SPEAKERS CONTENTS INSERTS
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REVIEW THE STRUCTURE AND POLICIES OF THE LOAN DEFICIENCY PAYMENT PROGRAM
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
JUNE 16, 1999
Serial No. 10624
Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
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LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
Page 3 PREV PAGE TOP OF DOCMICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
Page 4 PREV PAGE TOP OF DOCLEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, prepared statement
Berry, Hon. Marion, a Representative in Congress from the State of Arkansas, submitted questions
Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Condit, Hon. Gary A., a Representative in Congress from the State of California, submitted questions
Page 5 PREV PAGE TOP OF DOC Stabenow, Hon. Debbie, a Representative in Congress from the State of Michigan, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Glickman, Hon. Dan, Secretary, U.S. Department of Agriculture
Kind, Hon. Ron, a Representative in Congress from the State of Wisconsin, letter of June 16, 1999 to Mr. Stenholm
REVIEW THE STRUCTURE AND POLICIES OF THE LOAN DEFICIENCY PAYMENT PROGRAM
WEDNESDAY, JUNE 16, 1999
House of Representatives,
Committee on Agriculture,
The committee met, pursuant to notice, at 1:30 p.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Barrett, Ewing, Goodlatte, Canady, Smith, Lucas of Oklahoma, LaHood, Moran, Thune, Cooksey, Gutknecht, Walden, Hayes, Stenholm, Condit, Peterson, Dooley, Minge, Pomeroy, Berry, Goode, McIntyre, Stabenow, Etheridge, Boswell, Phelps, Lucas of Kentucky, and Hill.
Staff present: William E. O'Conner, staff director; Tom Sell, deputy staff director; Lance Kotschwar, chief counsel; Alan Mackey, Michael Neruda, Callista Bisek, Wanda Worsham, clerk; Howard Conley, and Anne Simmons.
Page 6 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. The hearing will come to order.
Mr. Secretary, welcome.
Secretary Glickman is accompanied today by Mr. Thomas Grau, the Deputy Under Secretary for Farm and Foreign Agricultural Services; Mr. Parks Shackelford, Assistant Deputy Administrator for farm programs, Farm Service Agency; Ms. Vickie Hicks, Deputy Administrator for Commodity Operations, Farm Service Agency, and Mr. Terry Hickenbotham, Director of the Farm Loan and Analysis Group of the Farm Service Agency.
I appreciate, Mr. Secretary, your coming up before this committee today. As you know, Mr. Barrett postponed his subcommittee hearing regarding your proposed changes in the Loan Deficiency Payment Program, at the request of the Department, until the program changes were finalized.
Prior to the 1998 crop year, loan deficiency payments and marketing assistance loans were almost unheard of by wheat, feed, grain, and oilseed producers. Today however, LDP's and marketing loans have become increasingly important, and, in many instances, vital to producers throughout the country, who were until last year unfamiliar with the program.
LDP's and marketing loan gains are a significant aspect of Federal farm programs. The 1998 LDP's and marketing loan gains totaled about $3 billion; 1999 payments are projected to be as high as $5 billion. When compared to fiscal year 1999 Agricultural Market Transition Act payments of about $5.6 billion, the impact is obvious.
Let me be very clear about one thing, Mr. Secretary. There is no member of this committee who is opposed to your efforts to strengthen producers' net farm income by improving the operation of the Marketing Assistance Loan and the LDP program. However, as we have learned more details about the proposal, it has become obvious to us thatas you have previously statedthere will be winners and losers. In today's hearing we hope to find out for sure whether this proposal does more good than harm.
Page 7 PREV PAGE TOP OF DOC With that being said, I think that it is clear that there are several important issues that we need to discuss today, with respect to the proposal and the LDP changes. First, we have concerns about how a national LDP rate will fit within the purposes of the marketing loan and LDP's. These programs are designed to assist producers in the orderly marketing of commodities by taking off the pressure to sell at harvest time. We have concerns about the incentives that will be created by a national LDP rate.
Second, we have concerns about a national LDP rate that will lower harvest-time prices. As you know from your tenure here a few years ago, this committee has long been concerned about decreases in USDA's local posted county prices leading to decreases in local cash markets. It is very likely that a national LDP rate will have the same effect in some areas. When you combine it with the soft demand that we are likely to see for this year, we definitely see the potential for decreases in some cash markets. If you end up giving more money to producers in the form of higher LDP's, but the market reacts by providing less money in the cash market, then you have simply replaced money that that market would have provided with a Government payment.
Look at what happened to corn in August of last year. USDA adjusted gulf terminal market price differentials 2 cents on each day between August 18 and August 21. This was reflected in an increase in corn LDP's of 8 cents over those same 4 days. The very next week, cash corn prices in Chicago were off 12 cents.
Third, we think that there is real potential for increased forfeitures in some areas next year. If you look at the current carryover commodity inventories from last year, combined with the crop forecast for this year, we will literally be awash in grain by the time harvest comes around. If prices stay at current levels, producers will hit the LDP marketing loan gain payment limit relatively quickly. This will then give them no choice but to forfeit their crops. This could be exacerbated in some areas if LDP's are increased relative to local cash markets.
Page 8 PREV PAGE TOP OF DOC Fourth, we are concerned that your proposed changes to the LDP Program will do nothing to address the underlying issue of loan rate inequities. You have stated that there are some inequities across State lines and across county lines. We agree with that. However, rather than create a whole new formula for calculating LDP payment rates, you have the option to adjust loan rates to more accurately track local cash markets. We gave you that ability to fully adjust loan rates in the 1996 farm bill. Since 1995, you have chosen to make substantial loan rate adjustments. Everyone, including FSA, seems to acknowledge that loan rates need to be adjusted.
To summarize, we have concerns about the proposal; how it fits within the purposes of the Marketing Loan Program; its potential effects on harvest-time prices in some areas; its effect of forfeitures for the 1999 crop year, and what it does not do to correct underlying loan rate inequities. One way or another, this decision needs to be made. Additionally, now that we are well into wheat harvest, we have questions about whether this proposal can be applied to the 1999 wheat crop, and questions about retroactivity.
Farmers would far and away prefer their income to come from the market, not from LDP's. When economic conditions are as difficult as they are today and completely out of our producers' controls, there can be no dispute that loan deficiency payments and marketing loan gains are absolutely vital to the stability of our Nation's agricultural producers.
However, from what we understand about your proposal at this point, we see it creating windfalls for some producers in the form of higher LDP's than last year, while at the same time creating disadvantages for other producers in the form of lower LDP's than last year. With so many questions about the actual effects of this proposal, we are unsure whether it would be appropriate to make this change at this time.
We are looking forward to your testimony, Mr. Secretary. I appreciate, again, your appearing before this committee.
Page 9 PREV PAGE TOP OF DOC I would recognize Mr. Stenholm, for any comments he might make.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman. I think there are several things, as you say, we all agree to and will agree to. There are problems in the operation of the wheat, feed grains, and oilseed loan programs. Shopping around to get the highest LDP has become a major part of many producers' marketing strategy. The question is should this be the case or should the LDP Program serve to make up shortfall not received in the marketplace, which was the original intent of the program?
The LDP payout has gone from zero in 1995, to $2.6 billion in 1998. Already we have 3,711 payments totalling $5.2 million in 1999. Mr. Secretary, we applaud you for taking action, knowing that there are going to be winners and losers. Every time action is taken with that in mind, there is fallout to be taken. Making this first step, I think we are going to find, it is going to be necessary if we are to ever face up to the tough task of updating county loan rates, which should have been done over the last 3 or 4 years on a regular period basis, but has not been done.
It is hard to judge how much the winners may win, or the losers may lose. This is something that we all need to keep in mind. That is determined in the marketplace. If we could just predict the market, we could absolutely predict who is going to be the winner and who is going to be loser. If we could do that, farmers would not have anything to worry about.
If we agree with the Department's current guiding principle that the program needs to reflect cash prices, and what is going on out in the countryside, the question then has to be: Is there a better way to do that than through the use of terminal markets? This and other questions I look forward to asking you, after we have heard from you. Thank you for being here.
Page 10 PREV PAGE TOP OF DOC The CHAIRMAN. If there are any additional statements, they may be included at this time.
[The prepared statement of Mr. Barrett follows:]
PREPARED STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Today, the members of the Committee on Agriculture will receive testimony reviewing the USDA's staff proposal and possible modifications regarding the Loan Deficiency Payment Program.
I would like to thank Chairman Combest for his continuous review of this proposal as Members examine the possible effects to our Nation's producers. I would also like to thank Members of the full committee for their support and patience as we continue to review the administration's proposal.
A special thank you to Secretary Glickman for his willingness to testify on this critical issue. Secretary Glickman, it is always a pleasure to have you and your staff here and the Agriculture Committee does appreciate your time. As you know, the General Farm Commodities Subcommittee, which I Chair, rescheduled and postponed a hearing regarding proposed changes in the Loan Deficiency Payment Programthe last postponement at the administration's request.
There are many policy issues within the Loan Deficiency Payment Program. Today, I would hope that the committee could focus on the issue of Posted County Prices, and the proposal of a national loan repayment rate. I agree that this system needs improvement in a number of areas. However, I believe that both the House and Senate Agriculture Committees must thoroughly examine any modifications to the current program.
It is important that we examine our individual districts and states to learn how this proposal effects our farmers. Frankly, from extensive analysis of Nebraska it appears that there might be a slight gain overall when all commodities and all counties are considered; however, there are certainly winners and losers by specific county and specific commodity. Generally speaking, Nebraska is probably as well off with the status quo as to take the risk with a major change in the structure of the Loan Deficiency Payment Program. Because this program was not operational due to the high grain prices prior to the 1998 crop year, producers have just become familiar with the current programand now the Department is considering changes to the basic formula of this program. Complaints heard last year about the operation of the basic program would be supplanted by a new set of complaints with a brand new structure.
Page 11 PREV PAGE TOP OF DOC Our analysis also indicates that there would not be any difference between eastern Nebraska closer to the Missouri River, and western Nebraska, with the exception of the counties adjoining Colorado along the western border of Nebraska. These counties might see a reduction in income. These same counties also experienced difficulties with LDP and loan rates under the current system.
Regretfully, county FSA employees have been on the receiving end for the criticisms of the LDP program. In my visits with these employees in many of the counties in my congressional district, I have personally heard about the many extra hours that these men and women have spent serving our Nation's farmers. There is no guarantee that under a national loan rate that the workload would decrease appreciably.
As we examine the national LDP proposal, a number of advantages appear. It is possible that the uniform rate may be more equitable for farmers. Also, the harvest distortion of Posted County Prices would no longer exist. However, a number of issues concern me at this time. A problem that might result from a uniform rate is that it would be decoupled from the current cash market prices. This decoupling would necessitate our farmers re-thinking their marketing strategies since the local cash price relationship may no longer exist.
Mr. Secretary, it is important that we keep in mind the current status of our Nation's producers as we examine the winners and losers of this proposal. I commend you, and your staff for all the hard work that has taken place to compile information and develop modifications to the Loan Deficiency Payment Program.
Again, I want to thank you, Mr. Chairman, for holding this hearing on this very important issue. I look forward to working with my colleagues and USDA to assist our Nation's farmers.
PREPARED STATEMENT OF HON. DEBBIE STABENOW, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Page 12 PREV PAGE TOP OF DOC Mr Chairman, I am pleased to have the opportunity to participate in today's Agriculture Committee hearing that will review the structure and policies of the Loan Deficiency Payment Program. I welcome Secretary Glickman to today's hearing and look forward to his testimony on this important program for many commodities.
I understand that the Loan Deficiency Program is under review by the U.S. Department of Agriculture following several complaints and inquiries in 1998 from producers, producer groups, agribusiness, Members of Congress, and State Governors. There are substantial differences in LDP rates across state and county lines that certainly merit further review. I have heard from my local producers that the LDP rate for them does not seem fair. I would like more information from USDA about the current proposal they are formulating that would change the system of determining posted county prices for each county. I would also welcome any other information about other changes that are under consideration that would help my producers. In particular, I would like to share information with my producers about efforts to simplify the program.
The CHAIRMAN. Mr. Secretary, please proceed.
STATEMENT OF HON. DAN GLICKMAN, SECRETARY, U.S. DEPARTMENT OF AGRICULTURE
Secretary GLICKMAN. Thank you, Mr. Combest and Mr. Stenholm. It is a pleasure to be here again. I have with me the folks that you have mentioned, plus Keith Collins, our Chief Economist, and Keith Kelly, head of the Farm Service Agency.
Quite frankly, this is an extremely complicated subject. It goes beyond, in some areas, my capacity to either understand or explain it. It was John Maynard Keynes who said, I think, ''For every complicated problem, there is a simple and a wrong solution.'' So all those things factor into what we are trying to do today.
The fact, however, is that when this program was createdthe 1996 farm billnobody, whether it was you, or whether it was us, ever expected that the LDP's would become a primary part of the farm safety net. None of us hoped that prices would be in such despair, as they are now, with the commodities. The fact of the matter is that few of us really thought that this would be a integral part of the process. But as prices weakened, folks began using the Marketing Loan Program, and began starting a trickle of LDP's into the farm economy as prices began to fall.
