98-682: Farm Disaster Assistance: USDA Programs and Recent Legislative Action

Ralph M. Chite
Specialist in Agricultural Policy
Environment and Natural Resources Policy Division

Updated November 4, 1998

Available Major USDA Disaster Programs

USDA has at its disposal three major programs designed to help crop producers recover from the financial effects of natural disasters -- federal crop insurance, noninsured assistance program (NAP) payments, and emergency disaster loans.

Federal Crop Insurance

The federal crop insurance program is administered by USDA's Risk Management Agency. The program is designed to protect crop producers from unavoidable risks associated with adverse weather, plant diseases, and insect infestations. A producer who chooses to purchase an insurance policy must do so by an administratively determined deadline date, which varies by crop and usually coincides with the planting season. Crop insurance is available for more than 60 crops. The authorizing legislation for the crop insurance program does not specify which crops are eligible for insurance. Instead, USDA's Risk Management Agency makes an administrative decision concerning whether a particular crop is eligible in a particular county based on a wide variety of variables. Among these variables are the interest of growers in coverage, the economic importance of the crop to a region, and the production risk associated with the crop.

The federal crop insurance program was instituted in the 1930s and was subject to major legislative reform in 1980, and again in 1994. The Federal Crop Insurance Reform Act of 1994 (Title I of the Federal Crop Insurance and Department of Agriculture Reorganization Act of 1994 (P.L. 103-354/H.R. 4217) combined a revised federal crop insurance program with a permanent disaster payment program (see Noninsured Assistance Program (NAP) below) to provide basically "free" catastrophic coverage to all crop producers beginning with the 1995 crop year.

All policies are sold and completely serviced through approved private insurance companies that are reinsured by USDA. However, there are four major sources of federal costs for the crop insurance program. USDA absorbs a large percentage of the program losses (the difference between premiums collected and indemnities paid out), subsidizes a portion of the premium paid by participating producers, compensates the reinsured companies for a portion of their operating and administrative expenses, and pays the salaries and expenses of the Risk Management Agency (RMA). Total federal costs for the crop insurance program are variable from year to year depending on the severity of natural disasters. For FY1998, appropriators made available $64 million for RMA salaries and expenses and estimated outlays at $1.3 billion for the Federal Crop Insurance Fund, which funds the program losses, premium subsidy and the reimbursement of expenses of the reinsured companies.

Under the current crop insurance program, a producer who grows an insurable crop selects a level of crop yield and price coverage and pays a premium that increases as the levels of yield and price coverage rises. However, all eligible producers can receive catastrophic (CAT) coverage without paying a premium. The premium for this portion of coverage is completely subsidized by the federal government. Under CAT coverage, participating producers can receive a payment equal to 60% of the estimated market price of the commodity, on crop losses in excess of 50% of normal yield, or 50/60 coverage.

Although eligible producers do not have to pay a premium for CAT coverage, they are required to pay upon enrollment a $50 administrative fee per covered crop for each county where they grow the crop. The total fee cannot exceed $200 per producer per county, up to a maximum of $600 per producer for all counties in which a producer has insured crops. The fee can be waived by USDA for financial hardship cases. Any producer who purchases additional coverage so that at least the equivalent of 65 percent of yield is insured at 100 percent of the market price (65/100) will also be exempted from the $50 fee, but will instead be required to pay a $10 per policy surcharge for the additional coverage. The recently enacted agricultural research bill (P.L. 105-185) contains a provision which increases the fee for CAT coverage to 10 percent of the premium subsidy for such coverage beginning in 1999.

Any producer who opts for CAT coverage has the opportunity to purchase additional insurance coverage from a private crop insurance company. For an additional premium paid by the producer, and partially subsidized by the government, a producer can increase the 50/60 catastrophic coverage to any equivalent level of coverage between 50/100 and 85/100, (i.e, 85 percent of yield and 100 percent of the estimated market price.)

To help ensure improved participation in the program, the 1994 reform act made CAT coverage mandatory for any producer who wished to participate in certain federal farm programs. The Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, the 1996 farm bill) eliminated this mandatory linkage to farm program eligibility as long as a producer provides a written waiver to the Secretary of Agriculture agreeing to forego eligibility for disaster payments in connection with the crop. If a producer does not sign a waiver, the farm bill requires CAT coverage as a prerequisite for receipt of a Conservation Reserve Program payment, a USDA farm loan, or the 7-year market transition payments authorized by the 1996 farm bill.

Noninsured Assistance Program (NAP)

Producers who grow a crop that is currently ineligible for crop insurance may be eligible for a direct payment under USDA's noninsured assistance program (NAP). NAP has permanent authority under the Federal Crop Insurance Reform Act of 1994 (P.L. 103-354), and is currently administered by USDA's Farm Service Agency. NAP was designed to replace ad hoc farm disaster legislation that was enacted nearly every year between 1988 and 1993. The program is not subject to annual appropriations. Instead, it is funded through USDA's Commodity Credit Corporation, which has a line of credit with the U.S. Treasury to fund an array of farm, trade, and conservation programs.

