994, the
Administration proposed, and Congress passed, groundbreaking crop insurance
reform legislation; when he signed the 1996 farm bill, and on many occasions
since, the President expressed his interest in strengthening the farm safety
net; and in 1998, the President worked hard to secure congressional approval
for emergency funding to help farmers and ranchers hit by natural disaster
and low prices in 1998 and who endured successive years of losses.
                                
The Administration is committed to working with Congress to develop and
enact crop insurance reform legislation that is based on the following
principles: maximum participation in the programs, comprehensive coverage,
flexibility, use of market mechanisms, and lowest cost to both farmers and
ranchers and taxpayers.

In response to recent experience, the Administration offers the
following preliminary proposals that meet these principles for crop insurance
reform: bringing new, more flexible risk management tools to farmers; making
the basic program more financially worthwhile by raising the floor on basic
crop insurance coverage; increasing the incentives for farmers to purchase
higher levels of coverage; covering multi-year disasters; covering livestock;
making farmers in designated disaster areas eligible for NAP assistance once
such a designation occurs; and providing better information and risk
management education to farmers.

These proposals are discussed in more detail following background on
the crop insurance program, a summary of its weaknesses, especially those
revealed by recent experience, and the Administration s principles for crop
insurance reform.

                            Background

Prior to 1994, the crop insurance program served some farmers, but
never achieved sufficient participation to become the primary source of
federal assistance for farmers stricken by economic losses from natural
disasters. As a result, Congress passed a series of ad hoc disaster payment
programs in the 1980 s and early 1990 s and farmers relied on historic farm
programs to support their incomes.

In 1994, the Administration proposed legislative reforms to merge crop
insurance with ad hoc disaster payment assistance. Offered to farmers on a
crop by crop basis, the government provides farmers premium-free basic
coverage to cover catastrophic losses, known as CAT coverage, and farmers
have the opportunity to purchase higher levels of coverage at subsidized
premium rates, known as buy-up coverage. The legislation also created a non-
insured assistance payment (NAP) program for crops for which an insurance
program is not yet developed.

In its proposals to Congress for the 1996 farm bill, the Administration
recommended that the legislation enhance crop insurance by providing the
Department of Agriculture (USDA) authority to offer revenue insurance --
insurance to protect against price declines, not just losses from natural
disasters. Congress adopted the recommendation, and also established a
program by which USDA offers risk management education to farmers. At the
same time, that legislation weakened the historic farm safety net by doing
away with much of the counter cyclical income support programs that had been
the heart of traditional farm policy.

In 1998, farm income fell precipitously. Commodity prices plummeted as
world markets softened, and other farmers struggled with the effect of
natural disasters that hit many parts of the country. Neither the crop
insurance program nor the 1996 farm bill were able to ameliorate the dramatic
losses the farm economy suffered. Ultimately, the Administration worked with
the Congress to provide nearly $6 billion in emergency funding in the fiscal
year 1999 omnibus legislation as compensation for market and production
losses.

Consistent with its commitment to an adequate crop insurance program,
the Administration supported a provision requiring that uninsured recipients
of the emergency assistance obtain insurance over the next 2 years. More
significantly, to encourage greater participation in crop insurance and as a
down payment on crop insurance reform, USDA earmarked $400 million from the
emergency aid program to provide farmers a 30 percent reduction of their crop
insurance premiums on 1999 crops.

            Weaknesses in the Crop Insurance Program

In spite of improvements made to the. program, through legislation and
administrative actions, the Administration believes the crop insurance
program still suffers major shortcomings; they are:

    Basic CAT coverage is not sufficient to provide farmers an adequate
safety net in times of severe stress, and not enough farmers buy higher
levels of coverage - only two-thirds of the farmers who have crop insurance
purchase buy-up coverage.

    Farmers generally only obtain insurance based on expected market prices
established at the start of the year, and which may vary significantly from
actual prices at the time of harvest. Also, current insurance products do not
protect them against low prices that carry over year to year.

   Farmers who experience several years of adverse weather may be unable to
obtain enough insurance to cover their costs of production, because the
coverage they can buy is linked to and limited by their actual production
history. In many cases, farmers find their insurable yields declining as their
premium rates increase, a problem especially acute in the Great Plains.

