CRS Report for Congress
Federal Crop Insurance and the
Agriculture Risk Protection Act of 2000
(P.L. 106-224)
November 13, 2000
Ralph M. Chite
Specialist in Agricultural Policy
Resources, Science, and Industry Division

Congressional Research Service The Library of Congress

Federal Crop Insurance and the
Agriculture Risk Protection Act of 2000 (P.L. 106-224)
On June 20, 2000, the President signed into law the Agricultural Risk Protection
Act of 2000 (P.L. 106-224, H.R. 2559), which reduces significantly the farmer cost
of acquiring a crop insurance policy beginning in the 2001 crop year. P.L. 106-224
is estimated to add $8.2 billion in new federal spending for the federal crop insurance
program over the next 5 years (FY2001-2005), in order to attract more farmers into
the program and lessen the need for ad hoc disaster assistance.
From 1994 through 1999, the federal government spent an average of $1.5
billion per year on crop insurance subsidies and program costs. The government pays
the full cost of the premium for catastrophic (CAT) coverage and pays a portion of
the premium for higher levels of coverage. Private insurance companies sell and
service the policies, but are reinsured by the government for most of their losses and
Major reforms were made to the crop insurance program in 1994 in hopes of
permanently replacing expensive ad hoc disaster payment programs with a more
heavily subsidized crop insurance program. Overall farmer participation in the
program had increased in recent years, but not enough to forestall the perceived need
for ad hoc disaster payments. Moreover, the enactment of a series of multi-billion
dollar farm financial assistance packages in both FY1999 and in FY2000 encouragedth
the 106 Congress to consider further modifications to the crop insurance program.
Opposition to crop insurance enhancement came from those concerned that increased
premium subsidies encourage further overproduction and price-depressing surpluses,
and bring environmentally fragile land into production.
P.L. 106-224 addresses many problems with the crop insurance program that
were identified by several farm and insurance industry groups. Most of the new
spending authorized by the bill is to be used to increase the portion of the premium
paid by the government on behalf of the producer for insurance coverage higher than
the CAT level, and, for the first time, to subsidize a portion of the additional cost of
revenue insurance products.
P.L. 106-224 also provides improved coverage for farmers affected by multiple
years of natural disasters; authorizes pilot insurance programs for livestock farmers
and growers of other farm commodities that are currently not served by crop
insurance; gives the private sector greater representation on the crop insurance
policymaking board; and eases eligibility requirements for a permanent disaster
payment program for noninsurable farmers, among many other provisions.
The FY2001 budget resolution (H.Con.Res. 290) made room for the new
spending required by P.L. 106-224. The resolution permitted new agricultural
program spending of $8.2 billion over the FY2001-05 period for modifications to the
federal crop insurance program.

Background .................................................... 1
Crop Insurance Basics............................................2
Pros and Cons of Crop Insurance Enhancement Legislation................4
A Brief Legislative History th
of Crop Insurance in the 106 Congress ..........................5
Major Crop Insurance Provisions of the
Agricultural Risk Protection Act of 2000 (P.L. 106-224)..............7
Premium Subsidy............................................7
Background ............................................ 7
Provisions in P.L. 106-224.................................8
Multiple-Year Crop Losses and Actual Production History...........10
Background ........................................... 10
Provisions in P.L. 106-224................................10
Livestock Coverage.........................................11
Background ........................................... 11
Provisions in P.L. 106-224................................11
Private Sector Incentives.....................................11
Background ........................................... 11
Provisions in P.L. 106-224................................12
Noninsured Assistance Program (NAP) Changes...................12
Background ........................................... 12
Provisions in P.L. 106-224................................13
Budget Implications of the Crop Insurance Legislation..................13
List of Tables
Table 1. Government Cost of Federal Crop Insurance....................3
Table 2. Comparison of Premium Subsidies:
P.L. 106-224 vs. Previous Law.................................9

