September 2, 2014

Ryan Alexander
President
Taxpayers for Common Sense
651 Pennsylvania Ave, S.E.
Washington, DC 20003

Director, Product Administration and Standards Division
Risk Management Agency
United States Department of Agriculture
P.O. Box 419205
Kansas City, MO 64133–6205

RE: Implementation of Risk Management Agency provisions in the Agricultural Act of 2014, 7 CFR Parts 400, 402, 407 and 457, Docket No. FCIC–14–0005

To Whom It May Concern:

Taxpayers for Common Sense (TCS) appreciates the opportunity to provide comments to the Risk Management Agency (RMA) on the implementation of certain crop insurance provisions in the Agricultural Act of 2014. Taxpayers for Common Sense is a non-partisan budget watchdog serving as an independent voice for American taxpayers. Our mission is to achieve a government that spends taxpayer dollars responsibly and operates within its means.

The current agricultural subsidy system is a maze of market distorting and highly parochial policies that generally rewards a handful of large farm businesses or well-connected industry segments at the expense of taxpayers. The system results in costly inefficiencies that detract from program goals and produce numerous unintended consequences. The federal government bears a disproportionate amount of the financial risks for agribusinesses to the detriment of taxpayers, consumers, and agriculture as a sector making it less competitive, less resilient, and less accountable for its impacts.

TCS has long advocated for reforms to make the agricultural safety net more cost-effective, transparent, accountable to taxpayers, and responsive to current market conditions and needs. While the Agricultural Act of 2014 fails to take the necessary steps to achieve this reformed safety net, instead of expanding the role of Washington in agriculture through new business income entitlement programs and increasing spending on federally subsidized crop insurance, there is an opportunity to make progress in the implementation of crop insurance provisions.

TCS strongly encourages RMA to remember that while USDA may consider producers and other agricultural businesses “clients,” it is taxpayers who are footing the bill. Farm bills are notorious for vastly exceeding their estimated costs – the last two farm bills are on pace to exceed by $400 billion their Congressional Budget Office (CBO) scores at passage. The decisions RMA makes in developing and administering programs under its jurisdiction play an important role in determining whether taxpayer-funded agricultural programs will continue to be vastly over budget.

TCS strongly encourages RMA to implement the Agricultural Act of 2014 while being cognizant of the reality that federal taxpayers are responsible for more than $17 trillion in debt and are facing annual deficits exceeding $500 billion. RMA must not simply attempt to maximize spending, but follow the will of Congress in prioritizing federal support only where necessary and in a manner that is cost-effective and transparent. 

The following sections provide more detailed comments on the relevant sections of the July 1st interim rule:

a. Section 2611 of the 2014 Farm Bill: Guidance on Conservation Compliance

As the rule states, “Section 2611 of the 2014 Farm Bill links the eligibility for premium subsidy paid by FCIC to an insured’s compliance with the Highly Erodible Land Conservation (HELC) and Wetland Conservation (WC) provisions of the Food Security Act of 1985.” The premise of these accountability standards – “conservation compliance” – is that receipt of federal funding is a two-way street, and subsidies should not be used to tear up sensitive land, drain wetlands, or shift unintended costs onto others. These farm bill provisions reduce the cost of agricultural pollution and limit long term liabilities by ensuring producers minimize soil erosion on highly erodible land and forgo draining wetlands.

However, in order for these provisions to be effective, adequate enforcement of these minimum conservation practices must be prioritized after implementation. Independent analysts including USDA’s own Office of Inspector General (OIG) found that from 1991 to 2008, compliance with conservation accountability standards varied from region to region, many farms were out of compliance (up to 20 percent in the 1995 OIG report), and millions in taxpayer dollars could have been saved if subsidies were appropriately withheld for risky production practices.  Strong enforcement, proper monitoring, and effective implementation should be prioritized so these provisions achieve measurable public benefits. Adequate resources must also be provided to local officials for monitoring and enforcement efforts, and staff members must be well-trained to ensure consistent enforcement from county to county and state to state.

Flexibility should also be built into program regulations so local, on-the-ground knowledge and realities are considered in farms’ conservation plans. For instance, if only a small portion of a field is categorized as highly-erodible land, the sensitive acres may require a different conservation plan than the rest of the field. In addition, conservation practices should be evaluated in a holistic view to ensure that those with public benefits greatly outweigh others with potential negative impacts. For instance, installing stream buffers to conserve soil and water could be zeroed out if they are covered in excess agricultural residue left over from flooding or heavy rains. Public benefits of conservation practices may also be reduced when drainage tile is installed on farmland, increasing the rate at which water flows from farmland to nearby waterways. Considering these factors when developing conservation accountability standards will ensure that these provisions not only achieve their stated outcomes but also reduce long-term liabilities of agricultural runoff.

b. Supplemental Coverage Option

Section 11003 of the Agricultural Act of 2014 provides for the creation of a new shallow loss income entitlement program called the Supplemental Coverage Option (SCO). The federally subsidized crop insurance program is already an overly generous, gold-plated program, with taxpayers covering on average 62 percent of the premiums for participants. The Agricultural Act of 2014 makes it even more complex and costly through creation of three new shallow loss programs layered on top of premium-free catastrophic policies and highly subsidized buy-up coverage. TCS encourages RMA to implement SCO in a way that minimizes excessive risk taking at taxpayer expense, competition with existing private sector risk management options, and conflict of interest between crop insurance agents and the availability of government-run programs such as Agriculture Risk Coverage (ARC).

