Statement of Joseph W. Glauber

Deputy Chief Economist, U.S. Department of Agriculture

Before the Committee on Agriculture, Nutrition and Forestry, United States Senate

March 10, 1999

Mr. Chairman and members of the Committee, I appreciate the opportunity to appear before this hearing on risk management and the role of crop and revenue insurance. My comments today will examine the nature of risks faced by farmers and ranchers and strategies used to mitigate these risks, including the use of futures, options, and other privately-offered marketing and production contracts. I will then address the Federal crop insurance program since 1981, focusing on participation in the program, actuarial performance, and the role of the private sector in delivery and risk sharing. Lastly, I will raise a number of issues that will need to be addressed when considering crop insurance reform.

The Nature of Agricultural Risks

Producers face a myriad of risks that affect their production and marketing decisions. The magnitude of these risks may vary substantially between commodities and regions. To understand how these risks affect producers' demand for risk management instruments like crop insurance, a number of factors must be considered:

Use of Risk Management Instruments

Farmers and ranchers use a variety of risk management strategies to mitigate the risks that they face. Some of these strategies may be complementary to crop and revenue insurance, while others may be substitutes. No strategy can fully achieve perfect protection from income risks at an acceptable cost.

Contracting. According to USDA's Agricultural Resources Management Study (ARMS), a third of the value of crops and livestock produced in the United States in 1997 was grown or sold under contract (Banker and Perry). Commodities produced under marketing contracts accounted for 21.7 percent of the total value of U.S. production in 1997. Commodities produced under production contracts accounted for 9.5 percent of the total value of U.S. production in 1997.

Marketing contracts establish a price (or a formula for determining price) before harvest or before the commodity is ready for marketing. The producer typically assumes all risks of production, but shares pricing risk with the contractor. Contracting tends to be higher for fruits and vegetables than for other crops. About 40 percent of the value of all fruits and vegetables was sold through marketing contacts in 1997. Other crops with large shares produced under marketing contracts include cotton (33 percent) and sugar beets (82 percent). Under 10 percent of the value of cattle production was sold under marketing contracts, compared with more than 60 percent of the value of dairy production.

Production contracts detail who supplies the inputs-the producer or the buyer -as well as the quality and quantity of a particular commodity and the compensation due the contracting producer for services. Production contracts are more typically used for livestock. According to ARMS, poultry and poultry products produced under contract accounted for 70 percent of the total value of production in 1997. About one third of the total value of hogs and 14 percent of the value of cattle were produced under production contracts.

Contracting was reported by farms in all sales classes. However, farms with annual sales exceeding $250,000 accounted for more than 75 percent of the value of products grown and sold under contract. Larger farms were more likely to use contracting than farms with sales of less than $250,000-53 percent compared with 8 percent.

Contracting has been controversial, particularly forward contracts and marketing agreements between meat packers and cattle feeders. These methods of procurement, together with packer-owned or fed animals, are often collectively referred to as captive supplies, and they accounted for about 20 percent of steer and heifer procurement in 1997. Hog contracting has risen sharply in recent years and may now account for 60 percent or more of total sales. As more animals are procured through such arrangements, producers who do not use them may find it difficult to locate buyers for their product.

Futures and Options. Organized trading in agricultural futures dates back to the 1870's in this country, yet their direct use by producers has remained relatively limited. According to the ARMS, only 7 percent of all farms reported the use of futures in 1996. Large farms are more likely to use futures. Of those family farms reporting annual sales in excess of $250,000, about 25 percent reported using futures or options contracts in 1995.

Today, over 300,000 agricultural contracts are traded each day on futures exchanges--an increase of about 70 percent over levels in the late 1980's. Over the past few years, a number of new contracts, such as futures on fluid milk and crop yields, have been developed . Growth in futures volume has occurred for a number of reasons, but key factors are the reduction of farm support prices in the 1980's to levels below market clearing prices and the flexibility provisions of recent farm legislation that allow producers to base planting decisions on market rather than administered prices.

