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Climate Issues; Ag Economy; and Crop Insurance

Climate Issues: Copenhagen- General Background

AP writer Arthur Max reported yesterday that, “U.N. climate negotiators looked Wednesday to the United States to bring fresh ideas — perhaps in the form of extra billions of dollars — to try to salvage a bare-bones political agreement by the end of the week on controlling global warming.

The U.S. must find ways of meeting demands by a suspicious world on reducing greenhouse gas emissions without exceeding what Congress will allow. It must also find the cash in a tight budget.”

The article pointed out that, “The U.S. delegation objected to a proposed text it felt might bind Washington prematurely to reducing greenhouse gas emissions before Congress acts on the required legislation. U.S. envoys insisted, for example, on replacing the word ‘shall’ with the conditional ‘should’ throughout the text.”

Juliet Eilperin and David A. Fahrenthold reported in today’s Washington Post that, “As President Obama prepared to visit the historic climate conference here, there were signs Wednesday of a break in the impasse between rich and developing nations.

“The United States and Japan agreed to make major contributions to the developing world to keep prospects of a deal alive. And the leader of a bloc of African nations said they would accept a smaller — though still sizable — package of financial aid, in return for going along with an agreement.

“But tear gas hung in the air outside the conference center, as protesters demanding faster and more stringent cuts in greenhouse-gas emissions clashed with police. And, inside, talks were slowed by disagreements within the developing world — which has proved a more powerful, and more fractious, force than expected.”

Today’s Post article explained that, “On Wednesday, for instance, rich and developing countries were disagreeing about the starting point for that debate.

The European Union, Japan, Australia, Russia and Canada want to scrap the 1997 Kyoto Protocol, because the United States and China did not join in its pledges to cut emissions, and start with a new document. But a bloc of poorer countries wants to make the next agreement a formal sequel to the one in Kyoto, which binds most developed countries to emission cuts and provides some financing for poor ones.”

Edward Felker reported in today’s Washington Times that, “The United Nations climate change summit in Copenhagen appeared Wednesday to be falling victim to a standoff between the United States and China, with observers starting to voice fears that already-low expectations for the conference will not be met.”

In more detail with respect to China, Bloomberg writer Kim Chipman reported yesterday that, “China is demanding that a global agreement to reduce greenhouse gases prohibit nations from imposing trade sanctions, further pitting the world’s No. 1 emitter against U.S. lawmakers.

The draft accord from a United Nations-led meeting in Copenhagen to forge a climate treaty bars rich countries from adopting trade actions tied to global warming. China said such language will avert ‘trade wars.’”

The Bloomberg article noted that, “‘We will always oppose any practice of establishing trade barriers under the guise of protecting the global environment,’ Yu Qingtai, China’s climate-change ambassador, said in an interview.

A proposed U.S. law would impose tariffs by 2020 on imports of certain goods from countries such as China seen as not doing enough to cut emissions. American politicians and labor groups say pending legislation to cut heat-trapping gases must include tariffs on such nations because they gain competitive advantage.”

Ms. Chipman pointed out that, “U.S. senators such as Benjamin Cardin, a Maryland Democrat, say it’s ‘critical’ that the U.S. retain its option to impose tariffs, or border-tax adjustments, on China and other countries. The Senate is the only U.S. body authorized to approve treaties.

Labor groups in the U.S. including the AFL-CIO say the measure is crucial to protect domestic industries that might be undercut if other countries aren’t bearing the same environmental costs to produce products.”

And with respect to perspective on climate issues from India, Bloomberg writers Gaurav Singh and Jim Efstathiou Jr. reported yesterday that, “For Jairam Ramesh, India’s environment minister, United Nations climate-change talks in Copenhagen are as much about easing poverty in his country as preventing the world from overheating.

“India, home to 1.2 billion people, is the fourth-biggest polluter from burning carbon-based fuels as the nation promotes industrial growth to lift more of its people out of impoverishment. Because India has contributed little in the past to emissions blamed for global warming, Ramesh remains an unyielding figure at talks among 193 nations struggling to agree on ways to fight climate change.”

The article stated that, “‘Since the first and overriding priority is for poverty alleviation and sustainable development, we cannot accept under any circumstances the concept of a peaking year’ for developing countries, Ramesh said yesterday in an interview. ‘So we must limit the global goal to a temperature increase.’

“India endorses a proposal to limit the increase in global temperatures to within 2 degrees Celsius (3.7 degrees Fahrenheit) of pre-industrial times. The burden of meeting the target should fall on the U.S. and Europe, countries that have contributed most to historical carbon-dioxide emissions.”

Climate Issues: Copenhagen- U.S. Perspective

An update posted yesterday at CQPolitics.com stated that, “Sen. John Kerry promised Wednesday that Congress will pass a sweeping climate change bill in 2010 — if negotiators here can reach a global deal this week.

