in union is strength

Index:

• Introduction
• Principles
• The Five Options
• Two-Tiered Crop Insurance
• Equity Building
• Self Directed Risk Management
• Non-Insured Assistance Program
• Administrative Cost Recovery
• Crop Insurance Should Remain Public
• Problems with the Status Quo
• National Disaster Relief Program
• Conclusion
• NFU Response to the Crop Insurance Review

Introduction

Production risks are important hazards in primary agriculture, and production losses are an important destabilizing element in farmers' lives. This has always been true and is likely to continue to be so.

Privately administered and delivered crop insurance is not feasible - the risks to a private insurer are too great and the prices which a private insurer would have to charge would simply not be affordable for the vast majority of farmers.

The National Farmers Union's predecessors, the provincial unions, fought for publicly administered all risk crop insurance long before it became a reality. The National Farmers Union continues to support crop insurance as a core safety net program for farmers.

Principles

The National Farmers Union believes that the following principles should govern the design and delivery of the crop insurance program:

1. The program should be made available to the producers of every commodity. The only exceptions should be cases where it is not technically feasible to deliver it.
   
   
2. The premiums must be affordable for farmers.
   
   
3. The program's design must be simple and predictable.
   
   
4. The program should be publicly administered. This is both because crop insurance is not operable without subsidization and because public crop insurance corporations have proven themselves more administratively efficient than private insurance companies operating in other fields.
   
   
5. The program should be flexible. It should offer basketed and area coverage to those who want cheap insurance. It should offer individual coverage, higher coverage levels, and features such as risk-splitting, to those who desire it. The program should be able to accommodate new crops and alternative production methods, such as organic farming.
   
   
6. Coverage levels should reflect actual production history and the area average cost of producing a crop. Crop insurance should cover, at the very least, the cash costs of producing a crop.
   
   
7. The program should have the effect of enhancing the natural environment.

The Five Options

The Status Quo

In our view, the current crop insurance program is a proven risk management vehicle, which is adaptable to most commodities. Nothing is perfect, however, and we will at a later point identify some of the deficiencies in the current program which need to be addressed.

The National Farmers Union has believed for some time that crop insurance requires a parallel National Disaster Relief Program which would deal with widespread and severe crop failures. Such crop failures tend to make crop insurance financially unsound.

Two-Tiered Crop Insurance

This proposal is in essence a realignment of premium costs. The heavily subsidized, lower level of coverage would act as a disaster relief program - something which is clearly of interest to government.

We fear, however, that higher participation at the lower coverage levels will eat up a disproportionate share of the government premiums. The coverage levels which most producers currently take, 70% in the West and 80% in the East, will become more expensive. Greater expense at traditional coverage levels implies lower participation and ultimately even higher premium costs at these coverage levels.

We do not believe that crop insurance is an appropriate disaster relief vehicle, though crop insurance data would clearly be useful in a National Disaster Relief Program.

The proposal does not address the problem of hard to insure crops.

Equity Building

The National Farmers Union believes that this is an unlikely investment tool for those who find crop insurance too expensive, and/or who find their probability of claiming too low.

Equity accounts would be entirely financed by producers. All producers would pay a premium load in order to build these accounts for a minority of producers. We believe that there is a problem with this.

Self Directed Risk Management

This is NISA by another name. NISA is not an insurance scheme and as a consequence it does not pool risk. We believe risk pooling to be the soundest way of managing crop yield losses.

The National Farmers Union believes that there is no sense in proposing SDRM as anything other than a NISA top up. Surely separate administration of these two programs would be a terrible waste. If SDRM was delivered as a NISA top up, however, we would have considerable concern about NISA features such as the 3% interest bonus on unmatched deposits, which would tend over time to consume considerable government resources which would otherwise go to crop insurance.

We do not believe that SDRM would be useful for beginning farmers, nor would it be useful in a series of crop loss years.

If SDRM is adopted by government, it must be very clear that it can only be offered to producers of commodities which have had overwhelming technical failures in the delivery of their crop insurance programs. If producers of such commodities also grow crops which can be adequately covered by crop insurance, they should not have the option of choosing SDRM for those crops as well.

The National Farmers Union does not believe that attempts to adapt crop insurance to the needs of fresh market horticulture have been exhaustive. We would suggest, for example, that the difficulty of calculating current and historical prices could be overcome by using area average cost of production in the calculation of coverage levels.

Non-Insured Assistance Program

We believe that this program design would provide low and unpredictable coverage, in an administratively complex fashion. Better disaster relief programs than this can be designed.

Administrative Cost Recovery

It is important that governments not make a core safety net program more difficult to use. Unfortunately, the federal government's intention to recover 20% of its share of administration costs does precisely that. It increases farmers' costs, at a time when premiums are high, without any visible compensatory benefit.

