Tape #246 - Agriculture Risk Management

AT THE RISK MANAGEMENT AGENCY WE HAVE BEEN UNDER GOING LOTS OF CHANGE OVER THE LAST SEVERAL YEARS. LYDIA HERE, IN THE FRONT ROW, REPRESENTING CROP INSURANCE AGENT PROFESSIONAL - HELP ME - THAT’S IT - PROFESSIONAL INSURANCE AGENTS, CROP INSURANCE AGENTS AROUND THE COUNTRY IS ONE OF THE COOLER PEOPLE WHO WORKED ON OUR LEGISLATIVE ON THE HILL. AND AS WE WORKED ON THAT LEGISLATION MANY PEOPLE INVOLVED WITH THOSE PROGRAM REMEMBERED US AS FCIC - (FEDERAL CROP INSURANCE CORPORATION). THAT WAS WHEN MISMANAGEMENT FOR FARMERS MEANT QUITE A NUMBER OF THINGS. IN THE PAST IT WAS A COMBINATION OF DIRECT SUBSIDIES WHICH ARE NOW BEING PHASED OUT. ADHOC DISASTER PAYMENTS IN TERMS OF DROUGHT AND FLOOD. AND ALSO A MIX OF FEDERAL CROP INSURANCE WHICH MOST FARMERS DID NOT SUBSCRIBE TO AND A SMALL MIX OF PRIVATE CROP INSURANCE. THEN IN 1994, 96, WITH THE FREEDOM OF FARM ACT AND THE FAIRNESS ACT, WE IN THE US MOVED TO A FAR MORE MARKETING ORIENTED PROGRAM. WE SEE THE SUBSIDIES BEING PHASED OUT. THE ADHOC DISASTER PAYMENTS ELIMINATED. AND WHAT WAS A FEDERAL CROP INSURANCE PROGRAM SEPARATELY AND A PRIVATE INSURANCE PROGRAM SEPARATELY NEITHER OF WHICH HAD LARGE PERCENTAGES OF FARMERS TO SUBSCRIBE TO IT USE THEIR TOOLS, WAS COMBINED WHICH BECAME A SEPARATE AGENCY AND A PUBLIC/PRIVATE PARTNERSHIP. SO NOW WE IN GOVERNMENT PARTNER WITH THE PRIVATE SECTOR INSURANCE COMPANIES WITH THE INSURANCE COMPANIES BEING OUR DELIVERY SYSTEM. THAT IS THEY DO THE SALES IN MARKETING AND SERVICING OF CROP INSURANCE POLICIES TO FARMERS AROUND THE U.S. WE COMBINE OUR EFFORTS, GOVERNMENT SECTOR/PRIVATE SECTOR FOR THE VARIOUS KINDS OF RESEARCH AND DEVELOPMENT WE USE TO FIND NEW PRODUCTS. AND WE ALSO SHARE THE RISK. WE NEGOTIATE THAT THROUGHOUT AN AGREEMENT THAT 18 CROP INSURANCE COMPANIES NOW, TAKE PART IN CALLED THE STANDARD RE-INSURANCE AGREEMENT. AND AS WE LOOK AT THOSE CHANGES, WE HAVE TO SAY ON THE ONE HAND, WE’RE PROUD OF OUR RECORD THAT THE PUBLIC/PRIVATE SECTOR AND THE SYNERGY, WE WENT FROM HAVING ONLY ONE OR TWO INSURANCE PRODUCTS TO A MULTI-KINDS. WE’VE GOT ALMOST 70 CROPS INSURED NOW. WE HAVE REVENUE INSURANCE PROJECTS, PRODUCTS AS WELL. SO THERE’S BEEN A CERTAIN SYNERGY THAT’S ALLOWED THE PROGRAM TO GROW. AND THAT SCENE THAT NOW WE’RE INTO THE 65-66 PERCENTILE OF FARMERS PARTICIPATING. AND WE HAVE ABOUT 85 PERCENT OF THE TILLABLE LAND COVERED. WE STILL HAVE CHALLENGES. WE’VE NOT ADDRESSED LIVE STOCK. WE HAVE MANY SPECIALTY CROP TO YET FIGURE OUT WHAT THE ACTUAL EARLY SOUND AND SPACE IS AND HOW WE CAN INSURE THOSE OVER TIME.

I HAD AT THE DEPARTMENT, AN INTERNATIONAL WORKING GROUP WHICH IS ALSO, HAS A CHARGE OF TELLING OUR STORY INTERNATIONALLY. WE’VE BEEN TO EASTERN EUROPE, TO LONDON, HAD PLANS COMING UP TO SOUTH AFRICA. WE HAVE NUMEROUS COUNTRIES COMING TO THE DEPARTMENT TO ASK US ABOUT HOW OUR NEW MEANS OF RISK MANAGEMENT ARE.

I’M PROUD TO SAY THAT I’VE ASKED JOE CONNER, A FINANCIAL ANALYST OF ARMAE, BUT MORE IMPORTANTLY, ONE OF THE LEADING STARS OF MY INTERNATIONAL TEAM TO WALK YOU THROUGH WITH A SENSE OF HISTORY WHERE WE ARE, WHERE WE’RE GOING, WHY WE’RE PROUD. THE NEW FORMS OF RISK MANAGEMENT THAT WE FOUND FOR FARMERS ARE GOING TO BE ABLE TO DO THE JOB NOT ONLY NOW IN THE 90’S BUT IN 2000 AND BEYOND AS WE FACE THE GAP, THE WTO AGREEMENT TO WIND DOWN SUBSIDIES TO FARMERS AND AT THE SAME TIME ALLOW OUR FARMERS TO BE SAFE AND OUR RURAL COMMUNITIES TO ALSO BE SECURE IN THEIR FINANCIAL RISK MANAGEMENT. AND WITH THAT IN MIND JOE CONNOR, I WELCOME YOU. JOE AND I WILL BOTH BE AVAILABLE AFTER WORDS FOR QUESTIONS. BUT LET ME TURN THIS MICROPHONE OVER. AND THE MICROPHONE IS JUST WONDERFUL.

JOE CONNOR -

THANK YOU. GOOD AFTERNOON. A GREAT PLEASURE TO BE HERE WITH YOU. WE’RE GOING TO TALK ABOUT RISK MANAGEMENT AND I THOUGHT IT BEST TO START AT SQUARE ONE WITH WHAT IS RISK MANAGEMENT. AND, IF WE’RE GOING TO DO THAT, LET’S START WITH TERMS TOO. WHAT’S RISK? RISK IS THE VOLATILITY THAT IS EXPERIENCED AND IT IS THE VOLATILITY IN THE OCCURRENCES OR THE OBSERVATIONS OF WHAT HAPPENS BASED ON WHAT YOUR EXPECTATIONS WERE FOR WHAT HAPPENS. AND IT CAN BE APPLIES TO ANY SCENARIO. FOR INSTANCE, THIS MORNING I WAS MAKING MY LUNCH, I CUT MY FINGER, I WENT TO THE DOWNSTAIRS BATHROOM, OPEN THE MEDICINE CABINET. I HAD THE RISK THAT I’D FIND NO BAND-AIDS. OR I HAD THE RISK THAT I’D FIND BAND-AIDS OR THEY WOULDN’T BE THE RIGHT SIZE. OR, THERE WAS ALWAYS THE RISK, AS IT TURNED OUT, THAT IT WOULD BE THE RIGHT SIZE BUT THAT IT WOULD HAVE MICKEY MOUSE OR GOOFY ON IT. SO I’VE BEEN WALKING AROUND ALL DAY WITH A MICKEY MOUSE BAND-AID. SO YOU HAVE TO DEAL WITH THESE KINDS OF RISKS. HAD I MANAGED THAT RISK BETTER I WOULD HAVE MADE SURE THAT THERE WERE MORE STANDARD, GOOD OLD FASHION, FLESH TONE, BAND-AIDS IN MY MEDICINE CABINET. NOW IN CASE OF AGRICULTURE IT QUICKLY BECOME, RISK QUICKLY MOVES INTO A BUSINESS FRAME WORK. FOR BUSINESS (OH BOY, THIS ISN’T VERY THICK IS IT?) CAN YOU SEE THAT? I DIDN’T THINK SO. ALRIGHT, WE’LL GO WITH SOME SCRIBBLED LINES THEN. FOR BUSINESS IF WE HAVE, LET’S SAY DOLLARS OR RETURNS, ON THIS VERTICAL AXIS AND WE’RE LOOKING AT TIME HERE ON THE HORIZONTAL AXIS. YOU KNOW, I THOUGHT WE WERE GOING TO GET SOME OF THOSE. OK. MAYBE SO, WE’LL SEE. MAYBE SO. YEAH, OK, ANYWAY. SO WE’VE GOT DOLLAR RETURNS HERE OR WHATEVER YOUR CURRENCY MIGHT BE. AND I SHOULD PROBABLY PREFACE THE TALK BY SAYING THAT UP UNTIL THIS INTERNATIONAL RISK MANAGEMENT INITIATIVE THAT BARBARA REFERRED TO IN HER OPENING REMARKS, OUR RISK MANAGEMENT AGENCY AND THE FEDERAL CROP INSURANCE CORPORATION HAD A EXCLUSIVELY DOMESTIC PERSPECTIVE. SO IF MY TALK LAUNCHES OR LEANS TOWARD A DOMESTIC PERSPECTIVE, FORGIVE ME, WE TRY TO OPEN OUR MINDS AS WE ENTER INTO THIS INTERNATIONAL FORUM THAT WE HAD RECENTLY. BUT IF I TALK IN DOLLARS IT’S BECAUSE THAT IS WHAT I’M USE TO TALKING IN AND SIMILARLY, I’M ALSO ALWAYS GUILTY OF USING IDIOMATIC EXPRESSIONS. AND I DON’T WANT TO ALIENATE ANYBODY WHO IS FROM A FOREIGN COUNTRY WITH THE USE OF THOSE.

