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Thursday, August 26, 2010

Renegotiation of the Standard Reinsurance Agreement (SRA) for Federal Crop Insurance

Dennis A. Shields
Specialist in Agricultural Policy


Under the federal crop insurance program, farmers can purchase crop insurance policies to manage financial risks associated with declines in crop yields and/or revenue. The program covers more than 100 crops and is administered by the U.S. Department of Agriculture's (USDA's) Risk Management Agency (RMA), which acts as both regulator and reinsurer. To encourage farmer participation and reduce the need for ad hoc disaster assistance, the federal government subsidizes the purchase of crop insurance policies, which are sold and serviced through 16 approved private insurance companies. Insurance company losses are reinsured by USDA, and their administrative and operating (A&O) costs are reimbursed by the government. 

A Standard Reinsurance Agreement (SRA) between USDA and the private companies spells out expense reimbursements and risk-sharing by the government, including the terms under which the government provides subsidies and reinsurance (i.e., insurance for insurance companies) on eligible crop insurance contracts sold or reinsured by insurance companies. As a result, the SRA plays a central role in determining program costs. The SRA does not affect policy premiums paid by farmers, which are based on RMA's estimates of risk and on subsides set in statute. 

As provided under the 2008 farm bill, USDA in late 2009 began renegotiating the SRA established in 2004. On July 13, 2010, USDA announced that all of the approved crop insurance companies had signed the new SRA, which covers crops with policy closing dates after July 1, 2010 (e.g., 2011-crop corn). Prior to and during the negotiations, some had criticized the previous SRA as being too generous for insurance companies following a significant increase in government costs in recent years. Although Congress does not directly approve any new agreement, Congress has been interested in its oversight capacity, particularly with respect to cost-effectiveness and effects on farmer participation, the industry's selling and servicing of crop insurance products to farmers, and baseline funding levels for the next farm bill. 

Since A&O reimbursements under the previous SRA were based on a percentage of premiums, their dollar amount had risen sharply in recent years as premiums rose to reflect higher crop prices. The A&O reimbursement increased from an average of $881 million during FY2004- FY2006 to $1.6 billion in 2009. Similarly, company underwriting gains (the amount by which a company's share of retained premiums exceeds its indemnities) have increased substantially in recent years, as weather has been generally favorable for growing crops. Some have argued that if the government share of gains is increased in exchange for a larger government share of losses, average taxpayer costs would decline. The insurance industry has contended that a certain SRA provision ("net book quota share") is a tax on underwriting income and crowds out private reinsurance. 

RMA released its first draft of the 2011 SRA on December 4, 2009, a second draft in mid- February 2010, and a "final" draft on June 10, 2010. The final SRA places a cap on A&O reimbursements to control costs, and limits a company's expenditures on agent commissions. Among the changes to underwriting provisions, the final SRA improves profit potential and reduces company risk in higher-risk and underserved states. Overall, USDA expects the changes to save $6 billion over 10 years. The industry remains concerned that funding reductions are excessive, potentially jeopardizing program delivery to farmers.



Date of Report: August 12, 2010
Number of Pages: 20
Order Number: R40966
Price: $29.95

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OMB Controls on Agency Mandatory Spending Programs: “Administrative PAYGO” and Related Issues for Congress

Clinton T. Brass
Analyst in Government Organization and Management

Jim Monke
Specialist in Agricultural Policy

On May 23, 2005, during President George W. Bush's second term, then-Office of Management and Budget (OMB) Director Joshua B. Bolten issued a memorandum to the heads of agencies. The memorandum announced that OMB would involve itself systematically in some aspects of how agencies execute laws related to mandatory spending. Under the process outlined in the OMB memorandum, if an agency wished to use discretion under current law in a way that would "increase mandatory spending," the memorandum required the agency to propose the action to OMB. Such actions might include regulations, demonstration program notices, and other forms of program guidance. For purposes of OMB's process, an increase was defined as spending more than the amount that the Administration assumed in its most recent projection of what is required under current law to fund the mandatory spending program. To offset such a difference in spending, the memorandum also required the agency to propose actions that would "comparably reduce" mandatory spending. The memorandum did not address, however, whether agencies' administrative actions and corresponding spending changes would be consistent with congressional intent or expectations, or whether agencies' proposals and OMB's decisions would be transparent to Congress and the public. 