Page 13 PREV PAGE TOP OF DOC Then prices collapsed. The spigot opened. That trickle turned into a torrent. We have made more than 2 million LDP's on 1998 crops worth about $3 billion, when coupled with marketing loan gains. Frankly, we expect that total will nearly double to, perhaps, $5 billion for 1999 crops. I frankly am more bullish about the longer term, because I think the export markets are going to turn around. Still for the time being, this has become a critical part of the farm safety net.
The success of that program is critical to our success in helping farmers cope with today's farm crisis. If it works wellthe LDP Program, if it is fair, if it is equitable, if it is efficient, and if it is easy to understand, it will meet the goals that Congress and the administration intended. But if there are inequities, complexities, and inefficiencies in how LDP's are calculated and paid, then our farmers will feel the repercussions and think that the program does not have any integrity to it.
After years of experience, being out in the countryside, hearing from farmers, elevator operators, our own field staff, governors, State secretaries of agriculture, and folks before me today, I have to tell you that the program has serious problems. It is inequitable. It is very hard to understand. It is complex. We would like to fix it.
Realizing that nobody has a perfect, I do not want to see the perfect become the enemy of the good. We have to begin to do something to try to fix this program. I think we have to make an obligation to try to make the program work as well as possible. So we have prepared a proposal to fix this. We want to work with you. It is not finalized as of today. I do think it is important that we have the hearing today. I think we ought to try to work through this problem the best we possibly have to do.
I would have to say that if we had today in place a plan as I am going to describe, and we were sitting here and going to adopt what we currently have, I would suspect that it would be universal not to do that. That is, I think most people believe that we need to try to restore some equity into the system. The current plan is not one that we would necessarily work with.
Page 14 PREV PAGE TOP OF DOC Let me talk a little bit about the problems. I show from these charts just a couple of things. Let us just consider the LDP rates from Texas for Soft Red Winter wheat on June 1just 2 weeks ago. In a circle of about 75 miles around Dallas, LDP rates varied from a low of 47 cents to a high at 95 cents, with rates of 59 cents, 79 cents, and 80 cents in counties in between. This area is served by a good highway system, making it beneficial to haul the grain to another county to get a rate that is as much as 48 cents a bushel above the LDP rate established for the county where the producer harvested the crops. Some do that. Some don't do that.
Along the Minnesota-Iowa border last fall during the harvest, LDP rates for corn in Minnesota were regularly 6 to 8 cents higher. When we adjusted the formula to equalize this difference, there was a collective howl from some folks in Minnesota, complaining that we would take this step, even though our formula for posted county prices had been running consistently below local market prices.
In the Pacific Northwest, LDP rates for Soft White wheat in Washington regularly exceeded those in neighboring counties in Oregonright across the Columbia Riverby 10 to 15 cents per bushel.
Last year, LDP rates for soybeans in Arkansas regularly exceeded those in Mississippi by about 6 cents. So what happened? Farmers hauled their beans across the river and stored themto the chagrin of the elevators in Mississippi.
Let us pull the Kansas one back up for Mr. Moranand for me, too. In the far southwest corner of the State, the loan rate for corn is $2.15 a bushel, in Morton County, KS. Across the border in Baca County, CO, the loan rate is 2 cents higher: $2.17 a bushel. Yet on January 4 of this year, the LDP rate in Baca County was 27 cents higher than in Morton County. It was 39 cents in Baca; 12 cents in Morton, with similar rates also in the counties of New Mexico, Oklahoma, and Kansas that bordered this one Colorado county. This is replicated all over the country in various degrees.
Page 15 PREV PAGE TOP OF DOC These problems are caused by several factors, including county loan rates that have been misaligned relative to local market prices for decades. I agree with Mr. Stenholm on that point. Part of the problem is just the nature of the beast, itself. It is, at best, highly complex, as much art as science, as our experts and marketing managers in Kansas City watch prices for all these crops every day, and every night finetune the posted county prices, ''PCP's,'' and thus, the LDP's for thousands of counties. Every single night this formula is done.
There are also systemic problems causing disparities in county LDP rates because, one, county loan rates are fixed and static for entire year's crop, but loan repayments are subject to change based on dynamic market prices as reflected in the daily PCP's; and two, in the case of wheat, county loan rates are determined on an all-wheat basis, but loan repayment rates are announced for each of the five classes of wheat.
The posted county price also poses problems at times for wheat, corn and soybeans. First, the PCP system was designed to reflect the average annual basis between a major market and a county. Thus, over the year, the PCP's generally tend to do well in capturing annual average price levels in local markets. However, they were not designed to ensure perfectly accurate price estimates on any particular days, because PCP's follow the market day-by-day. During the year, local changes occur reflecting regional supply and demand pressures and changes in transportation costs. This can cause PCP's to rise above local market prices, leading to forfeitures. Fall PCP's below local market prices resulted in unnecessary outlays.
Second, because the local posted county prices tend to reflect price trends in just two major terminal markets, the system provides price estimates relating to regions of the Nation. Where two regions meet, usually on State borders, LDP rates can be significantly different across some of these State lines. That has happened particularly on the Iowa-Minnesota border, and the Iowa-Illinois border.
Page 16 PREV PAGE TOP OF DOC How do we explain these disparities to farmers in neighboring counties? The truth is it is almost impossible to explain. You have just heard my explanation of the PCP system. It is extremely complicated. That is why we would like to simplify this very popular feature of the safety net. A single, national rate plan would cover what I call the ''Four E's'': equity, efficiency, ease of understanding, and enhanced income. Let me just briefly talk about these.
Equity. For the 1998 crop year, LDP rates were set on a county-by-county basis. So while one farmer got one rate, another farmer 5 miles down the road growing the same crop would get another. As I have just described, sometimes these differences were substantial. Thus the Government made one producer's crop a lot more valuable than the other, when in reality, they were the same. A uniform LDP rate would provide equity to all producers.
The second ''E'' is efficiency. Because we pay benefits according to where the grains are stored with varying rates from county to county in effect, the resulting system caused inefficiencies. Farmers would ship or drive their crops to wherever they got the higher rate. That resulted in a multitude of transportation efficiencies. The system diverted grain from warehouses farmers would normally do business with, further upsetting the apple cart. Because of the luck of the drawa sort of geographic lotteryone farmer might be able to travel a short distance to get a better rate, while a farmer living in another part of the State would not be so lucky. Under a uniform national LDP rate plan, the Government would not be providing the incentive to transport crops in this manner, thus returning to a more efficient use of transportation and warehousing.
The third ''E'' is ease of understanding. Under our new, simplified, single rate proposal, farmers would no longer be perplexed by the LDP formula. A simplified plan means they can focus their energies on what they know best, which is farming, leaving the LDP process to take care of itself.
Page 17 PREV PAGE TOP OF DOC The fourth ''E'' is enhanced income. Depending on budget considerations, the new plan would have the effect of pumping some additional dollars into the farm economy at a time they are sorely needed.
If this plan were in place now, for the 1998 crop year, it would have cost an estimated $400 million more in LDP's than we paid. I can't tell you what next year's cost would be. I have to use that, essentially, as a baseline figure. But you would be talking about, roughly, 10 percent more in LDP's under a national uniform plan.
Under the proposal, instead of calculating a different LDP for every single county, USDA will set one national LDP rate. It would be based on the major terminals used under the previous procedure. The rates would simply reflect an average for all major terminals of the difference between the terminal price for the preceding day, and the loan rate in the county in which the terminal is located. If a national uniform rate had been in place for the 1998 crops, our analysis shows that forfeitures would have been lower. Complaints about inequitable LDP rates and market distortions would likely have been dropped.
However, these improvements would have come with the projected cost of an additional $400 million for wheat, corn, and soybean loan programs. The higher cost is largely a result of a slightly higher average LDP rate under the national rate procedure.
I would have to say, however, that the LDP cost is based upon timing. It is a marketing decision that farmers will make. There is no way to absolutely predict not only the cost, but whether or not somebody is going to do better under the current system than under the old system, because it is all based on when you sell your grain. Timing is the most important factor in an LDP rate. So without knowing prices and producers' decisions for the next year, there is no exact way to predict the cost. The only thing is it probably cost at least as much as it would have cost last year. It may be a little bit more, because we are going to be having about $5 billion worth of LDP costs next year, as opposed to $3 billion this year.
Page 18 PREV PAGE TOP OF DOC As you can see, this is a fairly significant change in a key program. It involves a substantial sum of money. We are in discussions within the executive branch on the proposal, and, more importantly, the appropriate and the best policy for proceeding, including timing issues. While I know that USDA's staff has briefed the committee, on two occasions it conducted similar briefings for folks in the other body, as well as in the farm community. I am sensitive to the fact that we have not gone through a more public vetting of the proposal. We are currently studying how to accomplish that through a public comment process and still get the change in place as quickly as possible for 1999 crops when we expect to see heavy use of the program.
I also knowas you have said, Mr. Combestthat the wheat harvest is underway. So I would expect that we would make some special allowance for wheat farmers so they would not be prejudiced by the change, because they are in the process of taking LDP's out as we speak, and will continue to be doing that. We will have to protect them and essentially hold them harmless in some fashion.
I know this is a complicated problem. I am convinced that we should reform the system. We should not wait until next year to do so. You are going to have all these billions of dollars of LDP's coming out this year. We ought to try to do it the best possible way that we can.
With respect to the loan rates, if I were to adjust the loan rates this year to deal with this problem, I am advised by the staff that in most cases the loan rate for wheat would go down, up to a maximum of 68 a bushel. That is, adjusting the loan rate would probably result in lowering the loan rate in most cases, particularly for wheat. Sixty-nine percent of the people would go down, up to a maximum of 68 cents a bushel.
Perhaps in the beginning we should have been more aggressive in adjusting loan rates. Right now, given the price, I really am not too keen on lowering the loan rates anymore. The best idea is to try to come with the equity of the system so that everybody markets their crops in as best way as possible. I hate to get into winners and losers, but based upon the cost of this program you can see that in most circumstances, there will not be very many losers at all. I can't guarantee it, because it is based upon when you sell your grain.
Page 19 PREV PAGE TOP OF DOC In any event, I know this is complicated and there are problems with it. I would be glad to answer your questions with it. I will conclude my testimony by asking some of my more knowledgeable colleagues to come up here with me.
[The prepared statement of Secretary Glickman appears at the conclusion of the hearing.]
The CHAIRMAN. You mean from here?
Secretary GLICKMAN. That is a given.
The CHAIRMAN. Obviously, whomever you need, Mr. Secretary, and whoever wishes to come is certainly fine.
Let me make for sure that the record is clear that I am not advocating reducing the loan rate, but to just simply point out a problem. It seems to me, Mr. Secretary, in accomplishing your four ''E's'' that you wanted to, in these counties in Texassince you used them specificallywithin a circle of 75 miles around Dallas, the loan rate varies from $2.46 to $3.04. In fact, in the county where it is the highest, there is not any Soft Winter wheat production at all. But does doing what you are proposing accomplish the goal, if you have such a disparity in the loan rate, and you are basing a national LDP on the loan rate within the county? We have a 60-cent differentiationI believe that is right, 54 centsbetween the loan rates in those counties.
Secretary GLICKMAN. I think that is a fair question. I think in the case of the Texas example, the loan rate is a big part of the LDP rate difference. In the Kansas four-State area, the loan rate is a small part of the LDP difference, because the loan rate differential is fairly insignificant in those cases. Is that correct?
Mr. SHACKELFORD. I think that is a good answer. [Laughter.]
Secretary GLICKMAN. Thank you.
The CHAIRMAN. He got out that easy, didn't he? [Laughter.]
Page 20 PREV PAGE TOP OF DOC Again, I am not advocating that you reduce it as much as 68 cents. I appreciate your pointing out the fact that that may not be the case in every instance, but it still seems that the problem exists. That same potential problem exists. While you may have an average national LDP rate, being that it is based on the loan, it is still going to be advantageous for somebody to take their wheat somewhere else.
Mr. SHACKELFORD. I think I understand the question that is being asked. If the producer wants to transport the crop to that county to store it, put it under loan, and assume that producer will hold it in the loan until forfeiture, and will never find the marketing loan gainin this case the repayment ratemore desirable to market the wheat and pocket that gain, then, yes, the producer could haul the grain just for the intent of forfeiture.
However, I think most people would think it is unlikely that producers would want to do that. The combination of market prices which vary, and the loan deficiency payment rates repayment rates, which vary, it is going to be more in that producer's interest to repay that loan and reap that gain.
The CHAIRMAN. Yes, but in the case of forfeiture, if you are basing your LDP on the loan rate, you are not forfeiting your grain.
Mr. SHACKELFORD. For the producer to chase a loan rate, for examplemaybe I don't understand?
The CHAIRMAN. No, go ahead.
Mr. SHACKELFORD. If you looked at this example, in Tarrant County the loan rate is $3.04. So people have argued that producers will just haul to Tarrant County just to get the loan rate. But if we look at the uniform LDP rate over a period of time, there are going to be plenty of times when the producer can repay that loan rate at a lower level, reap a high market price, and get that market gain.
Page 21 PREV PAGE TOP OF DOC The CHAIRMAN. Well, we are not quiteI think we are passing each other.
Mr. SHACKELFORD. Well, one thing that I think we need to remember is that producers don't always sell their grain at the same price that they take an LDP at, or repay the loan at. In many cases, producers last year forward-contracted for fairly high prices. Then, those who were the smartest marketers requested LDP's at times when prices were lowest.
