Program to help small farmers now virtually run by industry

Introduction

When Brad Koetz was told that his impressive sunflower yield was unfit for human consumption, he was taken aback.

His healthy-looking, 250-acre crop of confection sunflowers the kind sold as snack food in your local grocery store suffered from a fungal disease, robbing him of a season of work. Because of this pest, Koetz’s crop was only worth 20 percent of what it should have been.

“The insurance adjuster came, took a sample of my crop, came back a week later and said to me, ‘We can’t cover this disease’. He told me this even though my policy says that I’m covered against all plant- and weather-related diseases,” Koetz said. “I’ve been paying crop insurance for years and in one shot they took away 25 percent of my revenues for the year.”

Sclerotinia forms hard, rock-like formations in the spaces where sunflower kernels are supposed to grow. However, these sunflower-seed shaped pellets are impossible to detect until processing occurs.

By citing a legal loophole, Koetz’s insurer tried to get out of reimbursing him. “They just wouldn’t cover me,” Koetz, said, despite the fact that crop insurance companies were making profits as high as 70 percent.

Koetz fell victim to a government program virtually run by the crop insurance industry.

It is an industry full of former Agriculture Department employees who jumped into high-paying, private sector jobs. They are major campaign contributors and form an effective lobbying group in Washington: Approximately 52 percent of the lobbying staff for crop insurance companies have worked at one time on Capitol Hill or at USDA on agricultural or crop insurance issues.

The insurance industry is a major player even by Washington standards. Between 1996 and 1999, it spent more than $25 million on lobbying alone. And between 1995 and 2000, it gave more than $3.5 million in donations to both Democrats and Republicans.

Yet the crop insurance program has been so poorly run that only two of every three dollars of the $1.5 billion in federal funds spent on the program annually have gone to pay farmers’ claims, according to documents from the office of Sen. Richard Lugar, R-Ind.

Meanwhile, the Bush administration has proposed little that would change the situation except for cutting the budget.

The proposed Department of Agriculture budget for 2002 includes $362 million for emergency aid and crop insurance subsidies, the Associated Press reported. That’s about 5 percent of the $6.9 billion allocated for this year.

In fact, Bush wants the private sector to “accelerate the development” of more crop insurance plans. The new administration has put forward virtually nothing that would curb the high levels of industry influence and profits at taxpayers’ expense that this public-private partnership encourages.

In the end, small farmers like Koetz – the very people the program is supposed to help – are hurt by it.

Relying on information given by his insurance company, Koetz assumed he was covered by his policy. His was a standard one called Multiperil Crop Insurance, the “bread and butter” policy from which the industry makes much of its profits.

Koetz is an assistant manager at a grain elevator who also owns a small spread near Embden, N.D., about 30 miles west of Fargo. He grows wheat, corn, soybeans and sunflowers on the farm where he lives with his wife and two children. North Dakota is a place where too much rain, sun, wind or hail is common. Living off the land is a difficult proposition at the best of times given the violent extremes in temperature. This is a place where, for farmers, every dollar counts.

Koetz is bitter about how he has been treated by the government and the crop insurance industry- so angry, in fact, that he filed suit against his insurer for breach of contract. “What they did to me was wrong,” he says, “it was just plain wrong.”

Where it all began

The history of crop insurance dates to the Dust Bowl in the 1930s, when small farmers were forced from their land by drought.

In response, President Franklin Roosevelt in 1938 initiated the Agricultural Adjustment Act. It was aimed at insuring mostly small farmers against losses from such calamities as drought, winterkill, tornadoes and insect infestation.

Originally, it was a modest program of just over $100 million a year. By the 1990s, the federal government was spending more than $7.3 billion on crop insurance. In 1999, more than 196 million acres was insured.

The program is supposed to work like this:

The federal government sets both the premium rates and rates of coverage for crops. The government also subsidizes premiums for some of these farmers, polices the system and ensures that insurance cheats are weeded out.

The government pays private-sector insurance companies to sell crop insurance to farmers. On top of that, the USDA provides the industry with reinsurance.

Reinsurance is like buying insurance on insurance. The industry purchases what amounts to an IOU from the government by which, in case of losses, the government promises to reimburse the companies for their shortfall. In other words, with reinsurance, the government agrees to share the risk with the insurance companies.