I TRY TO SPEAK FRENCH FOR A LONG TIME AND I FOUND MYSELF USING PHRASES LIKE “THAT’S A HORSE OF A DIFFERENT COLOR” AND I WOULD JUST TRANSLATE IT INTO FRENCH AND OF COURSE, IT MEANT NOTHING TO THOSE PEOPLE BUT IT’S EVEN WORSE WHEN YOU’RE TRYING TO TALK ABOUT SOMETHING THAT’S UNIQUE AND PEOPLE THINK YOU’RE TALKING ABOUT LIVESTOCK. SO WHEN WE LOOK AT RETURNS OVER TIME AND BASICALLY WE’RE GOING TO HAVE A CURVE, NO MATTER WHAT WE DO. THE AMOUNT OF ZIG AND ZAG IN THIS CURVE IS WHAT PEOPLE WILL REFER TO AS RISK IN ECONOMICS. SO AT THE RISK MANAGEMENT AGENCY, WHAT WE WANT TO DO IS SMOOTH OUT THOSE ZIG ZAGS. INSURANCE IS THE TOOK THAT WE’RE USING TO DO THIS. NOW IT’S IMPORTANT TO REALIZE THAT THROUGH INSURANCE THE OBJECTIVE IS NOT TO INCREASE RETURNS. SO WE ARE NOT IN BUSINESS TO INCREASE FARMERS RETURNS. AND WE DON’T EXIST TO INCREASE FARMERS RETURNS. THE REASON WHY WE EXIST IS TO HELP FARMERS TRY TO TURN THIS KIND OF A ZIG ZAG CURVE INTO SOMETHING THAT LOOKS A LITTLE BIT MORE LIKE THAT PERHAPS. THE IDEA BEING, IF ONE OF THESE VALLEY’S ENDS UP LASTING, LET’S SAY THE CURVE INSTEAD HAD GONE SOMETHING LIKE THIS AND HAD DIPPED LOW FOR A LONG PERIOD OF TIME. THIS PERIOD RIGHT HERE WOULD REPRESENT A LEVEL OF INCOME THAT COULD VERY WELL BE UNTENABLE FOR A FARMING OPERATION. SO WHAT WE TRY TO DO, AGAIN, IS HAVE A MECHANISM THAT WOULD SMOOTH OUT THOSE RETURNS. IT’S GOING TO TAKE AWAY A LITTLE BIT ON TH H UPPER END BECAUSE IT CAUSE YOU MONEY TO HAVE INSURANCE. BUT IT’S GOING TO ACCENTUALLY PUT IN AN INCOME FLOOR.

NOW, I WAS INTERESTED TO NOTE FAIRLY RECENTLY THAT THE UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT SET FORTH A PRONOUNCEMENT THAT SAYS A NATIONAL, A SOUND INSURANCE, NATIONAL INSURANCE AND RE-INSURANCE MARKET IS AN ACCENTUAL CHARACTERISTIC OF ECONOMIC GROWTH. INSURANCE REDUCES THE VOLANTILITY OF RETURNS, PROVIDES RISK REDUCTION, AND CREATES AN ACCEPTABLE ENVIRONMENT FOR CAPITAL FORMATION. SO LET ME GIVE YOU AN EXAMPLE OF WHAT THAT’S ALL ABOUT. AN INVESTOR’S SCENARIO. YOU’VE GOT A PERSON, LET’S SAY, WHO HAS INHERITED SOME LAND, OR HAS SOME LAND. OR LET’S SAY THIS PERSON SIMPLY HAVE A BACKGROUND IN FORMING. THEY’VE GOT T HE KNOWLEDGE. THEY HAVE THE KNOW-HOW. IN THAT PERSON’S MIND THEY KNOW IF THEY CAN PUT TOGETHER THE LAND AND THE CAPITAL THEN THEY’VE GOT THE LABOR. OR THEY CAN FIND THE LABOR HELP. THIS PERSON THEN HAS A PLAN. THEY GOT A BUSINESS PLAN. THEY KNOW THAT THEY CAN CREATE WEALTH. BY IMPLEMENTING THIS BUSINESS PLAN, THEY KNOW, OR HAVE CONFIDENCE THAT THEY CAN GET A RETURN. THIS PERSON IS READY TO INVEST. THEY ARE READY TO INVEST THEIR TIME AND THEIR EFFORT. WHAT THEY NEED IS MONEY. WELL, THEY GO TO THE BANK AND THEY START TALKING TO THE BANK ABOUT THEIR BUSINESS PLAN. AND THE BANK IS GOING TO LOOK AS COLDLY AND OBJECTIVELY AS YOU WOULD EXPECT THEM TO. THEIR LOOK AT THAT PERSON’S BACKGROUND. THEY’RE GOING TO LOOK AT THEIR TRACK RECORD. THEY’RE GOING TO SEE WHAT THEAT PERSON IS BRINGING TO THIS OPERATION. AND PART OF WHAT THEY WANT TO SEE IS WHO ELSE IS INVESTING CAPITAL INTO THIS OPERATION. NOW, SO YOU’VE GOT THIS PERSON. THEY’VE GOT THE KNOW-HOW. THEY’VE GOT, MAYBE THEY’VE EVEN GOT SOME CAPITAL. WHAT THEY NEED IS OPERATING FUNDS. THEY NEED WORKING CAPITAL. THEY NEED TO BUY FURTILIZER AND SEED. THE BANK IS GOING TO LOOK AT WHAT THEY CAN GET BACK ON THAT LOAN IF FOR ANY REASON IT GOES BAD. IF THAT PERSON IS STARTING OUT WITH LAND, WELL YOU CAN ALWAYS PUT YOUR LAND UP BUT I’M SURE IT’S NOT TOO HARD FOR ANY OF US TO IMAGINE TRAGIC SCENERIO’S WHERE PEOPLE WOULD LOSE THEIR LAND BECAUSE OF ONE OR TWO BAD YEARS OF FARMING. OR YOU CAN PUT UP THE CROP. THE PROBLEM IS THE VALUE OF THAT CROP IS ONLY AS GOOD AS THE CROP OBVIOUSLY. SO WHAT’S THAT PERSON GOING TO DO? THEY’RE GOING TO GO TO THE BAN AND THEY’RE GONNA SAY ALRIGHT, WELL, IF THEY CAN POSSIBLY SIT THERE AND SAY I’VE GOT THE KNOW-HOW, I’VE GOT A TRACK RECORD OF PERFORMANCE IN THE AGRICULTURE SECTOR. I KNOW HOW TO MANAGE THIS OPERATION. I’VE GOT SOME CAPITAL. I’VE GOT SOME MACHINERY. AND WHAT I NEED IS X NUMBER OF DOLLARS TO GET THIS THING ROLLING. AND I WILL GET YOU YOUR RETURN. I’LL GET YOU YOUR EIGHT PERCENT ON YOUR FUNDS YOU’RE GOING TO HAND ME. WELL, THE BANK IS GOING TO SAY, IF YOU’RE LOOKING TO COLLATERILIZE THIS LOAN WITH YOUR CROP, WHAT’S GOING TO HAPPEN WHEN THE CROP GOES BAD? IF THIS PERSON CAN’T SIT THERE AND SAY WELL, I’VE GOT INSURANCE IF THE CROP GOES BAD THEIR POSITION IS PRETTY WEAK. AND WE’VE SEEN THAT IN THE 15 YEARS THAT THIS PROGRAM, THE U.S. PROGRAM, HAS BEEN AT THE LEVEL THAT IT’S BEEN. THE PROGRAM IS 60 YEARS OLD. BUT IN 1981 CONGRESS GOT VERY SERIOUS ABOUT THIS PROGRAM. THEY FORMED THIS PUBLIC/PRIVATE PARTNERSHIP THAT BARBARA REFERRED TO AND THEY’VE ALSO BEGAN FORMULATING PUBLIC POLICIES THAT TRANSFERRED FARMERS AWAY FROM MORE TRADITIONAL NON-MARKET ORIENTED PROGRAMS INTO SOMETHING MORE MARKET ORIENTED. AS I JUST DESCRIBED, WHAT CAN BE MORE MARKET ORIENTED THAN A PRODUCER GOING TO A BANK AND SIMPLY LAYING HIS CARDS OR HER CARDS OUT ON THE TABLE TO SAY, THIS IS WHAT I HAVE TO OFFER. I NEED THIS LOAN. CAN YOU GET BEHIND IT? AND THIS ELEMENT THAT WE’RE ADDING TO THAT EQUATION, THIS CROP INSURANCE, IS IN MANY CASES, WHAT OPENS UP THAT CREDIT.

NOW IF THE BANK SEES, LET’S SAY YOU’VE GOT SOME BACKING. LET’S SAY YOU’VE BEEN IN BUSINESS FOR A WHILE. CHANGE THE SCENERIO A LITTLE BIT. YOU’VE BEEN IN BUSINESS A LITTLE WHILE AND YOUR RETURNS HAVE BEEN RELATIVELY STABLE. MAYBE YOU’VE HAD A PARTICULARLY GOOD YEAR. MAYBE YOU DIPPED DOWN FOR ANOTHER YEAR. EVEN THIS KIND OF SCENERIO AGAIN WE’VE GOT CROP YIELD OR CASH UP THERE. WE’VE GOT TIME DOWN HERE. EVEN THIS KIND OF SCENERIO CAN BE VERY OFF PUTTING TO A BANK.

THIS IS EXACTLY, AGAIN, THE KIND OF SCENERIO THAT MIGHT EEN BE MORE TENABLE, MORE ACCEPTABLE TO AN INSURANCE COMPANY. A COMMERCIAL INSURANCE COMPANY TO ACCEPT. BUT YOU NEED THAT INSURANCE COMPANY THERE. NOW I WANT TO SHOW YOU, IF I CAN, A SLIDE. INSURANCE IS THE SAME AS A BANK. IF THEY DON’T SEE THE PROSPECT FOR LONG TERM RETURNS THEY’RE NOT GOING TO BE THERE TO OFFER THAT. I’VE JUST EXCLUDED ABOUT HALF THE ROOM HERE HAVEN’T I?

THIS IS OUR CROP INSURANCE EXPERIENCE FOR THE LAST ROUGHLY TEN YEARS. AS YOU CAN SEE, THERE ARE A LOT OF HIGH PEAKS AND LOW VALLEYS. THIS KIND OF VOLATILITY HERE STRIKES HERE INTO THE HEARTS OF COMMERCIAL INSURANCE PROVIDERS.

NOW, IF YOU DON’T HAVE THE FUNDAMENTAL INDUSTRY BEHIND YOU TO BEGIN WITH, THEN THERE IS NO SCENERIO UNDER WHICH THAT PRODUCER CAN GO TO THAT BANK AND ASK FOR THAT LOAN. HOW DO YOU GET AN INDUSTRY STARTED WHEN YOU’RE LOOKING AT POTENTIAL RETURNS LIKE THE ONES WE JUST SAW HERE? IF NO INSURANCE PROVIDERS GOING TO JUMP INTO THAT BUSINESS THEN THIS GUY WILL GROW - MAN OR WOMAN - I’VE GOT TO BE VERY CAREFUL ABOUT THOSE TODAY I REALIZE AND I WANT TO BE. THIS PERSON IS GOING TO BE OUT OF LUCK WITHOUT THE INSURANCE INDUSTRY THERE TO SUPPORT THEM.

SO HOW DOE YOU START AN INSURANCE INDUSTRY? WELL, I HAVE A HOUSE AND IF YOU THINK OF THE SCENERIO BEFORE INSURANCE. I’VE GOT A HOUSE AND I’M HOLDING ON TO ALL OF THE RISK THAT THAT HOUSE MAY BURN DOWN. AND IF YOU HAVE A HOUSE, YOU’RE HOLDING ON TO ALL OF THE RISK THAT YOUR HOUSE MAY BURN DOWN AND YOU AND YOU AND EVERYONE ELSE. AND SO WE ALL SIT THERE IN OUR HOUSES AND WE CROSS OUR FINGERS AND HOPE OUR HOUSES DON’T BURN DOWN. THE ULTERNATIVE SCENERIO IS FOR US TO COME TOGETHER AND TO TAKE THOSE RISKS, THAT RISK, THE POTENTIAL THAT OUR HOUSES MIGHT BURN DOWN, AND PUT IT INTO ONE BIG POOL. BUY POOLING THESE RISKS WHAT WE END UP DOING IS EACH ONE OF US ACCEPTING A PORTION OF THE RISK THAT EACH OTHERS HOUSE MIGHT BURN DOWN. SO IF YOUR HOUSE BURN DOWN, I ACCEPT SOME OF THE LIABILITY FOR THAT OCCURRANCE. AND SO DOES SHE. AND SO DOES SHE AND EVERYONE ELSE. THIS IS WHAT THE INSURANCE INDUSTRY IS BASED ON.

