Crop Insurance & the 2012 Farm Bill Kent Lanclos United States Department of AgricultureRiskManagementAgency AAEA Annual Meeting July 26, 2011 Pittsburgh, PA

Program Participation Kent Lanclos Risk Management Agency 2

Program Participation Kent Lanclos Risk Management Agency 3

4 Program Participation CropPlanIns Acres CropPlanIns Acres CropPlanIns Acres Corn Group3.01 Soybeans Group2.31 Rice Group0.00 APH11.02APH10.60APH1.72 Rev59.47Rev52.49Rev1.03 Total73.56Total65.40Total2.75 Partic.84%Partic.85%Partic.76% % BUP94% BUP93% BUP57% Cotton Group0.02 Wheat Group0.11 APH2.99APH10.65 Rev7.19Rev35.28 Total10.19Total46.04 Partic.95%Partic.86% % BUP86% BUP93% Kent Lanclos Risk Management Agency

5 Premium Rates Kent Lanclos Risk Management Agency

Premium Rates 6  RMA’s general approach to premium rating is appropriate Consistent with actuarial principles  Review posted on RMA’s Website  RMA’s rating methodology, and supporting documentation also available  No legislation required Rating Methodology Review Kent Lanclos Risk Management Agency

Premium Rates 7  Adjusting historical loss experience to reflect Current T/P mix Unit structure Alternative weighting of years  Work underway by contractor Does not impact price component of revenue rates Rating Methodology Review Kent Lanclos Risk Management Agency

YieldTrends Kent Lanclos Risk Management Agency

Yield Trends 9 Impact of Yield Drag YearActual Yield Effect on Guarantee, 75% CL* 2011 Expected Yield APH ECL**69% *CL = coverage level **ECL = effective coverage level Kent Lanclos Risk Management Agency

Yield Trends 10 Addressing Yield Trends  FCIC Board approved 508(h) submission at May 2011 meeting Proposal by Illinois Corn Marketing Board Initially for corn & soybeans for 2012 Potential expansion to other crops in 2013  No legislation required Kent Lanclos Risk Management Agency

Declining Yields 11 Current Measures  Yield Plug Replace low yield with 60 percent of the county T- Yield (10-year county average)  Yield Floor APH can not go below 80 percent of T-Yield  Yield Limitation Year-to-year change in APH limited to 10 percent Kent Lanclos Risk Management Agency

Declining Yields 12 Addressing Declining Yields  Alternative yield plug that relies on producer’s own history rather than county averages Variable percentage tied to number of actual yields o More actuals => higher percentage  Replace current T-Yields with Personal T-Yield based on insured’s APH  Legislation may be required Cost/paygo considerations Kent Lanclos Risk Management Agency

3 rd Party Damage 13 Damage not due to a natural cause  No indemnity payment  Zero production meaning guarantee negatively impacted for next 10 years  Also, premium rate higher because of lower rate yield  Consider options Kent Lanclos Risk Management Agency

Crop Insurance in the South 14 Crop Insurance Participation CropSouth Midwest Insured / Planted BUP / Insured Insured / Planted BUP / Insured Corn 83%75%86%96% Cotton 96%71% Rice 75%47% Soybeans 83%70%84%96% Wheat 70%65%89%97% South = Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia Midwest = Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin Kent Lanclos Risk Management Agency

Crop Insurance in the South 15  RMA commissioned two studies of crop insurance participation in the South  Consistent findings of 2 studies No inherent flaw in program/policies such that “crop insurance doesn’t work in the South” Low participation (particularly BUP) due to o Misinformation & negative perceptions o High premium rates & other risk management options o Reliance on disaster assistance o Not required by lenders o Does not payoff every year Kent Lanclos Risk Management Agency

Crop Insurance in the South 16 Addressing Participation Concerns  Priority for RMA, but … No silver bullets  Minimizing fraud, waste and abuse to change perceptions  Premium rates Re-weight historical loss experience Reduce use of yield floors, cups, disaster plugs, etc.  Education and changing culture is a slow process Kent Lanclos Risk Management Agency

Program Cost 17 Reins. Year A&O+LAE Paid to AIPs Premium Subsidy Misc Program Gains & Losses AIP Gains & Losses Cost of Crop Insurance Program (Million Dollars) 2001 $635.87$1, $3.23-$10.99$346.00$2, $625.89$1, $0.38$1, $47.31$3, $733.66$2, $0.37-$174.68$377.85$2, $889.42$2, $4.22-$893.62$689.43$3, $829.25$2, $4.11-$1,604.41$914.97$2, $958.58$2, $0.00-$1,167.48$818.85$3, $1,332.53$3, $0.00-$3,082.33$1,572.47$3, $2,009.25$5, $0.00-$1,112.57$1,095.14$7, $1,618.51$5, $0.00-$3,732.14$2,297.77$5, $1,367.74$4, $0.00-$3,409.89$1,930.38$4, Kent Lanclos Risk Management Agency

Program Cost 18  The new SRA achieved $6 billion in scored savings over 10 years At current prices, savings would be significantly larger  Future program costs Lower premium rates => higher participation & coverage levels, but lower premium subsidies and company underwriting gains CBO scoring assumes loss ratio of 1.0 Future loss experience may be less favorable than recent past Kent Lanclos Risk Management Agency

Program Cost 19  Conundrum, if you will For FSA programs (counter-cyclical payment, marketing loans), higher prices mean reduced spending For crop insurance, higher prices mean higher more spending for premium subsidies and underwriting gains Kent Lanclos Risk Management Agency