FarmPolicy

December 23, 2014

Crop Insurance; Biofuels; CFTC Issues; Climate Change; and Mexican Tariff Issues

Categories: Miscellaneous

Crop Insurance

Yesterday, the U.S Government Accountability Office (GAO) released a report entitled, “Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the Program” (Full report, 43 pages; One-page recap).

An overview of yesterday’s report, which was completed in April and posted yesterday at the GAO Online, noted in part that, “The U.S. Department of Agriculture (USDA) administers the federal crop insurance program with private insurance companies, which, in turn, work with insurance agencies that sell crop insurance. In 2008, according to USDA, the program cost $6.5 billion, including about $2.0 billion in allowances to insurance companies to cover their administrative and operating (A&O) expenses, such as salaries and sales commissions to agencies. GAO was asked to examine (1) the reasons for recent substantial increases in A&O allowances, and the purposes for which insurance companies use these allowances, and (2) insurance agencies’ expenses for selling federal crop insurance policies, and questionable practices, if any, that agencies use to compete for business among farmers. GAO analyzed USDA and private insurers’ data, among other things.

“Between 2000 and 2009, companies’ A&O allowances nearly tripled, primarily because USDA’s calculation method for A&O allowances considers the value of the crop, rather than the crop insurance industry’s actual expenses for selling and servicing policies, which generally remained stable. This increase in the A&O allowances occurred without a proportional increase in the number of policies, acres, or amount of insurance coverage purchased. The higher A&O allowances occurred because of higher crop prices since 2006.”

Included among the recommendations offered by GAO was the suggestion that: “To better ensure that the A&O allowances provided to the crop insurance industry are sufficient for program delivery, but not excessive, the Secretary of Agriculture should direct the Administrator of the Risk Management Agency to develop a new methodology for calculating the A&O allowance so that it is more closely aligned with expenses, in terms of dollars per policy, as was the allowance in place before 2006, when crop prices increased sharply. Standard Reinsurance Agreement (SRA) renegotiations should achieve this goal. Once this alignment is completed, the Administrator should minimize annual fluctuations in A&O allowances that are unrelated to business expenses, while recognizing variations in delivery expenses across regions of the country.”

In a letter sent yesterday to the Senate and House Agriculture Committee Chairman and Ranking Members, 14 organizations affiliated with the crop insurance industry responded to the conclusions of yesterday’s GAO report, as well as the May 13, 2009 congressional testimony of Secretary of Agriculture Tom Vilsack.

In part, the crop insurance organizations explained that, “Although we have just received the GAO report and will have additional comments later, we note that a major concern of GAO—the amount of commissions paid to agents—has already been addressed. This GAO concern was first addressed by passage of the 2008 Farm Bill that included a 2.3 percentage point reduction in the A&O payment and 3 other factors, which are used to pay agent commissions. The second development that addresses the GAO concern is the precipitous decline in commodity prices for 2009. Commodity prices were principally responsible for the 2008 increase in agent commissions. Regarding prices, the ‘base prices’ for revenue polices are down 25 percent for corn ($5.40 to $4.04), down 34 percent for soybeans ($13.36 to $8.80), and down 44 percent for spring wheat ($11.11 to $6.20). These decreases will be reflected in agent commissions.

“Crop insurance is successful, indispensable and working as Congress intended.”

The letter pointed out that, “Although the appropriate level of compensation of agents has been raised as a concern by GAO in its April 2009 report, historical data indicate that overall agent compensation has not been out of line with compensation paid in related insurance industries. The independent accounting firm Grant Thornton studied U.S. crop insurance program costs and concluded that the ratio of commission expenses to premiums in the crop insurance industry were below those in the overall property and casualty insurance industry in every year from 1992 through 2007 (the last year of available data).”