   Participation in revenue insurance   which protects against falling
prices while growing, remains relatively limited; only about 16 percent
of the corn and soybean farmers who buy up to the higher levels of
coverage also take revenue insurance.

         Measured in value of sales, the livestock industry represents the
biggest segment of American agriculture, but the current crop insurance
statute does not permit USDA to extend coverage for livestock losses; the
private sector only insures against livestock mortality and this coverage is
used only sparingly.

   Crop insurance programs have not yet been developed for many important
and economically significant crops. Thus, these growers are protected only
through the limited coverage offered by the non- insured assistance payment
(NAP) program.

        Principles for Strengthening the Farm Safety Net
                through Reforming Crop Insurance
                                
To strengthen the farm safety net, the Administration believes
legislation to improve the crop insurance program should satisfy the
following principles:

        Maximize participation: The farm safety net, and the crop
     insurance program, should cover as many farmers and ranchers as
     possible.

        ComprehensIve coverage: Insurance coverage and risk management
     tools should be as comprehensive as possible, covering as much
     agricultural production crops and livestock and as many risks to
     economic and production loss as possible.

        Use market mechanisms: The farm safety net and crop insurance
     should make maximum use of market mechanisms.

        Flexibility: The crop insurance program should be 
     flexible enough to meet the diverse demands posed
     by the varied risks farmers and ranchers face.

          Lowest cost to taxpayers: These programs should be
     delivered at the lowest possible cost to taxpayers
     and farmers and ranchers.

                      The Administration's
                   Preliminary Proposals for
                    Reforming Crop Insurance

To achieve its principles for strengthening the farm safety net
by improving crop insurance, the Administration offers the following
proposals to Congress:

          Speed new, more flexible risk management tools to market: To meet
the changing needs of farmers and ranchers, crop insurance reform should
include providing farmers more flexible products to cover their diverse needs,
including more revenue- based, insurance products and coverage of a whole
farms production and revenue. Crop insurance reform should permit USDA to work
more creatively with private companies to develop and bring to market new risk
management tools and give USDA more flexibility to use pilot projects and
expand them.

          Raise the floor: Because the CAT and NAP programs only cover less
than one-third of the value of a crop, crop insurance reform legislation
should increase both the amount of the crop covered and the market price at
which a crop is insured thus making these basic programs more financially
worthwhile.

          Increase incentives for higher-level coverage:  Crop insurance
reform should improve the incentives for farmers to buy more comprehensive    
insurance at higher buy up levels. It should also provide farmers similar
incentives for all insurance plans, including revenue insurance.

          Cover multi-year disasters: To address the special concerns raised
by multi-year crop losses and losses not severe enough to trigger current loss 
requirements, crop insurance reform should authorize USDA to offer a new
multi-year insurance umbrella product to complement single-year policies.

          Cover livestock: Because the current crop insurance program does
not cover livestock producers, who make up the largest single sector of
American agriculture in terms of value of production, crop insurance reform
should include provisions to enable USDA to offer coverage of livestock. 

          Improve the NAP program: Because many farmers rely
on the NAP program as their primary protection from losses from natural
disasters, crop insurance reform should change the trigger that makes NAP
assistance available so the farmers become eligible for NAP assistance at the
same time USDA designates areas natural disaster areas that makes farmers and
ranchers eligible for emergency loans.

          Provide better information and service to farmers: Crop insurance
reform should increase farmer education about risk  management to enable them  
to assume more responsibility for and better manage their risks, through crop
insurance and the agricultural futures and options markets.

While the crop insurance program is a mainstay of the farm safety net, the
Administration also wants to work with Congress to examine other USDA programs
that assist farmers and ranchers suffering from natural disasters to improve
their performance in meeting specific needs that cannot be fully addressed
through crop insurance.

                           Next Steps 
                                
Having laid out these principles and preliminary proposals, the Administration 
is committed to discussing them and other options with farmers, ranchers, and
Congress, developing a comprehensive package to achieve our objectives, and
agreeing on the most appropriate way to finance it. 

Secretary of Agriculture Dan Glickman will conduct at least 3 regional forums
around the country on improving crop insurance, at places and on dates that
will be announced in the next few weeks. Through these forums and discussions
with Congress, the Administration intends to build upon the proposals laid out
in this document to forge a bipartisan agreement on crop insurance reform.



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