Federal Crop Insurance and the
Agriculture Risk Protection Act of 2000
Farming is commonly viewed as an inherently risky enterprise. In their
operations, farmers are exposed to both production risks and price risks. Farm
production levels can vary significantly from year to year, primarily because farmers
operate at the mercy of nature and frequently are subjected to weather-related and
other natural disasters. Farm operators can also experience wide swings in the prices
they receive for the commodities they grow, depending on total production levels and
demand conditions both domestically and internationally. Since farm income is
primarily determined by the combination of production and prices, annual farm
income therefore can be volatile.
Over the years, the federal government has played an active role in helping to
temper the effects of risk on farm income. On the production side, the government
has widely expanded coverage and increased the subsidy of the federal crop insurance
program. To help mitigate price risk, the government for many years administered
price and income support programs for producers of major field crops. Beginning in
the 1970s and up until 1996, these commodity support programs provided direct
payments to participating producers, when market prices fell below a government-set
target price. However, the omnibus 1996 farm bill (P.L. 104-127) terminated target
price deficiency payments for wheat, feed grains, cotton and rice growers and
replaced them with fixed but declining 7-year annual contract payments that are no
longer tied to market prices. Consequently, farmers needed to assume greater
responsibility for managing their price risk. Pilot projects were authorized by the
1996 farm bill to develop revenue insurance (income protection) products as part of
the federal crop insurance program.
A confluence of several events caused many farm groups and policymakers to
call for a reexamination of federal farm risk management programs, especially the
crop insurance program. In late 1997, prices for many of the major farm commodities
declined significantly, causing a drop in farm income for many producers. Also, over
the last several years, some regions experienced multiple years of natural disasters,
which limited crop production and reduced farm income. Many farm groups
complained that the then-current crop insurance program provided inadequate
coverage for producers when natural disasters strike. Many also contended that the
1996 farm bill did not provide sufficient countercyclical income protection for farmers
when farm commodity prices are low, as they have been since 1997.
In response to farm group pleas for assistance, a nearly $6 billion emergency
farm financial assistance package (P.L. 105-277, the FY1999 Omnibus Appropriations

Act) was enacted in 1998 to address losses caused by low prices and natural disasters.
Half of this amount went to contract payment recipients in the form of direct income
support. Most of the balance was paid to any producer (including contract holders)
who experienced either a 1998 crop loss or multiple years of losses caused by a
natural disaster. Another $8.7 billion financial assistance package was enacted as part
of the FY2000 agriculture appropriations act (P.L. 106-78) as many commodity
prices remained low in 1999. The large price tag associated with these assistanceth
packages, and others being proposed and subsequently enacted, prompted the 106
Congress to consider major modifications to the current federal crop insurance
program and seek ways to enhance available risk management tools so that future ad
hoc financial and disaster assistance programs might be avoided. (For more on
emergency farm assistance, see CRS Report RS20269, Emergency Funding for
Agriculture: A Brief History of Congressional Action, FY1989-FY2001.)
Crop Insurance Basics
The federal crop insurance program is administered by the U.S. Department of
Agriculture’s (USDA) Risk Management Agency (RMA). The program is designed
to protect crop producers from unavoidable risks associated with adverse weather,
plant diseases, and insect infestations. Insurance policies are sold and completely
serviced through approved private insurance companies that have their losses
reinsured by USDA. Whether or not a crop is covered under the program is an
administrative decision made by USDA. The decision is made on a crop-by-crop and
county-by-county basis, based on farmer demand for coverage and the level of risk
associated with the crop in the region, among other factors. Most of the major crops
(wheat, corn, other feed grains, cotton and rice) are covered in nearly every county
in which they are grown. Fruits, vegetables and other specialty crops are also
covered, but availability of coverage varies by region. In total, approximately 70
crops are covered.
There are four sources of federal costs for the crop insurance program. USDA
absorbs a large percentage of the program losses (the difference between premiums
collected and indemnities paid out), subsidizes a portion of the premium paid by
participating producers, compensates the reinsured companies for a portion of their
operating and administrative expenses, and pays the salaries and expenses of the
RMA. (See Table 1.)
Under the program, a participating producer is assigned: 1) a “normal” crop yield
based on the producer’s actual production history, and 2) a price for his commodity
based on estimated market conditions. The producer can then select a percentage of
his normal yield to be insured and a percentage of the price he wishes to receive when
crop losses exceed the selected loss threshold. The producer pays a premium that
increases as the levels of insurable yield and price coverage rise. However, all eligible
producers can receive catastrophic (CAT) coverage without paying any premium.
The premium for this level of coverage is completely subsidized by the federal
government. The farmer pays an administrative fee for CAT coverage ($60 per crop
per county in 2000, rising to $100 in crop year 2001 under P.L. 106-224), and in

