BULLETIN NO.: MGR-95-044 TO: All Reinsured Companies All Risk Management Field Offices FSA Headquarters, Program Delivery and Field Operations FROM: Kenneth D. Ackerman Acting Deputy Administrator SUBJECT: Insurance Purchase Requirements and Prevented Planting Rules The Secretary of Agriculture addressed two key issues that emerged during the first year of the new crop insurance program. The issues are: insurance purchase requirements and prevented planting rules. The proposed changes will require regulatory and legislative actions. This notice simply signals future policy directions for your consideration. (1) INSURANCE PURCHASE REQUIREMENTS Background Under the Federal Crop Insurance Reform Act of 1994 (Act), producers who expected to receive farm program benefits were required to buy crop insurance, if available, on crops of economic significance. Throughout the 1995 sales season, the Farm Service Agency (FSA) received numerous concerns from producers and their elected representatives regarding the impact of this provision on small shareholders. In some cases, families have divided their shares into amounts as small as 1 to 5 percent for each shareholder. The crop insurance liability (the amount of indemnity to be paid if a total loss occurs) is often less than $500 and many of these individuals complained that it is unfair to require them to carry crop insurance and pay the $50 administrative fee for catastrophic risk protection (CAT). The Act exempts producers from the crop insurance linkage requirement if the crop was not of "economic significance," which is defined by statute to mean that the crop's value did not exceed 10 percent of the value of all crops grown by the producer. Additionally, the regulations to implement the Act provide that economic significance would not be considered and linkage would not apply if the total expected CAT liability was less than or equal to the administrative fee of $50. FSA issued Bulletin MGR-95-008 in March 1995, which provided guidance on restructuring the way producers receive the farm program benefits in order to avoid paying multiple administrative fees. Among other things, multiple owners have the ability under current rules to combine their interests into a single partnership and receive a single farm program payment. In this case, they would need to purchase only a single crop insurance policy and pay a single $50 processing fee. Many landowners; however, refuse to seek this relief because they prefer to receive individual benefits. Action The following changes have been proposed for spring planted crops for the 1996 crop year: (1) Legislation will be requested for the 1996 crop year to increase the amount of liability considered to be economically significant from $50 to $500. This change would enable shareholders with less than $500 liability the option of not insuring their interest without compromising their participation in the farm programs. (2) A single "joint venture" policy with one $50 administrative fee per crop per county would be made available to producers having an undivided share in a crop. This would satisfy linkage for all landowners who hold an undivided interest in land, subject to the following: (a) None of the landowners may hold any other interest for which they are required to obtain at least CAT. Producers with multiple farming interests would be required to purchase separate catastrophic coverage. (b) Total insurance liability for the combined landowners must be $2500 or less. (c) One landowner must receive indemnity payments under a designated tax ID number and distribute the indemnity payments to others sharing in the crop. Note: This option would not change how acreage reduction program benefits are shared; payments would still be made to the present tax ID. (d) All others sharing in the crop must agree on the landowner designated to receive indemnity payments. (e) All landowners qualifying under this provision must be listed as substantial beneficial interests without regard to the percentage of their actual interest in the policy. (f) Each landowner would continue to receive separate farm program payments. (3) FSA is also proposing that owners of small undivided shares in tobacco be insured under a single insurance policy held by the holder of the marketing card. Tobacco producers will have the option of purchasing a single CAT policy to meet the linkage requirement. (2) PREVENTED PLANTING Background Several significant changes were made in prevented planting insurance coverage for the 1995 crop year, including: (1) Allowing a producer to receive both a crop insurance prevented planting production payment and a 0/92 or 50/92 program benefit; (2) Providing a prevented planting production payment equal to 25 percent of the guarantee for timely planted acreage when acreage that is prevented from being planted is subsequently planted to a substitute crop; and (3) Providing a prevented planting production payment equal to 75 percent of the guarantee for timely planted acreage when acreage that is prevented from being planted is not used for haying, grazing or the production of a substitute crop. Action The following changes have been proposed for prevented planting insurance under the Federal crop insurance program beginning with spring planted crops for the 1996 crop year. These program changes cannot be implemented for 1996 fall planted crops because the insurance contract change date has already passed. The 1996 fall planted crops will be covered as they were in the 1994 prevented planting provisions. CAT prevented planting payments on acreage that is planted to a substitute crop are statutorily prohibited. As a result, the statute would have to be amended to apply the substitute crop provision to the CAT coverage level. (1) Allow a producer to receive a 0/92 or 50/92 program payment and a crop insurance prevented planting payment equal to 50 percent of the production guarantee for timely planted acreage (40 percent for hybrid corn seed and 35 percent for cotton, ELS cotton, and rice) when prevented planting acreage is not planted to a substitute crop. The Secretary proposes that this be included in both buy-up and CAT coverage for 1996 spring planted crops. (2) Allow a producer to receive a 0/92 or 50/92 program payment and a crop insurance prevented planting payment equal to 25 percent of the production guarantee for timely planted acreage (20 percent for hybrid corn seed and 17.5 percent for cotton, ELS cotton, and rice) when prevented planting acreage is planted to an eligible substitute crop. An appropriate premium increase would be built into the base rate for this coverage. This change would be available only for buy-up coverage for 1996 spring planted crops. (3) Provide a producer the option of excluding the added prevented planting benefit described in item (2). Producers who exclude the added benefit would not pay the increased premium rate. (4) Convene a meeting of commodity groups, industry, and FSA representatives to reach agreement on changes for the 1997 crop year and beyond.