A large volume of production is hedged indirectly through cash forward sales at the local warehouse. Warehouse operators and other grain merchants offer forward contracts because they can offset these purchases on futures exchanges. About 16 percent of all producers reported use of forward contract sales in 1995. Almost 50 percent of those farms reporting sales over $250,000 used forward contract sales in 1995. Cash forward contracts allow producers to manage their price risk, while avoiding other aspects of futures trading such as basis risk, which is the variation in the difference between the local cash price and the futures price.

In recent years, there has been considerable growth in the diversity of exchange-based cash contracts offered by elevators and other grain merchants. Instruments such as flex options, basis contracts, and hedge-to-arrive contracts are designed to give producers more flexibility in their marketing decisions. With the development of area yield futures and options there has been interest in offering cash revenue contracts for producers, for example, revenue-based contracts based on county crop yields and December corn futures. Under current Commodity Futures Trading Commission (CFTC) regulations governing the sale of off-exchange commodity options, so-called agricultural trade options, such sales must be tied to actual delivery of the commodity, as opposed to a cash settlement. Some critics feel that the lack of cash settlement provisions diminishes the benefits of these contracts and argue that the CFTC should treat agricultural trade options in a manner similar to other, nonagricultural markets (National Grain and Feed Association).

Crop and livestock diversification. Enterprise diversification is an effective means to stabilize a farm's cash flow as long as returns from the various enterprises are not highly correlated. Jinkins examined farm enterprises by type and found that cotton farms are among the most diversified. Cotton farms also produce substantial amounts of cash grains, fruits and vegetables, and have some livestock enterprises. By contrast, poultry operations tended to be among the least diversified. On a regional basis, the Southeast tended to be the most diversified, with the Northern Plains the least diversified.

Storage. Storing a portion of one's crop at harvest gives producers flexibility to sell their crop through the marketing year. Storage allows them to take advantage of price rises, but also exposes them to potential price declines.

Leasing. Leasing inputs gives producers the flexibility to respond to changing markets and decreases the capital required to expand operations. Farmers lease a variety of inputs including land, machinery, equipment, and livestock. According to the 1997 Census of Agriculture, about 40 percent of farm operators reported leasing some or all of the land that they farmed in 1997.

Savings and borrowing. Another important means of offsetting unanticipated declines in farm income is through adjustments in savings and borrowing. Drawing on liquid assets is a form of self-insurance that many producers use to offset short-term income fluctuations. Similarly, demand for short-term loans tends to increase when incomes fall.

Income averaging. As a result of tax law changes under the Taxpayer Relief Act of 1997 and the Omnibus Consolidated Appropriations and Emergency Supplemental Appropriations Act of 1999, farmers and ranchers are permitted to income average. Under a progressive tax rate system, taxpayers whose annual income fluctuates widely may pay higher taxes over a multi-year period than other taxpayers with similar but more stable income. Income averaging can mitigate this effect by allowing taxpayers with a more variable income to pay a more constant income tax rate over time (Monke and Durst; Monke).

Federal Crop and Revenue Insurance

Federal crop insurance has been available for selected crops and regions since 1938, but it was not until passage of the Federal Crop Insurance Act of 1980 (1980 Act) that crop insurance became broadly available. The 1980 Act made crop insurance the primary form of disaster protection, replacing the disaster legislation of the 1970's for program crop producers. To encourage participation, crop insurance premiums were subsidized for the first time. Crop insurance coverage for program crops was rapidly expanded to all counties where program crops were grown and to major producing areas for many other crops. By 1990, total county programs (the national sum of crops covered in each county) exceeded 21,000, compared with fewer than 4,000 in 1979.

Participation. Participation in the program grew slowly during the 1980's. By 1988, fewer than 56 million acres were insured, almost double the 1980 level, but they accounted for only 25 percent of eligible acres (figure 1). Statutes authorizing disaster assistance which were enacted following the droughts of 1988 and 1989 resulted in increased participation, in part due to requirements that recipients of disaster payments purchase crop insurance in the following crop year. During the early 1990's, enrolled acreage averaged about 90 million acres, less than 40 percent of eligible acreage.