The speech by Kerry, a key Senate player in drafting climate change legislation, drew a standing ovation from a packed hall. Throughout the fraught negotiations at this U.N. global warming summit, other nations have said repeatedly that the chief obstacle to reaching a deal is inaction by the U.S. Senate.”

The CQ update added that, “Kerry’s promise set the stage for President Obama’s appearance Friday, the last day of the summit. The president, too, is expected to promise U.S. action to cut emissions. But Kerry’s assurances were especially welcome to foreign negotiators, who know that Obama’s promises will ring hollow if the Senate fails to back him up with legislation.

“To that end, Kerry, D-Mass., used his moment on the world stage to explain the local politics that drive congressional politics, and to illustrate the concrete challenge of finding 60 Senate votes for legislation that would transform the nation’s energy economy, even as the nation struggles through a recession.”

Glenn Thrush reported yesterday at Politico.com that, “Sen. John Kerry (D-Mass.) is tired of the world telling the Senate what to do — so he spent his brief stopover Wednesday at the U.N. climate conference telling the world what it can do for the Senate.

“In a speech that was part climate-change pep rally, part lecture on America’s legislative political dynamics, Kerry argued that he needs a strong political settlement at COP-15 to jolt the Senate into action on its moribund cap-and-trade bill.”

In alluding to the domestic issues regarding China, with implications of tariff protections that China expressed concerns with, Reuters writer Richard Cowan reported yesterday that, “[Sen. Kerry] noted difficult economic times in the United States that complicate debate of a climate change bill.

“‘To pass a bill, we must be able to assure a senator from Ohio that steel workers in his state won’t lose their jobs to India and China’ if those countries are not subjected to tough climate control requirements in a global deal.”

A related article posted yesterday at Politico.com stated that, “After negotiating the night away with foreign officials, U.S. climate negotiator Todd Stern dragged himself to a hotel conference room at 7:45 a.m. Tuesday for a second round of questioning — this one at the hands of Senate staffers.

The care and feeding of the Hill delegation at U.N. climate conferences, usually a secondary task for State Department officials, has taken on greater urgency this year, with President Barack Obama’s ability to conclude a binding international climate agreement contingent on passage of the stalled Senate bill.”

The Politico article explained that, “Just as influential this year are swing-vote senators from both parties, who are open to a deal but remain skeptical of emissions caps that might harm home-state industries and anything that appears to force the U.S. to make more of a sacrifice than China or India.

“They include Sens. Debbie Stabenow (D-Mich.), Sherrod Brown (D-Ohio), Blanche Lincoln (D-Ark.), Arlen Specter (D-Pa.), John Rockefeller (D-W.Va.), Joe Lieberman (I-Conn.), Kit Bond (R-Mo.), Olympia Snowe (R-Maine) and Dick Lugar (R-Ind.), who sent aide Richard Helmke, a respected climate conference veteran.

“Stern and his staff have taken great pains to keep the swarm happy, holding one-on-ones with at least 14 senators, fielding dozens of inquiries from staff and hosting a briefing with a dozen senators before departing for Denmark.

The senators represented here have a variety of viewpoints but are united by a singular demand that Obama agree to no deal that requires the United States to spend more and pollute less than emerging rivals China and India.”

Glen Thrush also reported yesterday at Poltico.com that, “Nancy Pelosi is taking a fairly large contingent to Copenhagen Thursday, flying to the climate conference with 14 Democrats and six Republicans.”

The update quoted Speaker Pelosi as saying, “The House of Representatives has taken historic action to address the climate crisis and transition our country to a clean energy economy. We see Copenhagen as a meeting about job creation – how do we move forward to create millions of clean energy jobs and new technologies to keep America number one. We are going to send a message of support for the Obama Administration’s efforts and we bring with us the strong commitment of the Congress to take action, as the House of Representatives did in June.”

Meanwhile, Lisa Lerer reported yesterday at Politico.com that, “Sen. Lindsey Graham (R-S.C.) is scheduled to meet privately Wednesday evening with top administration climate aide Carol Browner… He plans to discuss the ways Senate leaders can deal with manufacturing and coal state worries that the bill will spike electricity bills in the midst of a deep recession.”

And with respect to President Obama’s participation in the Copenhagen talks on Friday, Reuters writer Jeff Mason reported today that, “His visit is fraught with risks. If the president, a Democrat, puts a more aggressive offer on the table, he could face criticism from Republicans who charge the United States is going too far without getting enough in return from big developing economies such as India and China.

“If he is more cautious and the talks end up faltering, he would be connected to that failure and his efforts to pass domestic climate change legislation could suffer along with his credibility among other international leaders.”

Jim Tankersley reported in today’s Los Angeles Times that, “The stakes are high, even though Obama and other leaders are aiming only for a framework agreement that would not be legally binding.