return can receive a payment equal to 55% of the estimated market price of the crop,
on losses in excess of 50% of normal yield.
Table 1. Government Cost of Federal Crop Insurance
— in Thousand $ —
Net ProgramAdminis.Other
Losses orPremiumExpenseAdministrative
Fiscal Year(Gains)aSubsidybReimburse.cCosts dTotal
1981$ 97,056$ 46,966$0$ 104,714$ 248,736
1982 (60,361) 91,418 18,506 110,341 159,904
1983 146,645 64,559 26,184 96,715 334,103
1984 211,411 98,352 75,709 101,905 487,377
1985 215,896 100,088 107,275 98,110 521,369
1986 215,824 89,633 101,308 97,465 504,230
1987 55,563 73,391 106,990 73,318 309,262
1988 609,404 103,379 154,663 77,981 945,427
1989 400,023 190,546 265,890 88,080 944,539
1990 233,872 213,297 271,616 87,146 805,931
1991 246,986 196,146 245,157 83,928 772,217
1992 232,261 197,405 245,995 88,352 764,013
1993 750,654 197,543 249,817 104,745 1,302,759
1994 (126,934) 246,589 291,738 78,053 489,446
1995 187,719 774,114 373,094 104,591 1,439,518
1996 87,961 978,499 490,385 64,165 1,621,010
1997 (373,015) 945,024 450,253 73,669 1,095,931
1998 (75,039) 940,157 426,895 81,682 1,373,695
1999(80,338)1,295,454 e494,83666,0211,775,973
Total$ 2,975,588 $ 6,842,560$ 4,396,311$ 1,680,981$ 15,895,440
a Net Program Losses = Total Premiums less Loss Claims adjusted for net gains or losses shared with
private insurance companiesb
Premium Subsidy = Portion of total premium paid by the governmentc
Administrative Expense Reimbursements = Paid to insurance companies for their delivery expensesd
Other = Primarily the salaries and expenses of USDA’s Risk Management Agencye
Premium subsidy for 1999 included a $357.4 million premium discount provided on an emergency
basis in the FY1999 Omnibus Appropriations Act (P.L. 105-277)
Source: USDA Risk Management Agency

Any producer who opts for CAT coverage has the opportunity to purchase
additional insurance coverage from a private crop insurance company. For an
additional premium paid by the producer, and partially subsidized by the government,
a producer can “buy up” the 50/55 catastrophic coverage to any equivalent level of
coverage between 50/100 and 75/100, (i.e, up to 75% of “normal” crop yield and

100% of the estimated market price.) In limited areas (mainly the Northern Plains),

production can be insured up to the 85/100 level of coverage.
A buy-up option that has been available since 1997 on a pilot basis on major
crops and has been quite popular is revenue insurance. Revenue insurance combines
the production guarantee component of crop insurance with a price guarantee to
create a target farm revenue guarantee for a crop farmer. Under revenue insurance
programs, participating producers are assigned a target level of revenue based on
market prices for the commodity and the producer’s production history. An insured
farmer who opts for revenue insurance can receive an indemnity payment when his
actual farm revenue falls below a certain percentage of the target level of revenue,
regardless of whether the shortfall is caused by low prices or low production levels.
For farmers who grow a crop that is not insurable under the federal crop
insurance program, USDA has permanent authority to make direct payments to
farmers under the Noninsured Assistance Program (NAP). NAP provides payments
equal to the catastrophic level of insurance coverage (55% of the market price paid
on losses in excess of 50% of normal yields).
Pros and Cons of Crop Insurance Enhancement
In recent years, surveys have shown that nearly two-thirds of eligible acreage
was enrolled in the crop insurance program. However, prior to 1999, a quarter of all
eligible acreage was enrolled only in the fully-subsidized catastrophic (CAT)
coverage, which is the most basic level of coverage designed to minimally protect
producers against a major disaster. Although farmers are encouraged to purchase
buy-up coverage to further protect against production risks, only about 40% of
eligible acreage was enrolled in buy-up coverage throughout most of the 1990s.
Participation rates for buy-up coverage improved in crop years 1999 and 2000
primarily because nearly $400 million in additional premium subsidies were pumped
into the program each year on an ad hoc basis through various emergency
supplemental bills.
When the 106th Congress was considering modifications to the crop insurance
program, many farm groups argued that bolstering participation in crop insurance
should be a high priority. If crop insurance is affordable and provides adequate
coverage, supporters contend, it would forestall political pressure for expensive ad
hoc disaster payment bills each year. Many farm groups also wanted the current
revenue insurance programs to be made more widely available, especially in light of
current low commodity prices and the elimination of target price deficiency payments
for major commodities. For the most part, the strongest supporters of crop insurance