Legislation enacted following the Midwestern floods of Spring 1993 authorized the issuance of disaster payments which totaled $2.6 billion and prompted Congress to pass the Federal Crop Insurance Reform Act of 1994 in the fall of 1994. Under the 1994 Act, producers of insurable crops were eligible to receive a basic level of coverage, catastrophic risk protection (CAT), which initially covered 50 percent of a producer's approved yield at 60 percent (55 percent, beginning in 1999) of the expected market price. Producers who elected coverage levels of at least 65 percent of the approved yield at 100 percent of the expected market price were eligible for a subsidy equal to the premium rate for a policy guaranteeing 50 percent of the approved yield at 75 percent of the expected market price. CAT coverage was required for producers that participated in the commodity price support and production adjustment programs, farm credit or certain other farm programs (so-called linkage). While the premium cost of CAT coverage was fully subsidized by the Government, producers were required to pay a sign up fee equal to $50 per crop per county.

At the time of enactment, it was anticipated that about 80 percent of the eligible acreage would enroll in the program (USDA 1995). While it was recognized that initially most of the increase in participation would be at the CAT level, it was anticipated, that as producers became familiar with the program and realized that the Government intended to rely on crop insurance as a substitute for the ad hoc assistance provided for free in the past, more producers would purchase higher levels of coverage.

A record 220 million acres were enrolled in the program in 1995, over 80 percent of eligible acres, with over half of these at the CAT level. Over 105 million acres were enrolled at the buy-up coverage levels, also a record high. The CAT program proved unpopular among many producers who believed that the value of the CAT coverage was not worth the nominal administrative fee. As a result, Congress modified the linkage requirement in the Federal Agriculture Improvement and Reform Act of 1996. For the 1996 and subsequent crop years, producers could forego CAT coverage by waiving their eligibility for any other emergency crop loss assistance. Participation in the CAT program dropped sharply. In 1996, there were 87 million acres enrolled in CAT coverage, a drop of almost 25 percent. By 1998, acreage enrolled in CAT had fallen to less than 60 million acres, a decline of 49 percent from 1995. Acres insured at the buy-up levels increased to 120 million acres, but not enough to offset the decline in CAT acres.

Of those producers purchasing buy-up coverage in 1997, about 85 million acres were enrolled at the 65 percent coverage level, representing about 75 percent of the total acreage enrolled in buy-up coverage (figure 2). At the 65 percent coverage level, the amount of the premium subsidized by the Government for multiple peril crop insurance is about 42 percent, while the producer pays about 58 percent of the cost of the premium. Since the subsidy level is fixed, the proportional level of subsidy declines for higher levels of coverage. For example, at the 75 percent level, the amount of premium subsidized by the Government is less than 24 percent of the cost of the premium. As a result of the higher farmer premium costs, only 15 million acres were enrolled at coverage levels greater than 65 percent.

Since 1996, when the first revenue insurance products were introduced, participation in revenue products has grown. As of 1998, three revenue insurance programs (Crop Revenue Coverage, Income Protection, and Revenue Assurance) were offered to producers in selected locations for selected crops. Two more (Gross Revenue Income Protection and Adjusted Gross Revenue) have been approved for sale in 1999. In 1998, almost 12 million acres of corn, 10 million acres of soybeans, and 5 million acres of wheat were enrolled in revenue insurance programs. Of total buy-up enrollment, revenue insurance accounted for over 32 percent of the corn acreage, 35 percent of the soybean acreage and about 16 percent of the wheat acreage. In Iowa, over 50 percent of the total corn acreage enrolled in buy-up was enrolled under a revenue insurance plan.

Actuarial performance. The actuarial performance of the crop insurance program has been under much scrutiny since the program's inception, but particularly since the growth of the program following the 1980 Act (Goodwin and Smith). Over the period of 1981-89, total indemnities exceeded total premiums (the producer-paid portion plus the Government-paid subsidy) by $2.0 billion. Excess losses for soybeans over the period totaled $590 million and those for wheat totaled $605 million. The aggregate loss ratio (total indemnities divided by total premiums) was 1.5 for the period, compared with 1.1 for 1948-80. The poor actuarial performance can be attributed to several factors including: widespread droughts during the period (1983, 1988, and 1989); rapid expansion of the program into areas where actuarial experience was limited; and fraud and program abuse (U.S. GAO).