“Failure would undercut hopes for a complete and binding global climate treaty next year; imperil climate legislation in Congress, a top priority for the Democrats; and handicap Obama’s efforts to reshape the world’s view of the United States.”

Climate Issues: Agriculture

David A. Fahrenthold reported in today’s Washington Post that, “The United States will join 20 other countries in a ‘research alliance’ to better understand — and prevent — greenhouse-gas emissions from farms, Agriculture Secretary Tom Vilsack announced Wednesday.”

Juliet Eilperin reported yesterday at the Washington Post’s Carbon Blog that, “U.S. Agriculture Secretary Tom Vilsak announced Wednesday the United States would provide $1 billion over the next three years to preserve tropical forests overseas.”

An update posted yesterday at the National Corn Growers Association Online noted that, “Throughout this week, NCGA President Darrin Ihnen and Director of Public Policy Rod Snyder are attending the United Nations Climate Change Conference in Copenhagen, Denmark. NCGA is an officially recognized observer organization at the conference.

“‘The conference this week has given us the opportunity to focus on the multiple challenges facing modern agriculture pertaining to climate change policy both domestically and internationally,’ NCGA President Darrin Ihnen said. ‘We have also had the opportunity to have a one-on-one meeting with Secretary of Agriculture Tom Vilsack to discuss our grower members’ interest in this issue and believe the discussion was very worthwhile.’”

Bob Meyer reported yesterday at Brownfield that, “Dennis Nuxoll with the American Farmland Trust says once the U.N. Climate Conference in Copenhagen wraps up, the focus will return to the two climate change bills pending in Congress. Nuxoll says legislation is better than EPA regulation and with the ag provisions inserted into the House version of the bill by Collin Peterson, ag can make money” (related audio at the Brownfield link).

Climate Issues: Editorials

The editorial boards at The Washington Post, New York Times and Wall Street Journal all included items relating to climate change in today’s papers.

Agricultural Economy

Ken Anderson reported yesterday at Brownfield that, “The average value of an acre of farmland in Iowa declined in 2009 for the first time in a decade. That according to an annual survey conducted by Iowa State University extension farm economist Mike Duffy (audio interview included at the Brownfield link).

“‘The statewide average was $4,371,’ Duffy says. ‘This was down two-point-two percent from 2008.’”

Crop Insurance

Last week, Bill Murphy, the administrator for the USDA’s Risk Management Agency, penned an item in the Omaha World Herald titled, “Win-win on crop insurance.”

Yesterday, the Manager of the American Association of Crop Insurers, David R. Graves, provided an in-depth analysis of last week’s piece by Mr. Murphy.

Dr. Graves indicated that, “In general, the article by Bill Murphy, RMA Administrator, that was printed in the Omaha World-Herald on Wednesday, December 9, 2009, appears to be a misleading public relations attempt to disguise the detrimental consequences of the ‘concepts’ and ‘numbers’ contained in the first draft of the 2011 SRA on the crop insurance program’s delivery industry, rather than a well-reasoned analytical explanation of the government’s proposal.”

More detailed responses by Dr. Graves to last week’s piece by Mr. Murphy are noted below.

Murphy. “… two compelling statistics demonstrate that this program is in urgent need of reform.”

Response. The modern Federal Crop Insurance Program (Program) is a product of congressional interest, intent and action over the last three decades. In writing the farm bill in 2008, Congress conducted a thorough review of the Program, and made significant adjustments, while rejecting a number of more radical changes. Thus, barely more than one year later, it is certainly misleading for Mr. Murphy to suggest “this program is in urgent need of reform.” Congress just reformed important parts of the Program.

Response. Mr. Murphy argues that two statistics, government payments to the companies in 2006 and 2009, demonstrate the program’s “urgent need of reform,” thereby supposedly justifying the largest cuts ever proposed for the Program, which would come on the heels of numerous reforms and cuts just made by the 2008 Farm Bill. His numbers for 2009 reflect the huge bubble in commodity prices in 2008, which burst in 2009.

Using a comparison of only two years of data to support conclusions is an unsound cherry picking of numbers to make a point. Crop insurance analysts know that you must use a long history of observed yields and prices to estimate both sound premium rates and the gains and losses the industry is likely see in future years. The historical data must take into account good years and catastrophic years. Mr. Murphy chose only two good years, 2006 and 2009, which used 2008 commodity prices, including budget cuts of $ 6.4 billion over ten years to make his case and has ignored the offsetting consequences of bad years on the industry.

Mr. Murphy also failed to show that the gross premiums on crop insurance policies in 2006 were $4.7 billion. But in 2009, gross premiums are $8.9 billion, up 90%. This near doubling of premiums means that in a good year, industry gains will be larger, such as in 2009, but in a bad year, industry losses will also be much larger. Fortunately for farmers, 2009 appears to have been a reasonably good production year, but 2010, or 2011 or 2012 may be much different. Basing decisions to cut crop insurance on only the returns from good years would likely create an industry made up of companies—if they stay in the business—highly vulnerable to bad markets and yield years. This is hardly the formula for creating the “more sustainable” program Mr. Murphy claims the Administration’s reforms will achieve.