The letter indicated that, “The crop insurance industry agrees that a fair deal between the taxpayers and the companies that deliver crop insurance is necessary and it believes that actions of Congress, the administration and the industry over the last almost 30 years have continuously evolved that goal. Over this time, payments for industry delivery costs have been reduced substantially, most recently as part of a 10-year $6.4 billion reduction in crop insurance funding under the 2008 Farm Bill.

“Adequate underwriting gains will be required to offset these reductions and to provide a reasonable rate of return on the investment of private capital to keep it at work in the crop insurance program. In recent years, company underwriting gains have been higher than expected, mainly due to generally good weather that has caused indemnities to be less than premiums. In good years, companies must build up reserves for the bad years that are expected to follow. USDA sets premium rates so that, on average, premiums equal indemnities. Since that has not been the case in recent years, there is every expectation that there will be excessive losses in years to come. As a result, returns to companies should be judged over a long period of years, not in a short period of years.”

To view the complete response to the GAO report, just click here.

Biofuels

Reuters writer Charles Abbott reported yesterday that, “U.S. corn and fuel ethanol prices would rise by 4 cents each if gasoline contained a 15 percent blend of the renewable fuel instead of the current 10 percent, said a University of Missouri think tank.

“Ethanol groups have petitioned the Environmental Protection Agency to increase the blend to as high as 15 percent. They say a higher blend rate will help the industry through the recession, assure federal mandates for ethanol use are met and pave the way for next-generation feedstocks such as switchgrass.

“‘Allowing 15 percent ethanol blends increases ethanol use and average corn prices, but the effects are modest,’ said the Food and Agricultural Policy Research Institute (FAPRI) in a study released on Friday.”

Mr. Abbott added that, “Consumer food prices, running at $1.4 trillion a year, would rise by $340 million under a 15 percent blend, known in shorthand as E15, the study said.

“Ethanol prices would be 4 cents a gallon higher, for an average $2.11, from 2011-18, FAPRI estimated. Ethanol use would rise by 780 million gallons annually, to average 17.3 billion gallons.

Corn would average $4.08 a bushel for the period, 4 cents higher than if there was no change in U.S. policy, the study said.”

Yesterday’s Reuters article noted that, “Feed costs for livestock and dairy producers would go up by 0.7 percent under E15, farm income would rise slightly and crop subsidies would decline by $20 million a year, the study said.”

Philip Brasher, writing yesterday at The Green Fields Blog (The Des Moines Register), also reported on the FAPRI briefing paper and noted that, “Putting more ethanol in Americans’ gas tanks would boost corn prices and cut income to livestock producers while having a negligible impact on supermarket prices, according to economists at the University of Missouri.

“The economists, who analyze farm policy for Congress, looked at the impact of a variety of biofuel policy changes, including an increase on the amount of ethanol allowed in gasoline from the current 10 percent to 15 percent.”

“The [FAPRI] analysis covered the period 2011 to 2018,” Mr. Brasher said.

In related news, Chris Flood reported yesterday at The Financial Times Online that, “Commodity markets staged a broad rally on Monday with crude oil hitting $68… [L]ast week’s Opec meeting provided fuel for energy bulls after Ali Naimi, Saudi Arabia’s oil minister, said the world economy had strengthened enough to cope with oil prices at $75-$80 a barrel.”

And Reuters writer Tom Doggett reported yesterday that, “U.S. retail gasoline prices increased for the fourth week in a row, rising another 9 cents to $2.52 a gallon, the Energy Department said on Monday.

“It is the first time gasoline surpassed $2.50 a gallon since last October.”

In a related opinion item, The Wall Street Journal editorial board indicated in today’s paper that, “The Obama Administration is pushing a big expansion in ethanol, including a mandate to increase the share of the corn-based fuel required in gasoline to 15% from 10%. Apparently no one in the Administration has read a pair of new studies, one from its own EPA, that expose ethanol as a bad deal for consumers with little environmental benefit.”

After a more detailed look at these two reports (one from the Congressional Budget Office and one from the EPA), the Journal opinion item stated that, “As public policy, ethanol is like the joke about the baseball prospect who is a poor hitter but a bad fielder. It doesn’t reduce CO2 but it does cost more. Imagine how many subsidies the Beltway would throw at ethanol if the fuel actually had any benefits.”