In 1989, the Federal Crop Insurance Corporation (FCIC) began a comprehensive review of rates and by the fall of 1990 had implemented rate changes for 1991 fall-planted crops. Rates were increased by as much as 15 percent in some crop reporting districts and were reduced by as much as 5 percent in others. Under Title XXII of the Food, Agriculture, Conservation and Trade Act of 1990 (1990 Act), FCIC was directed to adopt rates and coverages that would improve the actuarial soundness of the program. The 1990 Act limited increases to 20 percent over the comparable rate of the preceding crop year. In addition to the rate changes affecting all participants within a crop reporting district, FCIC implemented the nonstandard classification system (NCS), which increased the premium rates for those producers that had suffered losses in 3 of the previous 5 years and whose losses exceeded the loss severity for that crop for the State where the producer farmed.

The effects of the rate changes, particularly under NCS, caused some producers to drop coverage. Combined participating soybean acreage in Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina fell over 50 percent, from 2.5 million acres in 1990 to less than 1.2 million acres in 1991. NCS was discontinued in 1998 because of other program reforms that had made it largely unnecessary.

Legislative pressure to achieve actuarial soundness continued with the Omnibus Budget Reconciliation Act of 1993, which instructed FCIC to achieve an overall loss ratio of 1.1 by October 1, 1995, and encouraged FCIC to base yield guarantees on a minimum of four years of actual production history. The 1994 Act further lowered the target loss ratio to its current level of 1.075.

The actuarial performance of the program has improved considerably in the 1990s.

The overall loss ratio for all crops and coverage levels over the period 1990 to 1998 is 0.97, with total premiums exceeding total indemnities by about $300 million. Excluding the CAT business, the loss ratio for buy-up levels over the period 1990-98 is 1.08, with excess losses of $800 million.

Does this mean that the program is actuarially sound? Table 1 shows the loss experience for the period 1981-98. While the overall loss ratio for 1981-98, including CAT, is 1.11, there are a number of States where the aggregate loss ratio is in excess of 1.075. Excess losses for wheat, cotton, peanuts and tobacco all exceeded $250 million, and of the eight major field crops insured under the crop insurance program, only corn and soybeans showed a loss ratio under 1.075 over 1981-98 (table 2). When loss data for these crops were adjusted for current buy-up rates and the current book of business, the aggregate loss ratio falls to about 1.0.

Assessing the actuarial performance of the CAT business is more problematic because there is limited historical data over which to analyze CAT losses. CAT losses are typically low frequency events. With the exception of regional loss events like the drought in Texas and parts of the South in 1998, most of the country has enjoyed relatively benign weather since 1995. A widespread drought resulting in large losses similar to 1983 or 1988 could potentially wipe out cumulative gains in the CAT program. CAT rates are currently set relative to rates for 65 percent coverage. FCIC is currently reviewing its procedures for establishing CAT rates.

Role of private insurance companies. The Federal crop insurance program is unique among Federal programs providing natural disaster protection because of the partnership with private companies in sharing underwriting gains and losses. The 1980 Act authorized private insurance companies and licensed agents and brokers to sell Federal crop insurance policies. In addition, the 1980 Act directed FCIC "to provide insurers including private insurance companies or pools of such companies, reinsurers of such companies, or State or local governmental entities, including and political subdivisions thereof, that insure producers of any agricultural commodity under a plan or plans acceptable."

In the mid-1980s, about 80 percent of the premium was delivered by reinsured companies, and 20 percent through commissioned agents and private companies with service contracts with FCIC, but who bore none of the underwriting risks. In 1992, FCIC announced its intentions to eliminate the master market system by 1994 because the small sales base made a national program too costly. The 1994 Act allowed dual delivery of the CAT business by the Farm Service Agency (FSA) and the reinsured companies, but USDA ended dual delivery in 1997 to encourage more private delivery.