For the most part, mandatory spending programs are provided for in substantive laws under the jurisdiction of House and Senate authorizing committees. The Administration characterized the OMB review process as "augmenting its ... controls" on agency decisions. It also referred to the process as "administrative PAYGO." In using the term "PAYGO," the Administration juxtaposed this OMB involvement in agency decision making with a statutory and comparatively transparent mechanism that Congress has used when carrying out its legislative function. 

In 2009, the Barack Obama Administration said it would continue the OMB memorandum's process. After several years of implementation, however, very little is publicly known about the scope and effect of OMB's process, the rationales for OMB determinations, or whether the process has achieved its stated purpose of constraining mandatory spending. In one case, concerning a program in the U.S. Department of Agriculture, some details about OMB's process were disclosed publicly in June 2010. The disclosure prompted congressional concerns about the relationships between congressional intent, agency policy implementation, and the role of OMB. Even though OMB's process is not transparent, it is possible to analyze some of the memorandum's other potential implications, if its process were used. While potentially limiting spending, the OMB process may have measurable effects on program outcomes for entitlement programs, for example, and may impose administrative burdens on federal agencies. Moreover, if agencies experience difficulty in identifying plausible offsets, it is conceivable that agencies may choose to not consider, pursue, or submit to OMB an administrative action that would cost money, regardless of the agency's perception of a policy's merits or whether it would be consistent with congressional intent. Differences may arise between OMB and CBO baselines of projected federal spending. 

In approaching the subject of OMB controls on agency mandatory spending, Congress might assess at least five general options. First, if Congress sees no need to engage in lawmaking or oversight of the process, it might continue with the status quo. Second, if Congress wished to learn more about the process, Congress could conduct oversight. If Congress wished to address the topic prospectively through lawmaking, Congress might consider three other options: increasing transparency of OMB's process, legislating in greater detail, or modifying how OMB's process operates.



Date of Report: August 19, 2010
Number of Pages: 34
Order Number: R41375
Price: $29.95

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Reducing SNAP (Food Stamp) Benefits Provided by the ARRA: P.L. 111-226 & S. 3307

Joe Richardson
Specialist in Social Policy

Jim Monke
Specialist in Agricultural Policy

Gene Falk
Specialist in Social Policy


The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) included an acrossthe- board increase in benefits provided under the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp program), effective in April 2009. The ARRA effectively replaced, until after FY2018, the increase in SNAP benefits that occurs based on annual foodprice inflation indexing (under current inflation scenarios). The ARRA substantially raised maximum monthly benefits, by 13.6%. For a one-person household, the added benefit was $24 a month; for two persons, $44 a month; for three persons (the most typical household), $63 a month; for four persons, $80 a month; and for larger households, higher amounts. As a result, average household SNAP benefits (typically less than the maximum) were boosted by more than 15%. The effects of the ARRA benefit increase were expected to terminate after FY2018, when food-price inflation "caught up" with the ARRA add-on. Through FY2018, when the effect of this increase is currently projected to end, Congressional Budget Office (CBO) estimates indicate an extra benefit cost of some $57 billion linked to the 2009 ARRA provision. 

These increased SNAP benefits were recently reduced as part of P.L. 111-226 (a law providing funding for education jobs and Medicaid) and are proposed for further reduction in the Senate's amended version of its child nutrition/WIC reauthorization bill (S. 3307, as approved on August 5, 2010). 

Under congressional "pay-as-you-go" (PAYGO) rules, P.L. 111-226 and S. 3307 would tap future spending for ARRA-generated extra SNAP benefits to pay for costs incurred in these initiatives— to the tune of $11.9 billion in P.L. 111-226, and an additional $2.5 billion under the terms of S. 3307. P.L. 111-226 achieves its savings by terminating the ARRA across-the-board SNAP increase effective March 31, 2014. As a result, SNAP benefits will revert to what basic SNAP law directs (i.e., as calculated using annual food-price inflation). CBO estimates that the initial drop in monthly benefits will be between $10 and $15 a person—approximately a 10% reduction in average per person benefits. S. 3307 proposes to achieve its savings by moving up the date on which the ARRA-generated SNAP benefit increase will terminate—to October 31, 2013. 