enhancements were producers in the Plains states and other regions that are prone to
drought and other recurring disasters.
Others were concerned that applying any more federal money to crop insurance
might not be fiscally prudent, especially since program reforms in 1994 did not
preclude the enactment of multi-billion dollar emergency financial assistance packages
for farmers in FY1999 and FY2000.1 Critics argued that no new federal money
should be channeled into crop insurance until a more thorough investigation was
conducted of whether crop insurance is the proper federal risk management tool.
Critics also argued that reform of the federal program might be caught in a catch-22:
the federal program will not be improved until participation improves, say critics, but
participation will not increase as long as ad hoc disaster payments are regularly made
available. Others are concerned that increased crop insurance subsidies will promote
overproduction, which could potentially depress farm commodity prices, and cause
environmentally sensitive land to be entered into production.
A Brief Legislative History
of Crop Insurance in the 106th Congress
Over the last several years, the federal crop insuance program was scrutinized
by the Administration, the House and Senate Agriculture Committees, and various
farmer and insurance industry groups, to identify any shortcomings that might have
been discouraging farmer participation. A series of hearings was conducted on crop
insurance/risk management issues in both the House and Senate Agriculture
Committees in 1999.
The Risk Management Subcommittee of the House Agriculture Committee
completed markup of comprehensive legislation (H.R. 2559) on July 21, 1999. Full
House committee action was completed on August 3, 1999. H.R. 2559 was passed
by voice vote on September 29, 1999. The budget parameters for legislative changes
were established by the FY2000 budget resolution (H.Con.Res. 68), which provided
a $6 billion reserve fund for any reported legislation that provided “risk management
or income assistance for agricultural producers in FY2001 through FY2004.” (See
“Budget Implications of the Crop Insurance Legislation” below.)
In the Senate, several crop insurance bills, including S. 1580 (Roberts/Kerrey),
were introduced to address many of the perceived problems with the federal crop
insurance program. S. 1580 made modifications to the crop insurance program
similar to H.R. 2559. Senate Agriculture Committee Chairman Richard Lugar, who
strongly opposed S. 1580, stated that increased subsidies for crop insurance are not
the most efficient way to encourage farmers to manage their risk. Instead, he
introduced legislation (S. 1666) that would have made a direct payment to any

1 They pointed out that the 1994 reforms infused $1 billion per year of new spending and
required producers who opt out of crop insurance to sign a waiver disqualifying them from
receiving any future disaster payments. Disaster assistance provisions in subsequent
appropriations acts have allowed producers to receive disaster payments irrespective of the

insurable producer who adopts two of several risk management strategies. A lack of
consensus between supporters of S. 1580 and S. 1666 led to a several month delay
in consideration of a markup bill. At a March 2, 2000 markup, Senator Lugar offered
a chairman’s mark that blended the primary component of his bill with that of the
Roberts/Kerrey bill. Among its many provisions, the chairman’s mark would have
given farmers a choice between receiving an additional crop insurance premium
subsidy or receiving a direct payment in return for adopting two risk management
strategies. In addition to the purchase of a crop insurance policy, these options
included entering into a futures, option, or forward contract; enrolling in a risk
management education program; reducing farm indebtedness; diversifying crop
production; or contributing a portion of the payment into a tax-deductible trust fund.
As a substitute to the chairman’s mark, Senators Roberts and Kerrey offered a
modified version of their bill, which was adopted by the full committee by a 10-8 vote
on March 2, 2000, and subsequently numbered S. 2251. S. 2251, as amended on the
Senate floor was adopted by the full Senate on March 23, 2000. The Senate-passed
measure was similar to the House-passed bill in that most of the new spending would
have increased the government subsidy and reduce the farmer cost of purchasing an
insurance policy. Additionally, S. 2251 reserved $500 million over a 3-year period
for direct payments to producers who adopted two of several prescribed risk
management strategies in lieu of receiving a crop insurance subsidy. A manager’s
amendment to S. 2251 was adopted on the Senate floor. Among its many provisions,
it addressed some additional concerns of states that have a low participation rate in
the federal crop insurance program. Conference action on the two measures was
completed on May 25, 2000, with the House approving the agreement by voice vote
and the Senate passing the measure by a vote of 91-4. (See “Major Crop Insurance
Provisions of the Agricultural Risk Protection Act of 2000 (P.L. 106-224) ” below
for more information.)
Meanwhile, the FY2000 agriculture appropriations act (P.L. 106-78) was signed
into law on October 22, 1999. The measure contained emergency spending of $400
million for USDA to offer a premium discount to all farmers who purchased crop
insurance in the 2000 crop year. A similar provision was contained in the FY1999
omnibus appropriations act (P.L. 105-277), which enabled USDA to reduce the
farmer-paid premium by nearly 30% in the 1999 crop year.)
During the congressional debate, the Administration did not offer legislative
proposals to modify crop insurance. However, the Administration’s views on crop
insurance issues were contained in two documents — a Feb. 1, 1999 white paper
entitled Strengthening the Farm Safety Net: The Administration’s Principles and
Preliminary Proposals for Reforming Crop Insurance (available at
[http://www.usda.gov/news/releases/1999/02/crop]) and USDA testimony before
Congress. Additional crop insurance proposals were subsequently offered by the
Administration as part of its safety net initiative released with its FY2001 budget
request on February 7, 2000. Among the major risk management provisions in the
initiative were anticipated legislative proposals to 1) extend to the 2001 crop year the
30% discount already offered on an emergency basis for crop insurance premiums for
1999 and 2000; 2) improve insurance coverage for farmers affected by multiple years
of disasters; 3) establish a pilot program for livestock insurance coverage; and 4)