Risk sharing with the reinsured companies is accomplished through the Standard Reinsurance Agreement (SRA). The SRA determines how underwriting gains or losses are shared between the Government and the companies. Prior to 1992, the reinsured companies were criticized for sharing in very little of the underlying risks (GAO), but with the underlying actuarial problems associated with the program in the 1980s, it is understandable why the companies would be reluctant to share in risks over which they had little control.

As the actuarial problems of the program were addressed, companies were encouraged to share in more of the risks. Under the SRA negotiated for the 1992 and subsequent reinsurance years, companies could place their policies into one of three funds: the commercial fund, the developmental fund or the assigned risk fund. Under the commercial fund, companies share the most in net underwriting gains, but also are exposed to the greatest risks of large underwriting losses. Under the assigned risk fund, the reinsured company cedes 80 percent of the premium to the Government and ultimately shares in very little of the net underwriting gain or loss on the premium it retains. The developmental fund allows the reinsured company to retain more premium and share in more gains or losses than the assigned risk fund, but not as much as the commercial fund. Under the 1998 SRA, separate funds were also established for CAT and revenue policies. Underwriting gains are calculated for each fund at the state level and companies face some restrictions as to how much premium they can place in the assigned risk fund (up to a maximum 75 percent of total premium in some states, but generally much lower).

In exchange for larger underwriting gains, the reinsured companies have retained the premiums and losses associated with a larger book of the overall crop insurance portfolio. In 1992, the reinsured companies retained about $465 million of premium, about 60 percent of the total premium written. By 1998, retained premium had increased to $1.6 billion, about 85 percent of total premium written (table 3).

Underwriting gains have also increased. With generally favorable loss ratios, particularly for CAT, underwriting gains totaled about $825 million over 1992-97, an average underwriting gain of $138 million per year. The average masks wide variations between States and years. Net underwriting gains in 1997 were over $350 million, while yield losses due to the floods in 1993 were responsible for net underwriting losses of $84 million. Not surprisingly, reinsured companies have tended to retain more premium in the commercial fund in those states where major losses occur with low frequency (e.g., Iowa) and placed more premium in the assigned risk fund in those states where losses occur more frequently and where the underlying loss ratio has been above 1.0 (e.g., Texas).

Annual net underwriting gains have averaged over $300 million since 1996, which has attracted criticism from those who argue that the benefits for risk sharing do not outweigh the costs of high underwriting gains (Greenberg). While the potential for underwriting gains is large, reinsured companies have also been exposed to large potential losses. For example, had the 1988 drought occurred in 1998, it is estimated that net underwriting losses to the companies would have exceeded $450 million. Large underwriting gains have also made it easier for reinsured companies to lay off most of their risks in the commercial reinsurance market.

Product development. Since the inception of the Federal crop insurance program, FCIC has set actuarial rates for most of the crop insurance products. However, in recent years, a number of insurance products have been developed by the reinsured companies. Many of these products are offered as add-ons to the underlying crop insurance product and unless subsidized or reinsured are generally not regulated by FCIC. However, FCIC can refuse to reinsure the underlying policy to which the supplemental policy is appended if they believe its actuarial performance may be adversely affected. Under section 508 (h) of the Federal Crop Insurance Act companies can request that their products be eligible for reinsurance and premium subsidies. If approved by FCIC's Board of Directors, these products are then available for sale by any eligible crop insurance company or agent. The developing company thus gives up any proprietorship over the product. This is similar to commercial insurance where a company may file a copy of a policy filed by a competitor in the state.

The most significant product developments by the private sector have been the revenue insurance products, particularly Crop Revenue Coverage and Revenue Assurance. In both cases, the companies developed the rates for their products and then submitted them to FCIC for approval. Because of potential budget exposure to large losses, it is important to ensure that the rates are actuarially sound and do not affect the underlying crop insurance product.