This report outlines how the provisions in these two measures work to draw on future SNAP spending and benefits and the effect they have on ARRA-based SNAP benefits.



Date of Report: August 20, 2010
Number of Pages: 8
Order Number: R41374
Price: $19.95

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Thursday, August 19, 2010

Food Safety: Selected Issues and Bills in the111th Congress

Renée Johnson
Specialist in Agricultural Policy

The combined efforts of the food industry and government regulatory agencies often are credited with making the U.S. food supply among the safest in the world. Nonetheless, public health officials have estimated that each year in the United States, many millions of people become sick, and thousands die from foodborne illnesses caused by any one of a number of microbial pathogens and other contaminants. At issue is whether the current food safety system has the resources, authority, and structural organization to safeguard the health of American consumers, who spend more than $1 trillion on food each year. Also at issue is whether federal food safety laws, first enacted in the early 1900s, have kept pace with the significant changes that have occurred in the food production, processing, and marketing sectors since then. 

In the 111th Congress, several food safety bills have been introduced, and wide-ranging legislation (H.R. 2749) has passed the House. The Senate also has a comprehensive bill (S. 510). Both of these bills mainly focus on the U.S. Food and Drug Administration's (FDA's) food regulation rather than that of the U.S. Department of Agriculture (USDA, which has oversight of most meat and poultry). The bills would use the agency and its existing FDA authorities rather than create a new food safety structure or authorities. H.R. 2749 is a revised version of H.R. 759, and was amended and approved by a House Energy and Commerce subcommittee on June 10, 2009. The full committee further amended and approved H.R. 2749 on June 17, 2009, and the full House approved the bill on July 30, 2009, with a number of additional amendments intended to satisfy the concerns of agricultural interests. The Senate Health, Education, Labor, and Pensions Committee amended and approved S. 510 on November 18, and reported it December 18, 2009. Floor action is anticipated in 2010. In mid-July potential amendments to the bill were being discussed, aimed at addressing issues of continued interest to various Senators. A number of these could be proposed by floor managers when the full Senate takes up the measure. 

Food safety legislation is a response to a number of perceived problems with the current food safety system. For example, a growing consensus is that the FDA's current programs are not proactively designed to emphasize prevention, evaluate hazards, and focus inspection resources on areas of greatest risk to public health. Given its widely acknowledged funding and staffing constraints, and no explicit requirement on the frequency of inspections, the agency rarely visits food manufacturing and other facilities to check sanitary and other conditions. In response, the bills would require (although in different ways) food processing, manufacturing, shipping, and other regulated facilities to conduct an analysis of the most likely safety hazards and to design and implement risk-based controls to prevent them. The bills envision establishment of sciencebased "performance standards" for the most significant food contaminants. To help determine such risks and hazards, the bills propose improvement of foodborne illness surveillance systems. 

The bills seek to increase frequency of inspections, tighten record-keeping requirements, extend more oversight to certain farms, and mandate product recalls if a firm fails to do so voluntarily. Major portions of the bills are devoted to more scrutiny of food imports, which account for an increasing share of U.S. consumption; food import shipments would have to be accompanied by documentation that they can meet safety standards that are at least equivalent to U.S. standards. Such certifications might be provided by foreign governments or other so-called third parties accredited in advance; again, the major bills differ in how to accomplish these objectives. The bills have provisions for certifying or accrediting laboratories, including private laboratories, to conduct sampling and testing of food for various oversight purposes
.


Date of Report: July 30, 2010
Number of Pages: 38
Order Number: R40433
Price: $29.95

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Friday, August 13, 2010

Meeting the Renewable Fuel Standard (RFS) Mandate for Cellulosic Biofuels: Questions and Answers


Kelsi Bracmort
Analyst in Agricultural Conservation and Natural Resources Policy

The Renewable Fuel Standard (RFS) was expanded under the Energy Independence and Security Act of 2007 (EISA; P.L. 110-140) in an effort to reduce dependence on foreign oil, promote biofuel use, and stabilize transportation fuel prices, among other goals. Over a 15-year period, the RFS seeks to establish a market for biofuels in the transportation sector by requiring that increasing amounts of biofuels—36 billion gallons by 2022—be blended into transportation fuel. The mandate is to be accomplished with an assortment of advanced biofuels, including cellulosic biofuels—fuels produced from cellulosic materials including grasses, trees, and agricultural and municipal wastes. The cellulosic biofuel allotment in the mandate, as established by Congress in EISA, was 100 million gallons due in 2010, increasing to 16 billion gallons by 2022. However, on March 26, 2010, the U.S. Environmental Protection Agency (EPA) issued a final rule for implementation of the RFS that sets a new, lower cellulosic biofuel mandate of 6.5 million gallons for 2010.