The CHAIRMAN. Right.
Mr. SHACKELFORD. So I would think the case of someone who hauled the grain to Tarrant County, for example, they would look at market prices. They could sell that crop at a very good market price and repay that loan. There will be enough times when the combination of the market price will be higher than the repayment level. They will reap more than they would get under than just the loan rate.
The CHAIRMAN. I think we are going to have to go at this a little bit more, but I don't want to run over my time. I would encourage Members to note that as they begin to ask questions. We will try to stay within our 5 minutes. We will have as many rounds as the Secretary can stand. Mr. Stenholm.
Mr. STENHOLM. I guess the first question I want to deal with the loan rates a little bit more. I think everybody agrees that there should have been some adjustments made. The reason they haven't been adjusted is the fact that some would be adjusted downward. That is a politically difficult decision to make. Is that correct?
Secretary GLICKMAN. I would say that is probably a pretty fair statement, in all honesty.
Mr. STENHOLM. Have you, or your economist, looked at what it would cost if we took the same theory and strategy that we have used in Medicare, in which AACPPP payment in some States are $800 per person per case per day, or whatever the number is. In others it is $275. But we can't bring down the $800, so we gradually bring up everybody else. That is a theory that has been considered and done many times.
Page 22 PREV PAGE TOP OF DOC What would be the cost of bringing up everybody who is lower than what they should be, rather than bringing down those who have higher loans than they should have under the law?
Secretary GLICKMAN. Well, I am going to ask Parks to answer. I would have to say the law says that you can't have anything higher than a season average of $2.58 for wheat, for example.
Mr. STENHOLM. Then we would have to consider changing the law.
Secretary GLICKMAN. That is right.
Mr. STENHOLM. My concern is that LDP's are only part of the problem. If we go through this and we make these changes, we still have not addressed the overall problem of the disparities of pricing between counties between States, and between counties within States, all over the country. Is that not correct?
Mr. SHACKELFORD. We have not changed the disparity in the loan rates. You are correct. As the Secretary said, we are required by law, at this point, to have them all average out on a weighted average to the national loan rate. So we could not do that without a change.
Mr. STENHOLM. I understand. But I would like for you to give us a cost on that, because one of the long-term alternatives might be that we would want to consider changing the law. I am saying that with a question. I do see that even if we make these changes, we are still going to have some problems along the same lines of disparities for different producers who are sometimes neighbors. The only thing dividing them is a county line, or a State line. That is the problem. It is going to be hard to ever explain that to an individual producer.
While the uniform LDP rate should discourage producers from shipping grain out of their local areas strictly for a higher LDP rate, might grain continue to move to markets with higher cash prices?
Page 23 PREV PAGE TOP OF DOC Mr. SHACKELFORD. Might grain continue to move to markets with higher cash prices? Yes, sir. That is not something that we would interfere with, if it is for a normal reason. Our biggest concern about the disparity and the transportation is not because of a business or commercial reason that someone is offering a higher price. It is solely because of the Government program. We are concerned the Government program would be causing this disruption. Normal competition is certainly something we do not seek to interfere with.
Mr. STENHOLM. Mr. Secretary, did you and your staff look at whether it made sense to determine the repayment rates on regional or State lines?
Secretary GLICKMAN. Yes, I think they did. Of course, because significant intrastate and intraregional differences, given the size of States and regions, we thought that would not reduce the inequities very much. Is that correct?
Mr. SHACKELFORD. We would still have the problem between State lines, which is where many of the problems are now.
Mr. STENHOLM. So what did you do? You haven't done anything yet? What are you thinking that you might do?
Secretary GLICKMAN. We looked at that because the heart of the concerns that were raised to us were, frankly, differences across State lines, and regional lines as well. We decided not to proceed down that road. There is no question that is a possible solution. But I don't think it would reduce the inequities very much.
Mr. SHACKELFORD. It would be very difficult to determine what the fair rate was for the State of Texas, for example, given the different regions. Then when that was different from the rate in the State of Oklahoma, there would be, obviously, the same disagreements we face now.
Mr. STENHOLM. Review with me your understanding of the current system for determining loan rate differences between counties and between States.
Page 24 PREV PAGE TOP OF DOC We have a national average. In order to have that come out for different States, what is the criteria that you used to determine what a loan rate should be in a given county, in a given State?
Mr. HICKENBOTHAM. Congressman, I am Terry Hickenbotham. Our calculations for that are that we look at the previous history of the posted county prices, using those as a proxy for prices for each county. So when we looked at possibly updating the loan rates this year for each of the commodities, we did a 2-year average for each county of the posted county prices in that county. Then we weighted those, by production, across counties for each commodity.
Let us suppose that, in the case of wheat, weighting each county's two-year average of its posted county prices by their respective production levels means thatI'll call it a national average PCPis $3.58, instead of $2.58. We took those historical average PCP's and lowered them by a dollar, to bring them down so that the average was $2.58. As a consequence, each of the loan rates, weighted by production, will average out to $2.58. That is what we call unrestricted loan rates. Those are the ones that we looked at for wheat and the feed grains.
Wheat requires a special situation because of the classes of wheat. Because we are announcing an all-wheat loan rate, we have to weight the classes within the county by the reported acreage we have for each of the classes. For a given county, if 80 percent was devoted to durum, and 20 percent to hard red spring, then the two-year average PCP for durum would be weighted by 0.8, and the hard red spring would be weighted by 0.2. That would come out to an all-wheat average PCP for that county. That is calculated into the national average PCP, compared to the national average loan rate. Deductions or increases are formed as necessary.
I actually have examples written out for two counties. Unfortunately, in my notebook I don't have those examples with me. I apologize for that being difficult to follow. That is about as easy as I can describe it. It does take into account, if we had updated for wheat and feed grains, the spatial differences among counties.
Page 25 PREV PAGE TOP OF DOC Mr. STENHOLM. I guess one brief follow-up question: Since you have a concern about using the current PCP system for LDP's, why would you want to keep using them to determine loan rates? Is there not a better way?
Mr. HICKENBOTHAM. We are going to look at the possibility of collecting as much price data from around the country as possible. We don't have that kind of database of market prices, but we are looking at obtaining such a database. I guess that is the best answer that I can give, right now.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Secretary, you have certainly outlined a major change in the LDP Program. As you suggest, it is very complicated and very technical. My mind goes back occasionally to comments that I have had and concerns I have had with FSA offices out there, the tremendous stress they have been under, the hard work they have done, and the many long hours they have put in.
Along that line, did you ever consider, can you consider, or will you consider spot-checking out there, rather than local production levels? Is that possible?
Secretary GLICKMAN. Yes. I ask Mr. Grau to respond. He was a State Director in Iowa before he came up here.
Mr. GRAU. The answer to that question is, ''yes.'' We have worked really close to our State and county offices to simplify the process for the producers that walk through the doors. We have had the opportunity to visit with them about the possibility of this macro-change. They are thrilled if we would have the opportunity to make it, because it would make it simplified for them, too.
Mr. BARRETT. If this were to happen, when would it happen? Can you give me a timeline? Would it be uniform across the country in every situation? I presume it would be.
Page 26 PREV PAGE TOP OF DOC Mr. GRAU. We want this to happen as soon as possible. Training is going on as we sit here, at least addressing the situation. The microprocess is going to happen regardless of where we go with the macroprocess. Indeed, as you stated, we have to simplify it for the producers walking through the doors.
Secretary GLICKMAN. Just from a timing perspective, I would state again you do have the problem of winter wheat production. If we go ahead with this right away, there would have to be essentially a fail-safe mechanism so that winter wheat producers are in no way treated any worse than they would be treated under the existing procedure. Essentially, they could have the best of both worlds. You would start with production of this year's corn and soybean crops, from a timing perspective.
Second, there would have to be whether we would come out with some form public comment, let us say over the next 30 days or something. We are not required to do this, but this is a matter if significant change. So it may be prudent to do something like that.
Mr. BARRETT. I would certainly hope so. It makes a little sense to me. In selecting your terminal markets to establish that uniform rate, you have gone to 16, I believe, terminal markets. Seven of them are in the eastern Corn Belt, most of them around Illinois and that area. It appeared to me that there might be some marketing and transportation conditions within that area that could depress, or severely affect the rates. Is that a potential problem?
Mr. HICKENBOTHAM. Well, I guess maybe the best answer is to say that we would monitor the results of the formula constantly. Anything that was given in the notebook to House staffers in the previous briefing is based on strict application of the formula. We have not gone back tosay, in the case of cornmodify that. I think we have always publicly said that the formula is subject to change. Not the formula, necessarily, but some terminal markets would not be so important in the formula at certain times of the year.
Page 27 PREV PAGE TOP OF DOC Mr. SHACKELFORD. Let me make me make a point here that our analysis has shown that, yes, the potential exists. However, where we have looked at it there have been very, fewthey are not significantdifferences. In fact, when we look at the comparison of the uniform rate versus the actual rate now, the differences are only 3 or 4 cents. So we don't think that would be a problem, and our analysis has shown that it would not be.
Secretary GLICKMAN. But I do think his point is accurate. If we see a problem with the terminal issue and the computation of that rate, we will have to have the flexibility to modify it. If one terminal is not being used at all, or if one is being overused, if there are logistics problems, we are going to have to be on top of it.
Mr. BARRETT. It would seem to me that with that concentration in that particular area, that could affect the rate for cornfor exampleacross the entire country. Would it not? Could it not?
Mr. SHACKELFORD. We can't say, absolutely, that it would not. We can say that if we noted that there was a problem, we would adjust it. I think it is a little unrelated, but it is related in a way. If you look, today the statute lays out the way we calculate the world price for cotton, which is the repayment rate for cotton. Today that is based off the prices in Uzbekistan, Tanzania, Greece, Spain, and one other I can't remember. A lot of things have impacts on commodity prices.
Mr. BARRETT. Well, if these terminal markets are used, it doesn't give too much influence to some of the thinly traded markets of, say, corn in L.A.? What about sorghum in Toledo, et cetera?
Mr. SHACKELFORD. Well, once again our analysis, when we have gone through it, has shown that it has not. We are going to continue to monitor these rates daily, just as we do now. If we note that for some reason it is unduly influencing and showing an anomaly that is not normal in the market, we will adjust the way we do that, and not give the weighting to it.
Page 28 PREV PAGE TOP OF DOC Mr. BARRETT. OK. In the interest of time, Mr. Secretary, I will suggest to you that I have several more questions. For example, I have a question that I wish you would give me a response in writing. I contacted OMB earlier about the staffing of offices and investments in information technology throughout USDA. I would appreciate an answer to this question, at your earliest convenience.
Another question is on treating seed corn and grain corn producers the same. I would appreciate an answer in writing.
Secretary GLICKMAN. OK.
Mr. BARRETT. OK. Thanks very much.
The CHAIRMAN. Mr. Minge.
Mr. MINGE. Thank you, Mr. Chairman.
I would like to thank you for coming this afternoon. This is a very difficult topic. I think it is difficult principally because we are talking about a safety-net program that, really, has gaping holes. It really is not a safety net. Tragically, we have a farm program that has sold America's farmers down the river. I think that this committee and Congress ought to be going to bat for our farmers. We can't make money at $1.89, or whatever the loan rate might be for corn. We are losing farmers, nationwide, and consistently, at this rate. The AMTA payments are not pulling them through.
What we have is a vibrant economy. It is stunning how this economy is performing on both coasts, in the metropolitan areas across the country. But in the rural part of this country, the economy is collapsing. I think that it is intriguing to struggle with the loan rate, and with LDP, and other issues like that. But quite frankly, we are just talking about a few crumbs that American agriculture is getting. So I hope that we can continue this and look at initiatives that we can take that would have a more dramatic and beneficial impact on our rural economy.
Page 29 PREV PAGE TOP OF DOC Second, I would like to thank you for trying to make a silk purse out of a sow's ear. Obviously, it is not going to work. We can go through some interesting discussions this afternoon. You may well accomplish your task of making this program more understandable and fair across the Nation. I would like to give you my thanks for your efforts to do that. But still, as indicated in my first comment, we are left with a pig's ear. There is nothing that is going to change it beyond that.
There have been some comments about the Minnesota-Iowa border, and the discrepancies between the LDP's in the two States. That, obviously, troubled the Iowa farmers. The Minnesota farmers thought, for once, they finally had something going for them. They couldn't figure out why all the time they had gotten the short end of the stick, year in and year out. They thought that at least now they were getting something that was fair.
The problem that we had was that right in the middle of the harvest season, we lost 6 cents a bushel, because of a rather abrupt, unanticipated change. We had farmers that could have hauled those bushels in, or claimed them the week before. They came in on a Monday or Tuesday morningand bangthey had lost hundreds and hundreds of dollars. So the abruptness of the change, I think, is something that has shocked people than almost any other part of the action by USDA.
Finally, we have concerns about how the upper Midwest is treated in this whole process. We are more of a residual supplier to the international and the national market than any other section of the country. We tend to store our crops to a much greater extent than people in other parts of the country, who will deliver out of the field more often than we will. So we have a greater vulnerability to the swings in the price because we are storing crops. We are hoping something is going to happen. Sometimes the bottom drops out.