loosen eligibility requirements for direct payments provided through the Noninsured
Assistance Program (NAP).
Major Crop Insurance Provisions of the
Agricultural Risk Protection Act of 2000 (P.L. 106-224)
After more than one year of debate and legislative consideration on how to
improve participation in the crop insurance program, and whether federal involvement
in the program should be further enhanced, Congress completed consideration of the
conference agreement on the Agricultural Risk Protection Act of 2000 (H.R. 2559)
on May 25, 2000. The President signed the measure into law (P.L. 106-224) on June

20, 2000. (See “A Brief Legislative History of Crop Insurance in the 106th Congress”

above for information on the original House- (H.R. 2559) and Senate-passed bills (S.


P.L. 106-224 increases spending on the federal crop insurance program by $8.18
billion over the next 5 years (FY2001-05), with funding made possible by the FY2001
budget resolution (see “Budget Implications of the Crop Insurance Legislation” below
for more details.)
Most of the new spending in the measure (nearly $6.7 billion over 5 years) will
allow USDA to increase significantly the portion of the premium paid by the federal
government, and to subsidize revenue insurance products at the same rate as regular
crop insurance. An increase in the premium subsidy means that the participating
farmer’s out-of-pocket costs for purchasing insurance will decline in tandem.
Other major risk management provisions in the bill include: 1) an adjustment of
producer’s yields so that insurance coverage does not decline drastically when a
producer is affected by multiple years of disasters; 2) an expansion of USDA authority
to conduct pilot insurance programs, including two new pilot livestock insurance
programs and an expansion of the existing dairy options pilot program; 3) new
authority for private insurers who develop newly adopted insured products to be
reimbursed for their research and development costs, and for the industry to have
greater representation on the Federal Crop Insurance Corporation Board; and 4) the
elimination of a minimum area-loss requirement for eligibility in the noninsured
assistance payment (NAP) program, which makes direct payments to farmers who
grow a non-insurable crop that is affected by a natural disaster.
The following sections highlight these major issues, and provide more detail on
how they were addressed in P.L. 106-224.
Premium Subsidy
Background. Under the federal crop insurance program, USDA determines for
each insurable crop what the total premium needs to be to cover the expected
indemnity (loss) payments, so that the program can operate on an actuarially sound
basis. Prior to P.L. 106-224, the federal government spent approximately $1 billion
each year subsidizing the total premium to make insurance more affordable for

farmers. The premium for catastrophic (CAT) coverage (50/55 coverage, i.e., losses
in excess of 50% of normal yields are covered at 55% of the estimated market price)
is subsidized 100% by the federal government. However, the percentage of the
premium subsidized by the government declines as the level of coverage rises. For
example, in recent years and prior to P.L. 106-224, the government on average paid:

55% of the premium for 50/100 coverage; 42% of the premium for 65/100 coverage;

and 23.5% of the premium for 75/100 coverage.
Under former law, the government was prohibited from subsidizing the
additional premium cost of a farmer increasing the level of coverage from 65/100 to
75/100 coverage. Also, producers had to pay the full cost of the premium for adding
the price-protection component of revenue insurance to the standard crop insurance
policy. Consequently, many policymakers believed that this subsidy structure did not
provide enough incentive for farmers to purchase an adequate level of insurance.
Many argued that the subsidy structure needed to be inverted so that the government
paid a higher percentage of the subsidy as the level of coverage increases, and that the
premium for revenue insurance products should be subsidized at the same rate as
standard crop insurance. Others, however, were concerned that overly generous
subsidies might encourage planting in high risk areas and increase the risk exposure
of the government.
Provisions in P.L. 106-224. As shown in Table 2, P.L. 106-224 increases the
percentage share of the premium paid by the government for all levels of additional
coverage. The higher subsidy takes effect with the 2001 crop year. Although the
percentage of premium paid by the government will continue to decline as participants
move to higher levels of coverage, the government contribution to premium costs
significantly increases for all levels of coverage, particularly for the highest levels of
coverage. For example, the share of the premium paid by the government rises from

42% to 59% for 65/100 coverage, and from 24% to 55% for 75/100 coverage.