Every five years, the USDA renegotiates how much money it will pay the insurance industry to deliver crop insurance to farmers and how much risk each side will bear. It was during the most recent talks in 1997, referred to as the Standard Reinsurance Agreement negotiations, that the industry’s influence became obvious.

Sources say that Dallas Smith, then a top USDA bureaucrat, removed his top negotiator, Ken Ackerman, during these multimillion-dollar negotiations. This was after Ackerman played “hardball” with the crop insurers, offering them $50 million less than they had hoped for.

Just a year and a half after the talks ended, Smith went to work for the crop insurance industry.

The negotiations

During the Standard Reinsurance Agreement talks, the government negotiators job was simple: Get the best deal for the taxpayer by minimizing the amount of money the taxpayer would have to pay the insurance companies to deliver crop insurance. Ackerman was the highly regarded USDA team leader in charge of the negotiations.

Ackerman describes his role in the negotiations as “highly controversial.” Naturally, the biggest “controversy,” according to Ackerman, centered on how much money the insurance companies would receive from the government.

At the time, some insurers were earning stunning profits from crop insurance, with annual returns on equity that ranged from 30 to 70 percent, according to a 1998 Washington Post report.

If adopted, Ackerman’s proposal would have had a significant effect on the insurance industry’s bottom line by causing a 25 percent drop in its profits. The proposal, based on General Accounting Office recommendations, strongly perturbed the industry.

Then, something strange occurred. On April 18, 1997, two weeks after submitting his tough proposals, Ackerman was removed as head of negotiations.

His boss at the time, Smith, maintains that Ackerman was not removed. Smith, who was then acting undersecretary of farm and foreign agricultural services, asserts that “Ken played an important role in the negotiations throughout. He oversaw the negotiating staff and presented the results of the negotiations to Congress and other oversight bodies.”

But despite Smith’s denials, Ackerman has stated that he was in fact removed as head of the negotiations. Moreover, Joseph Connor, a former analyst at the USDA’s Risk Management Agency, as well as current and former USDA employees, back Ackerman. They state that the real negotiating power was removed from him. And sources close to the USDA say that it was Dallas Smith who was directly responsible.

Why would Ackerman a man widely respected at USDA and regarded as a tough negotiator be pulled just as the talks were getting off the ground?

One thing is certain: Although Congress imposed some restrictions, the deal that was finally reached was not regarded as very good for the taxpayer. The final agreement was closer to what the companies wanted, allowing them to make millions more annually in profits.

Connor, along with another former USDA official, said the insurance industry put pressure on top USDA people to pull Ackerman out of the talks. There were two occasions when “the insurance industry came to informally meet with one or more senior USDA officials to get Ackerman removed from the negotiations,” as one of the officials told The Public i.

While these claims are difficult to confirm conclusively, documents provided by the USDA through a Freedom of Information Act request show Ackerman’s name appearing repeatedly on documents related to the Standard Reinsurance Agreement negotiations before mid-April of 1997. Soon after, his name almost completely disappears from those records.

The revolving door

Officials at USDA and congressional assistants involved in crop insurance routinely leave government to join the crop insurance industry. Dallas Smith, the man who is alleged to have removed Ackerman from the negotiations, can be called an exemplar of what some officials call an “incestuous” relationship.

As Ackerman’s boss, Smith had significant oversight over the negotiations. He now works as a consultant for the National Crop Insurance Services, an industry trade organization that was involved in the 1997 negotiations.

Although Smith downplays the role of National Crop Insurance Services in the discussions, Bob Parkerson, president of this organization, freely admits that his industry group played a continual and significant role in them. “We were involved in all the meetings and were asked to give opinion on various important points,” he said.

According to Parkerson, National Crop Insurance Services continues to have a “good respect for Dallas,” whom they now use as a consultant “whenever they need an insight into the federal government’s position on a certain matter.”

Smith readily acknowledges that he went to work for National Crop Insurance Services as a consultant barely a year and a half after the negotiations ended.

He also works as a consultant with Meyers and Associates, a Washington-based lobbying firm with several large agribusiness concerns on its list of clients. In addition, he runs his own consulting firm, Dallas Smith and Associates, which primarily assists a corporate-agriculture clientele in dealings with the federal government.

With this type of rapid turnover between government and industry, the question arises whether future employment prospects cloud the judgment of these employees while they are in the public sector. Smith’s actions are not the only example.

A wider problem

The insurance companies for which Smith now consults are a powerful special interest in Washington.