My question is this: Do we have a system for making sure that the loan rate reflects the price in these different regions of the country, and does not penalize us for a distance from a marketlet us say, Chicagothat we rarely use as a market, when we often have local markets, now with greater and greater livestock feeding and ethanol plants, that end up being much more important than the distant terminal market that may be more important for the eastern Corn Belt, but for the northern Corn Belt may not be as big a consideration?
Page 30 PREV PAGE TOP OF DOC Second, I would like to ask if there is anything that you are doing to try to take into account the bases spread that exists in the upper Midwestespecially Minnesota and South Dakota, for corn and soybeansas compared to that spread as it exists in the areas that are closer to the terminals where you don't have the transportation differential?
Mr. SHACKELFORD. Well, what we are trying to do, because of some of the arguments you have made, is that going to a uniform rate would look at all of the national prices, and try to give an average. That is not as specific as the market price in that county. But our system has shown many of the complaints that we have had about the systems and the prices. In Minnesota, last year, for a long time our prices were below the market price. We tried to make that even and make it fair to all producers. Of course, we have those claims. Under this system it would not be as specific as to the market, but it would try to look at all the markets that were impacting it.
You asked the question about the loan rates reflecting the price. The loan rates, if we were to adjust them based on the discussion we had earlier, were based on previous prices in the county. The problem is that if we do adjust those loan rates, they all have to average out. So for every one that we increase, we have to decrease someone.
Mr. MINGE. Well, I see my time has gone. The chairman has admonished us to watch the colors. I would just like to say that the spread and the volatility of the price haunts us, particularly in the northern Corn Belt. We would like to make sure that this risk is carefully factored in, and we are fairly treated in the final results.
Secretary GLICKMAN. I would have to say, I think your point is a good point. When I was sitting where you were, I was concerned about this issue of loan rate differentials, distance from elevators, transportation costs, and this whole issue of deregulation. The further you are from a central point, the more you pay for that. It is difficult to deal with when you consider that there has to be some sort of a scientific method for computing these prices. A national LDP rate probably is a step in that direction. It doesn't go all the way, though.
Page 31 PREV PAGE TOP OF DOC Mr. MINGE. Well, the posted county prices sometimes are a mystery to us, too. We are not sure where they came from.
The CHAIRMAN. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you.
Mr. Secretary, thank you for being here. I live in one of those States that is a long way from every place that you have just described. It seems to me that where the focus of the Department should be is upon the posted county price, and allowing it to reflect actual prices. You have gone a long way toward something different than that. The focus should be making the current program work.
It is hard to be critical of the direction that your Department is going until we know more about it, and know the details. So I am glad to be here to learn that. But I fail to see how a national rate improves the lot in life of the farmers of a county in Kansas, who have little or no rail service. It is a long way to the elevator. Again, it is somewhat to what you just said. It seems to me that the problem is related to the posted county price, much more so than the overall LDP Program.
Mr. SHACKELFORD. Certainly. I think that what we are trying to doand I would agree; this does not go as specifically to the local county price. However, going to a uniform rate in some cases the tide will rise for everyone. Looking at the program and the way it works, there is nothing in the statutes that ties it to local prices. We try to get a repayment rate, or a loan deficiency payment rate, that will give the producer and incentive to repay the loan, rather than forfeit it. Basically, that allows them to repay it, and move that into the market.
In many cases last year, most producers took the loan deficiency payment rather than putting the crop under loan. So if we offer a rate that we consider fair to those producers if they accept it, we have then succeeded in doing what the statute would like us to do. We think that under this program it will cost more money, but producers will be getting more money. We think, on the whole, that is good for producers. We think it will show less forfeitures.
Page 32 PREV PAGE TOP OF DOC Mr. MORAN. Does that answer the question of what the uniform rate does in locations where the local price, plus the LDP, is way below the loan rate?
Mr. SHACKELFORD. On any specific day you may have cases where the local price, plus the LDP, is below the loan rate. But that varies every day. In some cases it will be higher. In some cases it will be lower. Producers, throughout a nine-month period, have the opportunity to take advantage. There have also been many cases where the local price, plus the LDP, will exceed the loan rate.
Mr. MORAN. Does the uniform rate affect that? Your plan, when you change to a uniform national rate, does it impact that circumstance? Are you saying that is going to occur depending upon what day of the week it is?
Mr. SHACKELFORD. It can occur either under the current system, or the proposed system.
Secretary GLICKMAN. I think the point isevery question it gets more complex in my own mind about what we are doingby and large, most producers will do better under this system than they do under the current system. Can I tell you exactly which producers, where and on what day? No. Because it is clear that we are going to be paying out about 10 percent more in LDP's, if we go down this road.
Mr. MORAN. That was my follow-up, Mr. Secretary. Is the reason that you can say that most, as a general rule, will do better because there is $400 million more involved?
Secretary GLICKMAN. Well, I think you have to assume that if there is more dollars going into farm country through enhanced LDP's, that means that somebody is getting those additional LDP's. But I think that we are not just doing because of the money.
Mr. MORAN. But if you put $400 million into the current way that the LDP is figured, you could say the same thing: more farmers are going to be better off. Right?
Page 33 PREV PAGE TOP OF DOC Secretary GLICKMAN. But you would also reduce. There are several pieces of this pie. The other thing is try to reduce the differences between counties, reduce the trucking of grain across counties, and doing those other things that I talked about at the beginning my statement.
Mr. SHACKELFORD. One of the things that we tried to is to go back and look at the comparison of all those different dates that we picked. In Kansas, for example, 6 weeks the LDP would have been higher under the uniform rate; 4 weeks it would have been lower under the uniform rate, and then for 6 weeks there was no rate under either option. Sometimes it is going to be higher. Sometimes it is going to be lower. As Mr. Secretary said, this is a marketing option by the producer. A lot depends on when that producer requests the option. It is not tied to the date of sale.
Mr. MORAN. The numbers you are talking about, Mr. Shackelford, are as if this program would have been in place last year?
Mr. SHACKELFORD. Yes.
Mr. MORAN. OK. Before my time expires, is there any flexibility to address problems that my Kansas farmers are experiencing today: following a hail storm, nothing to harvest; can't access the LDP? If they could harvest even a small amount of grain, they would qualify for an LDP. But because there is nothing there, they get nothing.
Mr. SHACKELFORD. That is entirely correct. Yes, sir. The loan deficiency payment is an option the producer can take in lieu of taking a marketing assistance loan. To be eligible for a marketing assistance loan, a producer must have collateralin this case, wheatproduced on a contract farm to pledge as collateral for this loan.
Without collateral, we can't make a loan. If we can't make a loan, we can't make an LDP.
Page 34 PREV PAGE TOP OF DOC Mr. MORAN. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. McIntyre.
Mr. MCINTYRE. I have no questions at this time, Mr. Chairman.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
Somehow I am reminded of a Rodney Dangerfield routine, when he came home one night, his wife was packing. He said, ''What is the matter, dear?'' She said, ''I'm leaving.'' He said, ''Is there another man?'' She looked at him and said, ''There must be.'' [Laughter.]
There is no question. The system that we have today is too complicated. You don't understand it. We don't understand it. Clearly, our farmers don't understand it. We do admire the fact that you are trying to come up with a simpler system that more of us can at least understand.
There is a gnawing concern. My colleague from Minnesota, Mr. Minge, began to touch on it. We are already put at a disadvantage, in some respects, the further we are away from a terminal market, particularly the further the way we are from New Orleans, or Portland, or one of the export markets. We are already put at that disadvantage. Our farmers receive less for our corn, beans, and so forth, than those who closer to those markets. So it seems to me that we are already put at a disadvantage. If you superimpose this new formula on a national LDP, at least the perception we have is that we are going to be punished again. We want to work with you. We do want a simpler system.
I guess the only question that I really have is you said there will be a comment period in the next 30 days.
Secretary GLICKMAN. Well, I was just saying that since I don't have a final plan to present to you, I can't tell what is going to happen tomorrow afternoon, with precision. My judgment is that there needs to be some opportunity for public input into this proposal.
Page 35 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Will you respond to that concern? There are actually some Minnesota corn growers sitting behind you.
Secretary GLICKMAN. Between you and them, I am trapped. [Laughter.]
Mr. GUTKNECHT. We do appreciate your being here. What can we say to those people to allay their fears? There is the perception that we have in our area that we are already get less for our commodities than if we lived closer to New Orleans. I mean, what can we tell those people?
Mr. SHACKELFORD. I think, once again, we tell them that there will still be the same opportunities under a uniform rate as under the PCP system. There will be times when the LDP rate, for example, would be higher; times when it would be lower.
Once again, I think an analogy is like the stock market. Not everyone buys or sells at the highest or lowest point. When we compare the highest LDP rate available under the uniform system, if we look at the 4 months last year from August to November, and the average of what farmers actually received, generally, the highest opportunity they would have had under the uniform rate is double what producers actually gotor is close to it. So it is going to be much the same as marketing the crop. Producers have the opportunity to market at a higher price, yet claim an LDP at a lower price. We still think there will be plenty of opportunities for a higher LDP for those producers.
Mr. GUTKNECHT. But let us come back to the real issue of regional differentiation. I mean, if you are in southern Illinois, closer to the Mississippi River, the price that you may get for your corn or beans may be ''X'' amount. The chances are good that the further you are away from a terminal market, the lower the price you are going to get, anyway. If you have a national LDPmaybe we are missing the point herebut doesn't it mean that we are going to be punished in two ways? I don't see how you can say you have a national rate that doesn't punish people that are further away from terminal markets.
Page 36 PREV PAGE TOP OF DOC Secretary GLICKMAN. I don't think that is accurate. I am not saying that there isn't a prejudice from your geographic location in terms of how loan rates are set, because I think there is some truth to that. But I don't think this national rate would affect that in any additional way. This is Keith Collins, our Chief Economist.
Mr. COLLINS. Mr. Gutknecht, no, I am not sure that is the case. Basically, the way we are talking about constructing this national rate is taking these 15 or 16 terminal markets, throw out the high and the low, and then subtracting off the bases in each of those counties.
It could be that if we had 15 terminal markets that had abnormal bases that didn't reflect most of the Nation, you would bias the calculation of uniform LDP against some areas of the country. But as we have looked at this, in the construction of the examples that we have done going back to 1998 crop and looking at over 16 days, it didn't work out that way.
So my conclusion to you is one of empirical observation. We have actually gone back and looked at all these crops, all these counties or 16 days, and there wasn't a State where the uniform LDP was either higher or lower in very single case. For corn, or wheat, or soybeans there was always a day when you did better under the uniform LDP, or you did worse. That is a little bit of the reason why the Secretary has had a bit of difficulty saying conclusively how this is going to work when we look prospectively out ahead.
So, to some extent, the conclusions that we have come to have been empirical from looking back at what happened over the last year. I think what you are talking about conceptually could happen, but empirically we did not observe that.
Secretary GLICKMAN. One of the things that I would say is that if we begin to see that the terminal process is not working, or it is inflexible, we are going to have to make modifications to it. This thing has to be fair.
If I might add one other thing. Going back to the silk purse and sow's earwe are doing our best to try to make a part of the safety net that nobody ever dreamed would be implemented work. The truth of the matter is that we arguing over this because prices are so low that the supplies are so overhangingly high. Other factors aren't working well. We can argue about whether the current farm bill provides an adequate safety net or not. Since we have this one piece of it here, we have to do our best to try to make it as fair as possible.
Page 37 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Well, Mr. Secretary, again we thank you for comingDr. Collins, and others. We want to work with you. Just understand that there is an awful lot of concern, not only in our area, but in other areas of the country, that we are going to get hit with a double whammy. We will work with you to buff off some the edges, and try to make a system that works and makes sense. But do understand the concerns that are out there. Thank you.
The CHAIRMAN. Mr. Pomeroy.
Mr. POMEROY. Mr. Secretary, I commend you for what you have tried to do here. This committee says over and over again that we want farmers to farmnot farm the program. Yet, we have a program that provides significant rewards just for hauling your crops a little further down the road to a different elevator. I would sure hate to be an elevator manager of some of those less competitive rates, competing against my neighbor elevators, who just by fluke of the farm program, are able to provide a significantly better return. That is a classic case of the program driving results, not market forces driving results. I think, therefore, this needs to be attended to.
On the other hand, it does seem very much to me to be an exercise of rearranging the deck chairs on the Titanic. I was on this committee when we removed meaningful price protections from the farm program. I fought it. The decision was made. I believe that decision, and the subsequent collapse in prices has proven to be an absolute nightmare for the American farmer.
As you have mentioned several times, these loan rates were never contemplated in any of our minds as something that we would actually be establishing the price for, but that is exactly what has happened. Just look at wheat alone: $2.57 loan rate. They used to be protected, under wheat, up to $4 a bushel, under the old deficiency program. The $2.57 figure is a lower return to the tune of a $1.43 a bushel. Clearly, that is not even covering and protecting cost of production. It is a small wonder we are having the financial hemorrhage throughout rural America that we are experiencing.
Page 38 PREV PAGE TOP OF DOC You talked about fixing this in a way that creates winners, but no losers. I just want to underscore that the importance of achieving that result. Under this farm bill there have been plentymore than enoughlosers, already. We can't take somebody in desperate shape, and because you are a making a national fix, reduce their loan rate, taking away the pathetic level of price protection they are now getting under the deficiency payment.