Additionally, P.L. 106-224 requires USDA to subsidize revenue insurance products
(or any new, approved plans of insurance) at the same rate as the level of subsidy
provided for a basic crop insurance policy. (Previous law required producers to pay
the full additional premium cost of purchasing revenue insurance.)
When compared with previous law, the premium subsidy structure in P.L. 106-
224 (including the new subsidy for revenue insurance) will cost the government an
additional $6.7 billion over 5 years, according to Congressional Budget Office (CBO)
estimates. This amount accounts for more than 80% of the $8.2 billion total cost of
the crop insurance enhancement legislation. To slightly defray the cost of the
additional subsidies, P.L. 106-224 requires that a new administrative fee of $30 per
crop per county be assessed to any producer who purchases additional crop insurance
coverage beyond the catastrophic level.
P.L. 106-224 retains the current 100% premium subsidy for catastrophic (CAT)
coverage at the 50/55 level of coverage. However, the administrative fee for CAT
coverage will rise from the current $60 per insured crop, to $100 in crop year 2001,
which according to CBO will cost farmers an additional $60 million over 5 years.
P.L. 106-224 also gives farmers the opportunity to obtain a higher level of CAT
coverage than the 50/55 level, if the producer opts for Group Risk Plan (GRP)
coverage. GRP, currently available in certain areas on certain crops, is based on

county yields rather than an individual farmer’s actual production level. It pays all
insured farmers in an area when the entire area’s production of an insured crop falls
below a certain percentage of the normal production of the area. Because large area-
wide losses occur less frequently than individual losses, premiums are generally lower
for GRP than for regular crop insurance. P.L. 106-224 allows a farmer to increase
the level of CAT coverage from 50/55 to a higher level of GRP coverage, as long as
the total premium subsidy is the same.
Table 2. Comparison of Premium Subsidies:
P.L. 106-224 vs. Previous Law
Government-Paid Portion of Premium as a Percent of Total Premium
Level Previous Law (1)P.L. 106-224









(1) For the last two crop years the actual premium subsidy has been higher than what is shown in the first
column of percentages. Not included above is a further 30% discount given to all producers for the 1999 crop
year and a 25% discount in 2000, under the authority of various emergency supplemental acts.
Source: USDA Risk Management Agency and sponsors of bills.
One of the major differences between the original House (H.R. 2559) and Senate
(S. 2251) crop insurance bills, as originally passed by their respective chambers, was
that the Senate-passed bill would have reserved approximately $360 million for a
“choice of risk management options” pilot program, which was strongly supported
by Senate Agriculture Committee Chairman Richard Lugar. This provision was not
adopted by conferees, and is therefore not part of P.L. 106-224. Under the pilot
program, a producer could have chosen to receive either a subsidized crop insurance
policy, or forgo the subsidy and instead, receive a direct federal payment, if the farmer
agreed to adopt two of several eligible risk management practices. This pilot program
was supported by Senators from states with a traditionally low participation rate in
the crop insurance program, primarily in the East.

Multiple-Year Crop Losses and Actual Production History
Background. The level of crop yield coverage is viewed by farmers as one of
the most critical features of the program, and a major determinant of whether a farmer
will purchase insurance. In determining what a normal production level is for an
insurable farmer, USDA requires the producer to present actual annual crop yields
(usually stated on a bushel per acre basis) for the last 4 to 10 years. The simple
average of a producer’s annual crop yields over this time period then serves as the
producer’s actual production history (APH). If a farmer does not have adequate
records, he can be assigned a transition yield (T-yield) for each missing year of data,
which is based on average county yields for the crop.
A producer can insure a certain percentage of his APH, up to 75% in most
regions, and as high as 85% in selected regions. If an insured farmer’s actual yield
falls short of his insured yield, the producer potentially can receive an indemnity (loss)
payment. Farm groups in regions that have been stricken with multiple years of
natural disasters in recent years (particularly the Northern Plains and Texas) have
complained that the system of calculating APH used prior to P.L. 106-224
discriminates against them and causes them to be assigned crop yields that are below
their true production potential. When producers are affected by multiple years of
disasters, the years of little or no harvested production tend to significantly reduce the
producer’s APH. These producers sought for some accommodation so that the their
yield guarantee was not severely reduced by multiple-year crop losses. Moreover,
some farmers have complained that a low APH prohibits them from purchasing
adequate levels of insurance to cover their costs of production. Others question the
logic of insuring crops on land vulnerable to high risk of losses.
Provisions in P.L. 106-224. Effective in the 2001 crop year, P.L. 106-224 sets
a floor under a farmer's past and future annual yields so that yields in any year cannot
fall below 60% of the transition yield for that commodity. This means that even if a
producer has a total crop loss in any year, the yield used for that year to calculate the
producer’s APH will not be lower than 60% of the historical average production for
the region. This provision was contained in the original House-passed bill, while the
Senate bill would have allowed a producer to exclude one poor year of production
history for each 5 years included in APH. The estimated federal cost of the 60% floor
in P.L. 106-224 is $788 million over 5 years, according to the Congressional Budget
No provision in previous law specifically required USDA to adjust yields for
multiple years of disasters. However, current USDA regulations prohibit a farmer’s
APH from falling more than 10% in any one year, nor can it fall any lower than 80%
of the transition yield for certain major row crops. Also a producer’s APH cannot rise
more than 20% from one year to the next. The Administration supported
enhancements to the program that assist a producer affected by multiple years of