Eligible crops include any commercial crops grown for food or fiber that are ineligible for crop insurance, and include floriculture, ornamental nursery, Christmas tree crops, turfgrass sod, seed crops, aquaculture (including ornamental fish), and industrial crops. Trees grown for wood paper or pulp products are not eligible.

For a producer of a noninsured crop to become eligible for a payment, areawide losses for that crop must be at least 35 percent of normal yields. Once the 35-percent areawide threshold is reached, an individual producer must then experience a minimum crop loss of 50 percent. A noninsured producer then receives a payment comparable to an insured producer -- 60 percent of the market price on losses in excess of 50 percent. In order to qualify, producers must file an acreage and production report with their local FSA office by a predetermined crop reporting date, and must report losses within 15 days of the crop loss. A producer of a noninsured crop is subject to a payment limit of $100,000 per person and is ineligible for a payment if the producer's qualifying gross revenues exceed $2 million. Eligible producers do not pay any premiums or administrative fees for NAP coverage. Total NAP payments in FY1997 were $52 million and are estimated by USDA to be $69 million in FY1998.

Emergency Disaster Loans

When a county has been declared a disaster area by either the President or the Secretary of Agriculture, agricultural producers in that county may become eligible for low-interest emergency disaster (EM) loans available through USDA's Farm Service Agency. Producers in counties that are contiguous to a county with a disaster designation also become eligible for an EM loan. EM loan funds may be used to help producers recover from production losses (when the producer suffers a significant loss of an annual crop) or from physical losses (such as repairing or replacing damaged or destroyed structures or equipment, or for the replanting of permanent crops such as orchards).

Once a county is declared eligible, an individual farmer within the county must also meet the following requirements for a production loss loan. A producer must: 1) be a family farmer; 2) experience a production loss of more than 30 percent; 3) have an active federal crop insurance policy, if available; and, 4) be unable to obtain credit from a commercial lender, but still show the potential to repay the loan. (In some years, USDA has waived the crop insurance requirement and the 30 percent minimum loss requirement.) A qualified producer can then borrow up to 80 percent of the actual production loss or $500,000, whichever is less, at a subsidized interest rate of 4.5 percent.

The EM loan program is permanently authorized by Title III of the Consolidated Farm and Rural Development Act (P.L. 87-128), as amended, and is subject to annual appropriations. Available funding for EM loans in FY1998 was $150 million, much of which was provided through emergency supplemental appropriations. Both the House- and Senate-passed FY1999 agriculture appropriations bills would provide $25 million in new lending for FY1999.

Other USDA Disaster Programs

Livestock Assistance. Persistent drought conditions can lead to severe losses of animal feed grown by livestock farmers on the farm. When feed becomes scarce and water supplies dry up, many producers are forced to sell off their herds, usually at a lighter weight, which can depress market prices and farmer income. Prior to 1996, USDA had the legislative authority to provide a wide array of livestock assistance programs to help farmers purchase feed off the farm when on-farm feed losses were significant. However, these emergency livestock programs were suspended by the 1996 farm bill until 2002, because many felt that some of these programs duplicated the federal assistance provided by crop insurance and NAP.

USDA has other authorities that can be activated when disasters strike livestock growers. Under certain circumstances, producers in counties declared eligible by USDA are permitted to cut hay or graze livestock on land idled under the Conservation Reserve Program (CRP). The CRP is a USDA program that allows participating farmers to idle environmentally-fragile farmland for 10 years in return for a federal rental payment. Haying and grazing on these acreage have been permitted by USDA in recent years on a limited basis in regions that have experienced severely dry conditions, and only if the farmer is willing to forego a portion of the CRP rental payment.

Separately, the Disaster Reserve Assistance Program provides cash reimbursement on a cost-share basis for eligible feed purchased by livestock farmers in approved counties that have experienced significant feed losses. The program is funded by the sale of feed grain stocks that USDA holds in a disaster reserve authorized by the Agricultural Act of 1970. For a farmer to become eligible, both the farmer and the county in which he farms must experience a minimum feed loss of 40 percent. Payments in recent years have been at the rate of 30 percent of the value of the eligible loss.

Emergency Conservation Program. The emergency conservation program (ECP) provides emergency funds to farmers and ranchers for sharing the cost of rehabilitating farmland damaged by natural disasters, and for carrying out water conservation measures during severe drought. It is permanently authorized by Title IV of the Agricultural Credit Act of 1978 (P.L. 95-334), administered by USDA's Farm Service Agency, and subject to annual appropriations. Cost-sharing may be offered for such measures as removing debris from farmland, re-leveling or grading farmland, and restoring permanent livestock fences, structures and other installations. Available funds can be used to replace or restore a conservation practice or to restore the land to a condition similar to that existing prior to a natural disaster, and may not be offered for the resolution of conservation problems existing prior to the disaster.