Second, Mr. Secretary, I would ask that you respond to the issue of inter-commodity fairness on loan rates. That is another thing. I talked about how a farmer might make a decision to drive past one elevator in favor of another. Well, frankly, farmers are making decisions to plant one crop instead of another, based on loan rates. That is not what we wanted either. In fact, you are going to have the tendency of swamping the boat as farmers take advantage on a relative basis a higher loan rate that might, for example, be in place for oilseeds, leaving small grain production to have lower levels of loan support. Of course, we know more and more to plant oilseeds under Freedom to Farm. We are going to have more and more yield, lower and lower prices; and, therefore, higher and higher outlays under the LDP's.
So it seems to me that we need to address, along with this project, the inter-commodity equity of the loan rate, not in a way the reduces loan rates, because a guy just raising oilseeds is a guy that is struggling and can't take that hit. We need to bring up the others to where they are at a relative level with the oilseed rate.
It seems to me maybe that will be an area where we can fashion some bipartisan consensus and end up withnot, certainly, the old safety neta better safety net than the absence of one, which is the present circumstance. Would you respond?
Secretary GLICKMAN. No question that, given the current state of prices, the oilseed loan rate has an incentive to plant for that loan rate. It will probably further exacerbate the cost of the LDP Program, as we keep oilseed prices lower. I can't quantify the amount; maybe Keith can. I am sure there is some truth to that.
Page 39 PREV PAGE TOP OF DOC I don't know whether you want to comment on the relative nature of the loan rates. But there is no question that they are a bit out of whack. At least the corn loan rate is a bit out of whack with respect to the oilseed loan rate. There is no question. You are right. You would rather raise them than lower them.
Quite frankly, we have talked about the fact that loan rates were capped. They don't float with some historic market average. That is part of the problem, I think. That is a longer term solution than what we can probably do right here.
Mr. COLLINS. Just to validate your point: Had we not capped loan rates, using the formula under the 1990 farm bill, the corn loan rate today would be $2.10 a bushel. In fact, we are at $1.89. On the other hand, under the old farm bill, we were $4.92 for soybeans, and we are now $5.26. So we have gone down on corn, and we have gone up soybeans. That solicited some supplier response and some increase in oilseed acreage, as you have indicated.
There have been other factors as well. We have had different varieties which have made soybeans easier to grow in North Dakotathings like that. But no doubt about it: that change in relative profitability from the loan program is affecting producers' planting.
Mr. POMEROY. I want to make it very clear that I am not complaining about the oilseed loan rate. I am complaining about every other loan rate.
Mr. COLLINS. Not bringing that one down; bringing the other ones up.
Mr. POMEROY. You have got it. One might conclude that you don't have a finished product for us today, because in the administration they were blanching at the additional outlay that it might cause. I would just tell you, and maybe you can tell some others back at the White House that the utter despair and need in farm countrynot just in the upper Plains, but throughout the countrymakes the additional outlay under the loan rate proposal seem literally insignificant. It is not at all matched to need. It is less than the least of which we must do. So cost should not hang this up.
Page 40 PREV PAGE TOP OF DOC Secretary GLICKMAN. I also want to say that this is not a critical part of the safety net modification proposal. It will have some help, but it is largely being proposed for the other reasons that I have talked about: equity, efficiency. I wouldn't want the impression that this is a big, enormous part of the safety net proposal.
Mr. POMEROY. That is an important point. This is done so one elevator doesn't go out of business just by virtue of the program that you are charged with running. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. Lucas of Oklahoma.
Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman. I must congratulate the Department. In the initial rumors about this proposal that have circulated, you have done something that I have not been able to do, and that is to unite the Oklahoma Farm Bureau, the Oklahoma wheat growers, and Oklahoma Farmers' Union in the concern and potential opposition. That is an accomplishment, gentlemen. [Laughter.]
Now I say as the combines are rolling across Oklahoma, let us step back and go over, Mr. Secretary, your comments earlier about how Hard Red Winter wheat would be addressed. The 1999 crop which is now coming into the elevators, under this proposal and the old system what do I tell my producers' back home when they ask me about where they stand in the process?
Secretary GLICKMAN. Yes. Why don't you kind of restate what I said before.
Mr. SHACKELFORD. Currently, we have a procedure in the field because, as you know we have been working on this for some time, with your staff and others. It states that for right now we will continue to make LDP's or allow loans to be repaid under the existing system. If the decision is made to go to the proposal of the uniform national loan rate, we will pick a date certain when that will begin. Those producers who received an LDP under the PCP system, if they would have received more under the new uniform system, we will compensate for that difference. If they received more under the PCP system, we will allow them to keep that.
Page 41 PREV PAGE TOP OF DOC Mr. LUCAS of Oklahoma. That will apply to hard red winter wheat harvested in 1999?
Mr. SHACKELFORD. That will apply to any crop that is harvested up until the time that this new policy goes into effect, if it goes into effect.
Mr. LUCAS of Oklahoma. Of course, that is the key phrase: if it goes into effect. There again, in the coffee shops, they remind me about the emergency disaster money of last October 1998. I draw comments about how things progress along.
Secretary GLICKMAN. But I would point out that while that took some time, as of today mostand some cases, virtually allof that money has been distributed.
Mr. LUCAS of Oklahoma. Absolutely, Mr. Secretary. I can point out that probably this will happen quicker than that. Would that be a fair statement?
Secretary GLICKMAN. It would be a fair statement.
Mr. LUCAS of Oklahoma. Thank you, Mr. Secretary. I yield back the balance of my time.
The CHAIRMAN. Thank you very much. Mr. Ewing.
Mr. EWING. He kept telling me I was 14th on the list, but I persevered and waited. Thank you, Mr. Secretary for coming down here again.
I am having a hard time understanding the proposed change. I think I have it now. There would be a LDP rate set for corn and soybeansthe interest that I have in my district. That would be an average based on the 14 terminal areas?
Mr. SHACKELFORD. Yes. It varies by crop. Generally, the terminal market is an effect on the crop.
Mr. EWING. So the actual county price would be used instead of the loan rateno, the loan rate, minus the new average price that you say?
Page 42 PREV PAGE TOP OF DOC Mr. SHACKELFORD. Right. The loan rate, minus the uniform LDP rate would be the repayment rate in that county.
Mr. EWING. So the posted county price really wouldn't have any impact on your LDP payment?
Mr. SHACKELFORD. No, sir.
Mr. EWING. I come from a very good area. We have been blessed. We have had a pretty good loan rate: $1.92 for corn. Our LDP maybe has been a little higher by a few cents. Our price of our grain is a little higher in our part of Illinois.
It appears to me we are going to be part of the losers. Illinois is either No. 1 or No. 2 in both corn and soybeans. So you have a lot of producers there, a lot of people to take less. Can you respond to that?
Secretary GLICKMAN. Well, again, you don't know who is going to win or lose before you determine how the grain is marketed. I don't think internally we believe that Illinois is going to be a loser at all in this particular procedure, to be honest with you.
Mr. EWING. Well, we have been fortunate. We have been getting a little more. But the point I want to make is the added price that we get for our grain, because we are close to market, is built into the value of our land. You start to adjust this, you start to adjust one of the basic things that people for years have used when they made investments. You understand? If you could get a little more for corn or soybeans in a certain part of the country, you are going to pay more for the land in that area than you are when you get farther away.
Secretary GLICKMAN. I am just not sure, though. We don't believe this is going to affect the local price at all.
Mr. SHACKELFORD. This should not impact your local price and those differences. In fact, if you look at our analysis, one would assume that it would enhance the value of your land in Illinois.
Page 43 PREV PAGE TOP OF DOC Mr. EWING. Well, I am never opposed to that, but I am particularly interested in protecting. We are fortunate enough to be close to a river. We are fortunate enough to be close to railroads. I would just hate to see a big production area like Illinois suffer a lower LDP payment because you are spreading it out over the country. I mean, I may be inconsiderate of my friends in other parts of the country, but I don't think that some ought to suffer so that you can spread this around the country.
Secretary GLICKMAN. I guess I would say, Tom, that, again, I can't tell you how, specifically, your State is going to do. It depends on how the grain is marketed. We are adding about 10 percent to the amount of money that is being paid out under the loan deficiency payments. It would be extremely remote that you would be prejudiced at all in this thing. I can't give you an absolute guarantee, however.
Mr. EWING. Well, how would this impact? It wouldn't impact the county loan rate?
Mr. SHACKELFORD. No.
Mr. EWING. So if the LDP went down, you might get more grain put under loan?
Mr. SHACKELFORD. Yes, sir. It is possible that producers might make the decision. It is very possible that producers are going to put more grain under loan this year, regardless, because of the tough economic situation. The CCC loan rates may be a better option. Take that loan and repay higher cost for credit somewhere else. But producers will still be able to repay that at a lower price.
Mr. EWING. It is pretty apt that high soybean-producing areas will be looking at the loan rate maybe more than the other areas.
Mr. SHACKELFORD. Well, if we see low soybean prices, we may see very high loan deficiency payments for soybeans, which may lead those producers to accept the loan deficiency payment and not enter the loan.
Page 44 PREV PAGE TOP OF DOC Mr. EWING. Well, I guess I have one final request. I understand this is terribly complicated. You are trying to be fair. The things that I pointed out are concerns that I have.
It would appear that you could run some modelsmaybe you havebased on what it would have been in the past when we knew the facts. Maybe those would help alleviate some of the fears that we have from Minnesota to Illinois to Oklahoma. I think you have heard a lot of people express concerns here today, because they just don't know what they are getting. Thank you.
Mr. GRAU. Just an additional point. Those are very valid points. We have run some models for the producers. I think they are going to be mighty, mighty pleased, Congressman. Back to the four ''E's'' the Secretary stated; they are going to be taken care of.
Secretary GLICKMAN. We will get you any models we have for your State. We will get them to you. I think that is a fair request.
Mr. SHACKELFORD. Yes. We have provided the staff. One of the things that we can show you is what would happen in the past if we did this. The thing that makes this most difficult for the Secretary, or any of us, to explain is we cannot predict what market prices will do in the future on a day-to-day basis and what actions producers will take, because this is a voluntary choice on their part. That is what makes this whole thing so hard to grasp.
Mr. EWING. Mr. Chairman, just one further comment. I was basing some of my concerns on some maps that I have that show a reduction in price. Maybe that information would be helpful.
Mr. SHACKELFORD. OK. The only maps we had showed what the rates actually were last year, accompanied by a chart of what the uniform rate would have been. We had other maps on loan rate adjustments. That is an entirely different issue. That does have to even out if we take away from one county to add to another, because they have to balance.
Page 45 PREV PAGE TOP OF DOC Secretary GLICKMAN. We also have estimated State impact. But again, that is just highly speculative. All that information is available to you.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman.
Mr. Secretary, I wasn't around when the 1996 farm bill was passed. I was aroundnot as a Memberwhen the 1985 bill was passed. You talk a lot about farming the program. There was an awful lot of farming the program under the old system, as well, and a lot less flexibility. Basically, I think the thing producers like, if anything, about this particular bill is that at least they have flexibility to plant what they want to plant.
One thing I do believeI am probably a minority around hereis that one thing we could do is to uncap the loan. I think that it does provide that your price support is then tied to actual prices: what the market reality is. It is not an artificial price. It would probably float over time. But to me that makes, as a matter of public policy, probably more sense than some of the other things under consideration.
We have a concern. I am like Mr. Lucas. I think you have united the farm groups in our State. We believe, in the Dakotas, because the transportation costs of getting to elevators that this has the potential to adversely impact our part of the country. My concern would be that our Plains States seem to be as hard hit as anywhere, right now, with the circumstances and conditions we are dealing with in agriculture. We are very concerned that this might further complicate that.
Just a couple of questions. The LDP is a function of loan rate, and a function of posted county price, both of which you control. If there are regional inequities like this, isn't there some way in which they can be addressed on a regional level, instead of having to go to a national uniform program?
Mr. SHACKELFORD. Well, in the issue of loan rates, for example, if we try to address the inequities of the loan rate, the law requires that they all average out to the national loan rate. For every loan rate that we adjust up to correct an inequity, we have to adjust the loan rate down somewhere else in the country.
Page 46 PREV PAGE TOP OF DOC Under the PCP system in existence today, we do try to make adjustments to try to as fairly reflect the prices as we can. However, we are talking about 2,500 counties throughout the Nation trying to value that a day after the fact, and try to get it as close as we can. There will always be differences. One of the problems with any of the programs we administer, somewhere between Miami and Seattle there has to be a line in the difference that occur across the country. Invariably, whichever side of that line producers are on, they are very concerned about it, and feel the line was drawn in the wrong place.
By going to a national uniform rate we feel that with loan rates still differentiated that producers will at least be receiving the same rate. We think we can meet the goals of the statute in having them repay the loan, or take the LDP in lieu of putting the crop under loan. We will not have the disparities of people hauling grain to different parts of the country, which hurts your local elevator. We will not have the complaints of producers saying, ''In that county, they are getting a higher payment than we are. Why?''
Ms. HICKS. I would like to respond to this, since I am the one who has to administer the PCP Program on a daily basis. When you are looking at a situation like we have in Tarrant County, where it is a loan rate problem, or you are looking at Baca County, CO, where it is not a loan rate problem, if we try to go in and make an adjustment, we can't pinpoint by county the adjustment.