NOW IN ORDER TO MAKE THIS HAPPEN, WHAT DO WE NEED? WELL, WE NEED RETURNS THAT DON’T QUITE LOOK LIKE THAT. SO THAT MAKES US THINK WELL, PERHAPS THERE’S A ROLE FOR GOVERNMENT IN THIS PROCESS.

SO WHAT’S HAPPENED IS, IN 1938 THEY STARTED A FEDERAL CROP INSURANCE CORPORATION. THE IDEA WAS TO GIVE GOVERNMENT A ROLE IN INSURING CROPS. NOW AT THE TIME THERE WAS ABSOLUTELY NO PRIVATE INDUSTRY EXISTING TO INSURE CROPS. SO WE GOT INTO THIS BUSINESS SOLO BUT IN 1981 WAS A CRITICAL YEAR. THAT WAS THE YEAR THAT WE TURNED AND BROUGHT THE PRIVATE SECTOR IN. NOW THE PRIVATE SECTOR OBVIOUSLY WANT TO SEE THE ABILITY TO MAKE A RETURN. THE PRIVATE SECTOR WANTS TO SEE THE ABILITY OF THE INDUSTRY TO REMAIN VIABLE OVER THE LONG TERM.

SO WHAT DO YOU NEED TO BE VIABLE IN INSURANCE? WELL, YOU NEED THE ABILITY TO PAY LOSSES. YOU GOT TO BE ABLE TO BE THERE AND PAY THEM ON TIME. IN THE CASE OF OUR PROGRAM YOU NEED TO BE ABLE TO PAY EXPENSES. AND YOU NEED TECHNICAL EXPERTISE. YOU NEED TO KNOW HOW TO GROW THE CROPS. YOU NEED TO KNOW WHERE THE RISKS ARE. WHERE PEOPLE MAY BE USING FAULTY PRACTICES. SO YOU NEED THE TECHNICAL EXPERTISE AND MAYBE WELL, AS CERTAINLY AS IMPORTANT AS ANY OF THEM, YOU NEED DISCIPLINE. YOU NEED TO HAVE THE DISCIPLINE TO ADJUST LOSSES AND CLAIMS ACCURATELY AND TIMELY. AND YOU NEED TO HAVE THE DISCIPLINE ON THE OTHER SIDE, ON THE GOVERNMENT SIDE, TO MAINTAIN THAT PROGRAM AS STABLE AS POSSIBLE. TO MAINTAIN THE INTEREST OF THE PRIVATE SECTOR. SO FOR THE FIRST 40 TO 45 YEARS OF OUR PROGRAM WE HAD ONLY GOVERNMENT PARTICIPATION. AND IN THE LAST 15 YEARS, 16 YEARS WE’VE HAD THE PRIVATE SECTOR INVOLVED. HOW DID WE GET THEM INVOLVED? WELL IT’S BEEN A GRADUAL PROCESS. THEY LOOK AROUND. THEY STUDY IT. WE HAVE TO TALK TO THEM ON AN ONGOING BASIS AND MAKE SURE THAT THEY UNDERSTAND THAT THERE IS A COMMITMENT, TO THE EXTENT THAT WE CAN, TO MAKE THIS A LONG TERM PROCESS. WE KNOW THAT THERE’S ALWAYS THE RISK AGAIN THAT THE POLITICAL ENVIRONMENT COULD CHANGE. AND IN THAT CASE, IN THAT EVENT, WE’RE LOOKING AT LAWS THAT COULD CHANGE, THAT COULD WIPE OUT THIS ENTIRE INDUSTRIES OVER NIGHT. THAT’S A RISK THAT OUR PRIVATE INSURERS TAKE ON WHEN THEY BECOME A PART OF OUR PROGRAM. IF IT HAPPENS, IF FOR ANY REASON CONGRESS DECIDES WE ARE GOING TO WIPE EXPENSES ASSOCIATED WITH CROP INSURANCE OFF OF OUR RADAR SCREENS, THEN THIS PROGRAM IS OVER. THIS IS A VERY DISTABLIZING FACTOR.

THE WAY THAT WE ADDRESS THAT IS TO CONTINUALLY WORK TOGETHER ON THE HILL TO MAKE SURE THAT THERE IS SUPPORT FOR THIS INDUSTRY. AND SO FAR SO GOOD ON THAT. OUR EFFORTS HAVE BEEN FARELY FRUITFUL.

NOW, THE U.S. CROP INSURANCE PROGRAM, AS YOU’VE SEEN, HAS HAD PRETTY WIDE FLUXUATIONS. AND THE WAY WE GET THE PRIVATE SECTOR INVOLVED IN THIS IS IN THE SAME WAY WE CUT ACROSS AN INDIVIDUAL FARMER’S VOLATILITY OF RETURNS BY SETTING THIS INSURNACE FLOOR ON INCOME, WE ACCENTUALLY HAVE TO DO THE SAME THING WITH OUR PRIVATE SECTOR’S PARTNERS. AND THE WAY THAT WE DO THAT IS THROUGH A CONTRACT WE CALL OUR STANDARD REINSURANCE TREATY. AND ESSENTUALLY WHAT HAPPENS WITH THAT IS THAT FIRST OF ALL, THE GOVERNMENT AGREES TO ACCEPT ALL OF THE LOSSES OVER A CERTAIN LOSS RATIO. LOSS RATIO IS SIMPLY THE AMOUNT OF LOSSES DIVIDED BY THE AMOUNT OF PREMIUM. AND SO YOU CAN SEE, ALL OF THESE LOSS RATIO’S ARE GREATER THAN ONE. THAT MEANS THE AMOUNT OF LOSSES PAID OUT THE DOOR ARE GREATER THAN THE AMOUNT OF PREMIUM THAT CAME IN THE DOOR. THEN YOU CAN NOW PERHAPS UNDERSTAND BETTER WHY THIS IS SUCH A FRIGHTENING SCENERIO FOR A COMPANY THAT HAS TO SHOW IT’S CARE HOLDERS A RETURN ON CAPITAL.

IN VIRTUALLY EVERY YEAR, EXCEPT 94, AND THEN THESE LAST TWO YEARS, THEY’VE HAD LOSSES THAT ARE AT LEAST EQUAL TO, IF NOT GREATER THAN THE AMOUNT OF PREMIUM THAT WE BROUGHT IN. SO WHAT THE RE-INSURANCE TREATY DOES IS IT TELLS THE COMPANIES, OK, YOU DON’T HAVE TO WORRY ABOUT ANY OF THE LOSSES OVER SAY 250 PERCENT. NOW WE HAVEN’T EXCEEDED THAT IN ANY OF THESE YEARS BUT IT’S NOT AN ABSOLUTELY UNTHINKABLE, UNIMAGINABLE SCENERIO.

AND THEN WE ALSO SAY WITHIN THESE OTHER LAYERS WE’RE GOING TO SPLIT OUT THE LOSSES, DISPROPORTIONATELY AND WE’RE GOING TO WORK IT OUT SO THAT OVER THE LONG RUN, IT LOOKS TO US AND WE AGREE, THIS IS A NEGOTIATED PROCESS, LOOKS TO US LIKE YOU’RE GOING TO GET WHATEVER THE GOING RATE OR RETURN OR RETURN ON CAPITAL IS IN THAT INDUSTRY. LET’S SAY IT 15 PERCENT. SO FOR INSTANCE, WE’D SAY, AS SOON AS LOSSES HIT 150 PERCENT OR HALF OF THOSE LOSSES. SO THIS JUST CUTS THIS LAYER RIGHT HERE RIGHT IN HALF FOR THE COMPANIES. PERHAPS IN THE LAYERS BETWEEN WHERE LOSSES ARE 2 TO 2.5 TIMES PREMIUMS, WE’LL TELL THE COMPANIES WE MIGHT TAKE 75 PERCENT OF THOSE LOSSES. AND BASICALLY THE OBJECTIVE IS SIMPLY TO CRUNCH THOSE NUMBERS SO THAT IT LOOKS BASED ON RECENT HISTORICAL EXPERIENCE, LIKE WE’RE GOING TO BE ABLE TO OFFER THOSE COMPANIES A RETURN FOR THEIR INVESTMENT.

NOW QUICKLY ON THE HEELS OF THIS IS PROBABLY COMING THE QUESTION IN SOME OF YOUR MINDS. IF YOU’RE PAYING THE COMPANIES A RETURN TO WORK THIS BUSINESS WITH YOU ISN’T IT INHERENTLY, MORE EXPENSIVE THAN THE GOVERNMENT GETTING IN HERE AND DOING IT ALL BY ITSELF? I MEAN THE GOVENMENT DOESN’T HAVE THE PAY ITSELF A RATE OF RETURN. AND OUR PARTICULAR PROGRAMS PAYS THE COMPANY NOT ONLY A RATE OF RETURN BUT ALSO REIMBURSES THEM THEIR OPERATING EXPENSES. AND ALL OF THOSE EXPENSES AER ALL CRUNCHED BY THE CRUNCHERS INTO AN APPROPRIATE RATE OF RETURN. SO IT’S REALLY THIS RATE OF RETURN ISSUE WE REALLY WANT TO FOCUS ON. WHY ARE WE PAYING SOMEBODY A RATE OF PROFIT TO BE INVOLVED IN A PROGRAM THAT WE WOULDN’T HAVE TO INCUR THAT EXPENSE IF WE DID IT ALL OURSELVES. WELL THE REASON FOR THAT COMES BACK TO THE NOTION OF PRIVATE/PUBLIC PARTNERSHIPS. AND I THINK THAT I CAN HONESTLY SAY THAT THERE’S PRETTY MUCH NO WHERE IN GOVERNMENT WHERE THAT IDEA IS BETTER EXEMPLIFIED BETTER THAN IN THE CROP INSURANCE PROGRAM. IT’S UTILIZED A LOT THROUGHOUT GOVERNMENT THESE DAYS AND IT’S A STRONG PART OF THIS ADMINISTRATIVE’S INITIATIVE TO BRING THE PRIVATE SECTOR INTO GOVERNMENT WORKING. AND I THINK I CAN HONESTLY SAY AND I’M NOT A POLITICAL APPOINTEE, SO I’M RELATIVELY OBJECTIVE HERE, THAT INFACT, THIS IS THE REAL THING. THIS IS THE PRIVATE/PUBLIC PARTNERSHIP THAT WORKS.