CFTC Issues

In related developments regarding the price of oil, Reuters writer Tom Doggett reported on Friday that, “U.S. Senator Bernie Sanders has asked the federal futures market regulator to crack down on speculators whom he blamed for pushing up crude oil and gasoline prices.

The price for crude oil topped $66 a barrel on Friday, up more than 70 percent since mid-January. The rising oil costs have been passed on to consumers in the form of higher prices for gasoline, jet fuel and other oil products.”

Meanwhile, Gretchen Morgenson and Don Van Natta Jr. reported in yesterday’s New York Times that, “As the financial crisis entered one of its darkest phases in October, a handful of the nation’s largest banks began holding daily telephone sessions. Murmurs were already emanating from Washington about the need for a wide-ranging regulatory overhaul, and Wall Street executives girded for a fight.”

The Times article noted that, “The nine biggest participants in the derivatives market — including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America — created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.

“To oversee the consortium’s push, lobbying records show, the banks hired a longtime Washington power broker who previously helped fend off derivatives regulation: Edward J. Rosen, a partner at the law firm Cleary Gottlieb Steen & Hamilton. A confidential memo Mr. Rosen drafted and shared with the Treasury Department and leaders on Capitol Hill has, politicians and market participants say, played a pivotal role in shaping the debate over derivatives regulation.”

Yesterday’s Times article stated that, “[Representative Collin C. Peterson, a Minnesota Democrat and the chairman of the House Agriculture Committee], whose constituents include farmers, who are historically suspicious of Wall Street and whose livelihoods depend on efficient markets, is a longstanding critic of loose regulation. And since his committee oversees the Commodity Futures Trading Commission, he would retain more of his prerogatives overseeing the market if the C.F.T.C. were the main regulator.

Mr. Peterson’s bill specifically bars derivatives trading in a clearinghouse regulated by the New York Federal Reserve, which he said in an interview ‘is a tool of the big banks’ that ‘wouldn’t do much’ to regulate the contracts.

“Because the banks’ lobbyists persuaded some of his Republican colleagues to resist more sweeping changes, Mr. Peterson said, he has had to modify a bill he introduced that is similar to [Senate Agriculture Committee Chairman Tom Harkin’s] in calling for wide-ranging limits on derivatives.

“‘The banks run the place,’ Mr. Peterson said. ‘I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.’”

Climate Change

Reuters writer Charles Abbott reported yesterday that, “U.S. agriculture should be allowed, as part of a climate-change bill being drafted in the U.S. House, to earn money for carbon offsets, a spokeswoman for Agriculture Secretary Tom Vilsack said on Monday.

At present, the bill is silent on a role for farms and forests in controlling emissions of greenhouse gases. Under House rules, the Agriculture Committee and seven other committees now have a chance to modify the bill.

Vilsack believes agriculture and forestry should be included in an offsets program and the Agriculture Department should play a role in overseeing any such program, spokeswoman Chris Mather said in an email.”

In addition, Ed Tibbetts reported yesterday at the Quad-City Times Online (Iowa) that, “U.S. Agriculture Secretary Tom Vilsack said he understands the skepticism in rural areas over the proposal to cap carbon emissions but urged about 200 people here to embrace the change for its potential opportunities.”

Mr. Tibbetts added that, “‘I understand the skepticism out in the countryside about this,’ Vilsack said.

But as agriculture practices improve, he said, farmers might find they can make money if they’re compensated for their changes.

“Some agriculture groups are unhappy with the House bill, in part because it isn’t more explicit about authorizing farmers to sell emission credits. Vilsack told reporters later he thinks the plan will be more specific by the time it makes its way through Congress.”