When we do make one, it is a national adjustment, which is not unlike what we will be doing on the loan repayment system. It would be a national rate. We can't go in and fix some of these inequities like we would like. If it is more of a regional inequity, or we have a riff line between States, we can go in and make the adjustments to terminals and try to modify that and get rid of that riff line. It is difficult to make smaller adjustments.
Mr. THUNE. If you uncap the loan, does allowing it to float make it more easier, or more complicated?
Page 47 PREV PAGE TOP OF DOC Secretary GLICKMAN. I would just say that, as a matter policy, I think we ought to uncap the loan.
Mr. THUNE. Right. I understand that. I am talking about from the standpoint of trying to
Mr. SHACKELFORD. It will do neither. It will be desirable to producers, because they would receive more money. We will still have the same issues.
Mr. THUNE. I think there are some members, as well as some producer groups, that have suggested as an alternative taking the lower of the two terminal prices used in the posted county price calculation, as opposed to the higher. Is that something that you all have considered?
Secretary GLICKMAN. Yes. I think that you may want to talk about this. I think that has a fairly extensive budget impact. Is that correct?
Mr. SHACKELFORD. Well, there are a combination of things. First of all, it would not address the inequity problems. That was an issue raised, for example, in the Minnesota-Iowa border. However, it would just shift the disparity to another State border, and another place.
So we would continue to have the same problems in the disparities. The cost, had we chosen that last year, would have been over $1.5 billion in additional payments. It would have been less reflective of market prices.
Mr. THUNE. So in other words, if cost weren't the only consideration, it still would not be a viable alternative.
Mr. SHACKELFORD. That is correct. Cost is not the only reason why we would see a problem with that.
Ms. HICKS. It would not have dealt with the riff line that we have. It just would have shifted that riff.
Page 48 PREV PAGE TOP OF DOC Mr. THUNE. OK. Thank you very much, again, for your answers. Please understand the concerns that our producers have about this as it evolves. I hope that you all will keep us in post consultations as this proceeds. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Walden.
Mr. WALDEN. Thank you, Mr. Chairman.
Mr. Secretary, we have been told that the proposed national LDP would average the county LDP ratesthose counties home to terminal markets. What terminals did you use for those calculations?
Mr. SHACKELFORD. They vary by crop. We take a sampling.
Mr. WALDEN. To get specific, how about Soft White wheat in the Northwest: Oregon, Idaho.
Mr. SHACKELFORD. We can provide that to you. The problem is for each crop it varies. We have to look at those.
Secretary GLICKMAN. We will get it to you by tomorrow.
Mr. WALDEN. My second question is perhaps a naive one. How does all this change of proposing fit in under the budget caps? Do we see a fiscal impact that we can justify with the budget that is being appropriated?
Secretary GLICKMAN. Well, it is mandatory spending. It is not technically under the caps. Mr. Stenholm is far more experienced at this than I am. Our LDP numbers have gone up from $0 to $5 billion in the last 3 years. It has not really been under the caps. It is still money that is being spent, however. OMB guards that fairly closely.
Mr. WALDEN. OK. Thank you. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Following up on Mr. Thune's question a moment ago about using the lower. Have you looked at using an average, instead of the higher?
Page 49 PREV PAGE TOP OF DOC Mr. SHACKELFORD. Of the two terminal markets?
Mr. STENHOLM. Terminal markets, yes.
Mr. SHACKELFORD. Yes. And that would come out about halfway toward using the lower one. I am sorry, but when you are averaging two things, that is the mathematic effect. It also will continue a disparity, and in many cases not be reflective of the local prices.
Mr. STENHOLM. Would that help the equity question?
Mr. SHACKELFORD. No, sir. We would still have the same problems. They might shift to different places, but we would have problems on the equity continue.
Mr. STENHOLM. Following up on the loan problem, and Mr. Pomeroy's question about the disparity between commodities, which is a problem, any time you have farmers planting for the loan rate, rather than the market, we have a problem. You acknowledged that. We all acknowledge that. We also need to acknowledge why we have not touched that one, lately.
I didn't complete my thought process with you a moment ago when I was using a Medicare example. Let us assume for a moment that no one gets cut. You bring everybody up to what they should be, based on that theory. Then you factor everybody back to the national average that the law requires you to do. Under that theory, those who have a higher loan than they should would get cut, but not as much as they should. Those who have a lower loan would be increased, but not as much as they should.
As you look at thatsomething that I would hope that this committee would be interested in looking intois that something that we could all live with, politically?
Secretary GLICKMAN. It is possible. Is that a practical thing to be able to do?
Page 50 PREV PAGE TOP OF DOC Mr. STENHOLM. That is what I am asking.
Mr. SHACKELFORD. It would limit the increases and decreases. The problem is your statement about certain areas not being cut quite as much as they should seldom rings true. Those producers object to cuts regardless of whether we feel they should or shouldn't be implemented.
Mr. STENHOLM. Then I think it would be fair for the administration to say to the Congress, openly and honestly, ''We think we need to increase the amount of the loanor the cost of the program, or whateverin order for us to adequately do the job that we need to do.''
My concern is we are going to make these adjustments in LDP. We are going to have some folks that are going to be upset, because they are going to get less than they believe they should have, et cetera. Until we can deal openly and honestly with the question of loan rates between shipping points, we are going to have a difficult time solving any of these problems, are we not?
Secretary GLICKMAN. Yes. I think you are probably right. I would have to tell you in all fairness that the fundamental issue of loan rates is going to have to be set legislatively. We can, theoretically, have the authority to move up or down a bit. But we have also come out in favor of increasing, or uncapping loan rates and doing other things. What we are trying to do here is, admittedly, a very small first step. It is something that we think needs to be done in order to give some fairness to the program. We have designed it in a way, quite frankly, where there are very few losers.
Mr. STENHOLM. I think I understand that. Following up on Mr. Pomeroy's question, we have some other problems that are going to rear their ugly head into this thing very, very soon.
A theoretical question: If we didn't have LDP's today, and if the choice of the farmer today was to put the crop in the loan and not sell it, because we just said we are not going to sell our wheat for less than the county loan rate, how much less wheat would we be selling today?
Page 51 PREV PAGE TOP OF DOC Mr. COLLINS. I am not sure I understand the question.
Mr. SHACKELFORD. If we had the old marketing loan. If we had the old price support system in effect before the 1985 farm bill.
Mr. STENHOLM. If your county loan rate was $2.60. The farmer there said, ''I'm not selling it for less than $2.60, because I can get $2.60 on the loan. I am going to put it in the loan.'' How much less wheat would we be selling?
Mr. COLLINS. A little bit less, but not a whole lot less. Prices have been above the loan rate, generally, over the last several months. I think as we go through this summer, we would sell less than we would sell with the marketing loan, without question.
Take last summer as an example, wheat prices fell through the summer. In August, they averaged $2.37 a bushel. The loan rate was $2.58. It wouldn't have averaged $2.37 had you not had a marketing loan. It would have been up around $2.65, or so. To get the price up to $2.65, you would have had to market less. So you would market some less. But where prices are right now, I don't think it would be a whole lot less.
Mr. STENHOLM. I guess that is one of the things that kind of bothers me a little bit about our policy in this regard. What we are really doing is we are pushing prices down. We are pursuing the lowest theoretical price of what somebody out in the market is offering. That is supposed to be based on international competition. Yet, I am not sure about any of the complexities that we are talking about which you, Mr. Secretaryand all of ushave admitted that we don't quite understand. We do understand the price level. The price levels that farmers are being offered out in the country are very, very low.
Secretary GLICKMAN. I think there is some truth to what you are saying. You remember the 1985 farm bill. We went into that farm bill with significant Government stocks. So you had this question of high loans and Government stocks. So we decided to move to a marketing loan system. I suppose in the big picture of things the market is not affected dramatically, when you consider all of the world market. But yes, I think it could have some bearish effect on the short-term basis.
Page 52 PREV PAGE TOP OF DOC Mr. SHACKELFORD. The problem, I guess, at that time, in the philosophy that we went to was the concern that if we do have a fixed loan rate that nothing sells below, our competitors can all come in and undercut it by a few cents and know they are protected up to that level. So we become a marketer of last resort.
Mr. COLLINS. There is another problem, too. If in fact that loan rate, which becomes the price support floor, is above the market clearing price, then you are encouraging production, which will keep compounding over time. You have eliminated the acreage reduction program. So you have no way to put the brakes on that, except through the market price.
Mr. STENHOLM. I don't think anybody thought with the 199596 farm bill that the loan rates we were setting were going to have an encouraging effect for production.
Mr. COLLINS. Not at the time.
Mr. STENHOLM. Not at the time.
Mr. COLLINS. But it is happening today. It is happening for soybeans.
Mr. STENHOLM. But versus the alternative of what your choice is. Not whether you are going to make any money at that, but just basically it is the same thing we have in crop insurance. You have the price guaranty higher than the market price. You have folks making more money by not harvesting the crop, than by harvesting it. That has become a real problem.
Mr. SHACKELFORD. In fairness on the soybeans, just so we get on the record, the loan rate is one of the issues. But in certain parts of the country, one of the reasons producers are planting soybeans is because they are one of the lowest-cost alternatives, and one of the most drought tolerant. In parts of the country, producers are looking at what is the cheapest crop they can put into the ground because of the difficult economic situation. That is also a factor in addition to the loan rate.
Page 53 PREV PAGE TOP OF DOC Mr. COLLINS. To continue this, there is one more. [Laughter.]
Secretary GLICKMAN. When you are surrounded by economists and brilliant people, it never ends.
Mr. COLLINS. There is one more. A chronic problem agriculture has always hadthis is getting at the heart of itand that is variable cost are pretty darn low.
To give you an example: Variable costs of production for soybeans are about one-third of the total economic costs of producing soybeans. As a result of that, to get people to stop producing, you have to get prices down below variable cost. That is not going to happen. That is very, very low. That was sort of the historical agricultural treadmill problem. The prices went down. You couldn't get much cut-back in production.
This year is a perfect example. We have had much lower prices, with planting flexibility. What has happened to total planted acreage in the United States? It is down only about 5 million acres, on a base of 300 million. It is very hard, regardless of where you set the loan rate as long as you have them, to not encourage some production.
Mr. STENHOLM. Fair analysis. Mr. Chairman, one final point here. We have talked about this. We have heard about this so-called ''winners and losers'' list. You have talked about it. It is my sense that your analysis of this is that first, it is difficult to determine until the market determines it. It is pretty hard to analyze it any other way. That is my analysis of what you have said today in your analysis that has gone into the recommendation. You do not believe that there will be substantial winners or losers.
Secretary GLICKMAN. I think that you are correct. It is very hard to pinpoint this issue. It is dependent upon the market. It is dependent upon marketing choices and the timing of the decisions. We do not see this as a loser for very many American farmers at all. We see it costing some additional money, which indicates that there are probably going to be more winners than losers in the abstract. But we can't tell you who it will be, right now. It will probably be, in the big picture, not material one way or the other. It will just make the system much more equitable.
Page 54 PREV PAGE TOP OF DOC Mr. GRAU. In addition, for the producers themselves not to have to choose which elevator to drive to, or which county, State line, or regional line, that is going to take a lot of pressure off of American farmers.
The CHAIRMAN. Let me ask you a question, Mr. Secretary, or whoever. I am glad Mr. Ewing brought up a parochial issue. I don't feel quite so bad about approaching one myself.
Under USDA's own analysis on wheat, it shows Texas is about a $1 million loser. We haven't been able to get the information on corn. There are some others who have done some analysis and suggest that that figure in wheat is not $1 million, but probably closer to a $3 million loss. On corn, we have had some suggestions that it is at a minimum of $7 million. Most of that corn is grown in
Secretary GLICKMAN. Your area.
The CHAIRMAN. A part of an area of the State that I am very familiar with. If you can comment on that, that would be fine. If you can't comment on that, you had mentioned earlier that there might be some areas that would require adjustments. I am wondering if that qualifies as an adjustment. In that area, a $7 million-plus and $3 million-plusa $10 million hitis fairly substantial for a fairly small geographic area.
Secretary GLICKMAN. First of all, these numbers were estimates based upon certain dates where we looked last year, and then looked at this year.
Mr. SHACKELFORD. As you know, we picked random dates from last yearnot totally random, but we tried to space them over a period of timeand looked at what actually did happen: what producers did last year; what the market did last year, and what they actually got. I don't have those numbers for corn. But where we looked at it for wheat, for example in Texas, four of the weeks the uniform rate was higher; 6 of the weeks it was lower. Depending upon when producers request that LDP will have more to do than our rates, but they do vary. Once again, it really depends upon the producers' options.
Page 55 PREV PAGE TOP OF DOC I think that it is unfair that when I have talked to some of the people who have done analysis, they have just spread evenly over 16 dates and the total amount of the production, and therefore, came with a number. But going back to something like the stock market, I think the producers are more likely to choose to take an LDP on the date when the LDP rate is higher. Can I tell you that they will all do that? Invariably, they will not. Smarter marketers are going to do better than those that are not.
Generally, the opportunities will be there. Certainly during the harvest time, there will be a number of times when the maximum is above what it is now. Certainly there will be cases when the maximum is a lot more than the average that producers request.