If the federal government proceeds with this transfer of cost, we would like to see it charged as a percentage of the value insured in each contract. An equal charge per crop insurance participant would be quite unfair. Much of the administrative work load in crop insurance is proportional to the size of the account, for example, adjustments for large claims take more staff time than do small claims.

Crop Insurance Should Remain Public

Crop Insurance does not represent a commercial opportunity for any private insurance company. If crop insurance were privatized, it would have to remain heavily subsidized. Tax dollars would not only have to serve the public purpose of stabilizing farm incomes, they would have to also produce profits for the private insurance companies' shareholders.

We believe that there are administrative economies of scale which can only be realized if provincial crop insurance programs are delivered by a single organization. Duplication of administrative infrastructure would be an added cost which farmers and governments would have to bear. The administration costs of provincial Crop Insurance corporations compare very favorably to those of private casualty insurers.

Problems with the Status Quo

As mentioned at the beginning of this brief we believe that there are problems with the status quo which need to be addressed:

1. Many provinces do not have an adequate mechanism for reducing the risks of growing new crops. Farmers who innovate should have some means of laying off at least a portion of the risk
   
2. Many farmers complain about inadequate coverage levels for some crops, in some areas. Much of this is due to the speed with which a ten year average reacts to improved crop results; some of it is due to growing new crops which do not have yield histories
   
3. Producers of fresh horticulture complain that the current design does not meet their needs. We suggest that more effort be put into adapting crop insurance to meet their needs
   
4. Premiums in some provinces are not affordable for large numbers of producers. In Saskatchewan, this is directly attributable to a large deficit, and to a federal requirement that the deficit be retired rapidly while simultaneously building a reserve fund

National Disaster Relief Program

The NFU has always supported the idea of a national disaster relief fund. A disaster program should only operate when crop losses are widespread and severe. The program should have predictable rules and simple administration.

It is our belief that crop insurance would work better if a disaster program was in place, primarily because onerous deficits would not be created. Crop insurance customers should not be penalized by the rules of a disaster program for having taken responsibility for production risks. Disaster payments to crop insurance participants could either be top ups to crop insurance coverage, or more appropriately, be applied directly against a crop insurance deficit.

Conclusion

The National Farmers Union supports the continued use of the current crop insurance design, though we also support seeking improvements to it.

We believe that crop insurance should remain a core program, and we are worried that governments might injure it fatally by withdrawing too many resources from it.

The National Farmers Union does not believe that crop insurance can work as a privatized commercial insurance product. We believe that it must remain publicly financed and publicly delivered.

We have sympathy for the producers of commodities which are not easily insured, but we still believe that an insurance approach to their problems offers the best prospect of success.

Questions for Discussion

1. Should production risk management programs be primarily business instruments, or are there broader "social" dimensions?
   
   • They are business instruments which have a social purpose. They are legitimate insurance products which stabilize farm income, but they would not be provided by the private market unless it was heavily subsidized.
   
   
2. Should government financial assistance focus on widespread and serious losses, with farmers assuming the responsibility for "normal" risks?
   
   • Farmers are able to assume production variations within certain limits. These limits are lower than that implied by "widespread and serious losses". Governments should help farmers purchase insurance in the 70-90% of long term average range.
   
   
3. What should be the extent of risk-splitting?
   
   • Actuarially sound risk-splitting should be allowed to make the program attractive to those who do not currently participate. Those who do not consume the risk-split should not be expected to pay for it. Cheaper options without risk splitting should also be available
   
   
4. Should production risk management programs be characterized by more or less national consistency?
   
   • One national program might be desirable but is not possible given the provinces constitutional responsibility for crop insurance. It is important that all provincial programs meet the objective of providing affordable, all risk production insurance to producers. In meeting that objective it is important that the federal government continue to provide a fixed percentage of crop insurance premiums and that it continue to act as the re-insurer for each provincial program
   
   
5. Should CI remain the only production risk management program or should it be supplemented or replaced by other instruments?
   
   • A national Disaster Relief program is needed to cover circumstances of very widespread crop failure. Crop Insurance tends to suffer large deficits in such circumstances which makes the program more expensive and less attractive in subsequent years
   
   
6. Which of the program options presented in the paper best addresses the needs of crop producers in Canada?
   
   • The status quo, though there are problems in its operation which must also be addressed
   
   
7. What are the best ways to ensure that administrative and delivery requirements of production risk management programs are met?
   
   • Both levels of government should continue to adequately fund the administration of crop insurance. Transferring administrative costs to producers, or merely reducing administrative expenditures without maintaining service, will only make the program seem more expensive and less administratively simple
   
   
8. Should the government actively explore privatization of CI or production risk management programs? Should they actively investigate and promote alternative methods?
   
   • No