Livestock Coverage
Background. Traditionally, livestock has been a sector of production
agriculture that has received a minimal amount of price and income support from the
federal government. However, some groups have expressed interest in new authority
for some type of subsidized revenue insurance product for livestock producers in
conjunction with the federal crop insurance program. Previous law gave USDA the
discretion to determine whether a farm commodity is insurable, but specifically
excluded livestock as an insurable commodity.
Provisions in P.L. 106-224. P.L. 106-224 requires USDA to conduct two or
more pilot programs to evaluate the effectiveness of risk management tools for
livestock farmers. The pilot programs can provide livestock producers with
protection from the financial risks of price and income fluctuation, or from production
losses. P.L. 106-224 gives USDA the authority to provide reinsurance to private
companies offering livestock insurance, or to subsidize a livestock producer’s
purchase of a futures or options contract. USDA is given the authority to determine
which counties are to be included in a pilot program. The livestock pilot programs
are authorized to begin in FY2001 with annual spending limits of $10 million for each
of FY2001 and FY2002, $15 million in FY2003, and $20 million in FY2004 and each
subsequent year, for a projected 5-year total cost of $75 million. During the debate,
the Administration supported giving USDA the authority to offer revenue-based
insurance products for livestock on a pilot basis.
P.L. 106-224 also allows USDA to conduct pilot risk management programs for
other farm commodities as a way of testing whether any new program is suitable for
the marketplace and addresses the needs of producers. Another provision in P.L.
106-224 expands the existing options pilot program from 100 to 300 counties. The
dairy options pilot program was the first and only such program developed by USDA
under its 1996 farm bill authority to conduct options pilot programs. The program
educates and subsidizes dairy farmers in their use of the futures market as a tool for
managing price risk.
Private Sector Incentives
Background. Private insurance companies are free to develop new risk
management programs and submit them to USDA for approval to be reinsured under
the federal crop insurance program. For example, private companies have developed
some of the revenue insurance products that are now available on a pilot basis on
various crops in certain areas. Under prior law, USDA was not authorized to
reimburse the private companies for developing and maintaining these new products.
Many companies claimed that this lack of compensation had a negative effect on the
number of new products developed by the private sector and the number of risk
management tools available to farmers in general. Private entities will not engage in
product development, they say, if the developer has no opportunity to recover its
expenses. Private insurers also point out that newly developed and approved
insurance products can be adopted immediately by any competitor without the
competitor reimbursing the insurance company for its development costs, which they
say further stymies product innovation.