The CHAIRMAN. I know there is a great deal of uncertainty in this. Obviously you can see where some of the concerns where people are looking at this from other viewpoints and are raising the question. I don't know at times those certainties are ever decided for sure, but that is a concern. I wanted to make for sure that is registered. We may have to lick that calf again. [Laughter.]
One of the things that I was interested in looking at is there a pattern that you see of winners and losers? For example, where there has been a discrepancy in the past with regard to one's location to a terminal, does this provide more or less help as you move away from a terminal? Do you understand what I am saying? Is there a pattern to where the winners and/or losers are based upon their location?
Mr. SHACKELFORD. We don't think there is a specific pattern to winners or losers. There are areas where the rates, under uniform rate if it had been imposed last year, would have been lower generally than the PCP system was. In many cases, those are very small differences.
Mr. COLLINS. I think that is true. We have crunched quite a lot of numbers and have done all kinds of maps. One of them to make it easier for us, we put red on the losing States and green on the winning. We run these maps for each of the days and times we looked at. The colors jump all over the place. One State is green on date; it is red on the next date. A very sharp, strong pattern across all commodities does not emerge.
Page 56 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Secretary, one of the things that you had mentioned earlier as we were talking was about timing in this in regard to equitableone of your ''E's.'' Current wheat is coming off. Charlie sold his, so he may have a little more of a personal interest in this than I do.
From what I understood you to say, based upon when and if you can put this into place, there may be an option available for the current wheat crop. Then future crops that would be harvested later on in the year would come under the new program.
Secretary GLICKMAN. That is basically correct.
The CHAIRMAN. I can only imagine difficulty in an option, because you have to sit downvirtually every dayand figure how you compare under the two.
Mr. SHACKELFORD. Let me clarify what we are saying. If producers have accepted an LDP, for example, or repaid a loan before this change goes into effect, we will go back and look on that date and what the rate would have been on that date.
The CHAIRMAN. And give them an option.
Mr. SHACKELFORD. Otherwise, you are right, because people will say, ''Well, I certainly would have done this on a different day.''
The CHAIRMAN. So when their transaction has actually occurred, you will look back and give them an option, and if you can buy it up, or whatever.
Secretary GLICKMAN. That is correct.
The CHAIRMAN. OK. On the comment period, that has never been specified. You have talked about the desire for that. Are you looking atwithout actually making a proposal todayputting this out for comment for a period of time?
Secretary GLICKMAN. I think it would be prudent to do that. So my answer is ''yes.'' Again, we haven't formally
Page 57 PREV PAGE TOP OF DOC The CHAIRMAN. I understand that.
Secretary GLICKMAN. It would be some form of comment period that would allow people an opportunity to get their views in from out in the countryside. We would probably put something in The Federal Register and ask people to comment over a short period of time30 days, something like that. There is a lot of wisdom out there in the countryside from people who are dealing with this on a day-to-day basis.
The CHAIRMAN. I know. I am hearing from a lot of them.
Secretary GLICKMAN. Particularly on a subject as complicated as this one. I think we do need to hear that. I will have to tell you that Tom Grau, here, was a State Director. I personally talked with State directors in your State as well as South Dakota, Mike O'Connor, and others. We are trying to get as much field comment as possible. You never know until it is out there, until you hear people say, ''Well I do it this way. This doesn't work very well.'' I think we have to do some of that.
The CHAIRMAN. Mr. Secretary, we will try to accommodate your time in this as well as Members with a vote coming.
I am sure there are a number of other questions. I have several myself that we may need to submit.
Mr. STENHOLM. Just a brief followup to the chairman's question a moment ago: In regions that over the last 3 or 4 years have lost their rail service, which immediately reduced the price of their wheat value at the terminal by at least 10 centssometimes 12 to 15 centswhat significance does that have to a producer in light of the LDP, the question before us, and also, the changes in the loan that have not occurred, et cetera?
Mr. COLLINS. If they lost rail service, presumably that means their bases would go up. Their LDP would go up. If we go to a uniform LDP, it would seem that it is possible that could lead to a lower LDP. I don't know where those regions are. The chairman, a minute ago, mentioned our analysis that showed Texas having a reduction in total LDP's of $1 million. We only had three States, in total, that had a reduction in LDP's.
Page 58 PREV PAGE TOP OF DOC Secretary GLICKMAN. That is, again, based upon those dates
Mr. COLLINS. The 16 dates. They were all in the range of $1 milliona couple of cents per bushel. So there was no pattern that jumped out of regions that, across all these commodities, were disadvantaged.
You might be talking about very small regions within a State, which doesn't show up in the aggregate data we have. We could go back and take a look at that. On the State-level data that we have looked at, nothing shows up as a persistent loss as a result of our looking at those 16 days. I think, theoretically, it could occur. I don't think we saw it in the data.
Mr. SHACKELFORD. In many cases, under the old system that adjustment did not occur either.
Mr. STENHOLM. That was for you to think about as you look at the loan rates, the commodity disparitiesall of these. Is there is significance to regions that lose their rails service? Trucking cost more. Therefore, it does change the bases. Is that being considered?
Mr. SHACKELFORD. I think one of the things that it is also fair to bring up is, as the chairman has mentioned, everyone is concerned about the uncertainty and the unknown of this proposal. I think we could say the same about the existing system as to what will actually happen over the next few months. I don't think anyone can fairly predict that.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I think you may have answered this. Just for the record, the concern in South Dakota has been that the LDP, plus the market price, doesn't add up to the county loan rate. What is an explanation for that?
Mr. SHACKELFORD. On some days that would be the case. On other days, the LDP, plus the market price, would exceed the loan rate. So the producer would be getting a benefit. That can occur under the current system or under the proposed system. There will be greater variations, potentially, under the new system on the uniform rate. There will be those times when it could be lower. There will also be a number of times when it will be higher.
Page 59 PREV PAGE TOP OF DOC Mr. THUNE. I was just wondering though, if going to a uniform national system doesn't exaggerate that problem.
Mr. SHACKELFORD. That is possible. Once again, any time you try to make something more simple and more even across the way, it does take away some of the flexibility, and, maybe, the perceived fairness.
At the same timeI forgot the point I was going to make, so I will shut up. Excuse me.
Mr. THUNE. Well, that is OK. I need to go vote, anyway. Thank you. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. Intuitively, I just have to believe that a national rate penalizes those regions that have less transportation services. In follow-up to what Mr. Stenholm said, please take into account those factors. I can't imagine how it could be any other.
I don't disagree with Mr. Shackelford that there are problems with today's program in the same regard. But if we are going to fix this thing, let us also fix the transportation/cost issue.
Mr. SHACKELFORD. We understand that. So far our analysis has not show that.
I remember the point I was going to make. Let me come back quickly and say the one thing when we look at forfeitures there has been a lot written about it. You have to remember that for any particular lot of grain, there is only one date that forfeiture can occur: that is the last day of the 9th month. We have to look all throughout that 9-month period. There are often plenty of opportunities when producers can market it at a profit above that level. Do producers always do that? No. But under the current system, we still face that same issue.
Page 60 PREV PAGE TOP OF DOC Mr. MORAN. Mr. Secretary, have you decided to implement this program this year?
Secretary GLICKMAN. I think it is clear that we would like to implement the program. As I have said before, all of the details haven't been worked out because of the cost issue. I have also said that we will implement it with some public notice and comment, which would mean that it is not immutable. It is not written in stone.
Mr. GRAU. One additional point on the microchanges: we definitely will implement them out to our county offices to ease it for the producer.
Secretary GLICKMAN. Irrespective of whether we go ahead with this or not, those changes are going to be made.
Mr. MORAN. Do you anticipate that you have the funding capacity within the PCC to adequately operate this year's program?
Mr. SHACKELFORD. Yes.
Mr. MORAN. How are these LDP's treated under GATT?
Mr. COLLINS. These payments are what they call ''amber box payments.'' They are subject to discipline. They are counted in the aggregate measure of support.
The CHAIRMAN. If the gentleman from Kansas will attempt to wrap up?
Mr. MORAN. OK. How are the enhanced AMTA payments treated under GATT?
Mr. COLLINS. We have not reported the enhanced AMTA payment, yet, to the WTO. Our thinking is that we will treat them as also amber box payments and subject to discipline.
Mr. MORAN. Mr. Chairman, thank you very much.
The CHAIRMAN. Without objection, the record of today's hearing will remain open for 10 days to receive additional materials and supplementary written responses from witnesses to any question posed by members of the panel.
Page 61 PREV PAGE TOP OF DOC The hearing of the Committee on Agriculture is adjourned.
[Whereupon, at 3:30 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Hon. Daniel Glickman
Mr. Chairman and members of the committee, I am pleased to appear before you to discuss our proposal to institute uniform national loan deficiency payment rates for wheat, feed grains, and oilseeds. This would be a significant change from the previous procedures that used county-specific posted county prices for determining county LDP and loan repayment rates. The administration is continuing to examine this and other reforms as well as the process for handling the potential program changes.
My testimony begins with a brief summary of the background of the program and issues we have considered including a discussion of specific problems associated with the previous system, the proposal for changing the calculation of LDP rates, and major concerns that have been expressed relative to national LDP rates. I will then conclude with some additional statements on the changes being considered.
DECISION ON NEED FOR UNIFORM NATIONAL LDP RATES
The marketing assistance loan programs have become increasingly important under the provisions under the Federal Agriculture Improvement and Reform Act of 1996. At the time of enactment, little LDP or marketing loan gain activity was expected to occur during the 1996 to 2002 period. However, record harvests here and abroad, a strong dollar, and a significant downturn in export markets resulted in U.S. farmers suddenly facing unexpected and sharp declines in major crop prices. LDP and marketing loan gain outlays have exceeded $3 billion for the 1998 crops and are projected to exceed $5 billion for the 1999 crops.
The current LDP/marketing loan gain system can be improved. Without change, complaints about inequitably disparate LDP rates across State and county lines and about producers delivering their commodities to counties outside normal marketing channels just to get higher Government payments would justifiably continue.
Page 62 PREV PAGE TOP OF DOC USDA has received continual comments on the manner in which marketing loan repayment and LDP rates are established when the first flood of complaints began to come from farmers, elevator operators, our county and State office personnel, some State Secretaries of Agriculture, some State Governors, and many of your colleagues regarding inequitable LDP rates across county and State lines. Our proposal to institute uniform LDP rates is in direct response to these comments.
Let me explain to you what I mean with a couple of examples from the many across the country:
Consider the LDP rates from Texas for Soft Red Winter wheat on June 1, just 2 weeks ago. In a circle of about 75 miles around Dallas, LDP rates varied from a low of 47 cents to a high of 95 cents, with rates of 59 cents, 79 cents, and 80 cents in counties in between. This area is served by good interstate highways, making it clearly beneficial to the farmer to haul the grain to another county to get a rate that is as much as 48 cents a bushel above the LDP rate esablished for the county where the producer harvested the crop.
Along the Minnesota-Iowa border last fall during the harvest, LDP rates for corn in Minnesota were regularly 6 to 8 cents higher. When we adjusted the formula to equalize this difference, there was a collective howl from folks in Minnesota, who were flabbergasted that we would take this step, even though our formula for PCPs in Minnesota had been running consistently below local market prices. In the Pacific Northwest, LDP rates for soft white wheat in Washington regularly exceeded those in neighboring counties in Oregon by 10 to 15 cents per bushel.
If a uniform national LDP rate had been in place for the 1998 crops, USDA analysis shows that forfeitures would have been lower. Complaints about inequitable LDP rates and market distortions would likely have dropped. However, for these improvements to appeal to many producers, there would have been a projected cost of an additional $400 million for the wheat, corn, and soybean loan programs. The higher cost is largely a result of slightly higher average LDP rates under the national rate procedure.
Page 63 PREV PAGE TOP OF DOC The $400 million cost significantly exceeds the $60 million collateral value of the 18 million to 26 million bushels of 1998 crop forfeitures that the Department's analysis indicates could have been avoided if the national LDP rate had been in place last year. However, simply minimizing potential forfeitures is not the major focus of a national LDP rate approach. Rather, a national LDP rate might provide a more equitable and transparent program to producers and will reduce market distortions that are prevalent under current procedures.
The ''problems'' with the current system for determining LDP rates are admittedly exacerbated by the current system of county loan rates. The county loan rates in place for the 1998 and 1999 crops of wheat and feed grains are essentially the same as those in place for the 1995 crops, which were at that time deemed to be in need of substantial revision to better reflect local market prices. In fact, this problem of county loan rates being misaligned relative to local market prices has at least a 30-year history.
Regardless, I do not believe that wheat and feed grain county loan rates should be adjusted downward during the current farm crisis. To adjust these loan rates to fully reflect recent local market price information would have resulted in lower loan rates in 69 percent of the wheat producing counties, with a maximum decrease of 68 cents per bushel. For corn, loan rates would decrease in 35 percent of the corn producing counties, with a maximum decrease of 25 cents per bushel. Also, a review of the soybean maps that you were provided easily shows that the misalignment of county loan rates is hardly the source of all the complaints. (This is also evident from the maps for the other commodities.)