Murphy. “… the crop insurance industry has significantly matured and the way that farmers and ranchers use crop insurance has significantly changed, making the existing contract between USDA and the crop insurance companies obsolete.”

Response. The SRA is “a cooperative financial assistance agreement between FCIC and the Company to deliver eligible crop insurance contracts under the authority of the Act.” The SRA does not develop “eligible crop insurance contracts,” which are the policies that farmers and ranchers buy. The SRA defines the terms and conditions companies must agree to in becoming eligible to delivery federal crop insurance policies to farmers and ranchers. Use of federal crop insurance by farmers and ranchers depend on the terms and conditions contained in the policies they buy, not the terms and conditions of the delivery agreement the government has with insurance companies. For Mr. Murphy to indicate the SRA is obsolete because of the way farmers and ranchers use federal crop insurance is misleading.

Murphy. “These record profits are not sustainable, in part, because the increase in governmental payments occurred without a proportional increase in the number of policies or acres covered.”

Response. Mr. Murphy seems to have concluded that total cost of delivery of the Program can be explained or accounted for by only two factors—the number of policies and the number of acres. This conclusion is misleading because it omits the significant and substantial impact of government rules, regulations and other operational requirements on human resource and capital demands. Each new program rule or regulation increases the industry’s work load and human resource requirements whether additional policies or acres are involved or not. There has been a substantial growth in government rules and regulations in recent years, especially since the passage of the ARPA amendments of 2000, and it is commonly known that more changes are pending. These changes add to the cost of delivery.

Murphy. Mr. Murphy’s op-ed also refers to the Milliman study, commissioned by RMA. He quotes the Milliman conclusion that the industry earned a rate of return on equity of 16.6% over the past 20 years.

Response. What Mr. Murphy does not tell you is the following:

(1) Milliman and RMA have no accurate measure of the equity of the industry, so they assume one by allocating a portion of the entire property and casualty industry’s equity to the crop insurance program. In other words, the equity of companies outside the crop insurance industry is assigned to crop insurance companies. This is done without regard to the reserves required by regulation and actually held by crop insurance companies and their reinsurers as back up for the policies they sell.

(2) Milliman and RMA assume that delivery payments to companies are equal to their delivery costs. However, a study of actual data conducted by the accounting firm of Grant Thornton based on actual data found otherwise. Delivery expenses that are in excess of government delivery payments reduce the rate of return.

(3) Milliman and RMA assume that reinsurance costs are zero. In fact, when crop insurance companies buy private reinsurance, the reinsurers must cover their expenses and get a return on their equity, and those costs must come out of the underwriting gains of the crop insurance companies. Such costs, too, reduce the industry rate of return.

(4) Milliman and RMA report a supposed 20-year rate of return for the crop insurance companies, which cover 1989-2008. Had they included 1988, an omitted year and one of the worst droughts in the history of American Agriculture, the estimated rate of return would have been reduced.

(5) Milliman and RMA do not estimate an expected rate of return, only an historical one. As a result, their estimate does not incorporate the $6.4 billion in cuts imposed by the 2008 Farm Bill, which will reduce the industry’s rate of return.

Murphy. “USDA has proposed important, common-sense changes in the insurance agreement the department is currently renegotiating with the insurance industry.”

Response. Both the Administration and the industry should seek a new SRA that results in continued fine service to farmers, reasonable returns to the private companies that deliver the program and bear the risk of loss, and reasonable costs to taxpayers. The best way to get there is to have appropriate, analytically based negotiations. On that matter, RMA and the companies met on December 10 in Kansas City. The companies requested that RMA provide the data and analysis they used to estimate the amount of funding that would be cut from the program and on the expected returns in the future that they estimate under the draft SRA. RMA refused both requests. Providing analysis, rather than op-eds would be a good place to start a negotiation with so much at stake for American agriculture.

Murphy. In other statements, Mr. Murphy has suggested that farmers would not be hurt by his proposals.

Response. This conclusion is disingenuous in the extreme. If his proposed cuts are made in the delivery of the program, many companies and agents will be forced to withdraw from many areas of the country. The high-risk states, the so-called underserved farmers, and the smaller farmers will be hurt the most. Many will be unable to purchase crop insurance.

It defies reality to state that you can cut another $4 billion from (RMA’s own estimate) the Program over five years after Congress cut $6.4 billion from the crop insurance program over ten years in the Farm Bill without doing serious damage to American agriculture and, thereby, farmers and ranchers, Dr. Graves noted.

Keith Good