THE REASON IS KIND OF SUBTLE. THE REASON IS IF YOU HAVE THE GOVERNMENT IN THIS BUSINESS BY ITSELF WHAT’S GOING TO HAPPEN? WELL FIRST OF ALL, I THINK IT’S LIKELY TO SAY THAT POLITICAL PRESSURES ARE MUCH MORE LIKELY TO RULE EVERY DECISION THAT’S MADE WITHIN THE COURSE OF THE PROGRAM. AND THERE IS THIS CONSTANT NECESSITY TO BALANCE HARD-COLD BUSINESS DECISION MAKING WITH PUBLIC POLICY MAKING.

NOW CLEARLY THERE ARE RISKS IN HERE THAT YOU WOULD HAVE TO CALL SOCIAL RISKS. THAT MEANS THERE ARE FARMERS WE ARE INSURING THAT IF THE COMPANY HAD THE CHOICE THEY WOULD SAY, THANK YOU VERY MUCH BUT WE DON’T WANT YOUR PREMIUM BECAUSE IF I LOOKED AT THAT PERSON’S LOSS SITUATION, THEY MAY HAVE HAD THIS LONG DIP THAT WE’VE NEVER EVEN SEEN A SPIKE ON. IF THAT WERE THE CASE, AGAIN, THE PROGRAM WOULD FALL APART. SO WHAT WE HAVE TO DO IN THIS PROGRAM IS STRIKE A BALANCE. AND WHAT WE’RE BALANCING IS THE SOCIAL POLICY, THE PUBLIC POLICY PORTION OF THE PROGRAM WITH THE DESIRE TO CREATE A SOUND BUSINESS ENVIRONMENT FOR OUR PRIVATE PARTNERS.

ON THE ONE HAND, WE’VE GOT POLITICAL PRESSURES THAT COULD STEER THE PROGRAM IN THE WRONG DIRECTION FAIRLY EASILY. AND WHAT WE’VE DONE BY BRINGING THE PRIVATE PARTNERS IS ESTABLISH A MECHANISM THAT ACTS LIKE A KIND OF SCALES AND WHEN POLITICAL PRESSURES MOVE UP THERE’S AN OFF SETTING EFFECT. THAT’S NOT A GOOD EXAMPLE BECAUSE THE UPS AND DOWNS WON’T WORK FOR ME. BUT LET ME GIVE YOU ANOTHER EXAMPLE THAT HAS NOTHING TO DO WITH SCALES.

IF POLITICAL PRESSURES MOVE UP IT MEANS, FOR INSTANCE, THERE’S A LOT OF PRESSURE ON THIS BUDGET. NOW, IF - LET ME GIVE YOU AN EXAMPLE OF WHERE FOR INSTANCE RECENTLY IN THE UPPER MID-WEST. WE HAD A LOT OF RAINS AND FLOODING. THERE WAS A GREAT DEAL OF POLITICAL PRESSURE IN THIS CASE FOR PEOPLE TO MOVE INTO THIS AREA. WE HAD POLITICIANS FLOCKING TO THIS AREA. EVERYONE WANTED TO DO SOMETHING FOR THESE PEOPLE WHO WERE LIGITIMATELY HARMED BY THESE WEATHER EVENTS. NOW, THERE WAS A LOT OF PRESSURE ON THE CROP INSURANCE PROGRAM TO MAKE AMENDS. TO MAKE A SPONTANEOUS CHANGES TO IT’S PROGRAM STRUCTURE. THERE’S NO WAY THAT THAT CAN HAPPEN WITHOUT COMPLETELY DISTABLIZING THE ENTIRE PROGRAM. BECAUSE WHAT IT MEANS IS TO OUR PRIVATE PARTNERS IS YOU CAN’T COME INTO THIS PROGRAM AND EXPECT THAT IN THE NEXT YEAR AND THEN THE YEAR AFTER THAT WE’RE GOING TO BE RUNNING THIS OPERATION THE SAME WAY. THIS COMES BACK TO THE POLITICAL RISK THAT OUR PRIVATE PARTNERS TAKE ON. AND INFACT, WE HAVE TO BUILD IN A LITTLE BIT OF RETURN. A LITTLE BIT MORE RETURN ON THEIR CAPITAL BECAUSE THEY’RE UNDERTAKING THIS RISK. SO WE’VE GOT THIS EXPENSE THAT WE WOULDN’T HAVE IF WE WERE DELIVERING THE PROGRAM ALL BY OURSELVES. WHAT ARE WE GETTING FOR THAT? WELL, I THINK IT’S FAIRLY SAFE TO SAY THAT IF WE HAD GOVERNMENT EMPLOYEES DELIVERING THIS PROGRAM THAT WE WOULD NOT GET THE SAME LEVEL OF AGGRESSIVENESS IN THE SALES AREA THAT WE GET WHEN WE’VE GOT 17 COMPANIES OUT THERE BATTLING EACH OTHER TO HAVE MORE PREMIUM THAN THE GUY OR GIRL NEXT TO THEM.

NOW WHEN I TALK ABOUT AGGRESSIVENESS, I JUST MEAN NOT SO MUCH THAT THERE IS A COMPLACENCY AMONG GOVERNMENT EMPLOYEES. I’M KIND OF SENSITIVE TO THAT MYSELF. I’M TALKING ABOUT SIMPLY THE FACT THAT THERE’S NOTHING AT STAKE FOR THE PERSON WHO’S IN THE GOVERNMENT. AND I THINK IT’S JUST VERY NATURAL THAT THEINCENTIVES ARE GOING TO BE DIFFERENT FOR SOMEONE WHO’S IN THE PRIVATE SECTOR, WHO HAS A MANAGER WHO IS EXPECTING CERTAIN SALES QUOTERS FROM THEM AND THE REASON FOR THOSE SALES QUOTERS ARE BECAUSE IN THE HIGHEST ECHELON OF THAT COMPANY YOU HAVE BOARD MEMBERS WHO ARE SETTING GOALS FOR THAT COMPANY. AND IF YOU DON’T REALIZE THOSE GOALS, THEN THERE ARE REPROCUSSIONS.

VERY OFTEN IN GOVERNMENT, THERE IS NOT THAT SAME LEVEL OF INSECURITY, IF YOU WILL. AND THAT INSECURITY IS A POSITIVE THING IN THIS CASE. BY THE SAME TOKEN, ON THE LOSS OF ADJUSTMENT SIDE, IF SOMEONE CALLS IN WITH A LOSS AND WE HEAD OUT TO THAT FARM AND START LOOKIN AT DAMAGED WHEAT OR CORN, THERE’S EVERY REASON TO BELIEVE, THE PRIVATE INCENTIVES ARE GOING TO ADJUST THAT LOSS DOWN TO THE HAIR. BECAUSE THEY’RE LOOKING AT A LOST RATIO THAT MEANS PROFITS OR LOSS. AND WE HAVE THIS INSULATION IN GOVERNMENT THAT WE NEED TO BE MINDFUL OF.

I HAVE MET SOME OF THE MOST DEDICATED PEOPLE I HAVE EVER WORKED WITH AND I SPEND A LOT OF TIME IN THE PRIVATE SECTOR WORKING IN GOVERNMENT. BUT I THINK THE FUNDAMENTAL PHYSCOLOGY IS NOT THE SAME. AND YOU HAVE TO RECOGNIZE THAT.

NOW IN TERMS OF WHERE WOMEN’S ROLES HAE BEEN IN OUR PROGRAM, I’M FAIRLY HAPPY TO SAY THAT REALLY THERE HASN’T BEEN TOO MANY AREAS THAT I CAN THINK OF WHERE WOMEN HAVEN’T BEEN PRESENT FOR THE LONG TERM FOR US. NOW THE LONG TERM FOR US IS ALSO 15-16 YEARS NOW BUT SOME OF OUR HIGHEST PERFORMING SALES AGENTS ARE WOMEN. THESE ARE REAL HOME RUN HITTERS MAKING SIX FIGURES MANY TIMES OVER.

PEOPLE IN THE HIGHEST ECHELON OF THESE COMPANIES THAT I REFERRED TO INCLUDING THEIR WOMEN. OF COURSE THE RISK MANAGEMENT AGENCY ON THE GOVERNMENT SIDE, WE HAVE WOMEN DOING A LOT OF THE MANAGERIAL WORK. IN THE FIELD AS WELL, DOING LOSS ADJUSTMENT WORK. SO I THINK IT’S FAIRLY SAFE TO SAY THAT IN THIS PROGRAM WHILE IN ANY CULTURE AND OURS IS NO EXCEPTION. THERE IS PLENTY OF PROGRESS THAT CAN BE MADE. BUT THIS A FAIRLY INCLUSIVE INDUSTRY. AND I KNOW THAT THIS ADMINISTRATION WORKS TO MAINTAIN THAT AND TO ENHANCE IT. AND WE’RE FORTUNATE THAT WE’RE IN AN INDUSTRY WHERE WOMEN HAVE EMERGED AS MAJOR PLAYERS AND HAVE BEEN IN THAT ROLE FOR SOME TIME.

NOW WHEN YOU SPEAK ABOUT THIS INTERNATIONALLY HOW DO THIS APPLY TO OTHER COUNTRIES? WELL, I THINK THE BEST WAY TO TALK ABOUT THIS IS TO DIVIDE THOSE COUNTRIES INTO TWO AREAS. THE INDUSTRIALIZE COUNTRIES AND DEVELOPING COUNTRIES. INDUSTRIALIZE COUNTRIES, MANY OF THEM, HAVE A LOT OF SUBSIDY SYSTEMS THAT ARE VERY DIFFERENT FROM OURS. AS WE’VE MOVED MORE TOWARD MARKET ORIENTED SUBSIDY SYSTEMS, A LOT OF OUR TRADING PARTNERS IN THE INDUSTRIALIZED WORLD HAVE MAINTAINED ALL KINDS OF THINGS LIKE DIRECT PAYMENTS TO IF PRICES DON’T MEET CERTAIN PRICE TARGETS. I’M ALSO REFERRING TO THINGS LIKE MARKET INTERVENTIONS. THIS IS WHEN, OF INSTNACE, PRICES ARE NOT AS HIGH AS THE PRODUCERS AND THE POLITICIANS WANT TO SEE THEM BE. THEN THE GOVERNMENT ACTUALLY GOES INTO THE MARKET AND BUYS THAT COMMODITY AND PUT IT IN A WAREHOUSE UNTIL THAT PRICE GOES UP TO WHERE THEY WANT IT TO BE.