They promote a program that, according to Keith Luse, chief of staff in the Senate Agriculture Committee, shortchanges farmers and funnels “too much money to the industry.”

Beverly Paul provides another good example of the blurring line between the private and public worlds. Throughout the mid-1990s, she worked as a spokeswoman for American Agrinsurance, the third-largest underwriters of crop insurance in the nation.

She left this position to work for then-Sen. Bob Kerrey, D-Neb., as his legislative assistant. There, she played a significant role in shaping a crop insurance bill passed in June 2000 one backed by the insurance industry. After Kerrey’s term ended in January 2001, Paul joined the staff of Sen. Benjamin Nelson, D-Neb., handling agricultural issues.

When asked about her rapid succession of government and industry jobs, Paul maintained that there was no conflict of interest between her role as legislative assistant and insurance industry insider. “You know how Washington works,” she said. “That’s the logical progression of peoples’ careers you leave government and join industry. That’s what everybody on the Hill [Capitol Hill] does.”

Several USDA officials have complained about the strong connections of certain lobbyists who have worked in government. As one USDA source put it, “Sometimes I sit at these meetings with insurance company people, and they know more confidential insider USDA information than I do.”

Paul brushed aside such complaints. She said that “the people at USDA that are complaining are probably just mad because they didn’t get job offers from the industry themselves.”

Linda Vickers might typify the cozy relationship.

Vickers works as a lobbyist for one of the big industry players, Rural Community Insurance Services. Between 1996 and 1999, she received more than $625,000 in payments from this company. For part of that time, her husband, Gene Vickers, was a high-ranking official in the office of the undersecretary for farm and foreign agricultural services. Linda Vickers refused to comment for this report.

Partly as a result of this cozy relationship between individuals in the private and public sectors, the American taxpayer has been left with a program that is sub-par.

Criticism from within

The crop insurance program was heavily criticized throughout much of the 1990s within and outside the USDA. The Office of the Inspector General, an oversight agency within USDA, issued report after report blasting the agency for inefficiencies and financial irregularities in how crop insurance was delivered.

The USDA’s Risk Management Agency has also been accused of not properly supervising how crop insurance companies spend their money. One 1997 GAO report confirmed that much of the money the government was giving to the companies “for the sale and service of crop insurance” was wasted.

For example, taxpayer dollars were used to pay for “corporate aircraft and excessive automobile charges, country club memberships . . . sky box rentals at professional sporting events and company-sponsored fishing trips.”

Indeed, when negotiator Ackerman tried to curb some of the runaway costs associated with the administration and operation of the program, he “met with a lot of resistance from members of both the House and Senate agriculture committees,” according to Andy Morton, chief economist of the Senate Agriculture Committee.

These politicians were “pressured by the insurance companies to put a brake” on the attempts by the USDA’s Risk Management Agency to rein in these costs, he said.

Those costs increase when the taxpayer is left to pick up much of the tab.

For example, in some states insurance companies are allowed to put in as much as 75 percent of their policies in the “assigned risk” pool. With these policies, the government takes the lion’s share of the risk, which in turn gives insurance companies “little reason to effectively monitor risky policyholders, little reason to deny claims of questionable losses, and no cause to find fault with their own practices,” according to a 1999 report from the USDA’s Inspector General.

In reality, the program amounts to a complex form of “cherry picking,” where the insurance companies get to keep the most profitable policies and hand the less attractive ones to the taxpayers.

Small farmers suffer, too

Like taxpayers, small farmers also get the short stick. Lower-income growers are finding it increasingly hard to buy inexpensive insurance policies. These cheaper policies yield only marginal profits for the industry, which sells them only grudgingly.

In many states, insurers are allowed to put only 25 to 30 percent of their claims in the assigned risk pool leaving out many small farmers.

Between 1997 and 1998, the number of low-income farmers who bought this basic form of insurance dropped by 78 percent. Because their profit motive is low when they deal with small low-income growers, the industry pays little attention to these people, who as a result are dropping out of the crop insurance program altogether.

There is little doubt that intense industry lobbying has helped keep the business of insuring crops profitable, though not good for taxpayers or small farmers.

As for Koetz, he’s in federal court in Fargo, N.D., to try to force the USDA and the crop insurance companies to do a better job of taking care of small farmers. He wants the government and the insurance industry to compensate him for his devastated sunflower crop.