Program costs. Total costs of the crop insurance program for FY 1999 are estimated at about $1.7 billion. Costs include net indemnity payments (indemnities paid minus premiums received from the producer), delivery expense reimbursement to the reinsured products (currently 24.5 percent of the premium dollar for buy up and 11 percent for CAT), and net underwriting gains through the SRA. As participation increases, so do expected net indemnities, delivery expenses and underwriting gains. In essence, program costs rise directly with the size of the premium. In addition, about $65 to 70 million is spent annually on salaries and expenses of the Risk Management Agency.

Outstanding Issues

As Congress considers potential changes to the Federal crop insurance program there are a number of issues that must be considered.

Will increased subsidies increase overall participation and, in particular, participation at higher coverage levels? While participation in buy-up levels of crop and revenue coverage represents almost 45 percent of eligible acreage nationwide, it remains low in a number of States and for a number of commodities. Most producers purchasing buy-up coverage tend to insure at the 65 percent coverage level. Will additional premium subsidies encourage more producers to purchase crop and revenue insurance and to increase coverage levels or will those subsidies mostly go to those who are currently insuring their crops?

Most empirical studies have concluded that the demand for insurance is fairly unresponsive to price changes (Knight and Coble). If these studies are correct, it may be difficult to expand coverage, even with additional subsidies, if producers view other risk management alternatives as less costly. The 1999 crop year will provide some indication of how subsidies affect participation. USDA will provide an additional $400 million for premium subsidies to reduce the farmer's costs of purchasing crop insurance by an estimated 30 percent.

The key to increasing participation may lie in developing new products like revenue insurance. This could mean providing more flexibility to the private sector to develop products that meet the unique needs of producers yet be based on actuarially appropriate rates.

Actuarial soundness. Actuarial soundness as defined by the Crop Insurance Act continues to be an issue among policymakers. While evidence suggests that the loss ratio of the overall crop insurance program is now near the statutorily targeted loss ratio of 1.075, there remains wide variation across states and crops. Failure to address these disparities can exacerbate adverse selection problems over time, and as a consequence, adversely affect the actuarial performance in the aggregate. Moreover, a poor actuarial performance will lessen the degree to which companies are willing to share risks through the SRA. Providing subsidies to producers is best accomplished without compromising the actuarial integrity of the underlying insurance product.

The Role of the Federal Government. Should the Federal government be in the business of "retailing" risk management products (e.g., product development, rate setting, sales)? USDA continues to have a large role in the development of risk management products. For example, FCIC continues to set crop insurance rates for multiple peril crop insurance products. Many have argued that this is a role that the private sector is better suited to perform. As discussed above, over the past three years, there has been much product development by the private sector, particularly in the development of revenue based contracts. Still rates are fixed among competitors. The level of development is perhaps surprising given the lack of proprietorship over these products once they have been approved by FCIC. Under the current program, companies cannot compete directly on rates, at least not on federally subsidized insurance products. Allowing companies to compete more on rates could potentially benefit producers and increase participation. However, this could have the potential to expose the Government to greater underwriting risks under the current SRA.

Others have argued that the Federal government should be primarily concerned with the "wholesale" level as catastrophic reinsurer. Over the past several years, the reinsured companies have borne an increasing share of underwriting risks, due in part to the SRA, which has allowed for larger underwriting gains. Nonetheless, there are areas of the country where the risk of farming are quite large and it remains doubtful that companies would ever be willing to take on a large share of the underwriting risk without substantial increases in premiums (Goodwin and Smith). A key for future reforms will be for the Government to balance addressing potential market failures while not crowding out potential market participation by the private sector.

That concludes my testimony. I will be happy to answer questions.


Banker, David and Janet Perry. "More Farmers Contracting to Manage Risk," Agricultural Outlook. USDA. Economic Research Service. AO-258. January-February 1999. pp 6-7.

Goodwin, Barry K. and Vincent H. Smith. The Economics of Crop Insurance and Disaster Aid. Washington, DC. The AEI Press, 1995

Greenberg, Jon. "Harvest of Cash" The Washington Post. January 12, 1998. pp. C1-C2.