THESE KINDS OF INTERVENTIONS BREAK DOWN MARKETS. THESE KIND OF SUBSIDY SYSTEMS WE WOULD ARGUE ARE DETRIMENTAL TO THE ESTABLISHMENT OF STRONG MARKET ORIENTED SKILLS ON THE PART OF PRODUCERS. AND WE WOULD ALSO ARGUE THAT IF THIS PRODUCERS ARE GOING TO FIND THEMSELVES IN A SITUATION, PERHAPS IN THE NOT TOO DISTANT FUTURE OF HAVING TO COPE WITH THE MARKET, THEY’LL BE AT A DISADVANTAGE. SO, IN A SENSE YOU COULD SAY THAT THIS LEVEL OF SUBSIDATION IS A DIS-SERVICE TO THESE PRODUCERS. AND, INFACT, SOME OF OUR TRADING PARTNERS IN EUROPE, WHO HAVE SOME PARTICULARLY HIGH SUBSIDY LEVELS, HAVE TOLD US THAT THEY’RE INTERESTED IN OUR PROGRAM NOW. THIS INTERNATIONAL RISK MANAGEMENT INITIATIVE THAT BARBARA IS SPEAR HEADING IS GETTING A LOT OF INTEREST FROM COUNTRIES WHO HAVE VERY HIGH SUBSIDY LEVELS BUT ARE CONCERNED THAT IN THE LONG RUN THEY CAN SEE THE DARK CLOUD IN THE OFFING. AND THEY’RE CONCERNED THAT IF THEY DON’T MAKE SOME ADJUSTMENTS OR MODIFICATIONS TO THEIR SUBSIDY LEVELS NOW THEN THEY’RE GOING TO END UP LEAVING THEIR FARMERS THERE IN A LURCH WHEN PUSH COMES TO SHOVE AND THE PRESSURE ON THEIR FISCAL APPROPRIATIONS BECOMES SO INTENSE THAT THEY HAVE TO TAKE MORE DRACONIAN SWEEPING MEASURES, BRINGING DOWN THOSE SUBSIDIES QUICKLY TO MAKE THEIR - TO MEET THEIR BALANCE BUDGET GOALS. AND IN THE PROCESS LEAVING FARMERS WHO HAD BEEN ESSENTIALLY TOTAL ON A PRIMEROSE PATH FOR TOO LONG IN THE LURCH WITHOUT THE TYPE OF SKILLS TO RESPOND TO THE MARKET. WHITHOUT THE KIND OF ORIENTATION THAT SAYS I HAVE RISK AND I NEED TO GO OUT INTO THE MARKET AND TRANSFER IT TO SOMEONE ELSE. AND I NEED TO DO IT THROUGH INSURANCE, OR I NEED TO DO IT THROUGH THE FUTURES MARKETS OR BOTH. BUT THAT IT’S THAT FARMERS RESPONSIBILITY. NOW WE’RE THE FIRST TO ADMIT THAT OUR SYSTEM IS VERY HIGHLY SUBSIDIZED, BUT IT’S MARKET ORIENTED AND WE FEEL THAT WE’RE IN A BETTER POSITION TO LOWER THOSE SUBSIDIES IN THE EVENT THAT WE ARE ASKED TO BY OUR TRADE PARTNERS.

IN DEVELOPING COUNTRIES IT’S A LITTLE BIT DIFFERENT. BECAUSE IN DEVELOPING COUNTRIES IT’S NOT AS IF WE’VE GOT THIS STACK OF SUBSIDIES THAT WE’RE WILLING TO SHIFT INTO A DIFFERENT KIND OF SUBSIDY PROGRAM. IN DEVELOPING COUNTRIED WE’RE LOOKING MORE AT A VERY NACENT MARKET. A MARKET THAT’S JUST BEGINNING. WHEN WE SEE THESE MARKETS, FOR INSTANCE THESE MARKETS THAT ARE IN TRANSITION, FOR INSTANCE IN THE FORMER SOVIET STATES. WHEN WE LOOK AT THESE MARKETS THEY’RE JUST STARTING OUT. THEY’RE AT A PLACE WHERE THEY CAN MAKE THESE DECISIONS FOR THE FIRST TIME AND DECIDE WHICH WAY THEY’RE GOING TO TRAVEL ON THIS ROAD. WE’RE IN THE PROCESS OF STRONGLY SUGGESTING THAT INFACT THE MARKET ORIENTED APPROACH IS THE WAY TO GO. THE CROP INSURANCE SYSTEMS ARE THE WAY TO GO AS OPPOSE TO THE MORE HEAVY HANDED MARKET INTERVENTION DIRECT PAYMENT TYPES APPROACH.

NOW OBVIOUSLY, AS SOON AS YOU START TALKING ABOUT SOMETHING LIKE SUBSIDIES IN GENERAL IN DEVELOPING COUNTRY YOU HAVE TO START TALKING ABOUT WHERE THEY’RE COMING FROM. AND THAT’S ALSO A PART OF THE INTERNATIONAL RISK MANAGEMENT INITIATIVE IS TO TALK TO THE MILTI-LATERAL FINANCIAL INSTITUTIONS AND TRY TO GET SOME FEED BACK FROM THEM ON HOW INTERESTED THEY WOULD BE IN PARTICIPATING IN MORE MARKET ORIENTED PROGRAMS.

DEPUTY UNDERSECRETARY OF TREASURY, LARRY SUMMERS, RECENTLY QUOTED IN

THE WALL STREET JOURNAL BY SAYING THAT THE IMF AND THE WORLD BANK HAVE DONE MORE TO PROMOTE FREER, MORE LIBERALIZED TRADE THAN ANY TRADE NEGOITATORS THAN ANY OTHER - IN ANY MULTI-LATER OR BI-LATERAL TRADE PROCESSES. AND WHAT THEY SAID BY THAT - WHAT HE SAID BY THAT IS REALLY PRETTY PROFOUND, I THINK. WHEN YOU THINK IN TERMS OF - FIRST OF ALL, THE AMOUNT OF CRITICISM THAT THESE MULTI-LATERAL BANKING INSTITUTIONS TAKE FOR SIMPLY TURNING ON THE WORKS AND CREATING DEPENDENCIES ON SUBSIDIES. HERE SOMEONE WITH UNPEACHABLE CREDIBILITY WHO’S COMING IN AND SAYING INFACT, THESE ARE THE VERY ORGANIZATIONS WHO ARE DOING MORE WORK TO PROMOTE FREE TRADE. AND THE WAY THAT THEY’RE DOING IT IS BY BOOSTING THE ECONOMIC LEVELS AND THESE ECONOMIES AND BY ASKING IN RETURN FOR THOSE ECONOMIES TO REMAIN OPEN TO TRADE. BY ASKING FOR POLICIES THAT KEEP THEM MARKET ORIENTED.

AND SO WE’RE VERY OPTIMISTIC AND HOPEFUL THAT WE CAN INFACT BRING THE WORLD BANK, PERHAPS OTHER MULTI-LATERAL DEVELOPMENT BANKS. THE ASIAN DEVELOPMENT BANK. PERHAPS THE NORTH AMERICAN DEVELOPMETN BANK THAT WAS SPAWN AS A RESULT OF THE NAFTA. THAT WE COULD BRING THESE INSTITUTIONS ON BOARD WITH THIS NATION, THAT INFACT, A MARKET ORIENTED AGRICULTRUAL SUBSIDY PROGRAM IS ALWAYS GOING TO BENEFIT THE FARMER MORE THAN A PROGRAM THAT SIMPLY PROVIDES PAYMENTS IN AN EFFORT TO REACH SOME HYPOTHETICAL LEVEL OF PARITY WITH INCOMES IN OTHER INDUSTRY SECTORS. NOW THAT AGAIN WHAT THAT’S GOING TO REQUIRE IS A DECISION ON THE PART OF THESE BANKDS TO BE THERE OVER THE LONG RUN. YOU’LL NEVER START AN INSURNACE PROGRAM THAT INVOLVES ANY PRIVATE SECTOR AFFILIATES IF YOU DON’T MAKE THE COMMITMENT TO BE THERE. ONE OF THE MOST OPTIMISTIC THINGS ABOUT THIS IS THAT IF THE WORLD BANK OR THESE OTHER MULTI-LATERAL FINAICIAL INSTITUTIONS DECIDE TO GET INVOLVED IN THIS, ONE OF THE THINGS THEY ARE MOST FAMOUS FOR, AND INFACT, I’VE EVEN BEEN CRITICISED FOR, IS STICKING OT WHAT THEY DECIDE TO DO. THERE IS AN OLD JOKE ABOUT THESE INSITITUTIONS THAT THEY FAUCET ONLY TURNS ON. AND ONCE IT TURNS ON, YOU’LL NEVER GET IT OFF AGAIN. WELL, IF YOU APPLY THAT TO THIS KIND OF SCENERIO IT’S ALMOST LAUDIBLE. BECAUSE IT MEANS THAT YOU’RE GOING TO BE ABLE TO GIVE THE PRIVATE SECTOR PLAYERS, THOSE PLAYERS THAT WILL BE WORKING WITH THE COMPANIES, EXCUSE ME, WITH THE COUNTRIES THAT ARE DEVELOPING THESE MARKETS. THE CONFIDENCE THEY NEED TO GO TO THOSE MARKETS AND TO STAY IN THOSE MARKETS WHEN THEY HIT THOSE TROUGHS LIKE THEY DID IN 1994. THAT WOULD BE, UNDER OTHER SCENERIO’S, A REASON FOR DEPARTURE. AND INFACT, THAT WAS BEFORE 1994 WAS BEFORE THE PASSAGE OF OUR FEDERAL AGRICULTURE IMPROVEMENT AND REFORM ACT. THE FAIR ACT. THE ONE THAT WAS THE MOST MARKET ORIENTED SO FAR. AND WE SAW DEPARTURE. WE SAW COMPANIES IN THE INTERNATIONAL RE-INSURANCE MARKET PICK UP THEIR MARBLES AND GO HOME. AND THE REASON WAS BECAUSE AT THE TIMES IN 1994, WE STARTED BAILING OUT LITTLE SECTIONS OF OUR COUNTRY. WE ACTUALLY STARTED VIOLATING THESE BUSINESS DISCIPLINES. AND IT WAS, THE 1996 ACT WAS VERY IMPORTANT REINFORCEMENT OF THESE NOTIONS THAT INFACT THE U.S. GOVERNMENT IS COMMITTED TO MARKET ORIENTED CHANGES AND MARKET ORIENTED DOMESTIC SUPPORT PROGRAMS. IT’S VERY CONSISTENT WITH CHANGES WE SEE IN OTHER AREAS. WELFARE TO WORK AND THESE SORT OF AREAS. THE IDEA IS THAT WE WANT TO MOVE FROM THE SIMPLE EXPECTATION THAT INCOME INHANCEMENT WILL TAKE PLACE AND RATHER GIVE THE PERSON A REASON TO UNDERSTAND AND TO GAIN THE SKILLS THAT THEY NEED TO FUNCTION IN A SCENERIO THAT MIGHT NOT BE AS WELL FUNDED IN TERMS OF SUBSIDIZATION AS SOME COUNTRIES ARE ABLE TO RIGHT NOW.

WITH THAT I THINK I’D LIKE TO OPEN IT UP TO QUESIONS, IF ANYONE HAS SOME.

(QUESTIONS)

MY NAME IS AMY RASBY AND I’M FROM CONNECTICUT AND I SPENT 18 YEARS ALMOST IN THE INESTMENT BUSINESS. AND I LEFT SMITH BARNEY WHICH IS A SUBSIDY TRAVELER’S INSURANCE IN JANUARY. I’M IN THE PROCESS OF FOUNDING WHAT’S CALLED THE CONNECTICUT INTERNATIONAL TRADE CENTER. WHICH WILL BE DEDICATED TO AN ELECTRONIC COMMERCE AND HELPING TO SELL AGRICULTURE PRODUCTS, IMPORTING AND EXPORTING AND ACTING AS A BROKER ALSO. CAN I MAKE MONEY OFFERING AS A SERVICE ANYTHING ALONG THE INSURANCE LINE, THE CROP INSURANCE, IT SEEMS LIKE IT’S A FAIRLY NEW PRODUCT IS IT NOT, IN THE INTERNATIONAL ARENA AND IS IT SOMETHING I COULD PUT AS PART OF MY DIVERSIFIED INVESTMENT PLAN FOR MY CENTER? FINDING PEOPLE TO SEE YOUR INSURANCE. LINKING UP BUSINESS ALLIANCES THAT TYPE OF THING.