Recent analysis has suggested that the United States might not have sufficient cellulosic biofuel production capacity to meet the 2010 RFS mandate of 100 million gallons instituted by Congress in EISA. The cellulosic biofuel community may fare better at achieving the new mandate set by EPA if certain obstacles are overcome. No commercial-scale cellulosic biofuel plants are currently operating. Roadblocks include unknown levels of feedstock supply, expensive conversion technology that has not yet been applied commercially, and insufficient financial support from private investors and the federal government.

Some financial support from the Departments of Energy and Agriculture is available to expedite cellulosic biofuel production. For example, the Biomass Crop Assistance Program (BCAP), created under the Food, Conservation, and Energy Act of 2008 (2008 farm bill; P.L. 110-246), is to support establishment and production of crops for conversion to bioenergy. Financial support available thus far via BCAP is for collection, harvest, storage, and transportation of eligible material. BCAP support for the establishment and production of eligible crops for the conversion to bioenergy is anticipated to begin in 2010. Also, the Department of Energy's Loan Guarantee Program, created under the Energy Policy Act of 2005 (EPAct05, P.L. 109-58), distributes loan guarantees to eligible commercial-scale renewable energy systems, including cellulosic biofuel plants, although criticisms have been raised that the program has been slow to get started.

Many questions regarding cellulosic biofuels and the RFS may arise as Congress engages in energy legislation debates. Can and will the 2010 and future RFS mandates for cellulosic biofuels be met? What impact will significantly lowering the 2010 cellulosic ethanol mandate have on investment in celluosic ethanol production? What are the next steps Congress could take to expedite cellulosic biofuel production? Proposed legislation (H.R. 2454, S. 1462, H.R. 2283, and S. 943), if enacted, may influence cellulosic biofuel production by providing additional financial, infrastructure, and environmental support. This report, in a question and answer format, discusses some of the concerns facing the cellulosic biofuel community, including feedstock supply estimates, an expected time frame for the first commercial cellulosic biofuel projects, and potential legislative options to address cellulosic biofuel production uncertainty for the RFS.


Date of Report: July 28, 2010
Number of Pages: 17
Order Number: R41106
Price: $29.95
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Wednesday, August 4, 2010

Measuring Equity in Farm Support Levels


Randy Schnepf
Specialist in Agricultural Policy

Federal farm law mandates support for, among others, 21 "covered commodities." Support for these agricultural commodities, as specified in the 2008 farm bill (P.L. 110-246) includes direct payments, counter-cyclical payments, and marketing loan benefits. Since 1996 a handful of these program commodities—feed grains (corn, sorghum, barley, and oats), cotton, wheat, rice, soybeans, and peanuts (hereafter referred to as the major program crops)—have received over $160 billion or 72% of all U.S. farm program payments, primarily in the form of commodity price and income support benefits.

Large disparities in the relative levels of benefit among these commodities have led to questions of equity. This report looks at available data for the major program crops and compares support rates per unit, total payments, payments per harvested acre, payments as a share of the value of production, and payments as a share of the total cost of production. In addition, price and income support levels are compared to market prices. By all of these measures there has been little equity across commodities. However, farmers often have argued for equity based on cost of production. Economists, on the other hand, would use trend (or a moving average of) market prices as the basis for setting support prices in order to avoid market distortions and resource misallocations.

There is little or no practical or theoretical justification for equalizing support rates, total payments, or payments per harvested acre. In fact, some critics say the subsidies themselves are not justified. However, to the extent that farm support is a political reality, equity is a consideration. There are times when market prices drop substantially, but temporarily, below trend levels. At these times support may be justified to prevent unnecessary and undesirable resource adjustments. This builds on the concept of a market-based "safety net" that uses market price trends as the key factor in setting support levels.