The disparity in county LDP rates also results from: (1)-county loan rates that are fixed and static (once announced) for an entire year's crop, but loan repayment rates that are subject to change, based on dynamic market price relationships as reflected in the daily (or weekly) PCPs, and (2)-in the case of wheat, county loan rates that are determined on an all-wheat basis, but loan repayment rates that are announced for each of five classes of wheat.
Page 64 PREV PAGE TOP OF DOC The PCPs also pose problems at times for wheat, corn, and soybeans. First, the PCP system was designed to reflect the average annual basis between a major market and a county. Thus, over the year, the PCPs generally tend to do well in capturing annual average price levels in local markets. However, they weren't designed to ensure perfectly accurate price estimates on any particular day because PCPs follow the market by a day. During the year, local changes occur reflecting regional supply and demand pressures and changes in transportation costs. This can cause PCPs to rise above local market prices, leading to forfeitures, fall PCPs below local market prices resulting in unnecessary outlays. Second, because local PCPs tend to reflect price trends in just two major terminal markets, the system provides price estimates related to regions of the Nation. Where two regions meet (usually on State borders), LDP rates can be significantly different across some of these State lines.
There are a number of examples that show the disparity in LDP rates is not just linked to differences in loan rates. Consider the case of soybeans, where county loan rates have not been restricted. The senior senator from Mississippi contacted us last year very concerned that LDP rates for soybeans in Arkansas were regularly exceeding those in Mississippi by about 6 cents, and his producers were hauling their beans across the river. An adjustment of PCPs here would have caused the dividing line to move to the center of the State of Mississippi, which would have resulted in even greater producer anguish.
A final example involves my home State of Kansas. In Morton County, in the far southwest corner of the State, the loan rate for corn is $2.15 per bushel. Across the border in Baca County, Colorado, the loan rate is two cents higher, $2.17 per bushel, yet on January 4 of this year, the LDP rate in Baca County was 27 cents higher than in Morton County, 39 cents in Baca, 12 cents in Morton, with similar rates also in the counties of New Mexico, Oklahoma, and Kansas that border this one Colorado county.
How do we explain theses disparities to farmers in neighboring counties? The truth is it is difficult. That's why we need to simplify this very popular feature of the safety net. Our single rate plan would cover what I call the 4 Es: Equity, Efficiency, Ease of Understanding and Enhanced Income.
Page 65 PREV PAGE TOP OF DOC Equity. For the 1998 crop year, LDP rates were set on a county by county basis. So while one farmer got one rate, another farmer 5 miles down the road, growing the same crop, would qualify for another. As I just described, sometimes these differences were substantial, thus the Government made one producer's crop a lot more valuable than anothers when, in reality, they were essentially the same. A uniform LDP rate would provide equity to all producers.
Efficiency. The second E is efficiency. Because we pay benefits according to where the grains are stored, and with varying rates from county to county in effect, the resulting system caused inefficiencies. Farmers would ship or drive their crops to wherever they got the higher rate. That resulted in a multitude of transportation efficiencies.
The system diverted grain from warehouses farmers would normally do business with, further upsetting the apple cart. And, because of the luck of the drawa sort of geographic lotteryone farmer might be able to travel a short distance to get a better rate while a farmer living in another part of the State wouldn't be so fortunate.
Under a uniform national rate plan, the Government won't be providing the incentive to transport crops in this manner, thus returning to a more efficient use of transportation and warehousing.
Ease of Understanding. The third E is Ease of Understanding. Under our new, simplified single rate plan, farmers will no longer be perplexed by the LDP formula. A simplified plan mean they can focus their energies on what they know best, farming, leaving the LDP process to take care of itself.
Enhanced Income. The final E is Enhanced income. Depending on budget considerations, the new plan with its increased efficiencies would have the side effect of pumping more dollars into the farm economy at a time that they are sorely needed. In order for the plan to work USDA expects it would cost at least an additional $400 million or more for the 1999 crops.
Page 66 PREV PAGE TOP OF DOCCALCULATION OF UNIFORM NATIONAL LDP RATES
Similar to previous procedures, national LDP rates would apply to each class of wheat, each feed grain, soybeans, and each minor oilseed. Rates will vary daily for wheat, feed grains, and soybeans, and weekly for minor oilseeds.
The national LDP rates will be based off the major terminals used under the previous procedure. The rates will simply reflect an average for all major terminals of the difference between the ''adjusted'' terminal price for the preceding day and the loan rate in the county in which the terminal is located. (Adjusted terminal price means the terminal's price quote less any within-county differential and less any temporary adjustment.) The resulting average equals the national LDP rate and applies to all counties equally.
MAJOR CONCERNS EXPRESSED RELATIVE TO NATIONAL LDP RATES
The biggest concern seems to be who are the winners and losers under the national LDP rate approach. Most importantly, everyone will continue to be assured of at least receiving their loan rate amount if the commodity is pledged as collateral for a loan. Let me remind everyone here today of exactly what the targeted level of benefits is under the marketing assistance loan program, because it seems many people have forgotten. It is the loan rate, and I repeat, that level will continue to be assured under the national LDP rate approach.
That said, I do understand the anxiety that results from this change in a few areas of the country, where the national rate would have been somewhat lower more times than higher over the past year. However, our analysis shows that even in these few areas, there will be periods when the uniform LDP exceeds the LDP generated by the current program. In addition, under the national LDP rate approach, the Credit Corporation (CCC) retains the authority to make additional adjustments to the LDP rate.
Second, some concern has been expressed that a national LDP rate has the potential to further depress harvest-time prices. This issue is very important and, therefore, must be carefully considered. Only in areas in which there are few local merchants (i.e., few competitors) has CCC occasionally encountered a situation in which cash prices ''chased down'' the PCP. For example, CCC lowered the PCP to reflect the local market price, and the local merchant simply lowered the local cash price further. This situation appeared to occur for corn in some Plains States. However, in most cases, no such influence has been observed by USDA.
Page 67 PREV PAGE TOP OF DOC The set of maps that you were provided shows ample evidence that LDP rates in many parts of the country under the previous program were often significantly higher than necessary to encourage marketings. The addition of LDP rates to local market prices well exceeded respective county loan rates in those areas. This is also easily seen in the soybean maps, but it's evident for all the commodities. Thus, for anyone concerned that a national LDP rate will result in LDP's higher than necessary in certain areas, they should recognize that is a characteristic of the current program.
Third, there is no reason to expect increased forfeitures with a national LDP rate. USDA's analysis showed that, if a national LDP rate approach had been used last year, forfeitures would have been slightly lower.
Fourth, I believe that a national LDP is consistent with the original purpose of LDPs. The LDP was originally called a production option payment (POPs). They applied to cotton and rice beginning in 1986 and were derived by subtracting an adjusted world price estimate from the national average loan rate. The resulting POP payment was equally available to all producers across the country. When cotton and rice POP payments have been available, respective domestic market prices have generally been well above the loan levels. Thus, a uniform LDP rate for wheat, feed grains, and oilseeds more resembles the original POP payment approach for cotton and rice than does the current procedure for grains and oilseeds.
In fact, the original purpose of the marketing loan program was to help ensure the orderly flow of loan commodities into the market. Current statutory authority simply states that repayment rates shall be set at the lesser of loan principal and interest or a level that essentially minimizes potential forfeitures and encourages marketings. Price levels are not even mentioned.
In deciding how to operate for the 1999-crop wheat, feed grain, and oilseed loan programs, we have encountered difficult tradeoffs. First, 1999-crop wheat and corn county loan rates will continue at 1998-crop levels. Oilseed county loan rates will continue to be updated to reflect the latest local market price information available, i.e., they are unrestricted.
Page 68 PREV PAGE TOP OF DOC The decision not set wheat and feed grain county loans rates on an unrestricted basis was confronted by two significant concerns. First, 69 percent of the wheat producing counties would have experienced a decrease in county loan rates; for corn, 35 percent. Second, not updating the county loan rates would continue to significantly contribute to disparate LDP rates across counties under the PCP system for determining loan repayment rates. Regardless, I still do not believe that there should be wide-scale reductions in county loan rates during the current farm financial crisis.
Based on the past year's experience with all the problems encountered in administering a loan program with rigid loan rates and dynamic PCP-determined loan repayment rates, we are considering using national LDP rates using the 1999 crops of wheat, feed grains, and oilseeds. This would be similar to the procedure that has worked well for the rice and cotton loan programs since 1986. In any reform effort we decide I'm sure we share common goals, including putting more equity and transparency back into the program and reduce market distortions and improve efficiency, make for an easier to understand program and enhance income at a time when that is sorely needed..
Mr. Chairman, that concludes my statement. I will be glad to address any questions that you may have.
"The Official Committee record contains additional material here."
Blended Grains Question for Secretary Glickman from Hon. Gary A. Condit, a Representative in Congress from the State of California
As I understand the policy concerning blended grains, a crop which contains a mixture of wheat, barley, and oats, is not eligible for a Loan Deficiency Payment unless there is a 90 percent predominance of one of the grains.
In light of a recent decision made by the Farm Service Agency's National Office to allow grain crops that are harvested as silage or hay to be eligible for an LDP, why couldn't a similar exception be made for blended grain crops which would make them eligible or an LDP? Since the payment is an LDP, there would be no risk on the Government's part to assume the crop. One simple solution would be to allow the grower to certify the percentage of each grain crop
Page 69 PREV PAGE TOP OF DOChe has harvested and base the LDP payment for each grain crop on that percentage. If this approach is not acceptable, why couldn't USDA allow payment for blended grains based on the lowest valued grain contained in the blend?
Can this policy change be made administratively? Is it a part of the changes to the LDP Program that the USDA is now in the process of making?
June 23, 1999
THE HONORABLE DAN GLICKMAN
Secretary of Agriculture
U.S. Department of Agriculture
Washington, DC 20250
DEAR MR. SECRETARY:
Thank you for testifying before the Committee on Agriculture on June 16, 1999. As I noted during the hearing, I have a few follow-up questions that I would appreciate you answering:
1. Why have you not adjusted county loan rates?
2. On the basis of an entire crop year, would you provide for each crop and state, summary LDP payment comparison data between the proposed rule and current provisions?
3. Does your analysis show any pattern of where producers do consistently better or worse? For example, does this system provide more help for production near terminals or less help for production further away from terminals?
4. Is there any likelihood of a weakening of the basis because of a national uniform LDP in areas that can be characterized as ''winners''?
5. Do you intend to use the 1985 Food Security Act cost reduction options if you are faced with the potential for increased forfeitures for 1999 crops and if so, how do you plan on implementing these options?
Page 70 PREV PAGE TOP OF DOC 6. If you do implement a national LDP payment rate, do you have legal authority to apply it retroactively to producers who have already utilized marketing loans/LDP's on 1999 wheat?
7. For corn, what effect does your analysis show with respect to the overall concentration of the payments? In other words, compared to the current system, how much more/less money will each corn-producing state be receiving overall? Please provide that state-by-state analysis, if possible.
8. For producers who will be receiving a relatively higher LDP compared with the current system, what analysis have you done with respect to the marketing loan gain limitation? In other words, have you analyzed what effect there will be on producers hitting the loan gain payment limitation earlier than the current system, including any effect on forfeitures?
9. During the hearing, you pointed out three StatesIllinois, Iowa, and Kansasthat would benefit by a national LDP rate for corn. Yet, the national colored maps handed out by USDA indicate a potential slight increase in income for the State of Nebraska as a whole. In fact, there have been some verbal indications out of USDA that Nebraska could benefit by up to $55 million, which is higher than Illinois and Kansas. For 1998, how would Nebraska be affected overall by your proposed national LDP?
Thank you for your attention to this matter.
Questions Submitted by Hon. Marion Berry, a Representative in Congress from the State of Arkansas
As you know, each county is assigned one or two terminal markets and the higher price at those terminal markets is used to calculate the posted county price and, consequently, the loan deficiency payment. How many domestic terminal market locations are there and where are they located?
Page 71 PREV PAGE TOP OF DOC Please provide to the committee a table which shows the LDP and county differential for corn and wheat on a current given date for a county assigned to each terminal market area.
June 16 , 1999
THE HONORABLE CHARLIE STENHOLM
House Committee on Agriculture
Washington, DC 20515
During today's hearing regarding the administration's proposed national uniform deficiency payment program, I would appreciate if you would bring to attention cross-state inequities that currently exist.
My congressional district runs along the Mississippi River, bordering the States of Minnesota and Iowa. Producers in my district have the option of selling their corn and other feed grains to either the Minneapolis or Chicago terminals.
During the 1998 harvest year, I received numerous inquiries from producers throughout my district regarding the posted-county price inequities that existed between neighboring Minnesota and Iowa. Due to the PCP inequities, Wisconsin producers in my border district were subject to lower program paymentsin some cases up to 20 cents per bushelthan neighboring Minnesota producers. The reason for this inequity is due to the fact that Minnesota payments are based off of the Pacific Northwest and Minneapolis terminals.
As you know producers are facing near record prices for many of their commodities and unexpectantly, the LDP program has become the only remaining safety-net. As we head into this crop year I am willing to work with you and the administration to clarify this confusion.
Page 72 PREV PAGE TOP OF DOC Thank you for your prompt attention to this request. As always, I look forward to working you on agriculture issues that are important to our Nation's producers.
Member of Congress
The Department of Agriculture did not respond to submitted submitted questions in time for printing.