With respect to the climate bill making its way through the House, Congressional Quarterly writers Edward Epstein, Bart Jansen and Paul Krawzak, reported yesterday that, “[House Majority Leader Steny H. Hoyer of Maryland] said he wants the controversial global warming bill (HR 2454) to pass the House ‘in the latter part of June or the early part of July.’ But such rapid movement of a bill that the Energy and Commerce Committee passed on May 21 after weeks of wrangling among Democrats will depend on whether more than a half-dozen committees with jurisdiction over pieces of the bill either conduct markups or waive that right. And that is still up in the air.

Robert Carlson, the president of North Dakota Farmers Union, noted in an item posted on Sunday at the Inforum Online (North Dakota) that, “Right now, climate change is a dominant policy issue in Washington. Recently, the Environmental Protection Association announced greenhouse gas emissions are a threat to public health. The U.S. Supreme Court gave EPA a directive to regulate GHG emissions. At the same time, Congress is considering a bill that would more clearly define the nation’s climate change policies.”

Mr. Carlson added that, “With an aggressive timetable to move climate change legislation through Congress, all of us need to urge lawmakers to support the following:

“- Award the U.S. Department of Agriculture authority to determine the parameters, promulgate regulations and serve as the administrator of an agricultural and forestry offset program.

“- Recognize the early programs to sequester carbon dioxide and allow those programs to be eligible under a mandated cap and trade system. 


“- Avoid placing artificial limits on the use of domestic agricultural offsets. 


“- Base carbon sequestration rates upon science.”

Meanwhile, Cynthia Dizikes reported yesterday at the MinnPost Online that, “As a major energy and climate bill winds its way through Congress, Rep. Collin Peterson has emerged as a pivotal player and a potential roadblock to the legislation that the Minnesota Democrat says could hurt farmers, ranchers and biofuel producers around the country.

“‘If they don’t fix this, there isn’t going to be a bill,’ Peterson said in an interview with MinnPost.”

Yesterday’s article stated that, “‘They either have to deal with us, or they can’t pass this,’ he said.

“By ‘us,’ Peterson means about 40 Democrats — all the Democrats on the Agriculture Committee plus about 15 more — who would represent a critical voting bloc if the bill receives little or no Republican backing, as is expected.

Before Peterson’s group can support the bill, known as the American Clean Energy and Security Act, they have said that they want to see more offsets for farmers, a larger role for the U.S. Department of Agriculture, changes in requirements for renewable fuels and alterations to carbon footprint calculations for biofuel operations.

Without these considerations, they say America’s agriculture and biofuel industries will be hobbled by increased fuel and feed costs and unfair competition from abroad, where farmers and ranchers will not have to abide by the same rules.”

Ms. Dizikes added that, “‘There really isn’t anything for ag in this bill,’ said Richard Krause, senior director of Congressional relations for the American Farm Bureau. ‘We really think that ag can play a key role in any kind of carbon reduction scheme, so we would just like to see that recognized.’

“Krause said that he would like to see the inclusion of agricultural offset options — or steps that farmers and ranchers can take to earn credits and defray increased costs — that might include different tilling practices, fertilizer management or other carbon sequestration measures.”

Mexican Tariff Issues

Jose de Cordoba reported in today’s Wall Street Journal that, “A Mexican trade association representing more than 4,500 trucking companies is seeking $6 billion in damages from the U.S. government because of Washington’s refusal to allow Mexican trucks to carry cargo over U.S. roads.

“The group, Canacar, filed a demand for arbitration under the North American Free Trade Agreement with the U.S. State Department in April, but didn’t publicize the move until Monday.”

For more background on this issue, see this FarmPolicy.com update from March 23.

Today’s Journal article explained that, “U.S. Transportation Secretary Ray LaHood has been working with members of Congress, industry officials and union representatives to craft a new program that would satisfy safety concerns and reopen the roads to Mexican-based truckers.

“Mr. LaHood said on May 21 that his proposal contains ‘good metrics’ for testing the safety of Mexican trucks and assuring that drivers are properly licensed.”

Keith Good

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