Harwood, Joy, Janet Perry, Richard Heifner, Agapi Somwaru, and Keith Coble. "Farmers Sharpen Tools to Confront Business Risks." Agricultural Outlook. USDA. Economic Research Service. AO-259. March 1999. pp.12-17.

Harwood, Joy, Richard Heifner, Keith Coble, Janet Perry, and Agapi Somwaru. Managing Risks in Farming: Concepts, Research and Analysis. USDA. Economic Research Service. Agricultural Economic Report No. 774. March 1999.

Jinkins, John E. "Measuring Farm and Ranch Business Diversity," Agricultural Income and Finance. USDA. Economic Research Service. AFO-45. May 1992. pp.28-30.

Knight, Thomas O. and Keith H. Coble. "Survey of Multiple Peril Crop Insurance Literature Since 1980," Review of Agricultural Economics 19 (Spring/Summer 1997): 128-156.

Mishra, Ashok K. and Barry K. Goodwin. "Farm Income Variability and the Supply of Off-farm Labor." American Journal of Agricultural Economics 79(August 1997): 880-887.

Monke, James. "The 1997 Tax Law: New Incentives for Farmers to Invest for Retirement." Agricultural Outlook. USDA. Economic Research Service. AO-257. December 1998. pp. 24-25.

Monke, James and Ron Durst. The Taxpayer Relief Act of 1997. USDA. Economic Research Service. Agricultural Economic Report No. 764. July 1998.

National Grain and Feed Association. NGFA Newsletter. Volume 50, No. 12. June 18, 1998.

U.S. Department of Agriculture. FY 1996 Budget Summary. February 1995.

USDA. Economic Research Service. Farmers' Use of Marketing and Production Contracts. Agricultural Economics Report No. 747. December 1996.

Wright, Brian D. "Agricultural Policy from the Ground Up" American Enterprise Institute for Public Policy Research. Conference paper. November 1994.

Table 1-Excess losses by State, 1981-98 2/
State Premium 2/ Indemnities Excess losses Loss ratio
Million dollars
Alabama 241.4 437.5 196.1 1.81
Alaska 0.5 0.4 0.0 0.97
Arizona 38.1 50.9 12.8 1.33
Arkansas 319.0 422.1 103.1 1.32
California 753.5 593.2 -160.3 0.79
Colorado 227.5 201.3 -26.2 0.88
Connecticut 4.8 4.4 -0.3 0.93
Delaware 9.3 9.8 0.5 1.05
Florida 269.6 281.3 11.8 1.04
Georgia 542.0 839.1 297.1 1.55
Hawaii 5.2 0.0 -5.1 0.01
Idaho 115.5 128.2 12.7 1.11
Illinois 750.1 560.3 -189.8 0.75
Indiana 337.5 317.9 -19.6 0.94
Iowa 1,356.9 1,001.8 -355.1 0.74
Kansas 745.5 756.7 11.2 1.01
Kentucky 144.9 141.6 -3.3 0.98
Louisiana 270.0 416.0 146.0 1.54
Maine 15.2 18.5 3.3 1.22
Maryland 25.2 26.7 1.6 1.06
Massachusetts 8.4 7.5 -0.9 0.89
Michigan 177.9 179.5 1.6 1.01
Minnesota 1,188.6 1,052.2 -136.4 0.89
Mississippi 265.5 372.8 107.3 1.40
Missouri 414.4 374.6 -39.8 0.90
Montana 454.1 741.8 287.7 1.63
Nebraska 887.4 671.6 -215.8 0.76
Nevada 1.0 0.8 -0.2 0.79
New Hampshire 0.7 0.9 0.2 1.35
New Jersey 7.8 8.4 0.6 1.08
New Mexico 41.1 54.5 13.4 1.33
New York 27.8 20.4 -7.4 0.73
North Carolina 444.3 630.7 186.4 1.42
North Dakota 1,172.5 1,402.2 229.7 1.20
Ohio 185.3 167.8 -17.5 0.91
Oklahoma 234.0 372.3 138.3 1.59
Oregon 43.2 34.2 -9.0 0.79
Pennsylvania 38.8 47.0 8.2 1.21
Rhode Island 0.3 0.3 0.0 0.90
South Carolina 151.3 221.2 69.8 1.46
South Dakota 613.6 653.8 40.2 1.07
Tennessee 91.6 97.4 5.7 1.06
Texas 1,785.3 2,779.9 994.6 1.56
Utah 10.5 17.7 7.3 1.69
Vermont 2.2 1.4 -0.7 0.66
Virginia 137.0 185.7 48.7 1.36
Washington 178.0 137.6 -40.4 0.77
West Virginia 6.9 11.5 4.7 1.67
Wisconsin 229.6 190.9 -38.7 0.83
Wyoming 29.0 36.2 7.2 1.25
--Totals 14,999.6 16,680.6 1,681.0 1.11
1/ Includes CAT.
2/ Includes premium subsidy.