I THINK THE KEY SOMETIMES TO MAKING MONEY, AND THAT’S THE QUESTION. CAN YOU MAKE MONEY? WITH CROP INSURANCE PRODUCTS IS TO IDENTIFY WHERE THE ACTION IS. HOW SOON YOU SHOULD GET IN. IS IT A - IS THE TIMING SO THAT YOU HAVE TO DO TOO MUCH OF THE TEACHING AND NOT QUITE ENOUGH OF THE MARKET TREND. WOULD THAT BE FAIR? AND AS YOU LOOK AT WHAT WE’RE DOING AT USDA AND ACROSS THIS COUNTRY WITH CROP INSURANCE. WE ARE IN A VERY LARGE GROWTH CURB FOR THIS INDUSTRY. IT HAS ITS UPS AND DOWNS. SOMETIMES I SAY THAT THE SYNERGY OF THE NEW PUBLIC/PRIVATE PARTNERSHIP IS REINFORCED WHEN THE RISK MANAGEMENT AGENCY BECAME A SEPARATE AGENCY AND ARE WHOLE FARMING PROGRAM BECAME MORE MARKET ORIENTED IS A AWKWARD SYNERGY. SOMETIMES THE FARMERS DON’T QUITE UNDERSTAND THEIR LEVELS OF RISK YET. ONE OF MY STAFF, PAT ENGLE, HAS JUST PAST OUT INTRODUCTION TO RISK MANAGEMENT WHICH IS A PIECE WE’RE USING WITH OUR FARMERS TO HELP TEACH ABOUT RISK.

FOR A LONG, LONG TIME, WHAT FARMERS DID WAS DEPEND ON THEIR BANKER TO TELL THEM, GEE, I’VE GOT THIS MANY COWS AND THIS MANY ACRES AND YOU KNOW I THINK I’M GOING TO PLANT SO MUCH IN CORN AND SO MUCH IN SOYBEANS AND HOW MUCH CAN I BORROW? AND NOW, IT IS A VERY MUCH MORE SOPHISTICATED CHALLENGE FOR OUR FARMERS AGRI-BUSINESS MAN AT THE GRASS ROOTS LEVEL AND THEY ARE JUST BEGINNING TO LEARN HOW IMPORTANT IT IS NOW THAT THERE IS NO ADHOC DISASTER PAYMENTS AND THE FARM SUBSIDIES ARE BEING PAID OUT.

WE’VE SEEN OUR INSURANCE COMPANIES. THE NUMBER OF INSURANCE COMPANIES THAT PROVIDE A PRETTY MUCH FULL RANGE OF INSURANCE PRODUCTS GROWN DRAMATICALLY OVER THE LAST YEARS. WE’RE SEEING A REAL CURVE, LEARNING CURVE IN TERMS OF INTEREST FROM INTERNATIONAL VARIOUS COUNTRIES AROUND THE WORLD. AND IF ONE LOOKS AT THE AGREEMENTS THAT HAVE BEEN MADE ALREADY IN GAT AND WTO THEN I WOULD SUGGEST THAT WE WILL BEGIN SOON A REAL LEARNING CURVE IN TERMS OF HOW OTHER COUNTRIES CAN PROVIDE A RISK MANAGEMENT SYSTEM THAT IS SIMILAR TO WHAT WE HAVE BEGUN WITH OUR FARMERS.

WE HAVE INTEREST IN EASTERN EUROPEAN COUNTRIES IN SOUTH AFRICA. IN SOUTH AMERICAN COUNTRIES. CANADA HAS ITS OWN FORM OF RISK MANAGEMENT AND CROP INSURANCE. ALTHOUGH THEIR PROGRAM IS PROVINCE BY PROVINCE RATHER THAN IN A SENSE EQUALLY AVAILABLE AS OURS IS ACROSS THE COUNTRY. I SAY EQUALLY AVAILABLE FOR OURS BECAUSE WE HAVE SOME 70 CROPS COVERED INDIVIDUALLY CROP BY CROP. OUR PROGRAMS BEFORE WHEN WE HAD DIRECT SUBSIDIES ONLY WERE ONLY FOR FEED GRAINS. SO CORN, WHEAT, SOY BEANS, COTTON, PEANUTS, TOBACCO. NOW WE’RE LOOKING AT ALL KINDS OF SPECIALTY CROPS. WE’RE STARTING TO LOOK AT ORGANICS. WE’RE ALSO LOOKINT AT HOW WE CAN INSURE A FARMERS REVENUE NEEDS. AND WE HAVE PILOT PROGRAMS GOING ABOUT THAT. WE’RE EXPECTING TO - I’M DOING THE INITIAL EXPLORATIONS RIGHT NOW FOR A TRADE MISSION THAT WILL BE IN EUROPE LATER THIS FALL WITH THE INSURANCE INDUSTRY OF WHICH IT’LL BE INDUSTRY ACROSS THE BOARD. JUST NOT CROP INSURANCE. THE CROP INSURANCE WILL BE AT THE TABLE. THIS WILL BE THE FIRST TIME THAT WE’VE DONE THIS. WE DID OUR FIRST INTERNATIONAL TRIP JUST A COUPLE OF MONTHS AGO OF WHICH WE TALKED TO THE LONDON RE-INSURANCE COMMUNITY. IN BOTH VIENNA AND PROGG IN WHAT WE CALL GOVERNMENT TO GOVERNMENT MEETINGS TALKING ABOUT HOW OUR PROGRAMS MIGHT FIT IN THEIR NEEDS AS THEY WISH TO JOIN THE EU.

THERE ARE A LOT OF CHALLENGES. JOE HAS TALKED ABOUT THAT. I THINK HIS WORDS WERE “THIS IS A VERY EXPENSIVE PROGRAM.” THIS IS ONLY A VERY EXPENSIVE PROGRAM FOR THE GOVERNMENT COMPARED TO THINKING ABOUT INSURANCE IN THE SENSE THAT YOU INSURE YOUR HOUSE WITH THE PRIVATE SECTOR. IT IS NOT A VERY EXPENSIVE PROGRAM IF YOU COMPARE IT TO WHAT THE U.S. HAS SPENT TRADITIONALLY IN TERMS OF DIRECT SUBSIDIES FARM PAYMENTS, IN TERMS OF HOW YES, WE HAVE FARMERS THAT SIGN UP FOR FEDERAL CROP INSURANCE WHEN WE WERE ONLY SOLD BY THE FEDERAL DELIVERY SYSTEM BEFORE WE WERE PRIVATIZED. BUT THEN WE TURNED AROUND AND THE SAME FARMERS, WHETHER THEY SUBSCRIBED TO INSURANCE OR NOT WE PAID THEM AGAIN WHEN THEIR COUNTY OR THEIR STATE WAS DECLARED AS DISASTER. SO IN A SENSE WE HAD LIKE THREE WAYS. A FOURTH ONE IF THEY TOOK PRIVATE INSURANCE. NONE OF THEM RELATED THAT WE PAID THEM. THAT WAS A GREAT DEAL MORE MONEY THAN THE DIRECTION THIS PROGRAM IS HEADED TOWARD. AND WHEN YOU LOOK AT IN THE DEVELOPING ECONOMY OF EASTERN EUROPE, FOR INSTANCE, AND THEIR NEEDS TO GET UP TO SPEED WITH THE EU MEMBER COUNTRIES. AND WHEN YOU LOOK AT INTERNATIONALLY THE GOALS THAT HAVE ALREADY BEEN SET BY GAT TO ELIMINATE DIRECT SUBSIDIES OVER THE NEXT 20 SOMETHING YEARS WITH A GOAL OF I THINK IT’S 2020. THOUGH I THINK THAT MOST PEOPLE THINK THAT MAY MEAN 2025 WHICH AT THE MOMENT SEEMS LIKE A VERY LONG WAY AWAY, BUT IT WILL MOVE VERY QUICKLY. THEN I THINK THERE IS SOME OPPORTUNITY TO START LOOKING AT WHAT ONE CAN DO. WE HAVE ABOUT SIX TO EIGHT CROP INSURANCE COMPANIES RIGHT NOW THAT HAVE BEEN CLEAR THAT THEY ARE VERY INTERESTED IN MY DEVELOPING INTERNATIONAL PROGRAM THAT I’M LEADING AT THE AGENCY. AND THEY ARE BEGINNING - I’M EXPECTING TO SEE A WORKING GROUP FROM THEM THAT WE WILL COOPERATE WITH SO THAT WE’LL KNOW WHERE WE’VE GOT LEADERSHIP TO BRING IN, FOR INSTANCE, FOR THE INSURANCE TRADE MISSION.

TIMING: IS THIS THE RIGHT MINUTE? I CAN’T TELL YOU BUT I DO THINK THAT IT IS A WONDERFULLY EXCITING PROGRAM AN EXCITING TIME.

JOE TALKED A LITTLE BIT ABOUT THE TIME WOMEN IN CROP INSURANCE AND I SHOULD TALK ABOUT THAT AS WELL. YOU KNOW OUR STUDY SHOW THAT OFTEN THE PERSON THAT DOES THE RISK MANAGEMENT IS WHAT WE USE TO CALL THE FARM WIFE ON THE FARM BUT WHICH I LIKE TO CALL THE FARM PARTNER OR SOMETIMES THE HEAD OF THE BUSINESS. BECAUSE SHE MANAGES THE BUSINESS PART EVEN WHETHER SHE’S ON THE TRACTOR OR NOT. AND WHAT WE’RE SEEING IS WITH CROP INSURANCE AGENTS THAT MANY OF THEM THINK MORE THOUGHTFULLY ACROSS THE BOARD. MAYBE BEING LESS FOCUSED ON THE DAY TO DAY OR MAYBE LOOKING AT WAYS THAT THEY CAN TAKE THEIR AGRICULTURAL SKILLS AND MOVE INTO ADDITIONAL INDUSTRY.

WE HAVE CERTAINLY WOMEN ACROSS ARMAE AND USDA. YOU’VE SEEN LOTS OF US AT THE TABLE YESTERDAY. TODAY YOU’LL SEE SOME MORE TOMORROW. WEDNESDAY THAT WE’RE REALLY PROUD OF. BUT I THINK IF YOU LOOK AT IT ACROSS THE BOARD OFTEN IN MANY KINDS OF INDUSTRIES WERE THE BEST SALES PEOPLE. AND THIS IS SALES OF INTANGIBLE IDEA. WHY DO I NEED TO TAKE CROP INSURANCE WHEN I’VE NEVER TAKEN IT BEFORE? IS WHAT MANY OF OUR FARMERS ARE ASKING. AND WHY, YOU KNOW, DON’T WE HAVE OUR DIRECT SUBSIDIES? AND OF COURSE WE DON’T USE WE’VE TAKEN OUR, WE’VE BITTEN THE BULLET AND WE’RE MOVING TOWARD THE DIRECTION OF MARKETING PROGRAMS ACROSS THE BOARD WHICH OTHER COUNTRIES WILL BE JOINING US IN. IN SOME THEY ALREADY HAVE JOINED US. QUESTION BACK HERE, BLUE SHIRT. LET ME COME BACK HERE AND GET YOU. SO WE DON’T HAVE TO SAY THIS TWICE.