Provisions in P.L. 106-224. Beginning in FY2001, P.L. 106-224 requires
USDA to reimburse the research, development and maintenance costs of any private
entity that develops a new (or existing) insurance product. The entity could receive
a payment for up to 4 years following approval, with the payment amount determined
by USDA. After the 4-year payment period, the insurance provider responsible for
maintaining the policy can develop and charge a fee to any other insurance provider
who elects to sell the policy. The amount of the fee must be approved by USDA’s
Federal Crop Insurance Corporation Board. Also under the act, if any farm
commodity is considered by USDA to be inadequately served by crop insurance,
USDA can enter into a contract with a private entity to carry out research and
development of insurance plans for that commodity.
P.L. 106-224 authorizes USDA to spend not more than $10 million in each of
FY2001 and FY2002, and $15 million in subsequent years on reimbursements for
research and development costs of new policies. Of this amount, not more than $5
million each fiscal year can be used for underserved states.
During the congressional debate, the Administration had proposed that USDA
be authorized to 1) reimburse private companies for the cost of any new successful
products they develop; 2) contract with the private sector to develop new products
for smaller crops; 3) reduce regulatory procedures for developing and updating
policies; and 4) develop more pilot insurance programs with greater flexibility.
P.L. 106-224 also gives the private sector more representation and power on the
Federal Crop Insurance Corporation (FCIC) Board, which is responsible for making
policy decisions relating to the scope of the federal crop insurance program.
Previously, the administrator of USDA’s Risk Management Agency served as the
chief executive officer of the FCIC board. P.L. 106-224 removes the voting rights of
the manager of the Corporation and would add a fourth farmer to the 9-voting-
member Board. It also adds the chief economist of USDA to the Board, and allows
the Board to select its own chairman. USDA had expressed concern that these
provisions would lead to weakened government oversight of the crop insurance
Noninsured Assistance Program (NAP) Changes
Background. The Noninsured Crop Disaster Assistance Program (NAP) is a
permanent disaster payment program administered by USDA’s Farm Service Agency
that is separate from the federal crop insurance program. The program was designed
to complement the federal crop insurance program by offering direct disaster
payments to producers who grow a crop that is not covered by the federal crop
insurance program. NAP is intended to be a transitional program for those growers
who are awaiting approval for coverage of their crop in their area and a more
permanent assistance program to those who grow a crop that is not economically
feasible to insure. Under previous law, in order to be eligible for a NAP payment, the
area in which the producer grew a non-insurable crop must first experience a 35%
loss of that crop. Once the area loss requirement is met, an individual producer can
receive a payment similar to catastrophic coverage on an insured crop: 55% of the
market price for the commodity on losses in excess of 50% of normal production

Many producer groups argued that NAP provided inadequate assistance to
uninsurable producers since its inception in 1994. (Total annual payments have been
less than $100 million each year.) They contended that the area loss requirement was
too restrictive and even if a county became eligible, the payment rate was too low for
individual farmers. The FY2000 Consolidated Appropriations Act (P.L. 106-113)
waived for one year the minimum area loss requirement of 35% for any producer who
farms in a region that has been declared a disaster area by either the President or the
Secretary of Agriculture.
Provisions in P.L. 106-224. P.L. 106-224 eliminates the minimum area loss
requirement as a prerequisite for receiving a NAP payment. Consequently, any
noninsurable producer can receive a NAP payment as long as the individual producer
has a minimum loss requirement of 50%. P.L. 106-224 also institutes a new
administrative fee that requires a potential recipient of NAP payments to pay a $100
per crop administrative fee (which can be waived for financial hardship cases). As
part of its safety net initiative, the Administration supported replacing the minimum
area loss requirement with a Secretarial designation for eligibility. The net cost of
eliminating the area loss trigger, offset by the new $100 administrative fee, is
estimated by CBO at $482 million over 5 years.
Budget Implications of the Crop Insurance Legislation
One of the most controversial aspects of enhancing the crop insurance program
involved the cost of any such changes. Estimating these costs is complicated by the
budgetary ripple effects of policy changes. For example, increasing the premium
subsidy for farmers will presumably increase farmer participation in the program,
which will in turn increase the amount of federal subsidy going to the private
insurance companies for their delivery costs. Also, greater farmer participation could
likely mean higher total indemnity payments to farmers and potentially greater
program losses for the government to absorb, especially if higher risk farmers are
attracted to the program.
The FY2000 budget resolution (H.Con.Res. 69), adopted by Congress on April
15, 1999, created a reserve fund of $6 billion over a 4-year period to be used
exclusively to fund the added costs of legislative modifications to federal risk
management programs, or for any type of farm income assistance. This reserve fund
served as the budget parameter for crop insurance enhancement legislation as it was
being considered by the respective chambers. The FY2001 budget resolution
(H.Con.Res. 290), as adopted by both chambers on April 13, 2000, increased the
amount available for new crop insurance spending from $6 billion over 4 years to
$8.18 billion over 5 years (FY2001-05), thus giving conferees more available funding
as they worked out the differences between the two crop insurance bills.
Separately, H.Con.Res. 290 also contained a reserve fund of $7.14 billion ($5.5
billion in FY2000 and $1.64 billion in FY2001) that could be used exclusively for
providing emergency financial assistance to farmers to help them recover from
continued low farm commodity prices. In order for the funds to be made available,
the House and Senate Agriculture Committees had to report authorizing legislation

by the end of June. Instead of reporting separate legislation, the two committees
agreed to include authorizing legislation for the $7.14 billion in a separate title (Title
B) of P.L. 106-224. For more information on this assistance, see CRS Report
RS20269, Emergency Funding for Agriculture: A Brief History of Congressional
Action and CRS Issue Brief IB10043, Farm Economic Relief: Issues and Options for