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Mike's Blog

Insights from the President of ProAg

Update to Q & A With Most Current Issues

by Mike Connealy on 09.06.2012

Like Congress, MC decided that an extended vacation from blogging was in order… can’t quite wait them out for five weeks, so we are going to update the Q&A version with issues that have surfaced since last we blogged.

 Q: Any updated prediction on the 2012 Farm Bill outcome ?
 
 A: We just don’t see the House bringing the Committee passed bill to a vote in the very limited time available before the House members all depart Washington DC for continued re-election activities. The Senate cannot do anything until the House sends them a signal – this seems unlikely at best. Once we tally the votes from November 6th and have an idea of which party controls the White House, Senate and House, we could see something pop during the lame duck session and before 12-31-2012. This could be done by wrapping something of a Farm Bill into a “omnibus continuing resolution” designed to avoid the “fiscal cliff”. Omnibus is a term used to describe a variety of issues rolled into one huge deal to vote up or down. The Bush tax cuts, debt ceiling, defense spending, Farm Bill (new or extension), Post Office, etc. All the legislative eggs in one basket for one vote, not the best way to run a country, but it has happened before !
 
 Q: What sort of agriculture (crop insurance) position might we expect from Republican VP Nominee Paul Ryan of Wisconsin ?
 
 A: Congressman Ryan represents a diverse rural and urban district in SE Wisconsin. He grew up and lives in Janesville, less than 50 miles from Madison – which is the hometown of ProAg parent company CUNA Mutual. The CUNA Mutual people have dealt with Congressman Ryan on a positive basis on many issues during his 14 years in the US House of Representatives, even before he was famous ! Most of what we know about Paul Ryan comes from his work as Congressman Paul Ryan or House Budget Committee Chairman Paul Ryan and not VP candidate Paul Ryan that might venture into new positions. 

 He is personally up to speed and has a position on most all of the important and current Farm Bill issues. As Chairman of the House Budget Committee he has played out his thoughts on the spending cuts needed in the next Farm Bill. This amount was $33 billion or so and was split up in various ways including a cut for crop insurance. He did indicate that as long as the House Ag Committee (HAC) Chairman Lucas met his spending cuts target, he would likely support the Committee version of the bill. Since the stalled HAC bill included $35 billion of cuts, none for crop insurance, we can “guess” that Congressman Ryan would vote for passage. Generally, the various Committee Chairman (Budget, Agriculture, Banking, etc.) try to support the efforts of each other in order to validate the position of Committee Chairman.

That being said, leaving SNAP Provisions out of the equation, Congressman Ryan is on the record generally opposed to most current Farm Bill spending such as direct payments, ACRE, SURE, etc. He is concerned about the amount of spending for crop insurance and has quoted out dated GAO reports as regards agent commissions and company underwriting results. He has associated himself on certain issues with other known US House Farm Bill opponents such as Jeff Flake from Arizona and Ron Kind from Wisconsin. This group operates under the banner that “free market / free trade” for US agriculture products solves Farm Bill issues over the long term. Similar to the current largely unsubsidized (but EPA regulated) cattle market, if we allow the market to sort out dairy, corn, soybeans, cotton, etc. we can reduce government interference and simply let the chips fall where they may. A stripped down version of the current crop insurance program would be the only safety net available.

So, we should expect that a Romney/Ryan win in November might lead to a “free market” Secretary of Agriculture with an anti-agriculture spending inclination. Should President Obama win re-election, it is likely that Congressman Ryan retains his house seat and his Budget Committee leadership position. No matter the Presidential election outcome, we will likely continue to be influenced by the now very famous Paul Ryan and if the chance presents itself to educate him about crop insurance, we should do so.
 
Q: Are the 2012 drought losses coming in about as expected ?
 
A: Corn harvest is underway early in the southern part of the corn belt. Thus far our field reports have all been dismal on corn in Indiana, Western Kentucky, Missouri and Southern Illinois. This could be due to the fact that drought stricken corn has dried down early and is the first to be combined. We have seen no positive surprises on corn in the drought affected areas.

Sporadic August rains have helped revive the soybeans prospects as compared to a month or six weeks ago. It remains to be seen if these rains are as helpful as hoped for on the loss side. From an underwriting gain/loss perspective, the positive soybean news does not offset the corn disaster. Corn liability for 2012 on the RMA summary of business report is in excess of $53 billion. Soybeans are important, but only add up to a little over $25 billion based on the spring price election. Once we add on the expected fall price to the corn book of business, the 2012 liability will likely exceed $80 billion – YOWZA !
 
Q: Is it a 2012 fact that the revenue (R) option is much more popular than the yield (Y) option on crops where both are available ?

A: For 2012, there is no question that agents and AIPs did an excellent job of protecting both yield and price using the R option. The RMA summary of business indicates that the Y premium amounts to $775 million nationwide. The R option without harvest price (HPE) was used on $167 million of premium and hopefully the paperwork in the file is in order on those opting for this plan. The “grand daddy” for 2012 premium is the R option with a robust $8.5 billion of premium. The RMA total book of business is about $11 billion for all crops and all plans, 77% of the total on the R option will put this plan in the spotlight after all the losses are paid.

Q: Any chance that ProAg will earn an UW gain and pay an agent profit share for 2012 ?
 
A: To quote an old adage, the chances are “slim and none” and slim is headed for the door. While ProAg can forecast a better than industry average UW result for 2012, we do not expect it to be positive. We currently forecast a 10% UW loss after all is said and done. Based upon the early corn harvest reports, we could easily be too optimistic at 10% loss. Our book has somewhat of a better spread than a pure corn belt play – we expect the industry to incur a 15% to 20% UW loss if harvest prices hold at current levels for corn and soybeans. 
 
Again, this is MC’s opinion and does not reflect any specific knowledge of any other AIP fund designation strategy or spread of business. The industry has generally been very aggressive in retaining in the commercial fund the bulk of the corn and soybean liability across the corn belt. In April of this year, when fund designations were made, the prospects were excellent for large corn and soybeans crops. My educated guess is that the industry historical pattern of retaining the risk was followed by one and all in the drought affected states of Nebraska, Iowa, South Dakota, Illinois, Indiana, Ohio and Missouri.

Q: Any new news that RMA will relax the $200,000 claim review requirements due to the high volume of such claims expected ?
 
A: MC hates to be a cynic, but it is an election year. Such a “waiver” is possible as we know that this occurred in Texas in 2011 due to drought severity. From a timing standpoint, we should expect that if the requirements are relaxed, it would be done before the election and Secretary Vilsack himself would be making the announcement. He already took “Obama Administration” credit for the 30 day delay on payment due date. Plus we have livestock ownership waivers and prospective loosening of cover crop rules on the special provisions of insurance (SPOI) that have surfaced as USDA attempts to be “farmer friendly” in face of the drought and with November 6th approaching fast.

As always, feel free to comment or ask follow up questions.

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