(QUESTION)

SO YOU’RE SAYING THAT YOU AS FARMERS NEVER HAD THE RIGHT INSURANCE POLICIES BEFORE?

(ANSWER)

I’M SAYING THAT THERE WERE SOME FARMERS WHO HAD CROP INSURANCE BEFORE BUT NOT A LOT OF THEM. IF YOU LIVED IN THE NORTHERN PLAINS CERTAIN DRY LAND AREAS. AREAS THAT MAY BE A LITTLE MORE HIGH RISK. YOU MAY HAVE BEEN A REGULAR CROP INSURANCE PURCHASER. BUT THE PERCENTAGE WAS VERY SMALL. DO YOU REMEMBER THE PERCENTAGE? TWENTY - IN THE 70’S SAY? AND NOW WE ARE AT ABOUT 66-67 PERCENT PARTICIPATION. SO WE HAVE DOUBLED OUR PARTICIPATION.

(QUESTION)

THE QUESTION IS WHAT WERE THE FARMERS ORIGINALLY INSURING FOR?

AND ORIGINALLY THERE WAS CAT. CATASTROPHIC INSURANCE THAT IF THERE WAS A VERY BIG DISASTER THAT YOU COULD QUALIFTY FOR PAYMENT FROM THE FEDERAL GOVERNMENT AND THEN THERE WAS AN INSURANCE ADDED IN 1981 - THIS WAS PREMISE SO I HAVE TO CHECK MY DATES WITH JOE.

MULTIPARAL INSURANCE WHICH FOCUSED ON INDIVIDUAL CROPS. IN THE PRIVATE SECTOR THERE WAS WHAT I ALWAYS CHARACTERIZE AS A LITTLE BIT OF RAIN AND HAIL. THUS, YOU’RE INSURED THAT IF YOU HAD A BIG HAIL STORM, A LARGE RAIN STORM WIPE-OUT THAT SORT OF THING. NOW YOU CAN CERTAINLY INSURE FOR DROUGHT. YOU CAN INSURE FOR HAIL, FOR FLOOD, FOR ALL DIFFERENT KINDS OF DROUGHT, OF BAD CROSS HAVING TO DO WITH WEATHER. BUT YOU CAN ALSO INSURE IN OUR PILOT PROJECTS HAVING TO DO WITH A PERCENTAGE OF REVENUE.

NECESSARY, YOU CAN INSURE FOR INIDIVDUAL CROPS, NOT JUST THE NORMAL FEED GRAINS. AND SO, WHAT DO WE HAVE? 67 CROPS? DO YOU WANT TO TALK AOBUT THAT A LITTLE BIT?

(NEW SPEAKER)

I WOULD JUST ADD THAT THE BASIS OF INSURANCE OF OUR PRIMARY WORK HORSE, AS BARBARA MENTIONED, MPCI, MULTI-PARAL CROP INSURANCE POLICY IS A PERCENTAGE OF THE YIELD, NORMAL AVERAGE YIELD, WHICH MEANS YOUR HISTORICAL YIELD IF YOU KEEP RECORDS. OR A YIELD THAT’S ASSIGNED TO YOU BASED ON YOUR AREA, IF YOU DON’T KEEP RECORDS. PARDON ME?

(QUESTION)

THAT THE AVERAGE YIELD YOU WOULD HAVE EVERY YEAR ON THIS ONE CROP. THAT’S WHAT HE’S TALKING ABOUT. A LOT OF FARMERS DO NOT KEEP RECORDS OF THEIR AVERAGE ANNUAL YIELD PER CROP.

(NEW SPEAKER)

IN TERMS OF RECORD KEEPING WHAT WE HAVE A LONG HISTORY OF PER ACTUAL PRODUCTION HISTORY. APH RECORDS IN THIS COUNTRY HAVE TO DO WITH PEOPLE IN OUR OLD THAT PARTICIPATED IN OUR OLD FARM PROGRAM. THAT WAS FEED GRAINS. SO CORN, WHEAT, COTTON, TOBACCO, PEANUTS. HAVE I MISSED ANYTHING? I DON’T THINK SO. I MEAN EVEN SOY BEANS, WHICH IS A MAJOR CROP, DIDN’T HAVE A FARM PROGRAM OVER THE LENGTHY PERIOD OF TIME. SO WE DO HAVE INDIVIDUAL, ACRE BY ACRE, OR NOT ACRE BY ACRE, BUT FIELD BY FIELD, FARMER BY FARMER RECORDS FOR FEED GRAINS. WHAT WE’VE LOOKED AT NOW IS MOVING IN SO THAT WE NOT ONLY HAVE THE RECORDS FOR FARMERS THAT FARM, THE ONES, THE CROPS THAT WERE ORIGINALLY IN THE FARM PROGRAM, BUT WE ALSO HAVE THE ABILITY TO INSURE THROUGH OUR PUBLIC/PRIVATE PARTNERSHIP ALL KINDS OF CROPS. MANY KINDS OF CROPS AND GROWING NUMBERS OF CROP YOU HAVE COME AS WE GET OUR RESEARCH DONE IN AN ACTUAL EARLY SOUND BASIS. THAT ALLOWS US TO INSURE ALL KINDS. MANY KINDS OF SPECIALTY CROPS. ALSO SOY BEANS WHICH SPLIT OUT THE DIFFERENT KINDS OF WHEAT. DURAM HAS IT’S OWN PROGRAM, FOR EXAMPLE. SO THE NEW SYSTEM ALLOWS MORE FARMERS TO BE ELIGIBLE AND TO PARTICIPATE AND ENCOURAGES FARMERS TO GROW ALL DIFFERENT KINDS OF CROPS BASED ON MARKET NEEDS. RATHER THAN ON IF YOU DON’T QUALIFY - IF YOU DON’T GROWN THIS KIND OF FEED GRAIN YOU DON’T QUALIFY FOR THE FARM PROGRAM AND YOU DON’T GET TO PLAY AT THE TABLE. DOES THAT HELP? ORANGE, YES PLEASE. YOU IN THE ORANGE DRESS. PLEASE.

(QUESTION)

I’M GOING TO ASK TWO QUESTIONS CAUSE I REALLY DON’T THINK I UNDERSTAND WHAT’S GOING ON TOO MUCH. WHEN YOU HAD YOUR GRAPH UP ON THE BOARD ARE YOU SAYING THE DIFFERENCE ONCE YOU’RE ACTUALLY INSURING IS INCOME. IF I SAY THAT I HAVE GOT AN EXPECTED INCOME THIS YEAR FROM MY CROP AND I DON’T MAKE THAT INCOME BECAUSE I HAVE A PLAGUE OF FEAS OR RATS OR SOMETHING. OH, I’M SORRY, I DON’T MEAN THAT ONE. OUR MARKET THE PRICES DECREASED. IT’S PROCESSING I’M TALKING ABOUT ISN’T IT? THE PRICES AREN’T RIGHT FOR THAT PARTICULAR CROP. AND SO I DON’T GET WHAT WAS BUDGETTED FOR CORN THIS YEAR. YOU MEET THE GAP.

(NEW SPEAKER)

WE DON’T MEET THE GAP. BUT WE DO LOOK AT, WE DO HAVE NEW REVENUE PRODUCTS BEING TESTED AND ALSO A PRODUCT PROGRAMS JUST ANNOUNCED SOON TO GO ON THE GROUND ABOUT DAIRY OPTIONS. AND I THINK THIS WELL BE AN IMPORTANT POINT FOR YOU TO SEPARATE THE TWO AND TALK ABOUT THEM A LITTLE BIT.

(NEW SPEAKER)

WELL THERE ARE AMPLE OPPORTUNITIES TO MANAGE RISK IN THE FUTURES MARKETS AS WELL AS WITH INSURANCE. AND THOSE ARE MORE SPECIFICALLY PRICE ORIENTED RISK THOUGH THAT YOU WOULD COVER IN THOSE PRIVATE FUTURES MARKET. TO DATE WE HAVE NOT, WE AS THE GOVERNMENT HAVE NOT BEEN INVOLVED IN AGRICULTURAL FUTURES MARKET IN TERMS OF SPECIFICALLY PROMOTING THEIR USE AS RISK MANAGEMENT TOOLS. HOWEVER, WE’RE ABOUT TO BEGIN. AGAINST WHAT?

THE QUESTION IS, ARE WE INSURING AGAINST COMMODITY PRICE DOWN TURN? AND THE ANSWER IS WE HAVE A POLICY CALLED CROP REVENUE COVERAGE THAT DOES INSURE AGAINST COMMODITY PRICE DOWN TURN. IN A SENSE, INFACT, IN SOME CASES, OR FOR A WHILE IT WAS A RATHER CONTROVERSIAL POLICY FOR US. BECAUSE THE FUTURES MARKETS WERE SAYING HEY, YOU’RE GETTING IN ON OUR GAME. AND WE HAVE HAD ECONOMIST DEBATING THAT ISSUE FOR THE LAST YEAR AND A HALF OR SO RATHER VIGOROUSLY.

THE QUESTION IS, IS IT ONLY SOLD IN THE U.S. AND THE ANSWER IS YES IT’S ONLY SOLD FOR U.S. FARMERS AND U.S. CROPS.

(NEW SPEAKER)

WHAT I WANTED TO KNOW HERE IS YOU’RE TALKING ABOUT COMMODITY PRICE DOWN TURN THAT’S ACTUALLY INCLUDED IN THE FARM. IT’S PART OF YOUR INSURANCE. WE DO HAVE CROP INSURANCE IN AUTRALIA AND WE INSURE AGAINS PERAL. IT’S TOTALLY COMMERCIAL. IT’S RUN BY THE COMMERCIAL INDUSTRY. SO WE’RE COVERED AGAINST THAT. BUT MY CONCERN HERE IS AND YOU HAVE ACKNOWLEDGE THAT THIS IS A FORM OF SUBSIDY. AND IT’S QUITE A GENEROUS AND EXPENSIVE, I THINK WAS THE WORD YOU USED, PROGRAM THAT IS PUT INTO THE AGRICULTURE SECTOR. DO YOU THINK THAT FOR ONE THING, THAT THIS CONFUGE MARKET SIGNALS TO GROW, NOR MATTER WHAT HAPPENS TO THEIR PRODUCT, TO THEIR MARKET, AND TO THE ECONOMIC - OF THEIR MARKET, THAT THEY ARE GOING TO RECEIVE A RETURN ANYWAY. SO THAT’S ONE PART.

AND SECONDLY, IS IT REALLY JUST A WAY AROND TO GET AGREEMENT?