Watershed and Flood Prevention Operations. This is a program area within USDA's Natural Resources Conservation Service which constructs small watershed projects that reduce floods, protect watersheds, improve water quality, reduce soil erosion, improve water supply and provide recreation. Most of these projects are undertaken in partnership with local interests.

Tree Assistance Program. The Tree Assistance Program (TAP) was first authorized by the Disaster Assistance Act of 1988 (P.L. 100-387) and is currently administered by USDA's Farm Service Agency. TAP provides assistance to producers for the replanting of forest trees and orchards that are lost due to natural disasters. Eligible recipients must experience a minimum tree mortality of 35 percent as a result of a disaster to receive assistance. For losses in excess of 35 percent, a producer can then receive a reimbursement of 65 percent of the cost of replanting trees, up to $25,000 per person.

Emergency Supplemental Appropriations for FY1998 (P.L. 105-174)

On May 1, 1998, the President signed into law an FY1998 supplemental appropriations act (P.L. 105-174, H.R. 3579), which included nearly $160 million in supplemental spending for USDA disaster programs. Most of this new spending was driven by disasters that occurred in late 1997 and early 1998, including an ice storm in New England, flooding on the West Coast, and tornadoes in the Southeast.

The $160 million provided by P.L. 105-174 included: 1) $80 million for Watershed and Flood Prevention Operations; 2) $34 million for the Emergency Conservation Program (ECP); 3) $21 million in new budget authority to support up to $87.4 million in additional Farm Service Agency emergency disaster loans; 4) $14 million for the Tree Assistance Program; 5) $6.8 million for a new dairy disaster assistance program which pays farmers for a portion of losses incurred when milk was rendered unmarketable because of a disaster; and 6) $4 million in direct payments to livestock producers experiencing severe production losses or a high livestock mortality rate due to a disaster. For more information on P.L. 105-174, see CRS Report 98-478 ENR, Agricultural Provisions in the FY1998 Emergency Supplemental Appropriations Act.

Disaster Provisions in the FY1999 Omnibus Appropriations Act

The Omnibus Consolidated Appropriations and Emergency Supplemental Appropriations Act , 1999 (P.L. 105-277) was signed into law on October 21, 1998, providing $5.9 billion in direct assistance to farmers to mitigate the effects of low crop prices and natural disasters. Included in this amount is:

• $3.057 billion in "market loss" payments to compensate grain, cotton and dairy farmers for loss of 1998 income caused by "regional economic dislocation, unilateral trade sanctions and the failure of the government to pursue trade opportunities aggressively." Of this amount $2.857 billion are for grain and cotton farmers who were eligible for a 1998 production flexibility contract payment, and $200 million is reserved for dairy farmers. These additional payments are about 50% higher than the $5.6 billion in contract payments farmers are scheduled to receive in FY1999. The Secretary of Agriculture will have to determine how the $200 million in dairy payments will be distributed among dairy producers, since milk is not a contract commodity;
• $1.5 billion in disaster payments to farmers who have incurred significant losses to any crop in 1998 due to natural disasters;
• an additional $875 million in direct disaster payments to producers who have experienced multiple years of natural disasters and crop diseases, particularly those in the Northern Plains and Upper Midwest; and
• $200 million in cost-share assistance for livestock growers who lost to a natural disaster a significant amount of feed grown on the farm.

Disaster payments will be made to a producer regardless of whether the farmer had an active crop insurance policy. However, if a farmer waived crop insurance coverage in 1998, he would be required to obtain crop insurance in the next two crop years as a condition for receiving a disaster payment. The Secretary also has the authority to use the available disaster funds to rebate a portion of 1998 crop insurance premiums paid by farmers for additional coverage beyond the basic level, so as not to penalize or discriminate against those who purchased insurance. Other conditions of eligibility for the disaster payments are left to the discretion of the Secretary of Agriculture, who will also determine minimum loss requirements and payment rates based on available funds.

Other emergency farm assistance provisions in P.L. 105-277 include: $50 million in disaster assistance to help western Alaska fishermen recover from poor salmon returns; $40 million in additional salaries and expenses for the Farm Service Agency (FSA), the USDA agency that administers farm commodity, disaster and loan programs; $31 million in budget authority to support $540 million in additional direct and guaranteed FSA farm operating loans; and $3 million in dairy disaster assistance. For more background, see CRS Report 98-201, Appropriations for FY1999: U.S. Department of Agriculture and Related Agencies; CRS Report 98-743, U.S. Farm Income: Recent National and Regional Changes and the Federal Response; and CRS Report 98-744, Agricultural Marketing Assistance Loans and Loan Deficiency Payments).