To truly be tools of “risk management” as opposed to means of shifting financial risk from producers to taxpayers, the existing federally subsidized crop insurance program and new shallow loss income entitlements must be significantly reformed. RMA can take a number of steps in this direction. RMA should err on the side of caution and ensure premiums under SCO are high enough to cover losses if commodity prices revert to their historic averages. Policies should be designed to incorporate best management practices that increase the resilience of the land to actual crop loss rather than simply compensate producers for their financial losses. Approved Insurance Providers should be required to keep a greater share of these policies to ensure the policies are adequately priced. And producers shouldn’t be allowed to reverse their one-time election of SCO versus ARC after market conditions and likely taxpayer subsidies are known since this only shifts unnecessary risks onto taxpayers.

Section 11(a) was revised to allow producers with CAT coverage to enroll in crop insurance add-ons. This provision may encourage producers to drop revenue or yield coverage levels to the 50 percent catastrophic level in order to reduce producers’ cost of premium subsidies by taking advantage of more highly subsidized options such as SCO (which is subsidized at 65 percent instead of the current 85 percent revenue coverage’s 38 percent subsidy level). While CBO predicted producers would drop coverage levels and hence shift more risks and costs onto taxpayers, RMA should minimize this practice by structuring SCO premium rates to adequately cover the increased financial risk that occurs from insuring against shallow losses.  In addition, SCO policies should include a surcharge for every yield plug inserted in a producer’s Actual Production History (APH), to account for the likelihood of real-world yields falling short of calculated guarantees.  Producers already receive incredibly generous subsidies through the current crop insurance program, and the government, now more than ever, should decrease – not increase – its role in the everyday decisions of agribusinesses.

Finally, while efforts to increase transparency of crop insurance subsidies and slightly reduce subsidies to highly profitable agribusinesses were stripped from the final 2014 farm bill at the last minute, RMA should work closely with the Farm Service Agency (FSA) to increase transparency of farm subsidies (including the federal crop insurance program). RMA should also prioritize payment integrity, the elimination of waste, fraud, and abuse in SCO and other crop insurance programs, and the reduction of overlap and duplication with other USDA programs, particularly farm commodity programs.

d. Adjustments to Historical Yields

Section 11009 of the 2014 Farm Bill allows producers to exclude historic yields when county yields were at least 50 percent below the ten-year simple average. Agricultural producers already receive generous premium subsidies in addition to favorable provisions allowing any producer to receive crop insurance subsidies regardless of the risk profile of the farmland. Basing these taxpayer-subsidized guarantees on an “actual” production history that cherry-picks the best years of production is fiscally reckless. Actual Production History should reflect the history of production actually experienced, rather than some aspirational potential harvest that would have occurred if not for the growing conditions actually experienced. This provision should not be implemented. If it is, a surcharge must be charged for every yield plug inserted in a producer’s Actual Production History, to account for the likelihood of yields falling short of these artificially high guarantees.

e. Protections for Native Sod

Section 11014 of the 2014 Farm Bill reduces crop insurance premium subsidies on native sod acres in certain Midwestern states. This provision only applies to plots of land that are larger than five acres. Due to the unintended consequences and large public costs of tearing up native sod for cropland production, this threshold should be reduced to zero acres, or at a minimum, ensure that producers tear up no more than five acres across all of their farms, regardless of location, joint ownership, etc. Taxpayers should not subsidize the conversion of sensitive cropland to crop production. Proper enforcement and monitoring of this provision should also be prioritized to ensure that taxpayer subsidies are not subsidizing risky planting decisions. Finally, information about new land breakings should be made available to the public on an annual basis.

f. Different Levels of Coverage for Irrigation Practices

Section 11015 of the 2014 Farm Bill allows producers to receive taxpayer subsidies for separate coverage of irrigated versus non-irrigated cropland in a county. Agricultural producers have access to a suite of unsubsidized risk management options; some of the primary risk management techniques are diversification of crops, use of hybrids, and irrigation practices. Taxpayers should not subsidize risk management options that are readily available and already widely used in the private sector. At a minimum, when implementing this provision, RMA should reduce the likelihood that producers shift acreage between irrigated and non-irrigated acres after this rule is finalized, a likely unintended consequence if adequate measures aren’t taken in advance.

h. Stacked Income Protection Plan

Section 11017 of the 2014 Farm Bill creates a new shallow loss income entitlement program for cotton producers called the Stacked Income Protection Plan (STAX). RMA should implement this new program in a way that minimizes future taxpayer liabilities and payouts by reducing overlap with other farm subsidy programs such as marketing loans, SCO, cotton transition payments, storage payments, and other federal programs. The program should also be implemented in a way that reduces the likelihood of another trade challenge to our country’s cotton subsidy programs, which only increases taxpayer payouts in the long-run.

Conclusion

Thank you for the opportunity to comment on implementation of the Agricultural Act of 2014. Through proper implementation, RMA has the opportunity to help create a more cost-effective, accountable, transparent, and responsive farm safety net. If you have questions, please feel free to contact me or Joshua Sewell at 202-546-8500 or josh [at] taxpayer.net

Sincerely,

Ryan Alexander
President
Taxpayers for Common Sense