(NEW SPEAKER)

OK, IN RESPONSE TO THE FIRST QUESTION IS WOULD BE INACCURATE TO SAY THAT THE FARMERS ARE GUARANTEED A PAYMENT THROUGH THIS SYSTEM. THE FARMERS PURCHASE A LEVEL OF INSURANCE BASED ON HOW MUCH COVERAGE THEY WANT. SO IF THEY WANT, FOR EXAMPLE, COVERAGE AT 50 PERCENT OF THEIR YIELD AT 60 PERCENT OF COVERAGE. SIXTY PERCENT OF PRICE. AND THIS IS A PRICE THAT IS PUBLISHED BY U.S.D.A. THIS 60 PERCENT OF THIS PRICE WE WILL COVER 50 PERCENT OF YOUR YIELD AT 60 PERCENT OF THIS PRICE.

WE HAVE OTHER COVERAGE. HIGHER COVERAGE THAT’S THE CATASTROPHIC LEVEL OF COVERATE. IT AMOUNTS TO ABOUT 30 PERCENT OF EXPECTED INCOME. WE HAVE HIGHER COVERAGES THAT GO UP TO 75 PERCENT OF EXPECTED INCOME. IF THE FARMER CHOOSES THAT HIGHER INCOME, OR, WE HAVE AN EVEN HIGHER COVER WHICH INSURES NOT ONLY THE YIELD, BUT ALSO THE PRICE. WHICH IS THE ONE THAT YOU ASKED ABOUT AND I REFERRED TO BEFORE. THAT IS THE MOST EXPENSIVE COVERAGE WE OFFER. AND IT’S ABOUT 40 PERCENT HIGHER THAN OUR HIGHEST MPCI - MULTI-PARAL CROP INSURANCE COVERAGE.

THESE POLICIES WILL COST THE FARMERS PLENTY OUT OF THEIR POCKETS. IT WOULD HAVE BEEN USEFUL HAD WE GOTTEN TO THIS DEBTH IN THIS PROGRAM TO ACTUALLY GO THROUGH A PREMIUM CALCULATION. BUT ON AVERAGE, THE FARMER SHOULD EXPECT TO PAY ROUGHLY 60 PERCENT OF THE PREMIUM THAT WE ASSESS. NOW THAT 60 PERCENT IN TERMS OF A CROP REVENUE COVERAGE POLICY OR ONE OF THE HIGHER COVERAGE POLICIES IS GOING TO BE SIGNIFICANT.

SO THE ANSWER TO THE FIRST QUESTION IS NOW THERE IS ONLY A PAY OUT IF THE YIELD GOES BELOW, IN THIS CASE, THE MOST POPULAR COVERAGE LEVEL IS 65 PERCENT OF YIELD AT 100 PERCENT OF PRICE. IN THAT CASE, IF THE YIELD SINKS BELOW 65 PERCENT OF THE BUSHELS, BASED ON HISTORY THAN THE FARMER IS IDEMNIFIED AT THE PORTION THAT SINKS BELOW 65. SO IF IT GOES DOWN TO 60 THEN FIVE PERCENT OF THOSE BUSHELS WILL BE COVERED AT 100 PERCENT OF OUR PUBLISHED PRICE. SO YOUR PAYMENT IS NOT GUARANTEED. IN TERMS OF THE GENERAL AGREEMENT ON TARES AND TRADES THE SUBSIDIES IN OUR PROGRAM HAVE NOT TO DATE BEEN NOTIFIED TO THE W20 AS WHAT IS TERMED GREEN BOX PROTECTED. IN OTHER WORDS, THEY HAVE NOT BEEN NOTIFIED AS BEING IMMUNED TO COUNTER VEILING ACTIONS. THEY ARE COUNTED AGAINST THE AMOUNT OF SUBSIDY THAT THE U.S. CAN INJECT INTO THEIR AGRICULTURAL SYSTEM BASED ON THE WTO AGREEMENT. SO THERE IS THIS CAP BEYOND WHICH YOU MAY NOT INJECT DOMESTIC SUPPORT INTO YOUR AGRICULTURAL SECTOR. OUR CURRENT LEVEL IS WELL BELOW OUR NEGOTIATED CAP AND OUR CROP INSURANCE SUBSIDIES REPRESENT ABOUT 10 TO 15 PERCENT OF OUR CURRENT TOTAL SUBSIDIES. SO, MY SYSTEM IS VERY GAP COMPLIANT.

THE QUESTION WAS, ARE WE FUGING MARKET SIGNALS BECAUSE THE PRODUCER IS EXPECTING A CERTAIN PAYMENT. IF A PRICE SO WHEAT FALLS OUT OF THE SKY AS ________ BECAUSE WE DON’T HAVE THE CEILING FIXED, THAT IS A MARKET SIGNAL TO REDUCE PRODUCTION. BUT IF THE PRICE OF WHEAT FALLS AND YOU HAVE AN INSURANCE POLICY THAT IS GOING TO GIVE YOU A RETURN ANYWAY, THAT IS GOING TO BE ABOVE YOUR PREMIUM, OTHERWISE YOU WOULDN’T WAIST YOUR PREMIUM, YOU REALLY ARE NOT GETTING THE SIGNAL TO YOUR PRODUCERS THAT THERE’S ANOTHER PRODUCTION IN WEIGHT BECAUSE THEY STILL CAN GO ON PRODUCING THE SAME COMMODITY AND DO IT AGAIN NEXT YEAR BECAUSE THERE’S STILL NOT ACTUALLY GOING TO BE IN A LOSS SITUATION. NOW IS A FUGING MARKET SIGNAL? THAT’S MY QUESTION.

(NEW SPEAKER)

I WOULD ARGUE NO. WOULD YOU LIKE TO TAKE THIS BARBARA? OK. I WOULD ARGUE NO FOR THIS REASON. THAT MARKET SIGNALS ARE, I THINK, IT IS LIGITIMATE FOR THE MARKET TO SHOW THE PRICE OF WHEAT GOING DOWN. BUT FOR THE MARKET TO ALSO SHOW THAT PRODUCER’S INCOME HAS REMAINED RELATIVELY STABLE BECAUSE OF THE FACT THEY PURCHASE INSURANCE. IF, FOR INSTANCE, UNDER THAT SAME SCENERIO, YOU MIGHT FIND A LOT LESS PRODUCTION NEXT YEAR, BUT A CERTAIN PORTION OF THAT REDUCED PRODUCTION MIGHT BE BECAUSE A LOT OF PRODUCERS WENT OUT OF BUSINESS. NO SO MUCH BECAUSE THEY SIMPLY DIDN’T LIKE THE PRICE OF WHEAT AND THEY DECIDED TO PLANT ANOTHER CROP. SO IF THEY WERE IDEMNIFIED ON THEIR INSURANCE POLICY ONE CAN ARGUE, I THINK QUITE REASONABLY, THAT THAT PRODUCER WOULD BE JUSTIFIED AND IT WOULD BE A RATIONAL DECISION FOR THAT PRODUCER TO MAKE WITHIN THE MARKET CONTEXT TO BACK IN AND PLANT WHEAT THE NEXT YEAR. WHY SHOULD THEY NOT PLANT WHEAT THE NEXT YEAR? WHY SHOULD THEY NOT PLANT, FOR INSTANCE, WHEAT THIS YEAR? IF WEATHER WAS SUCH THAT YIELD WAS SO GOOD THAT PRICES SUNK FOR A YEAR. IT DOESN’T MEAN THAT WEATHER WOULD BE SO GOOD THAT YIELDS WILL SINK NEXT YEAR. SO WHILE THERE MAY BE A SURPLUS IN ONE YEAR, THERE’S ALWAYS GOING TO BE THIS BEND WITHIN WHICH TOTAL YIELD IS GOING TO FLUCTUATE. AND IF THE YIELD GOES UP IN ONE YEAR THEN PRICES SHOULD EXPECT TO GO DOWN. AND I DON’T BELIEVE THAT IT WOULD BE FUGY MARKET SIGNALS TO IDEMNIFY PRODUCERS.

(NEW SPEAKER)

I JUST WANT TO MAKE REALLY CLEAR THAT WE RECOGNIZE THAT NO MATTER WHAT KIND OF CROP INSURANCE THEY BUY, WHETHER IT IS A CATASTROPHIC WITH A BUY UP PLAN TO GET A HIGHER PERCENTAGE OF COVER OR WHETHER IT’S REVENUE PRODUCT.

THE FORMULAS ALWAYS TAKES INTO ACCOUNT WHAT THE MARKET PRICE IS. SO THUS, IF YOU BOUGHT UP, SO YOU GOT 65 PERCENT COVERAGE IT’S 65 PERCENT OF WHERE THE PRICE OF WHEAT. SO WHEN PRICE OF WHEAT IS AT $4.00, WHICH IS IN THE TOILET FOR US, IF YOU WILL, THEN 60 PERCENT OF $4.00 DOESN’T EVEN COVER COST OF PRODUCTION. WHAT THIS IS, IS A WAY TO PROVIDE JUST ENOUGH REVENUE TO KEEP OUR LOCAL ECONOMY’S REASONABLY STABLE AND AT THE SAME TIME IT SENDS A VERY STRONG SIGNAL TO FARMERS THAT THEY DO NEED TO BE FLEXIBLE WITH WHAT THEY GROW.

WE JUST HAD A SITUATION A COUPLE OF WEEKS AGO, GROUP OF FARMERS FROM THE NORTHERN PLAINS AND DURAM WHEAT FARMERS TO BE VERY SPECIFIC. THEY WERE INTO OUR KANSAS CITY OFFICE WHERE WE DO RESEARCH AND DEVELOPMENT AND THOSE FARMERS WERE ARGUING. WELL THE PROBLEM IS WE’VE GOT WHEAT SCAB. THE PROBLEM IS WE HAD THE 93 FLOOD AND WE’VE GOT THE POT HOLE SIUTATION. THEY NEVER DRIED OUT. AND THEN WE GOT THE PLACE THAT DON’T HAVE POT HOLES. NOW WE GOT DROUGHT. IT’S LIKE WE GOT ALL THESE TERRIBLE THINGS. AND THE STAFF IN KANSAS CITY CHATTED BACK AND FORTH. AND FINALLY, ONE OF OUR STAFF SAID, WELL LET’S DO THIS BASED ON THE CURRENT WHEAT, CURRENT PRICE OF WHEAT, BASED UPON HOW MUCH YOUR USUAL CROP WOULD BE WITHOUT ALL THESE BAD THINGS. SO, WHAT WAS THE AVERAGE NUMBER OF BUSHELS? PICKED 50, 60. IT DOESN’T MATTER. THEY PLUGGED IN THE NUMBER, DID THE FORMULA, CAME OUT WITH - THEY STILL WEREN’T GOING TO GET ENOUGH MONEY TO COVER COST OF PRODUCTION. AND SO FINALLY ONE OF THE FARMERS LOOKED AT IT AND SAID YOU’RE REALLY TELLING US. HE SAID I OUGHT TO BE GROWNING SOMETHING BESIDES DURAM WHEAT THIS YEAR.