During the past 13 years (1997-2009), monthly average market prices for the major "covered commodities" have been below loan rates 30% of the time, and below effective target prices 58% of the time. However, this frequency has varied substantially across crops. This report calculates adjustments to policy parameters that would put each of the commodities "in the money" an arbitrary 30% of the time with regard to the price guarantee inherent in marketing loans, and an arbitrary 50% of the time with regard to adjusted target prices used by the counter-cyclical payments program.

Compared to market price trends from 1997 through 2009, upland cotton and rice have disproportionately high effective target prices and marketing loan rates relative to the other major covered commodities. Barley and soybeans have disproportionately lower adjusted target prices and marketing loan rates. The situation is mixed for most of the other crops; however, wheat, corn, sorghum, and oats are within +/-5% of the parity value for both loan rates and target prices, suggesting that they are the closest to achieving policy equity under this somewhat ad hoc analysis.


Date of Report: July 20, 2010
Number of Pages: 22
Order Number: RL34053
Price: $29.95



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Monday, August 2, 2010

Country-of-Origin Labeling for Foods


Remy Jurenas
Specialist in Agricultural Policy

Many retail food stores are now required to inform consumers about the country of origin of fresh fruits and vegetables, seafood, peanuts, pecans, macadamia nuts, ginseng, and ground and muscle cuts of beef, pork, lamb, chicken, and goat. The rules are required by the 2002 farm bill (P.L. 107- 171) as amended by the 2008 farm bill (P.L. 110-246). Other U.S. laws have required such labeling, but only for imported food products already pre-packaged for consumers.

Both the authorization and implementation of country-of-origin labeling (COOL) by the U.S. Department of Agriculture's Agricultural Marketing Service have not been without controversy. Much attention has focused on the labeling rules that now apply to meat and meat product imports. A number of leading agricultural and food industry groups continue to oppose COOL as costly and unnecessary. They and some major food and livestock exporters to the United States (e.g., Canada and Mexico) also view the new requirement as trade-distorting. Others, including some cattle and consumer groups, maintain that Americans want and deserve to know the origin of their foods, and that many U.S. trading partners have their own, equally restrictive import labeling requirements.

Obama Administration officials announced in February 2009 that they would allow the final rule on COOL, published just before the end of the Bush Administration on January 15, 2009, to take effect as planned on March 16, 2009. However, the Secretary of Agriculture also urged affected industries to adopt—voluntarily—several additional changes that, the Obama Administration asserts, would provide more useful origin information to consumers and also would more closely adhere to the intent of the COOL law.

Retail compliance with COOL requirements appears to have proceeded reasonably well. To address identified labeling problems, observers have called for additional outreach to retailers to help them better understand what is required and the steps they can take to improve compliance.

The most significant issue that has arisen to date is the November 2009 decision by Canada and Mexico to challenge COOL rules and the "voluntary suggestions" using the World Trade Organization's (WTO's) trade dispute resolution process. Both countries argue that COOL has a trade-distorting impact by reducing the shipment of their cattle and hogs to the U.S. market, as U.S. livestock market participants began to make adjustments in anticipation of new meat labeling rules. They also argue that COOL rules violate trade rules that the United States agreed to under the WTO and the North American Free Trade Agreement. Responses to this development reflect the heated debate seen earlier among key players in the livestock sector. U.S. meatpackers and processors support Canada's and Mexico's position that COOL violates U.S. trade obligations. Some cattle producer groups argue that COOL is consistent with U.S. commitments and does not discriminate between imported and domestic beef. Twenty-five Senators have expressed their support for COOL, noting that other countries (including Canada and Mexico) require country-of-origin information to be provided to consumers.

The 111th Congress is considering legislation that would expand COOL labeling requirements to cover more food products. H.R. 2749, the House-passed food safety bill, would expand such labeling to apply to all processed foods and to other agricultural commodities not now covered by the farm bill and other statutory provisions. The Senate-reported companion bill (S. 510) does not include a comparable provision, but pertinent amendments may be offered during floor debate. Separately, S. 1783 would require retailers to implement COOL for dairy products.


Date of Report: July 15, 2010
Number of Pages: 20
Order Number: RS2955
Price: $29.95


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