Table 2-Actuarial Performance for Selected Crops, 1981-98

(Million dollars)
Crop CAT coverage 1/ Buy-up 2/ Total
Premium  Indemnity Loss


Premium Indemnity Loss


Premium Indemnity Loss


Barley 14.2 5.6 0.39 270.9 396.9 1.47 285.1 402.5 1.41
Corn 329.1 86.0 0.26 3,579.5 3,181.7 0.89 3,908.5 3,267.7 0.84
Upland cotton 280.0 84.4 0.30 1,549.9 2,202.5 1.42 1,829.9 2,286.9 1.25
Peanuts 18.2 4.2 0.23 497.4 876.0 1.76 515.6 880.2 1.71
Grain sorghum 38.0 21.4 0.56 384.1 535.7 1.39 422.1 557.1 1.32
Soybeans 280.9 41.7 0.15 2,217.9 2,495.3 1.13 2,498.8 2,536.9 1.02
Tobacco 28.6 10.7 0.37 440.2 721.3 1.64 468.8 732.0 1.56
Wheat 196.3 132.9 0.68 2,436.1 3,275.5 1.34 2,632.4 3,408.4 1.29
Total 8 crops 1,185.2 386.9 0.33 11,376.0 13,685.0 1.20 12,561.2 14,071.8 1.12

1/ 1995-1998.

2/ Includes all business for 1981-94 and all non-CAT premium for 1995-1998.

Table 3--Net Underwriting Gains, 1992-1998


Premium (million dollars) Net underwriting gain 
Total Ceded Retained Gain/loss 1/ As percent of retained



Assigned risk




- 0.4

- 1.2

Developmental 137.1 72.6 64.5 0.5 0.8
Commercial 377.7 10.5 367.2 26.1 7.1
Total 694.2 228.6 465.6 26.2 5.6

Assigned risk




- 0.8

- 1.9

Developmental 129.8 64.7 65.1 - 4.9 - 7.5
Commercial 341.2 13.2 328.0 -77.8 -23.7
Total 701.9 267.5 434.5 -83.5 -19.2

Assigned risk






Developmental 160.0 81.6 78.4 8.1 10.3
Commercial 426.3 27.7 398.6 99.0 24.8
Total 918.7 384.3 534.5 108.7 20.3

Assigned risk




- 0.3

- 0.5

Developmental 342.6 234.0 108.5  4.9 4.5
Commercial 643.9 46.1 597.8 127.3 21.3
Total 1,280.6 514.8 765.8 132.1 17.3

Assigned risk






Developmental 336.3 143.9 192.3 17.2 8.9
Commercial 937.3 48.0 889.3 269.2 30.3
Total 1,622.2 469.7 1,152.5 287.9 25.0

Assigned risk






Developmental 327.0 108.7 218.4 24.0 11.0
Commercial 788.9 23.5 765.4 244.4 31.9
CRC/RA/IP 212.0  4.9 207.1 81.7 39.4
Total 1,687.0 423.9 1,263.1 352.5 27.9
Total 1992-97 6,904.7 2,288.7 4,615.9 824.0 17.9
Estimated 1998 2/ 1,875.6 284.2 1,591.4 340.2 21.4

1/ Net underwriting gains do not reflect reserve adjustments.

2/ As of March 3, 1999.